The Second Freight is starting as scheduled

02.08.2010 (15:07)

RZD Board has unanimously approved a package of documents to create a freight transport subsidiary, The Second Cargo Company.

Vladimir Yakunin, President of RZD, said that this decision was made despite the fact that today the government continues discussing the reform of Russian railways. However, in terms of creating The Second Freight (PGK), the results of these discussions will not change the basic elements and are unlikely to bring any extraordinary changes in the the whole system of work. The proposed business plan has been approved in order to go ahead and to follow the company creation timelines approved by the Russian Government and the last year's final Company Board Meeting, said Vladimir Yakunin.

President of RZD said that creating VGK means going away from the concept “public rolling stock”, in order to create equal business conditions for the holding and private owners in freight transport. Thus RZD is ready to follow the same rules as its competitors. The company believes that it will facilitate competition improving the quality of services for cargo owners, and also, it will raise investment attractiveness of this business sector. Mr Yakunin thinks that perhaps the main argument in favour of creation VGK is the expected increase in the capitalisation of the holding.

Evgeny Bogdanov, Director of A.T.Kearney (the company which participated in the business plan creation) presented a future VGK turnover forecast. He noted that keeping the target market share in those sectors where RZD is present, will allow the Second Freight to actually increase its market share. This will take place because such sectors will grow faster than others, so, VGK's market share will have already become more than 22% by 2015.

Second Freight's park will consist of 213,000 wagons. More than 70% of it will be gondolas. About 20,000 wagons will operate on the territory of the CIS countries. Thus, almost 90% of VGK's property will be rolling stock, and its renewability will be the main objective of this company, as well as ensuring that the country's loading figures do not fall. Consequently, most of the revenue will come from operating rolling stock, and about 70% – from gondola wagons. Among the main VGK's costs, there are repairs, depreciation and payroll.

Mr Bogdanov emphasises three points of VGK financial performance: by 2015 the total company's revenue will be more than RUR 100 billion. It will have a positive profit throughout the whole of its life, starting from the first year of its operation, reflecting the financial stability of the created business model of the subsidiary organisation. Its operating profit will be comparable with the profitability level of the largest independent rolling stock operators, and starting from 2012 it will be about 40%.

As regards financial stability, the company will begin active implementation of the task to update rolling stock by 2011; it will invest more than RUR 20 billion in it. It is worth noting that about two-thirds of the VGK investment program is to be realised before 2015, which can be explained by the type of rolling stock to be given to VGK's authorised capital. Also, the company will be stable enough to attract and maintain credits. Mr Bogdanov especially emphasises that from 2016 VGK will be able to repay its debts and continue the development at its own expense.

Comparing integral project performance indicators for three Scenarios (pessimistic, general and optimistic), we can expected that estimated market value of the created subsidiary company will exceed RZD's property invested even in the pessimistic scenario, which will yield a positive return on equity. Sensitivity of this business plan has been tested to basic company value factors, such as fluctuations in revenue rates, discount rates, wagon purchasing and repair prices. VGK's estimated value will be positive even if the impact of all four adverse factors present.

The following risks can be figured out, which can affect the market and VGK's value: customers' requirements may change; less wagons may be offered on the market; competitors may be dumping; captive companies owned by shippers may be created; and revenue rate may fall by more than 10%. Each of these risks are mentioned in the business plan with actions outlined to minimize possible negative effects.

Ramil Talipov, Head of RZD's Corporate Structure and Reform Department stated during the discussion of the business plan that the freight rolling stock operation sector has all key features of a competitive market. Its core members and a stable structure are established. More than 43% of the rolling stock is owned by independent companies, and this figure is constantly growing. There are more than 2,000 owners. In 2009, public park carried only 27% of freight using state regulated tariffs. Private freight railway fleet provides a considerable traffic in many sectors of this market, such as tankers, pig iron, mineral fertilizer wagons and other special rolling stock. Shippers have a wide choice of alternatives to public park.

Market situation in 2010 shows that there are minimal opportunities for RZD's public wagon fleet operation, because differences are too considerable between working conditions in public and private parks. Separation of high-and low-income cargoes reached maximum values these days. Three quarters of operation with the carrier's wagons are to transport low-income cargoes. There is less opportunity to repair infrastructure, and RZD has no money to update public fleet. All this requires immediate solutions.

The approved package of documents stipulates that VGK is created as a universal common network operator of own rolling stock. The company will carry cargoes across Russia both on wagon and route basis. It is also possible to provide freight forwarding and other services. VGK authorised capital will be up to RUR 46.4 billion. RZD will be the founder of the company, it will have 100% minus 1 shares in the authorized capital, and a non-profit organization "Zheldorreforma" will own one share.

Creation of the Second Cargo Company will not change the structure of rail freight service users. The same as now, its largest customers will be industrial and raw material companies in coal and steel industries; oil holding groups; and companies engaged in mineral fertilizers and construction. RZD and VGK interaction will focus on specific market activities, which is, first of all, high responsibility in the matter of customer service.

As a result of the discussion, the draft business plan for the Second Freight will be supplemented by at least three articles and will be submitted to the RZD Board of Directors for consideration.

Inga Dmitrieva
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