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 KAZAKHSTAN International Business Magazine №2, 2007
 Railways. The Quadrature of a Wheel Pair
Railways. The Quadrature of a Wheel Pair
By Sergey Smirnov
The government has been constantly discussing the idea of using Kazakhstan’s transit potential, which is geographically predetermined, on a large scale, ever since the country obtained its independence. Some experts believe that Kazakhstan’s revenue from this sector can match earnings from exporting hydrocarbons. For example, annual trade between Europe and Asia has now reached $700bn, of which $50bn is transit. As a result, this topic has been repeatedly raised and programmes drafted, but dividends have not been growing significantly. Kazakhstan’s share still does not exceed 1% of the total transit market between Europe and Asia. There is no alternative around. The transport sector produces 9% of the country’s GDP, the share of transit in this is 0.6%.
The country’s former peers in the Soviet camp – Poland, Hungary and the Czech Republic – have turned transit into a significant item of budget revenue and unemployment reduction. However, issues such as well-developed and quality infrastructure, stable legal and tax climates and a single tariff policy have turned out to be barriers that are hard to overcome in CIS countries. For these countries these problems have become something like the quadrature of the circle, to be precise, the quadrature of wheels or a wheel pair, because the bulk of cargo is being transported by rail in these counties. For example, Kazakhstan transports about 75% of cargo and 40% of passengers by rail.
The Reality of Rails
It is expected that Kazakhstan will transit 32.2 million tonnes of cargo in 2015 (9.3 million tonnes in 2005) and earn over 136 billion tenge. However, in order to look ahead with optimism one should now look at the existing situation in the railway sector. It features three factors. Firstly, the density of railways is 5.5 km per 1,000 sq km in Kazakhstan against about 110 km in Europe and 37 km on average in the CIS. Secondly, Kazakhstan has a very low percentage of electrified railway lines – 28% of the total, against 45% in Russia, 60% in Azerbaijan and 100% in Armenia and Georgia. Thirdly, it has a high level of amortisation of main assets in the sector (60-80%).
According to the Kazakhstan Temir Zholy national railway company, the share of passenger carriages whose service life has exceeded the norm (28 years) stands at 21% of the total passenger carriage fleet; 35% of carriages have been exploited for over 20 years and 42% between 10 and 19 years. A critical situation is also emerging around the locomotive fleet: the bulk of locomotives have been in use for over 15 years. Moreover, over a half of locomotives have to undergo repairs. Of 14,000 railway lines, 2,500 km (20%) missed a schedule of overall repairs. As a result, in drafting and endorsing timetables for trains speed limits are set on a tenth of railway lines.
Of course, there are also positive trends. According to official statistics, the volume of cargo transported by rail is growing: it grew by 10.2% to 246.5 million tonnes in 2006; cargo turnover grew by 10.9% to 191 billion tonne-km. Investment in modernising, repairing and developing main railway lines, replacing and developing infrastructure and electrifying lines totalled 90.8 billion tenge last year. However, despite annual growth figures the economic efficiency of Kazakhstan Temir Zholy’s activities is steadily falling, moreover, costs have been exceeding revenue since 2004.
The Corrosion of the System
Transition to a market economy demanded reforms in the railway sector. The decision on restructuring the railways and its implementation envisaged separating government involvement and economic management, changing the form of ownership and privatising railway enterprises and organisations. However, some specialists expressed views that reforms were not efficient because all the reforms had been carried out by Kazakhstan Temir Zholy itself, which, of course, was not interested in limiting its powers, reducing corruption and liberalising the railway transport market.
Under the programme to restructure the railway transport, another stage of the reforms ended in 2006 when the repairing and auxiliary subsidiaries of the company were separated from its main activities. A total of 51 repairing enterprises were sold out, whereas 40 water-supply enterprises, five heating-supply enterprises and 76 railway station buildings were handed over to local authorities. However, clients of the railway company have not felt significant improvements in services offered and the development of market relations.
