Transcript:

Dmitry Medvedev: Colleagues – I believe we have chosen just the right place to meet to discuss our railway tariff policy, so that we can personally experience all the pains of the rail pricing process, as well as to get a feel of Russia being a railway country, a country crossed by 85,000 kilometres of railways, where no one can imagine life without the use of railway services, be it intercity trains, local commuter trains or freight trains. Therefore, issues like long-term investment and railway fares are probably among everybody’s priorities.

On the other hand, transport in general is the driving force of industrial development and an important component of developing an area. By its nature, the railway is the only means of transport in Russia capable of shipping large amounts of freight, including strategic cargo such as fuels – oil, coal, timber, grain, etc. With its vast expanses Siberia feels this even more keenly. It is our task to make the national economy more competitive globally, something I already mentioned at a meeting of the state commission in Vladivostok. I am referring to the need to draft a balanced policy to link rail tariffs with the investment programmes of Russian railways. Therefore, what we will discuss today will ultimately be important for the well-being of the national economy, people’s living standards and the mobility of the population. Therefore, while planning the development of the industry it is also important to consider each region’s interests, in addition to the long-term geopolitical and social conditions. As of today, due to the increase in industrial production volumes and changing directions of cargo traffic, the key railway lines are overloaded. They mainly include rail links to seaports such as the Trans-Siberian and BAM Railways, the route from the Kuzbass coal mining region to the Central and Southern Districts, as well as the lines crossing the Urals to the northwest. We are in fact currently travelling along one of the busiest routes.

Experts estimate that by 2015 rail freight transport will go up by 20%, which is a big increase. At the same time, we have to face the truth here, by 2020, shipping an additional 20% will be a real problem due to infrastructure constraints. This means our highest priority for the next few years will be to resolve these problems – these bottlenecks.

As for ticket fares and rail freight rates, on the one hand they need to be high enough to at least prevent the railway from operating at a loss. On the other hand, they need to contribute to the development of  railways. So we should draft and adjust a methodology for keeping an economically justified level of expenditure as soon as possible. Therefore, one of my first instructions to the Economic Development Ministry will be to draw up this methodology, finalise it and submit it to the government. I would also like to point out that rail tariffs are not the only source of investment for the railways. We also need to discuss the possibility of private investments in commercial projects, as well as of course public-private partnerships. The projects can come in different formats: we have discussed, among other things, the possibility of issuing state guarantees for Russian Railways bonds. I do not know if that is of interest to you, Mr Yakunin (to Vladimir Yakunin, President of Russian Railways), state guarantees I mean.

Vladimir Yakunin: It certainly is Mr Medvedev. Development instruments are definitely a key issue. State guarantees are certainly among the more advisable options. This also needs to be discussed and coordinated with the relevant ministries first.

Dmitry Medvedev: Of course. That is one of the reasons we are all meeting here today – to discuss these possibilities with everyone.

While planning the development of our railway network, we must naturally look to the future, to 20 years from now. I am confident that new technologies for processing commodities will have a significant influence on the content of the major cargo flows – increase the share of high-value-added freight and optimise the infrastructure resources. On the other hand, it is clear that rail transport will be evolving as well, adopting more advanced transportation and shipments management technologies. With these goals in mind, I would like to instruct the Economic Development, Transport and Industry and Trade Ministries to analyse the current situation and estimate the required investments for the development of rail transport in the long term. If required, they can also submit proposals about adjusting the Russian Railways investment programme until 2020. Mr Dvorkovich, who is in charge of the fuel and energy sector in the government, should supervise these issues personally. On the whole, the railway pricing policy should be planned for a long-term period, which is something everyone is interested in: the railways, industry, the regions and all Russians as the end beneficiaries.

The non-financial sectors of the economies should have an opportunity for planning the shipments of their products in advance, because this is a key factor affecting a business’s competitiveness.

Finally, in conclusion, when we try to estimate the burden that railway transport lays on the economy (railways are often being criticised for this burden), one must keep in mind that the overall cost of shipment includes more than the rail rate regulated by the government and indexed annually. It also includes the cost of using railcars and the so-called operator rate, which is market-regulated, or at least should be. The government’s policy here is consistent, and is aimed at liberalising this market. This has proven effective so far -- specifically, starting in 2003, when half a million new cars were purchased and 600 billion roubles was invested in this sphere, in addition to the 125 billion raised from selling the controlling stake in Freight One. Therefore, there are no problems with renewing the rolling stock.

