Henry Posner's remarks at Russian Railways Conference, Moscow, Feb. 2004 (cont.)

FIRST PRIVATIZATION OF A FORMER SOVIET RAILWAY: Bringing International Experience and Best Practice to Estonia


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SPEECH DIRECTORY: Background on RDC RDC Businesses USA Argentina Guatemala Peru Malawi / Mozambique Estonia Investment Parameters Why Estonia chose to privatize How Estonia was restructured Results to date Differences between Former Soviet railways and other continents Differences between Estonian Railways and Russian Railways Estonian Railways' market position Estonian Railways' strategy Suggestions for Russia Q & A Session	Background on RDC - Investment Parameters Let us now discuss RDC’s investment parameters. In an investment environment RDC looks first and foremost for a committed government. If a government is simply going through the motions of appearing to restructure in order to satisfy politicians or The World Bank, we are not interested in being used as a stalking horse to make government agencies look busy. Second, we are looking for rational competition among bidders. In Africa our competition is the governments of France and South Africa, through their national railways. When these particular governments are our competition, I will confess to you that RDC has less money than they do and we are not likely to enter into that sort of competition. Third, we always have local partners. It is more important to know the politics, the culture and the macroeconomic business environment than it is to know anything about railways. Fourth, and only fourth in priority, are railway skills. I am not trying to paint an unusually modest picture of what RDC is, but this is the reality of how we invest and we think it is an important consideration as far as investment is concerned.
	Background on RDC — Businesses Now, on to Estonia, where since 2001 we have been partners with Rail World (USA), Jarvis (UK), Ganiger (Estonia) and the Estonian Government. Estonian Railways is a very interesting business in many respects. First of all, it goes to Russia (map) and most of our customers are Russian customers. It is also the first vertically integrated privatization of a national railway in Europe. And compared with the other businesses RDC is involved in, this is a very big business, with 40 million annual tons of traffic; this would put it in a league with some of the biggest railways in North America. And while this is a relatively small network, it is very strategic because its main business is moving Russian traffic to and from the Baltic ports. This photo shows the most highly visible accomplishment of Estonian Railways, and that is to take used locomotives from North America, re-gauge them and put them into service. By doing so, these 15 to 20 year old locomotives replaced two-section 2TE116 type locomotives and still have extra hauling capacity. This should be very interesting to those in the rolling stock business in the Russian market. There are many interesting opportunities to take used equipment from one place to another depending on the market and the operating conditions.
	Why Estonia chose to privatize So, why did Estonia privatize? The reasons were not unusual compared with the privatization schemes of other countries. One reason was to eliminate losses, but more importantly it was to improve the competitiveness of what is a major business for Estonia, the transit business. A big piece of Estonia’s economy consists of traffic such as oil moving from Russia to export, so between the Estonian Railways and the Estonian ports this is the core business. Another reason was to restructure along business lines. The freight railway was privatized; the passenger business was spun off into several businesses, some publicly held and some privately held. The point was that each type of business was put into its own company so that each management team could focus on its business.
	How Estonia was restructured The prime business of Estonian Railways is freight. The core businesses are the provision of infrastructure and the operation of freight trains. There is provision for Open Access freight operators. And as I said, the passenger business has been moved into several private companies–one receives a subsidy and one does not receive a subsidy. The electrified service around Tallinn remains in public hands.
	Results to date Let’s discuss the results to date of the privatization of Estonian Railways. The best measure is traffic and as the graph (Graph A) will show, traffic has increased since privatization. It is also important to note that the railways have worked very closely with the ports in order to make this happen. The Estonian ports are very competitive and Estonian Railways is helping them become even more competitive.	Top
	Graph A
	The financial result is one of increasing profits (Graph B). One thing that I should point out since this presentation was put together is that we were able to refinance our debt in the private sector. But the IFC (the International Finance Corporation) was extremely important in getting this off the ground and providing financing when it was privatized.
	Graph B
	My personal, most important measure is Safety. We have had a steadily improving safety performance since privatization (Graph C). These are very good results by North American standards, let alone by Estonian standards. The results speak for themselves.
	Graph C

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