Tuesday, June 25, 2013

Future of Rail Freight under the Microscope throughout Europe and Beyond

Competition Commissions have their Work Cut Out this Year
Shipping News Feature

ROMANIA – BULGARIA –LITHUANIA – CHINA – The EU Transport Commissioner Siim Kallas will not have to be concerned that his workload will diminish when the Eurotunnel and DB Schenker matters covered in our story this week are resolved. The European rail freight sector is throwing up all manner of situations which the Commissioner will take an interest in as national and European interests clash.

After successfully bidding just over €200 million for 51% of Romanian state owned rail freight carrier CFR Marfa last week, private rail operator Grup Feroviar Roman SA (GFR) was given two months to stump up the balance owed or lose the €28 million deposit lodged with the government. Whilst GFR meet with an assortment of bankers seeking to raise the cash the two rival groups, detailed in our story last month, both dropped out as the Romanian government changed the rules, and both former bidders, the joint venture between the Romanian Transferoviar Grup (TFG) and the Austrian Donau Finanz Gmbh and North America’s largest private rail management outfit OmniTRAX, are in consultation with lawyers with a view to arguing that bidding was rigged to only permit the GFR bid to go ahead.

Assuming the money is found, GFR wanted an instalment plan, not the cash up front demanded by the Romanian authorities and the IMF, now the successful bid will have to pass both the regulatory authorities at home and in Brussels. With opponents arguing that GFR will control in excess of 70% of the country’s rail cargo whilst also having substantial assets on the tracks of neighbouring countries, getting past the Romanian National Competition Council may be just the first hurdle GFR needs to cross.

CFR Marfa showed a net loss of over €20 million for the year in its last published accounts (2011) and will need a further €200 million investment according to GFR sources to modernise its new subsidiary. The deal is not seen as a fire sale by the Romanian government but in fact it was essential to conclude a deal by this week, following months of prevarication, to comply with one of the IMF conditions for continued support for the country’s economy. Other state assets also need to be disposed of in short order to keep the bankers happy.

Romania is just one of the countries which GFR, a company controlled by Gruia Stoica, 45 year old Romanian billionaire and head of the Grampet Group, which owns rail assets of various types in Serbia and beyond, and has apparently run profitable rail enterprises in his home country whilst the state owned freight group continued to lose money. Grampet companies have had previous dealings, and indeed joint ventures, with CFR Marfa in the past.

GFR also has a presence in Bulgaria where confusion reigns after the government’s Privatisation and Post-Privatisation Control Agency (PPCA) cancelled the privatisation of the state’s rail freight company BDZ Tovarni Prevozi on June 20th. The decision was apparently prompted by an asset freeze after the Irish headquartered Depfa Bank, subsidiary of German real estate group Hypo, went to Court claiming to be owed over €3 million by BDZ, the Bulgarian state railway.

Since the sale of the freight assets were proposed the Bulgarian government, a newly installed Socialist coalition, has expressed a preference for retaining state ownership, a tactic which has come in for condemnation from the former Minister of Transport, Information Technologies and Communications Ivailo Moskovski amongst others. Mr Moskovski has pointed out that to continue to operate freight services BDZ will require a further large cash injection to survive and, without the privatisation, this means another state guaranteed loan, something Ms Kallas back at EU HQ is likely to look askance at.

Critics of the government’s latest move say that by suspending the privatisation, BDZ’s numerous creditors will have the company wound up resulting in only two outcomes, either the state steps in to pay the outstanding debts, or thousands of redundancies will result. Mr Moskovski told local press he believes that the trades unions and workers at BDZ have resisted privatisation because under state control it has been possible for numerous corrupt practices to flourish.

Further north, in Lithuania, European efforts to ensure more freight traffic leaves the road and transfers to the tracks are proving more successful with the news that the European Investment Bank (EIB) has gone ahead with its plan to lend AB Lietuvos Gelezinkeliai (Lithuanian Railways) €50 million to develop the assets of both passenger and cargo carrying subsidiaries. The rail company, which employs close to 12,000 people and derives around two thirds of its income from customers outside the country, is to invest in new rolling stock including nine locomotives plus almost six hundred freight wagons including platform, open, covered and tank units.

Between 2008 and 2012, the EIB provided loans to Lithuania totalling €1.24 billion with infrastructure investment being the largest recipient in line with the EU’s aim of strengthening cohesion and convergence in the European Union. Much of this money has gone toward modernising the transport systems and this latest tranche of funding was signed over in Vilnius on the eve of the first ever EIB Board of Directors meeting in Lithuania just prior to the country inheriting the EU presidency. EIB President Werner Hoyer, commented at the event:

“The EIB strongly promotes sustainable transport, and railways will remain one of the most energy-efficient and least polluting land transport modes. We therefore particularly welcome this agreement with Lithuanian Railways, as the project will improve the competitiveness and attractiveness of rail transport services and consequently encourage passengers to switch from road to rail.”

China is also witnessing something of an upheaval in the rail transport sector as market based reforms become necessary in the light of ever expanding debt across the state run system. The China Railway Corporation (CRC) was hit with a mountain of debt with the dissolution of the Ministry of Railways three months ago splitting the commercial arm and administrative functions leaving a $350 billion hole in the accounts according to Chinese press reports. The Ministry has been subject to a series of calamities lately with its former boss, Liu Zhijun, previously one of the country’s most powerful Communist Party members, admitting in Court this month to numerous acts of corruption involving bribes from foreign companies plus a major train crash and the failure of the system planned to modernise ticketing. The rail company now has no independent website, remaining under the control of the Ministry of Transport.

As business has slowed in the country, the executive at the formerly profitable rail freight operation perceive that the need to reform has become paramount. To Western eyes the systems and processes need a complete overhaul to make the rail cargo sector efficient and this is a view shared by the China Railway Group, or to give it its proper title the China Railway Engineering Corporation (CREC), the largest construction company in the world by revenue, and one which has a vested interest in developing what would be the world’s largest and most complex multimodal system stretching right across the country.

Up to now much of CREC’s work has been spreading China’s influence throughout neighbouring Asian countries as well as across the globe, particularly in Africa. Most of the Chinese rail freight system has centred about the traditional bulk materials market, ferrying food and raw materials as the country’s economy exploded. Now, as growth slows, we are likely to see the same sort of energy invested in a multimodal logistics system carrying goods to a populace which has become more affluent and with aspirations to become the ultimate consumer economy.

Photo: In 2011 two trains collided in China killing thirty five people and injuring hundreds more despite billions of dollars invested to improve the system.