There are other problems though, and these have to do with the maintenance of that stock. As we were walking across the grounds of Omsk Transport University today, we saw how flaws are to be detected in the process of operating railcars and other equipment. In the past, the Transport Ministry took care of this entirely, a task later taken over by the joint-stock company Russian Railways. Now the full responsibility for this has been shifted to the owners of the respective railcar fleet, which poses certain problems that need to be discussed more deeply.

Furthermore, the railway sector, as well as the real sectors of the economy, finds it difficult to adapt to the changing environment – I am referring to the final costs of freight owners. Things do no alwaysrun smoothly here. I have often had to respond to emergency requests from the regions and issue the necessary instructions.

Overall, the situation is not critical. In fact, it is quite manageable and has improved as of late, but it is still early to relax. Some solutions are still needed, to minimise management and infrastructural risks. It is also important to keep the railway network attractive. I expect the participants in this meeting to come up with proposals on maintaining stable and transparent rules of the game for the next few years; proposals as for how to raise long-term financing for our railways (which are crucial for Russia, because ours is a unique country and we will have to deal with this issue now and in the future); as well as proposals for more effective operation of Russia’s entire railway system.

I would like to congratulate you all again on Railway Transport Day. Let's begin our discussion. We will stick to a format prompted by the content of this meeting. So we will now hear from the Economic Development Minister. Please Mr Klepach (to Deputy Economic Development Minister Andrei Klepach), go ahead.

Andrei Klepach: Thank you Mr Medvedev. Esteemed participants, I have a request to make. Here is the first slide of the presentation. As far as I understand, this proposal has been discussed and coordinated with the Federal Tariffs Service and other state agencies, and also with Russian Railways – to adjust the planned index of the rail rates for 2013. The previous economic development scenario and the budget law put the increase at 5.5%. Now, the proposal is to raise it to 7% (with regard to the infrastructure component). How will this benefit the industry? I should explain that this change will not resolve our funding problems, but it could help Russian Railways – alongside a potential cost-cutting effort and reserve regulation – avoid a loss in 2013, which we estimate at 38.6 billion…

Dmitry Medvedev: What do you mean 38.6 billion? In losses?

 

Andrei Klepach: Yes. Although this increase cannot resolve our investment problems, it can…

Dmitry Medvedev: Cover losses?

Andrei Klepach: Yes. It can help cover losses, along with a cost-cutting effort from Russian Railways. In this sense, in our opinion, not only the current rail rate, but also the planned indexations (by 7%, then 5%, and then 5.5%) should be linked to the changes in how effective the business is. We cited these estimates when we discussed Russian Railways’s financial plan. Perhaps we should write in a protocol that this indexation policy is prompted by the changes in productivity, which is determined by greater turnover, involvement of fewer personnel and a smaller labour input. In our opinion, productivity will increase by 4% in 2013, and then by 5% later on. They actually need to boost it even more to become effective and do without the subsidies we are currently granting to Russian Railways. This way they will make a good operating profit. This is my first point.

Dmitry Medvedev: Just for reference: What is your estimate for labour productivity in the railway transport sector?

Andrei Klepach: We usually talk about growth here.

Dmitry Medvedev: Fine, how fast is productivity growing in this sector?

Andrei Klepach: It grows at slightly over 3%.

Dmitry Medvedev: I'm not just asking for the fun of it. We have just discussed this with Mr Yakunin while looking at the new locomotive fleet. So do you think there is growth?

Andrei Klepach: Let me explain our calculations, which almost coincide with those of Russian Railways and the Federal Tariff Service. In 2012, we estimate that annual turnover will grow by 3.6%. The number of personnel employed will reduce by 0.1%-0.2%, so we still have a growth of 3%. But we believe that it should be even higher. With the number of personnel employed at nearly 1 million, and turnover at 1.3 billion, we have more than 1 million roubles per employee.

Vladimir Yakunin: There is no discrepancy. Mr Klepach is talking about shipments alone. But there are other types of activity performed by our company, such as modernisation and overhaul of facilities as well as capital construction. Therefore, when we discuss labour productivity, we are not only including freight shipments, but are estimating the financial results – we look at how much money we spent, how much we earned and under what conditions. And we can see that Russian Railways (no offence meant to anyone else) has been the only company for the entire nine years of its existence for whom salaries were directly linked to productivity.

There was only one occasion in which the government has had to add something when we lagged behind. At all other times, we followed that logic consistently. That is why what Mr Klepach is saying is perfectly correct, but only for shipments. In speaking about the entire company, we need to consider other types of activity as well.

Dmitry Medvedev: All right. Fine. Please go on.