An opinion poll carried out by the Forum of Kazakhstan’s Entrepreneurs among transport companies in early 2007 shows that the main factors that prevent the sector from developing are a lack of competition (54% of respondents), shortages of rolling stock (42%), high tariffs combined with low quality (29%), corruption (19%) and the high level of depreciation of main assets (12%). Damage, losses and theft while transporting were specified as a problem by 42.3% of respondents.
This is the result of dividing what used to be one single system in a way that no part of the railways is responsible for other departments now. For example, Kazakhstan Temir Zholy has set up fully-owned subsidiaries: the Locomotive company (which received the locomotives and teams that operate them), the Locomotive-Service company (restrooms for engine drivers and equipment for locomotives) and the Kazzheldortrans company (cargo rolling stock). At the same time, locomotive services on profitable lines such as Astana-Pavlodar, Aktogay-Ushtobe, Moyynty-Sayak and Dostyk-Alashankou have been handed over to private enterprises, which has reduced the financial state of the Locomotive company. The Transport and Communications Ministry noted that this had violated the principle of fair competition, which should be developed through selling train routes, not dividing railway lines into sectors, as the national company had done.
A similar situation has developed around the passenger sector, where there were also set up a number of enterprises which provide one another with often invented services for which clients of the railways have to pay. At the same time, 100% shares of newly-established companies, again, belong to the railway giant and liability-limited partnerships, set up under their “umbrella”, are often affiliated with the company’s subsidiaries. Of course, this scheme collects additional VAT for the state, but it also expanded unnecessary administrative apparatuses in each organisation.
As a result, the reforms in Kazakhstan Temir Zholy to a significant extent turned into a programme of dragging and dropping state property back and forth, which had a negative impact on traffic safety. Last year was marked by 70 cases of train derailment and because of failures in operating and repairing rolling stock 2,211 passenger carriages and 1,852 locomotives were not allowed to be used. According to the Southeastern Transport Prosecutor’s Office, the number of incidents involving carriages produced by the Spanish Patentes Talgo company grew from 21 safety violations in 2005 to 25 in the first 10 months of last year. These violations were due to failures in various blocks: pneumatic suspension, brake equipment, electronics and ice growing in prevention valves. Moreover, while conducting its inspection the Goods and Services Certification Centre established that the hardness of wheels of Talgo carriages did not correspond to Kazakh and international standards (882 wheel pairs were sharpened and replaced in the first 10 months of last year). However, Talgo is still speeding up to 170 km/h on old rails that are not designed for it, given there are no necessary fences along the railway lines.
The Transport Control Committee admitted in January 2007 that Kazakhstan Temir Zholy’s work to ensure traffic safety was not satisfactory. This was only the beginning. During a check at the national company prosecutors established that “of funds allocated for state purchases 2.5 billion tenge was cashed in and about 5 billion tenge was transferred to foreign accounts”. Between September 2006 and early 2007, the Southeastern Transport Prosecutor’s Office alone launched 17 criminal cases into violations of state purchases legislation, of which 15 cases were linked to the activities of Kazakhstan Temir Zholy’s subsidiaries and companies and enterprises affiliated with them.
Kazakh Prosecutor-General Rashid Tusupbekov noted that “the imperfection of a legislative basis, the opaqueness of the state purchases system and a lack of measures by a relevant body make it possible for certain officials from national companies to embezzle funds and take bribes for lobbying interests of enterprises affiliated with them”. Of course, many current problems of the railways were caused by the reforms and reorganisation.
This was not a surprise at all. Reforms depend on personnel, however, the number of highly-qualified railway specialists has fallen significantly over the past few years and a gap has emerged in the continuity of generations. Retired railway workers believe that there are practically no professionals in the medium- and high-tier management of the company. In the past railway departments and directorates recruited best workers from transport enterprises (carriage and locomotive depots and so on), but now recruits may have good, often Western, education, which is, unfortunately, not necessarily railway education. Moreover, an impression arises that people whose mercantile interests are higher than those of the state are being recruited as managers. Sadly, a list of discovered financial violations at Kazakhstan Temir Zholy backs up this conclusion.
