Significant developments help future sustainability

2007 was one of the most controversial years in Estonian Railways’ history. The year could be characterised by the repurchase of company’s shares by the government, record freight volumes during the first months of the year, record low volumes during the second half of the year, cost savings, staff reductions, efficiency improvements and preparation of the new business plan.

On 9 January 2007, the Republic of Estonia became the sole shareholder of Estonian Railways, after it purchased 66% of company’s shares from OÜ Baltic Rail Services. The shares repurchased by the government were sold to private investors in 2001.

Estonian Railways celebrated its 137th anniversary in the autumn of 2006. Despite many difficulties that have occurred throughout its long history, the company can be proud that it has always been able to survive and continue on its path to success.

The first four months of 2007 were the months when Estonian Railways carried record freight volumes. The average number of trains received daily at the border reached 36.1 and the monthly freight volume exceeded 4 million tonnes. The majority of the freight came from Russia and moved through the Estonian ports to Europe and America.

Between April and May 2007, a sudden deterioration in the political relations between Estonia and Russia took place, which had a strong impact on the economic relations of the two countries. In the period between May 2007 and the end of that year, Estonian Railways received an average of 18.7 trains per day at its border and the monthly freight volume decreased to 2.2-2.5 million tonnes. This volume level has stayed the same, even today.

Estonian Railways assumed that the development of ports in the Gulf of Finland would allow Russia to carry most of its oil products via its own ports only in two-three years’ time but Russia was able to reorganise the logistics of cargo lows much earlier.

In addition to reductions in freight volume, major changes in the commodity structure also took place. Whilst there were significant reductions in the transit volumes of liquid and solid mineral fuels, the volume of domestic freight made a huge leap forward. Larger oil shale volumes gave most of the growth.

The total volume of freight hauled on the infrastructure of Estonian Railways in 2007 reached 36.68 million tonnes. This volume was allocated between the three rail transport undertakings on the market, which were as follows:

• Estonian Railways 62.8%
• Westgate Transport 23.4%
• Spacecom 13.8%

The major commodity hauled by rail in 2007 was oil and oil products – amounting to 22.29 million tonnes in total. Compared to the previous year, the volume of oil products decreased by 3.68 million tonnes. The reduction in volume was mainly caused by the significant reduction in the volume of gasoline and diesel fuel. The volume of heavy oil that made up 70% of oil and oil products remained at the same lever recorded in 2006.

Whilst in 2006 the volume of coal hauled by rail totalled 7.78 million tonnes, in 2007, the coal volume dropped by 55%, reaching only 3.49 million tonnes in total.

The only commodity which occurred a significant increase in volume was oil shale: the volume hauled grew from 1.99 million tonnes to 3.29 million tonnes.

The volume of fertilisers hauled by rail in 2007 totalled 1.96 million tonnes – which was 17% less than in 2006. A reduction in the volume of timber also occurred – the total volume of which was 1.01 million tonnes and 38% lower than in the previous year. The volume of ferrous metals and bulk goods was close to one million tonnes. The volume of ferrous metals reached 0.99 million tonnes, decreasing by 20% year on year, whereas the volume of bulk goods was the same with a 32% growth. In case of bulk there was a growth both in domestic and export volumes.

In 2007, 0.93 million tonnes of chemical products was hauled, the volume of which has consistently been reduced by 17% year by year.

Another major commodity to increase in volume during 2007 was grain; most of it hauled as transit. The total grain volume reached 0.81 million tonnes, increasing by 25% compared to 2006.

Transit continued to be the most important mode of rail transport that gave more than 75% of the total freight volume. The volume of freight hauled as transit totalled 27.37 million tonnes, being 24.5% less than a year before. Domestic volumes reached 4.89 million tonnes and exceeded the volumes of 2006 by more than 50%.

2.09 million tonnes of freight was imported to Estonia, showing a reduction of 28%. Import freight volume moving inside the European Union grew by 4%, totalling 0.92 million tonnes. The volume of export grew by almost 26%, reaching the total volume of 0.68 million tonnes. The EU-related export remained at 2006 level, totalling 0.44 million tonnes. Intra-Community transit volumes doubled and reached the volume of 0.29 million tonnes.