Andrei Klepach: I didn’t see any discrepancy here. It's that the government’s tariffs policy should not be entirely expenditure based and correlate with the inflation rate, but it should also correlate with certain measurements of effectiveness. This could be labour productivity, which we have just discussed. In fact Russian Railways should be given credit for drafting a programme – even before a government decision came – an Innovation-based Development Strategy. Their programme has been approved by the government and includes a set of measures which provide for technological improvements.

Another set of issues that I would like to draw attention to has to do with investment programmes.

Dmitry Medvedev: Which slide?

Andrei Klepach: I suggest looking at slide number nine. Mr Medvedev, you have already talked about bonds, and you mentioned that we need a government guarantee. Generally, bonds of Russian Railways are placed quite successfully. But…

Dmitry Medvedev: I have a question about the amount of bonds placed. How much is it now? Around 30 billion?

Vladimir Yakunin: The most recent placement was for 30 billion. The previous placement in the western market, which was considered the best, was for around one billion euros. The amount is vital here, of course.

Dmitry Medvedev: I see. So basically, we need more.

Andrei Klepach: I would stress the following aspect. The balance on slide number nine shows that the demand in additional funding (from loans, privatisation and other sources) is nearly 30% of the current investment programme that Russian Railways and the Ministry of Transport are considering.

Dmitry Medvedev: Is this the entire programme for 2013 to 2015?

Andrei Klepach: Yes, from 2013 to 2015.

Dmitry Medvedev: That amounts to around one trillion or even 1.1 trillion.

Andrei Klepach: Yes, a little over one trillion. In terms of debt load, the debt/EBITDA ratio seems appropriate. But what is the problem (and this is partially included in a government protocol)? The projects require different amounts of time to pay off. I suspect we will hear details from Mr Sokolov and Mr Yakunin, but we estimate that out of the investment programme’s more than one trillion, the projects that are expected to pay off in over 10 or 15 years cannot in fact be provided with a commercial market loan, because nobody gives out loans for such long periods – maybe only abroad. Those make up around 40% to 70% of these projects. The Transport Ministry and Russian Railways can give you an exact proportion. What does this mean? We can’t include those funds in rail rates, otherwise the rates will have to be increased by 10-15% every year. It is an impracticable amount for the economy and cargo shippers. We can’t just take the money from the market. Can we take it from the budget? There is not enough money in the budget.

Dmitry Medvedev: So what can we do?

Andrei Klepach: So we think that what we need here are new mechanisms of long-term funding, which could be called modified market funding. This could include, firstly, a government guarantee that you have already mentioned, and secondly, bonds that would be placed, for instance, and bought by Vnesheconombank or even other banks but on certain resources or even certain tools. When we were discussing the budgeting rules, you and Mr Shuvalov stressed that part of the money of the National Welfare Foundation could be invested into long-term projects, if these project have a potential for growing assets and return. So this does not have to do with the budget, as the money must be repaid. This is why we believe that the Russian Railways bonds could be one of the options – but only in connection with certain commercial projects that do not have short payoff periods, but that are of strategic importance for the country.

Dmitry Medvedev: That’s the period of 10 to 15 years, correct?

Andrei Klepach: Yes, but they have some that run up to 20 years as well. We need to look into each particular case…

Dmitry Medvedev: What projects are we talking about?

Vladimir Yakunin: The Baikal-Amur Railway, for example.

Andrei Klepach: Yes, almost everything that’s on this railway is going here, but also several…

Dmitry Medvedev: What about high-speed rail?

Andrei Klepach: This programme is worth 1.1 trillion roubles, but doesn’t include high-speed rail. That’s a separate issue. Indeed, we need to inspect and update the railway development master plan and strategy, because it was adopted by the government about two years ago. I don’t remember exactly.

Remark: In 2008.

Andrei Klepach: Before the crisis.

Dmitry Medvedev: But later, of course, we began to clean it up on a regular basis.

Andrei Klepach: We need to make a strategic decision. If we decide to give it the green light, then we need to finance it, perhaps using budget funds, because even in China high-speed rail construction is partially financed from the budget.

Dmitry Medvedev: It is good that we are sharing ideas and that we speak the same language, because I wanted to say what you just said with regard to how things are organised in China. Yes, China's economy is different from ours, but nevertheless they are focusing on this issue and the budget has a much more important role to play. All right, we will talk about it later. Of course, we do have problems now. Please go ahead.

Andrei Klepach: In other words, this is a second major package of issues.

Dmitry Medvedev: Yes.

