Rail Garant publications

"Difficult market situations have never frightened true professionals, but for the railways, stability is always better than ups and downs", says one of the most successful businessmen in the Russian railway market, co-owner and CEO of Rail Garant SERGEY GUSHIN.

What is your assessment of the current state of the rail freight market in the main segments?

I think that in the markets we operate in, the most difficult situation is in the coal industry. As a result of the unification of empty mileage tariffs and general indexation, the transport component in the price of coal has increased. But the global coal market has dipped, the demand for coal has fallen and cannot be compared to last year. Although I am not a coal market analyst, we have talked to our customers and understand that without government support, the industry may experience an even greater decline. Today's Russian exports are about 120-150 million tonnes, which is just 1.5% of global coal consumption. Owing to the long decline in world prices, the profitability of mines has decreased and, in the event of a further decline, it may reach zero. According to our data, the coal industry is only surviving thanks to its operational reserve: coal is mined which does not cost a lot and expenses are put off to the future. But this can't go on for long. If the state doesn't think about the coal miners, then we will go back 15 years when the miners were banging helmets in protest on Gorbaty bridge. As one of such measures, our government should look closely at the railway tariff for coal companies to get away from the situation where it is higher than 50% of the final cost of production. This could be done by temporarily freezing tariff increases in the coal industry or by other means. The main point is for it to become possible to react more quickly to significant market changes.

What can open wagon operators do in this situation?

Operators have to follow the market and, of course, reduce the cost of their services. However, this gives us a difficult price: lease payments are 800-1000 roubles per wagon per day, which is more than the prices we offer to clients. So now we have to negotiate with leasing companies to revise the payment terms so that we can offer the consigner a reasonable wagon rental rate.

What do the leasing companies think of this?

In the vast majority of cases, with understanding. After all, we are in the same boat, or more accurately, in the same market. We have to restructure our debt obligations, reduce the size of leasing payments, but both us and the leasing companies understand that the market for operator services was and still is cyclical, and there is every reason to expect the situation to improve in the short term.

Many operators are currently worried about wagons with defective casting being stopped. How does your company plan to make up for losses from such decisions by the regulators?

There are products that are certified by the relevant bodies, comply with all current standards and GOST standards, and are inspected by Russian Railways and supervisory bodies. Therefore, all these bodies recommend us to buy these wagons. We go to the leasing companies, and together with them we buy these wagons and spread the risk between us. The market risks are clear; the operator's risk is whether there is a load or not, and this is correct. But in this case it is not clear whose risk it is. So it turns out that it is our fault that we buy wagons recommended by state bodies. But it's not so much about the losses. As a result of these actions, investor confidence in the industry is undermined, investment in the railway becomes unreliable as one telegram can stop tens of thousands of wagons. Money is spent, contracts are broken, but there is still no optimal solution. I am worried that all the banks will see higher railway infrastructure risks and will stop providing the same level of funding as previously. As a result, we will have a deficit again, including of goods wagons. In addition, we run the risk of ruining wagon building companies that have shown good growth in recent years.

Were mistakes were made in the reform?

In my opinion, we are still dealing with the effects of the last deficit. While demand grew we built a lot of wagons, the market picked up and investors appeared. As a result, the price of wagons grew dramatically, the chase for profit affected the quality of the wagons produced and no one cared about the consequences. But I can say with confidence that the operators don’t need this either. It is always better for us if the rate stays at 1 thousand roubles a day, than one year being 1.5 thousand roubles and the next 500. Large profits attract speculators who over-order wagons, which led to the current market collapse.

How can the state help in this situation?

I believe that there should be a well-thought-out policy in this area, output, demand and disposal of wagons need to be brought into line. After all, we can calculate the approximate volume of annual write-offs, wagon builders determine the production volume and Russian Railways and operators must report on the amount of traffic. Then issues wouldn't arise such as how to urgently remove 100 thousand wagons from the railway. And, of course, the state needs to change its approach to railway infrastructure investment. I believe that the decision on financing infrastructure projects should not be directly connected with their return on investment. For example, the Trans-Siberian Railway was built without worrying about the return, but just for strategic reasons, and it is now actively used by everyone. Of course, you can look for reserves within Russian Railways, and probably this is what should be done. But it is impossible to demand from the state infrastructure monopoly the same efficiency, which we, the operators, provide. We need to recognize the fact that we, the operators, took a share of the market from the monopoly and now consigners are paying us money for operations with wagons. Now we buy stock, we work with customers, reduce or increase rates and compete with each other. However, the government should play the decisive role in infrastructure development. Russian Railways management cannot be left to deal with this problem alone.

At the moment, the monopoly management is planning to introduce only additional technological constraints for operators. On the whole, they think that the carrier should be given management of 30% of the open wagon fleet, and only then will shipping become effective. How much do you agree with this position?

The large number of wagon owners actually hinders the transportation process. Consolidation of the fleet is profitable, effective and necessary, this process is gradually happening and we all need to think about it. A good example is SP Rail Garanta and Spetsenergotrans CJSC who manage our general fleet of covered wagons. As shareholders and board members with access to the budgets and to all accounting documents, we get everything that these wagons earn. We openly suggest that everyone joins this model, including such major companies as Freight One. This scheme is based on mutual trust and has proved itself to be very efficient. Using this logic, it would make sense to create a major company that would just own wagons, which would be managed by professional operating companies. For example, we work with the American company Exsif and rent tank-containers from them. This company does not enter the operating business, but just owns the containers and leases them all around the world. As a result, it has developed significant competence on the contents of tank containers and their operation, and due to the volume of owned property very cheap money. The company receives revenue from companies like us, by leasing a fleet and obtains a highly effective scheme. Brunswick created a similar company on the Russian market, but why don't Russian Railways and its structures, large financial institutions participate in such a company? And we, the operators, will sell the transportation in this fleet, which we do pretty well. It seems to me that this is one of the options for consolidating the fleet, and it is a totally market based solution.

What do the monopolists think of your initiative?

Generally speaking, together with Russian Railways, we aim for the same thing at all levels, to increase the volume and efficiency of traffic, which will not only increase our revenue, but also infrastructure revenue.

One of the major private projects in fleet consolidation is the creation of a major railway holding on the basis Sistema JSFC assets. Have you been invited to take part in this joint venture?

We were asked, but decided not to as we felt that the model was clearly unworkable. A large company that can spend a lot of money on acquiring SG-Trans, is in essence inviting you to a union with an unequal size of shareholders, which, in my opinion, is doomed as the majority always replaces the minority in the end. This is why we are always looking for equal partners.

Your group had plans to build a network of container terminals in Russia. What is the status of these projects?

By analyzing the needs of our specialized companies, we worked on the infrastructure development they needed and eventually came to the conclusion that it is more efficient to invest in the development of repair facilities. Our wagon-wheel workshop in Stary Oskol has been operating for five years and we have recently commissioned a new repair depot based there. So in the future, we will concentrate our energies in this direction.

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