EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT /
OECD Regulatory Reform Review of the Russian Federation
ECMT/OECD Review of Railways
PRELIMINARY CONCLUSIONS
These preliminary conclusions are not intended to be seen as instructions on the reform of the Russian railways. They are rather questions where, from the observations of problems and difficult issues in reform in other countries, the team believes further reflection might help the reforms underway progress. Only the Russian authorities are in a position to judge what the best course of action will be and the balance to be struck in the trade-offs to be made between competing objectives.
Progress
1. Great progress has been made in developing a comprehensive program of reform for the Russian railways. The Laws adopted set out a firm direction for reform whilst acknowledging the need to retain flexibility in the structural changes to be made as the market develops and responds to reform and avoiding economic shocks to this key section of the economy. Progress is favorable compared with the planning and speed of reform in many western railways.
Fundamental general points
2. Decisions, discussions and negotiations can only be as good as the quality of the information on which they are based. Whatever the objectives of reform for the Russian railways, it is vital that more accurate information is produced and made publicly available to the railways, to their customers and to academics.
Transparent accounts of costs and revenues presented according to International Accounting Standard methodology by line of business are required, identifying in particular losses and subsidies. This is essential if the economic impact of reforms is to be understood. It will also be needed to monitor the successes of reforms, and present them to the Duma, the press and the public, especially when criticisms and problems arise. As well as a vital next step in Russia, this is a universal lesson from reform in other countries.
Such transparent accounts are also essential to prepare the way for replacing cross-subsidies with direct financing for loss making passenger services.
3. It is important to prepare public expectations as to the results of the reforms. The public should not be promised unrealistic improvements or perfection. The inevitable trade-offs between different goals have to be explained and discussed.
Key decisions to be made now
4. Passenger rail transport should be separated rapidly from the rest of the system. The assets that should go to the passenger companies should be established and the cross-subsidies from freight to passenger services ended. For loss making suburban services, contracted public service obligations should be developed, as practiced in the European Union, or direct government funding should be introduced, as with Amtrak in the USA and Via in Canada.
Moreover, everywhere it has been tried, local government makes a better job of planning and choosing which social rail services to maintain when it is given the power to do this and the finance to pay for it. Even giving only a small part of the finance needed to the local authorities has a big impact in making their demands for public services more realistic and improving the efficiency of the services organized, for example, in some cases replacing rail services with buses.
5. The trade-offs to be made in achieving the objectives of reform need to be more clearly identified for all of the government bodies involved in reform. There is an important trade-off between a) improving the economic performance of the railway system itself and b) using the railway to promote social policies and regional development policies. International experience suggests the goal should be promoting the economic performance of the railway itself. If the economic costs are not identified increasingly accurately there is a major risk of bankrupting the railway when these goals are confused rather than addressed separately by separate government measures.
Next steps in reform
6. For the next steps in reform it is essential to clarify and define the goals of introducing competition. The laws already adopted stress the importance of competition, but competition can take different forms and serve different purposes. Competition removes the need to regulate tariffs for the carriage of freight (though it may require the regulation of charges for access to infrastructure). What kind of competition is to be encouraged:
· Rail versus truck?
· Rail versus rail – if so where?
a. between parallel lines, or
b. between trains running on the same line?
7. Once these goals for competition are clearly defined, it will be essential to review the compatibility of the tariff system with them. The plans for structural reforms will also have to be reviewed to ensure all three components: competition, tariff regulation and structural changes are mutually supportive, not conflicting. The next steps in reform should focus on the coherence between these three parts of the reform program.
8. One potential inconsistency arises in the structure of the regulated tariffs. The infrastructure component is much higher than the level of typical track access charges elsewhere. The reasons for this are not completely clear to the team. A high infrastructure charge will increase total cost recovery. But there is a risk that an infrastructure charge that is higher than the economic costs directly attributable to infrastructure will discourage competition between the Russian railways and other carriers on the same lines.
Conclusion
9. The urgent need is to continue the reforms. Without reform the railways will be starved of investment. The risks of delay are probably greater than the risks of pushing through the reforms. Given the rapid pace of economic development in Russia, allowing the railway reforms to lag behind could be very damaging.