Andrei Klepach: The third aspect that we need to discuss is very important for Russian Railways’ operational financial activities and customers as well. We have so far failed to find a solution to commuter rail traffic. It is assumed that the responsibility should be transferred from Russian Railways to regional authorities, which should set things straight as part of their agreements with local companies. At some point in time, it was supposed that the Finance Ministry will reserve a certain amount of funds as part of transfers to regional budgets, but the procedure hasn’t been worked out properly. As a result, under financial audit rules, Russian Railways must establish reserves for growth: 20 billion roubles in 2013 alone and another 20 billion in 2014, which effectively eats up the estimated revenue. Clearly, these are not losses but reserves, but we should nevertheless come up with solutions. Most importantly, this isn’t just a matter of financial accounting, but a question about the commuter rail fare. I do not even want to mention the figures showing how much fares may rise.

Dmitry Medvedev: Please don’t. There’s no need to scare anyone.

Andrei Klepach: However, the proposal that will go into the minutes is to have the Ministry of Transport and the Finance Ministry work this issue out. Some work is already being done. In conjunction with Baker & McKenzie our ministry is working on the commuter rail fare project. However, we have no financial estimates, nor have we decided on how financial responsibility will be divided between regions and Russian Railways and whether the federal authorities need to participate at least in transferring funds to regions. I motion to include this in the minutes and the directive. We must find a decision.

Dmitry Medvedev: Yes, let’s include this, because I don’t see it here.

Andrei Klepach: This point is not included.

Dmitry Medvedev: All right.

Andrei Klepach: My last point has to do with the methodology for identifying economically justified expenses and estimated rates of return. As a matter of fact, the methodology is there. It was prepared by the Federal Tariff Service and agreed with all agencies. It needs to be refined, though. I have a request here: please send your directives to the FTS first, because they are the ones who put it together in the first place. Of course, we will participate, as will the Finance Ministry and other departments. It needs some additional work.

Now, my last point with regard to transitioning to long-term tariffs. Of course, this is the right thing to do, but I would like to outline a broader context for this issue. We cannot fulfil the five-year plan for just one segment of the economy (Russian Railways) using just one benchmark (tariffs), when we have a budget for three years and our forecast covers three years as well. In fact, this means that we need to finish drafting the long-term forecast and submit it to the government by the end of 2012. All the parameters in question, including electricity, gas and rail fare, must be worked out and properly justified. The government considered various scenarios of this forecast in April.

Dmitry Medvedev: Just to make sure I understand you correctly: Do you believe that making a five-year forecast is impossible now?

Andrei Klepach: No, that’s not my point. I believe that the first run is already behind us. It’s just that we will be able to fully transition to five-year tariffs when… First, we need twelve months in order to re-work the regulatory framework and make it fit in with the Customs Union, the Common Economic Space and several other things. According to the directive, we can start doing this in 2014. Secondly, we must put together a long-term economic development plan and the government should decide on it accordingly. Only then will we be able to draft the five-year tariff plan for Russian Railways.

My third point is that the five-year tariff plan for the Russian Railways requires that the company itself have an investment programme and a financial plan for five years, because what they have now formally covers three years, but in actuality covers just one.

Dmitry Medvedev: I see.

Andrei Klepach: There are several steps that need to be taken here.

Dmitry Medvedev: We must start with something. We should work our way toward each other: Russian Railways should put together the financial plan and draft its expansion plans. The government, too, needs to start with something. Perhaps tariffs are a good place to start.

All right, thank you.

Andrei Klepach: Thank you.

Dmitry Medvedev: Let’s continue our discussion. Mr Sokolov, the floor is yours.

Maxim Sokolov: Thank you. Mr Medvedev, colleagues, we also have a presentation that everyone has on his table. To begin with, I would like to note that the Ministry of Transport, the Ministry of Economic Development, the Ministry of Finance and, perhaps, others present share the same positions. Over the past six months, we have been regularly discussing the development of railway transport, tariffs and the investment programme; therefore, we understand each other very well and have a good grasp of the situation.

Of course, transport industries are closely interconnected, and primarily with the prospects of Russian Railways. Therefore, developing the rail network and the removal of infrastructure constraints in the area of rail transport, in the first place, has a multiplier effect on the development of other transport industries and the economy as a whole. The work performed over the last six months allowed us to predict steady growth in freight transport within approximately 3% per year. As a matter of fact, this is in line with the plans for socio-economic development and manufacturing growth rates. We have also identified the relationship with promising railway development areas and the growing demand for transportation along these railways. As we can see, the demand will nearly double in the Far East, particularly, the Vanino-Sovietskaya Gavan railway, by 2020.

