Transportation of Metallurgical Freight: Intermodal Competition (Expert Review)

Transport system in Russia has never been homogeneous. There is a developed road and rail networks in the European part of Russia while the only way to reach some of the areas in Siberia and Russian Far East is air transportation. Today two main functions of the freight transport are sustaining industrial development and delivering export products.

In the USSR different means of transport were managed as parts of the unified system – thus, transportation was optimized. For example, road transport delivered freight from producers to the railway stations and vice versa, and rail transport was used for long-distance deliveries.

In the middle of 1990s the unified transport system started to transform into highly competitive system. Road transport became more competitive supported by governmental programs on road system development, renovation of car fleet. Moreover road transport was able to provide door-to-door deliveries, and had flexible tariff system.

At the same time railways missed the opportunity to change and adjust to the new market conditions. Many old features of railway system, which helped to sustain optimized transportation in non-market economy, but became obstacles in market economy, remained the same. These features include complicated schemes of applying for and negotiating the transportation, long delivery time, inflexible tariff system and class system of freight.

There is no doubt that competitiveness was lost not only because of the railways. In 1990s and early 2000s freezing of railway tariffs by state was one of the main state support measures for Russian industry. As a result railway sector was significantly underinvested; infrastructure did not develop due to the lack of funding, which led to increasing number of rail ‘bottlenecks’. We should mention that several industries (e.g. coal industry) are still supported by low export tariffs on rail transportation.

At the same time, initially road transport has been in more favorable conditions. Road carriers do not pay for maintenance and development of infrastructure while expenses on railway infrastructure account for 60% of total costs on railway transportation. However, starting from November 2014 federal road passage of trucks with a gross vehicle mass of more than 12 ton will cost RUB 3.5 per km (which is comparable to drivers’ labor costs). Thus costs for transportation of 1 ton of freight by a 53-foot trailer for 3000 km will increase by RUB 500, which can be compared to RZD JSC infrastructure and locomotives’ segments of tariffs on coal export.

There are many unlicensed carriers in road transportation market which use different schemes of tax avoidance and save on maintenance and renewal of car fleet. Such carriers are dumping illegally; it forces licensed carriers to use illegal schemes.

Corruption among regulatory authorities also contributes to unlicensed carriers’ well-being. For instance, the fine for truck overloading is hundreds of thousands RUB, but significant amount of trucks still carry freight being overloaded, and this money is not transferred to the budget. According to unofficial sources, carriers include “corruption costs” in their budgets, and these costs are almost equal to drivers’ labor costs.

Despite all these “unofficial” charges mentioned above, total cost of road transportation of 3rd class freight (high-profit freight with high level of processing) for more than 3500 km is 50-60% less than rail transportation.

Huge rail operators have already started to buy car carriers and develop their own car fleets. According to them, doing business in road transportation market is easier and more profitable compared to rail transportation market.

Rail transport is losing high-profit freight, including metallurgical products. Rail wheels producers have transported their products to overhaul plants by cars for a couple of years already. Some of the metallurgic plans being constructed today are suited only for road transport. Rail load of non-ferrous metals decreased by 5.8% in January-June 2013 while the production decreased only by 2.8%.

Decline in rail transportation of non-ferrous metals will persist unless rail companies and state officials make fundamental changes in their strategies and directions for development.

Alexander Polikarpov, Head of Freight Transportation Research Division

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