Budget

The budget of Estonian Railways for 2008 has been prepared, keeping in mind that our freight volume is expected to remain at the same level as it was during the second half of 2007. This means that if the freight volume of 2007 was more than 36 million tonnes, then the projected volume for the next year is just 26 million tonnes.

The sudden and drastic reduction in freight volume in 2007, forced Estonian Railways to apply significant saving measures. The company had to reconsider its need for labour force, as well as expenditure and investments.

Due to the reduced amount of business, we unfortunately had to lay-off 200 railway workers. The number of people currently working for Estonian Railways is close to 2,100. We also cut down on costs by hundreds of millions of kroons, maintaining at the same time the volume of investments into railway infrastructure.

Today, I am ready to affirm that the internal measures applied due to the changes in freight volumes that occurred last summer have proven to be efficient. By changing the structure and pricing of freight transport operations, we have been able to achieve a situation where Estonian Railways is still capable of repaying its debt, making infrastructure and rolling stock investments, ensuring traffic safety is met and providing good working and salary conditions for its employees, as well as continuing to be profitable.

The sudden reduction in the volume of freight originating from Russia provided a basis for reassessing the needs of the rail transport market. One thing is sure: Estonian Railways will never carry such big quantities of oil products from the eastern border to the ports as it once used to.

Instead, we are developing international container traffic travelling between east and south, and increasing the volume of domestic freight. The development of RailBaltica, connecting provisionally Helsinki and Warsaw, which is meant to be used for carrying both passengers and freight, has been given priority on a national level. Latvia, Lithuania and Poland are working on the same project in parallel with Estonia.

Business plan

In September 2007, the Estonian Government approved the new business plan of Estonian Railways. The business plan comprises a model reflecting the reduction in business volumes, as well as the need for increasing the average level of infrastructure access fees and freight tariffs.

The business plan focuses on the expected developments during the years 2007-2017. The plan was put together during the weeks following the restrictions applied by Russian authorities and it was adjusted in the middle of September.

Although we may expect a certain growth in freight volumes in the short-term perspective, in the long-term perspective we still foresee a reduction in the volume of freight moving from east to west due to the rapid development of Russian ports.

The business plan anticipates the need to concentrate more on freight flows that are not so dependent on sensitive political issues.

In summer 2007, Estonian Railways launched regular container trains going to Moscow and later to Kazakhstan. Today, we have an average of two container trains per week going from Tallinn to Moscow.

A significant increase in the volume of container business requires vast investments in modernising our wagon pool that has to comply with our future needs.

Having the government as our sole shareholder enables Estonian Railways to use alternative sources of financing, EU structural funds, for example, and to refinance the interest bearing liabilities of the company with cheaper loans.

As a state-owned company, Estonian Railways can use support from the EU structural funds for financing its infrastructure repair and maintenance projects. Before that we had to finance all of our investments ourselves. Now the EU can add through the Estonian Government four kroons to each kroon invested in our major projects. New investments will bring the technology used by Estonian Railways into the 21st century.

The future of Estonian Railway’s freight transport operations lies in the development of container business. The opportunity to bring Chinese cargo to the Estonian ports and carry it by rail has been talked about for years. After the Minister of Economic Affairs and Communications visited China with the delegation of Estonian businessmen, the cooperation between our two countries is moving towards Estonia becoming one of the logistic centres for container freight in the Baltic Sea region.

On 11 January 2008, the fourth largest port in the world – the Port of Ningbo – and the Port of Tallinn, signed a letter of intent with the objective to move at least 10 million TEUs of containers through Estonia to the east starting from 2011. The ports have decided to join their efforts in order to establish a distribution centre for Chinese goods in Muuga port, located nearby Tallinn. The distribution centre is expected to service the entire Baltic Sea region.

In the next stage of cooperation, the two ports are expected to build at Muuga a container terminal and distribution centre worth 2.33 million Estonian kroons. The capacity of the new container terminal to be built in the eastern part of Muuga port would be close to 1 million TEUs in the first stage. The capacity can be increased in the future.

The total investment amounts to 220 million US dollars and the construction of the new terminal should be completed by the end of 2010 or at the beginning of 2011. This terminal would be the first major distribution centre for Chinese cargo in the Baltic Sea region and it could service the markets of North-western Russia, Scandinavia and the Baltic countries.