Based on current estimates of future traffic volumes, we – as I said we agree on this – have identified railway bottlenecks that hold back such an increase in traffic. Currently, such bottlenecks are about 6,000 km long. Certainly, this includes the western and southern railway and is about a quarter of the length of the main tracks, which include the Baikal-Amur and the Trans-Siberian railways, along which about 80% of all freights are hauled. Clearly, if we do not intervene then such bottlenecks will extend to even greater lengths based on our socio-economic development forecast.

The issue goes beyond the bottlenecks: there is another general rail development problem. Today, we need to significantly update fixed rail assets: the locomotive fleet is comprised of approximately 20,500 locomotives, half of which are electric locomotives and the other half runs on diesel. Eighty-five percent of them were bought over 20 years ago. There was a time – from 1995 to 2003 – when we didn’t purchase new locomotives, and wear and tear on some of them is as high as 70% or 80%. The situation with shunting locomotives is almost critical. I believe Mr Yakunin will speak about it in more detail. We now need to buy 700 locomotives of all types per year.  So far, plans include a little more than 400. Therefore, this issue (this is shown in the next slide) also needs to be further studied. Partially, this is reflected and accounted for in the tariff rates that we are discussing today, but 700 locomotives is quite a lot and goes beyond the tariffs under discussion.

Rail conditions (next slide, sixth) require special attention, because fixed assets haven’t been repaired enough in recent years and this resulted in an increase in the length of rail tracks that are being operated past their service life. Railway is being restored using funds from the investment programme (renovation) and the operating budget (regular maintenance). The cost of renovation and the cost of maintenance are quite reasonable. In conjunction with our colleagues, we did an analysis and found out that one kilometre of maintenance work costs approximately 7 million roubles, while the reconstruction costs about 18 million. Compare this to the cost of new construction where one kilometre costs about 100 million roubles.

And we see that the amount of defective repairs is currently significantly exceeding what we have planned, despite what has been said here about the high indexation. The next slide shows the rate of tariff growth over the previous years. You can see that even when the tariff indexation rate was fixed, there were still additional subsidies from the federal budget. And by 2012, we reached a rate of 9%.

With regard to the rates in 2013, there are plans to increase tariffs, but there is no clarity about the additional subsidies, at least within those limits that have been provided for by the Ministry of Finance. This question has not been resolved, and we should certainly take this into account. At the same time, the price increase for basic products used in rail transport (the next slide shows these figures), has exceeded the tariff growth rate for railway shipments for almost all types of industrial products. And this, too, was not reflected in the tariffs.

I am not blaming colleagues from the Ministry of Economic Development, but as a rule, the inflation rate included in the tariff was based on the overall inflation rate in the economy. However, due to its specifics, railway transport mostly uses industrial products, for which the price increase was significantly higher than the average inflation rate. We can see this trend in slide No. 8.

If you could also open slide No. 10, which shows that the transport component in the final product price, as you have also mentioned, Mr Medvedev, the transport rate today is not so much determined...

Dmitry Medvedev: By the tariff.

Maxim Sokolov: Exactly, it is not so much determined by the tariff as market factors. And this slide specifically shows not the tariff component but the average transport rate for all types of cargo. And we can see that this rate has dropped for all transport modes over the past decade, with the exception of grain shipments, which, as you know, are subsidised.     

It should be also noted that over the past decade, the structure and directions of shipments have changed significantly, and, as a result, commodities make up the greatest portion of all shipments. They are charged at the lowest, so-called first tariff rate (there are three tariff rates in total).

Today, the share of these shipments is about 60% or even slightly more, but they only generate about 30% of the income received by Russian Railways. At the same time, shipments under the most expensive third tariff account for only about 15% of the total traffic, while generating an almost comparable share of income of about 17% to 30%. Therefore, tariffs are clearly the main funding source for Russian Railways, which also determines the possibility of attracting other types of financing, including loans, credits, bonds, etc.

Slide No. 13 shows that in 2013 Russian Railways is planning to increase its loan portfolio by 73 billion roubles (to a total of 500 billion roubles), and by 2015 it is expected to reach about 600 billion roubles. The overall ratio of debt to EBITDA is approximately about two indicators. In principle, from the perspective of financial efficiency, the company can take additional loans to fund projects which will pay off in the medium term.

Dmitry Medvedev: Are trying to say that this debt to EBITDA ratio will stay the same?

Maxim Sokolov: We assume that at least till 2015 it will stay at approximately the same level. If you take current activities, without additional investment programmes, so far this ratio does not even reflect the loans for the development of high-speed (I am not talking about super high-speed, just high-speed) lines. In any case, what we mean is that such a ratio will allow Russian Railways take additional loans for projects that can pay off in the medium term.