Tariff Policy
The tariff policy has a particular importance because tariffs to transport cargo are a significant contributor to the cost of many products. Preserving a steady growth trend, the transport component does not only reduce the competitiveness of Kazakh products on the international market, but also poses a threat to the entire domestic economy.
According to the Statistics Agency, railway tariffs have grown by 150% over the past six years. They grew by 19.3% last year alone. The transport component has exceeded 60% of the cost of certain products. For example, transporting a tonne of Yekibastuz coal to the country’s northern regions now matches its cost. The so-called carriage component of the tariff also makes its contribution to making the exploitation and amortisation of the carriage fleet very expensive. As a result, Russian railway tariffs seem more attractive than those of Kazakhstan Temir Zholy – the difference sometimes reaches 18-20%.
The tariff policy should have a precise scientific approach, but it is not clear how to adopt it in Kazakhstan. For example, two scientific research institutes deal with the tariff policy and science in the railway transport sector in Russia. Kazakhstan has neither of these.
Great Problems
In order to develop the transport sector systemically and modernise the economy further, it is necessary to ensure the faster development of infrastructure and logistics and renewal of main assets and rolling stocks, as well as improving the tariff policy. Kazakhstan has adopted a Transport Strategy until 2015, which envisages unprecedented investment – over $30bn. Kazakhstan Temir Zholy intends to invest $4bn in developing the sector in 2007-2010 alone.
According to the Transport and Communications Ministry, the country is expected to build about 1,600 km of new and electrify 2,700 km of existing railway lines by 2015. Cargo turnover will double and passenger turnover will grow by 50%, whereas transit by 240% and revenue from it by 200%. For this purpose, under the programme to replace the locomotive fleet, 75 long-haul diesel locomotives and 190 long-haul electric locomotives will be modernised by 2015. Over 300 new long-haul and about 500 shunting diesel locomotives and 40 passenger electric locomotives are expected to be bought during this period.
The Kazakhstan Temir Zholy management believes that in order to ensure proper operations the company needs to buy 1,141 new carriages by 2011, including 400 carriages in 2008. The company hopes to receive over 100 billion tenge of budget funds in 2008-2010 for this purpose. The main problem here is to avoid mistakes committed when buying 152 Chinese passenger carriages. These carriages, which were advertised as cheap (half the price of Russian-made carriages), reliable and meeting high modern standards, were imported without permission from the country’s epidemiological services and turned out to be dangerous to passengers’ health. Moreover, the country’s carriage depots turned out to be technologically not ready to service these carriages.
While solving the problem of carriages Kazakhstan Temir Zholy also hopes to carry out overall repairs and extend the service life of 229 old passenger carriages in 2007-2010. However, specialists believe, costs to extend their service life will account for 60-70% of the cost of new carriages, which is why it is not a very good investment.
In addition to China, the US General Electric company is actively strengthening its position on the Kazakh railway market. The US company intends to set up a plant to produce its engines in Kazakhstan. The leader of Russian railway machine-building, Transmashholding, also announced in February 2006 that it intended to set up a Russian-Kazakh joint venture in Kazakhstan to produce electric locomotives, diesel locomotives and passenger carriages for the whole Central Asia and Iran.
It is believed that by choosing Russia as a partner Kazakhstan will save significant funds on building new service centres and repairing plants (both countries have the same fleet of rolling stocks, infrastructure, a legislative basis, climatic conditions and so on) which will have to be built for producing US locomotives and operating Chinese carriages.
Building a highly-efficient network of transport and logistics centres should become a “breakthrough” project in the sector. The country will build at least five major and 15 medium-sized A-class transport and logistics centres over the next five to ten years. The Transport and Communications Ministry intends to remove the affiliation of Kazakhstan Temir Zholy with newly-established carriers in the railway sector.
However, it is not enough to solve only the problems of the technical state of the railways. The most complicated issue at the moment is to provide modern transport services not only technically, but also culturally and create indeed comfortable conditions for transiting cargo and passenger flows. With this, the Transport and Communications Ministry has more than enough problems to solve.

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Where Does the Brand Start?  Yevgeniy Zharkin 
Atlas Copco. Growth Strategy  Hans Hedensjö 
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