This is undoubtedly an extremely positive development for Estonian Railways, as prioritising container freight is one of the objectives set in our business plan. During the following three-four years, we should be able to carry almost 1 million TEUs of containers arriving at Estonian ports.

Juhan Parts, Estonian Minister of Economic Affairs and Communications, has said that the agreement between ports is important for the entire Estonian transit and trade sector, as it creates a direct link with one of the fastest growing economies in the world – China.

The Minister affirmed that Estonia should make the most important investment related decisions already this year. It should be decided whether there should be any new companies established and how will the facilities to be built be operated.

The Estonian business delegation, including representatives from Estonian Railways, will be visiting China again at the end of March to discuss the next steps of cooperation.

There is still a long way to go for the extension of port and growth of container volumes hauled by rail. The cooperation between ports has to move from the planning phase to taking action. Estonian Railways is one of the companies that needs to make investments in order to be ready for the significant growth in container volumes.

Decisions based on economic considerations are not made overnight and it will take several years before today’s plans are brought to life. It took several years of preparation before we launched our container trains going to Moscow and Kazakhstan. The Chinese freight is one of our objectives for the future.

In addition to international projects, the Marketing Service of Estonian Railways is working hard on growing domestic volumes. There are several major construction projects that are about to start in Estonia and it would make more sense to carry the construction materials by rail rather than by road.

One of Estonia’s railway infrastructure owners, Edelaraudtee, recently gave up freight operations on its own infrastructure and decided to focus on passenger transport. Therefore, it is possible that Estonian Railways will start freight operations also on Pärnu and Viljandi lines.

We have held meeting with our colleagues from Finnish Railways to discuss the potential of a train ferry connection between our two countries. It has been estimated that each year, the Finnish timber processing industry would need 1.7 million additional tonnes of timber from the Baltic countries. The train ferry could also carry annually 0.5 million tonnes of other commodities. 2.2 million tonnes is the minimal freight volume that would justify the launch of the ferry. We will see whether the plan is viable and if it will stand the test of time.

During the years 2008-2011, Estonian Railways will concentrate on the renewal of Tallinn-Valga railway line, which is one part of the international RailBaltica development project. According to the business plan of Estonian Railways, the company will invest in railway infrastructure up to 5 billion kroons by the year 2017. In the next couple of years, 177 million kroons from the TENT fund of the EU will be used for financing RailBaltica project. Estonian Railways has filed several more project funding applications for hundreds of millions of kroons.

The renewal of Tartu-Valga (up to the state border) railway line will start in April. The first stage of the project will last until November 2008 and the works will continue in 2009. The cost of work completed in 2008 may reach 200 million kroons, depending on the results of procurements.

The total length of sections expected to be renewed during 2008 is 31km, and next year it is forecasted to be 25km. The works planned include track superstructure (rails, sleepers, ballast) replacement, welding of rails, tamping and alignment works, renovation of level crossings, cleaning of land, etc. The project includes reconditioning of the problematic bridges located on the renewed sections.

The improvement of track condition facilitates primarily passenger train operations. In 2011, passenger trains will be able to drive at speeds up to 120km/h all over Estonian Railways’ infrastructure. This would allow the passenger train operators to start using modern rolling stock and become more competitive with other modes of public transport. In a longer perspective, it is possible that investments in railway infrastructure would enable to raise passenger train driving speeds up to 160km/h.

There are three passenger operators operating on the infrastructure of Estonian Railways. Edelaraudtee and Elektriraudtee provide domestic passenger transport services. International passenger trains between Estonia and Russia are operated by GoRail and starting from this spring also by Latvian Railways.

From 1 January 2009, Estonian Railways will have a new company structure. The company will be divided into three: a parent company with two subsidiaries dealing with freight transport and infrastructure management. This will hope to improve the transparency of costs in those two areas of activity and allow the independent development of both freight transport and infrastructure management divisions.

Kaido Simmermann

Kaido Simmermann studied at Tallinn Technical University where he gained an MA degree in Railway Engineering and he also studied Road Engineering. Between 1994 and 1999, Mr. Simmermann was a lecturer for Railway Engineering at Tallinn Technical University. Mr. Simmermann has held numerous positions at Estonian Railways, including Advisor to Director General between 1994 and 1995, Infrastructure Director between 1995 and 2007 and he is now Managing Director and Chairman of the Management Board.