We are certainly not referring to the projects to develop the Far East railway system. We are talking about projects in the Northwest, possibly some projects in the South, but mainly the lines leading to Baltic ports. Slide No. 14 shows the indexation plans for 2013 (our proposal is 7%) and the further increases required to offset inflation without additional government subsidies. Here we are quite close to the Economic Development Ministry and in agreement with the other participants in this meeting in an understanding that this should only prevent Russian Railways from operating at a loss in the medium term. As for investment, they should clearly look to other funding sources. One should also bear in mind that the 7% increase does not include any additional costs incurred by Russian Railways, such as property tax at around 0.7% that it will start paying next year. These additional costs will account for some 2.7% of its rail rates by 2019.

There is something else that we haven’t discussed today. We all understand that Russian Railways will incur additional losses of around 7 billion roubles after coordinating its rail rates with the other members of the Common Economic Space after the agreement on regulating access to railway services takes effect in 2013.

Yet, we also understand that rail rates alone are not a sufficient source for financing business development and agree with the Economic Development Ministry that other tools such as loans and state guarantees are needed to expand and modernise Russia’s railway network.

I would also like to say a few words about projects involving public-private partnerships and concession agreements. The problem is that using these options requires a change in the current legislation. Primarily, Russian Railways, which is an open joint-stock company, 100% owned by the government, needs to be authorised to act as a concession grantor. As of now, Federal Law No. 115 On Concession Agreements does not allow it to act as one.

So these are the issues, among others, that we are working on following the instructions you gave us in Vladivostok, Mr Medvedev. We have already made some progress jointly with the Economic Development Ministry and the Finance Ministry. Our reports to the government are in the works. Thank you.

Dmitry Medvedev: Thank you, Mr Sokolov.

Mr Yakunin, please make it short: the most painful issues have already been mentioned, but you can give us the insider’s view. Go ahead please.

Vladimir Yakunin: Thank you, Mr Medvedev. Esteemed participants, the reports from the Economic Development Ministry and the Finance Ministry indeed reflect the basic approaches, which we completely agree with. This was indirectly confirmed at a meeting at the Energy Ministry which partly focused on issues such as coal shipments for power generation purposes. So it seems that we have reached a basic unified understanding of the problems as well as potential solutions. So I would like to make a few points with your permission. You also have our presentation; it is not long.

My first point is that, after we fulfilled the instructions that Vladimir Putin, then prime minister, gave us in Kemerovo, we developed a general scheme together with the coal industry. We have done a large amount of the work together, something Mr Klepach already mentioned here. We will certainly need to make updates to accommodate the latest social and economic development targets. As for the inter-sector balances, we have worked with the Federal Tariff Service before; we’ve done a comprehensive job and have a solid basis for resolving this issue.

So under this general plan, with a GDP growth target of 3.5%, we will need to increase freight loads volume by 500 million tonnes by 2020 to keep up the demand for rail services. The Russian Railways system will be handling over 1.9 billion tonnes of freight by 2020. Our analysts estimate that the total increase in rail freight turnover will be even greater by 2020 than the figures Mr Klepach cited. We will certainly only talk in terms of these estimates at this point, but we expect that with significant economic growth, demand for rail services could grow by as much as 40%. As for a route-by-route analysis, the freight volume towards the Baikal-Amur Railway (towards the east) will increase 150%, and towards the Far Eastern ports at the Vanino-Sovetskaya Gavan transport hub, it may even grow fourfold compared with the 2011 level.

Dmitry Medvedev: Those are our targets in fact, now that you mention it. I’m talking about the Siberia and Far East Development Strategy.

Vladimir Yakunin: Right. If this is so, we will soon be facing the problem of low throughput capacity,

that’s the core of our discussion on railway rates. In this respect, we fully agree with the Ministry of Economic Development. We are willing to cooperate with the Transport Ministry in updating the rate schedule and in verifying all the figures we are discussing today.

As for the next slide, No. 3, we’re talking about the parameters of the investment budget. We have agreed to separate high speed traffic from this budget, as well as our obligations for FIFA World Cup commitments. We are talking only about the prospects for maintaining the rail network as it is now, avoiding any new or additional issues, and making do with the smallest possible support.

If we decide which investment projects should be implemented in the national economic interest, we shouldn’t limit ourselves to this 7% price adjustment but submit our proposals to the relevant ministries while they should, together with the manufacturers, determine what else must be done to cope with our planned increase in shipments.

Otherwise, we should make different decisions. Particularly, as far as the coal industry goes, we will have to stop licensing additional mining quotas simply because it will be impossible. What will we have then? The mining industry will be unable to meet its contract obligations, and its clients will start filing claims. On the whole, we need 5.7 trillion roubles over eight years, 2012-2020, to implement the general plan, with consideration for the limitations we referred to.

Dmitry Medvedev: Which year do you mean?

Vladimir Yakunin: The years 2012 through 2020.

We will have a budget deficit of about two trillion roubles – 1.88 trillion, to be precise. This is a thoroughly verified figure, and we can rely on it.

Slide 4 shows the dynamics of price adjustment in the manufacturing industries and railway rate adjustments. These two projections have never coincided; they are always completely out of balance for objective reasons.

When we mention, say, the necessity to implement investment projects, we mean that it is possible to analyse the appearance of the investment component, as was the case with the energy industry reform. We might also have other tools, which we have discussed. I’m prepared to talk about them with your permission.

I want to stress once again that a 7% adjustment will prevent the deterioration and downgrading of the infrastructure.

Dmitry Medvedev: So we will maintain a zero balance, in fact.

Vladimir Yakunin: That’s it. We’ll have to limit essential projects or even eliminate them from the investment plan. For example, everyone knows our relations with China. We need to eliminate our infrastructure limitations in our joint projects. However, it will be impossible to develop and comprehensively modernise the Karymsk-Zabaikalsk line. The same concerns the Mezhdurechensk-Taishet section, which we hear so much about, and many other projects, to say nothing of developing the Moscow and St Petersburg transport hubs. These are just the most graphic examples.

If we secure additional funding for the infrastructure component, we’ll be able to form an investment budget of 377 billion [roubles]. More than that, we will keep rate adjustments at 5% for 2014 and the following years. Later on, we can determine economic and social priorities based on the project principle, and find the sources for the extra funding.

I want to stress that we have been analysing rate adjustment together with the Ministry of Economic Development and the Federal Tariff Service since 2003. We disagree sometimes. However, as you can see in this graph, rates were always adjusted, on the average, in proportion with their growth. At the same time, steel prices increased 280% and coal prices five-fold. We consume these products, so our expenses grew spectacularly while the opportunity to cut these expenditures shrank.

Slide 5 shows investment shortages, which were mentioned here earlier.

Slide 6 demonstrates the investment budget deficit up to 2020. That’s the sum I specified – 1.9 trillion roubles, considering the same adjustment as for the investment component. We are certainly willing to cooperate with the relevant ministries for the enhancement of our company’s efficiency. When we talk about efficiency we mean the following: orders and resolutions, appeals to be more efficient sometimes result in the desired response from some (I hope Russian Railways is among them) while others remain deaf to them. What we need is material incentives. At present, we set rates according to the “expenditures plus” principle. Whenever we reach a particular level, the entire delta is set to zero, and we once again start negotiations on tariffs for the next planning period.

If only we had a long-term rate we could calculate and submit to the government our proposals concerning the company budget and the investment budget, proceeding from the point that the more efficient we get the larger the extra resources we obtain in the interests of infrastructural development, and the more we reduce the load on the budget.

And something else: when we speak about the use of funds, be it the future prosperity fund or an investment fund, we instantly create 30% additional sources for the financing of the state’s social and other obligations because this implies more additional taxes we will pay directly to the budget. I think it’s a factor serious enough to be considered.

We never stop our efforts to enhance our efficiency. You know, for example, that the company president’s contract includes a clause on which we pledge to increase efficiency and reduce costs by 10% a year. That clause was recommended by the government and approved by the board of directors. Understandably, we can implement this only in the field we manage. We obviously cannot set prices in the steel or energy industry. These prices are set by the state while we have only our own opportunities. Mr Medvedev, I reported to you during the crisis year that we had cut our expenses by 200 billion roubles and avoided dismissing 180,000 employees on an understanding with the trade unions and the employees, who agreed to work part-time. However, this sort of thing can be done only once. That same year, we increased our efficiency by 10% for obvious reasons. However, this is not the way to enhance efficiency under normal conditions.

There is a third source of funding. I mean loans. By 2015 we will owe about 700 billion roubles and be paying approximately 100 billion roubles on interest alone. So we are certainly interested in access to other sources, and we are planning to work up proposals to the government on this score. You have offered us support in this issue. This matter concerns the accumulated reserves of the Pension Fund and the Welfare Fund. I believe we should have a kind of symbiosis and use it.

As things are, our company’s investment rating coincides with the state’s. If that’s so, the change should probably boil down to avoiding an increase in the federal budget debt burden. On the other hand, we should not break Russian Railways’ budget coefficients.

Possibly we need another project office to issue state-guaranteed bonds. Then the debt burden will be outside the budget and neither the state nor our company will have to break their so-called covenants. That’s a perfectly practicable option for sources of infrastructure development funding. Slide 7 shows all this.

There is another question: suburban transport. This problem must be addressed, and now is the time to address it. Today, we have managed with great difficulty to balance out these budgets – I mean the 25 billion to support suburban companies for the infrastructural tariff. Any shift will cause tremendous damage. The regions also should be either prompted to find their own sources of funding or receive such funds if a decision is made on the Finance Ministry’s proposal to refund their expenditures.

I fully agree with you that this country will never see its potential without suburban and intercity railway transit. No air service or motor vehicle service will solve these issues. Meanwhile, we have difficulties even with intercity shipping after our economically substantiated allocations for such shipments were reduced by 6 billion roubles. As a result, we used up our rate regulation allocation at the end of October and were faced with a hard choice: either we make do without sleeping carriages, which might cause social discontent, or we carry passengers at our own expense.

Dmitry Medvedev: What did you come to, in the end?

Vladimir Yakunin: The Federal Passenger Company financed passenger transit single-handedly, so its profits barely exceeded 4 million roubles – less than the cost of one passenger carriage. But, Mr Medvedev, passengers want comfortable, air-conditioned carriages with chemical toilets, and this equipment cost more money.

As for our current freight transport, we have followed instructions on leasing rolling stock. At a meeting of the Energy Ministry it was stated that this is the first year without an acute shortage of coal wagons for the energy industry. However, Mr Medvedev, once again, that was done at Russian Railways’ expense. We have no equal terms with private companies. I would like to modify this slide you have, in which we say that we should deregulate wagon leasing. Possibly, we should make do with a fluctuation corridor at 20% to either side. Meanwhile, we are in a quandary. We cannot respond to the actual market situation while eliminating wagon leases would benefit the energy industry and communal services at the expense of socially important passenger transit. We are afraid this would bring negative results.

That’s all I wanted to add. I would also like to ask you to establish an interdepartmental working group that could determine extra non-budgetary sources for the funding of infrastructure development so that the process can be managed from one centre. This is an extremely topical issue, and we would like to see it solved as soon as possible. Thank you.

Dmitry Medvedev: Thank you, Mr Yakunin.

Ladies and gentlemen, we should first of all let the media people go. They are more dead than alive because they are standing while we are comfortably seated. They aren’t comfortable, but we can’t help it – we can’t stand up and give them our seats.

However, before the correspondents leave, I would like to highlight several important points. The present-day development concept for Russian Railways evidently demands major corrections because we can only keep afloat what we have while we cannot afford to solve even the simplest development problems. So we should think hard where to find funding sources. Mr Yakunin just said we should set up an interdepartmental group. I think this is not a bad idea. Let’s establish such a group. Do it please Mr Dvorkovich. Draw up proposals on what should be done, and how to staff the group. We don’t need miraculous inspiration – just new approaches on where to find the money.

We are in a complicated situation: we have budget limitations. We have budget rules with which we have tied our own hands. We have the current macroeconomic situation and the world financial situation to deal with. At the same time, we see that we can’t go without extra funds for our development. If we need state guarantees, let’s have them. I have no objections. Russian Railways evidently needs more money than it’s getting from bond investments. It isn’t 30 billion roubles, equal to a billion dollars – it’s a far greater sum, considering how large this country is. On the other hand, we should surely evaluate the general situation in the joint-stock company’s finances because, in the final analysis, [Russian Railways] operates as an ordinary joint-stock company though it is state-owned. It has all the requisite financial indices, and all the relations and balances mentioned here.

I would also like to say a few words about the National Welfare Fund. Please notice – this also refers to the finance minister, who is present here – that we have really agreed that the fund will participate in addressing relevant problems. I would like you to submit proposals on the use of the National Welfare Fund.

The commuter problem is extremely sensitive. Please submit proposals on how to develop suburban transit over the next three to five years. This problem concerns millions of people. It needs more than our traditional solutions. We cannot just shrug it off with: “That’s up to Russian Railways,” or “Let the regional authorities rack their brains over it.” The matter evidently demands a more sophisticated approach.

As for methods, we have agreed on them, and we will work according to them. The Federal Tariff Service might start it – I have no objections. We will shift to a long-term tariff, just as we stated in our discussion. Naturally, all agencies must prepare for this, just as our entire economy should. Why not use Russian Railways as a model to start this job?

We will discuss the figures now. In fact, this is all. I reiterate that the theme we are discussing is not just technological – it concerns practically all of our citizens, all of our industries and, in fact, our entire economy. So not just the development of Russian transport but all of Russia depends on what decisions we make now. Let’s get on with the job. Thank you. The press can leave now.

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