Agenda: Draft of Russian Railways’ investment programme and financial plan for 2014-2016 and 16 other issues.
Dmitry Medvedev: Colleagues, I’d like to say that I’ve signed a resolution on approving measures to increase the number of skilled workers. There will be a special procedure for drafting legislation for the independent assessment of professional skills and education establishments. At the same time, we should also modernise the curricula, primarily at engineering schools. As many as 250 new centres for applied qualifications are to open within five years.
As for our agenda today, the main issue concerns the investment programme and financial plan of Russian Railways. Its investment programme for 2014-2016 is 1.2 trillion roubles. This is a lot, but then, the company’s tasks are challenging too. This is why the Government will finance part of that investment programme and will allocate over 300 billion roubles to Russian Railways, despite the astringent three-year budget and current difficulties. The ultimate goal is to lift the infrastructure limitations that are hindering our economic growth. The throughput capacity of our railway system is clearly inadequate for developing some of our regions and their deposits, for ensuring the full traffic capacity of our seaports, and for successful operation in foreign markets.
Dmitry Medvedev: “The implementation of its Eastern projects (including the Baikal-Amur Mainline and the Trans-Siberian Railway) will increase cargo traffic by over 50 million tonnes annually by 2018.”
Nearly two thirds of the company’s investment resources, or more precisely slightly more than 60%, will be channelled into the renovation and modernisation of the railway infrastructure in the next few years, predominantly in Siberia and the Far East. The implementation of its Eastern projects (including the Baikal-Amur Mainline and the Trans-Siberian Railway) will increase cargo traffic by over 50 million tonnes annually by 2018. This is a solid foundation for creating new enterprises and new jobs, and moreover, this is a strong claim to servicing Europe-Asia transcontinental traffic, which we expect to keep growing.
The financial point is far from simple. I’d like to say that the system of revenues and expenditures should be analysed again with due regard for slowing economic growth. We did that when we drafted the federal budget. Now companies with state capital need to do this as I’ve said before, including at the Government meeting in September. Major steps have been taken towards this goal. This year spending will be reduced by over 90 billion roubles, and next year we plan to save another 80 billion. Anyway, there is room for optimisation through increased revenue and by consistently reducing expenditures. Expense optimisation should also include the improvement of quality, divestment of non-core assets and the reduction of management outlays based on proper concern for public safety, an area where you cannot be miserly and which must always be in the company’s focus.
Dmitry Medvedev: “This year spending will be reduced by over 90 billion roubles, and next year we plan to save another 80 billion.”
We also believe that all figures must be carefully scrutinised, including in financial and technological audits, to get a clear picture of expenditures and the reasons behind technical decisions, especially those that concern allocations from the federal budget and the National Wealth Fund. If necessary, corporate procedures should be adjusted too. It would be reasonable for Government members and the expert council to discuss the financial plans and investment programmes of every infrastructure monopoly, and this should not be limited to the issues which we customarily discuss with regard to Russian Railways.
At the end of the year we traditionally review our performance. This was a very difficult year. We acted in accordance with the provisions of the Policy Priorities of the Government and the Presidential executive orders of May 2012. We need to review our performance and make plans for the future. We will hold a meeting to discuss the implementation of the Policy Priorities and the Presidential executive orders.
Let’s start discussing the investment programme and financial plan of Russian Railways for 2014 and the planning period of 2015-2016. The Transport Minister will now deliver his report.
Maxim Sokolov: Mr Medvedev, ladies and gentlemen, colleagues. Allow me to present a report on the projects included in Russian Railways’ investment programme and financial plan for 2014-2016. Before I begin, I would like to speak briefly of the preliminary results of 2013 as the basis for further planning.
This year’s macroeconomic trends such as the pronounced slowdown in industrial production have reduced the volumes of cargo transportation by around 3.1%. Still worse, the change mostly affected third-class goods (flammable liquids under Russia’s dangerous cargo classification), which account for the bulk of Russian Railways’ revenues. To offset this reduction and its influence on the company’s 2013 financial results, Russian Railways implemented another cost-cutting programme this year.
The overall shortfall of expenses added up to 10 billion roubles this year, so that the 2013 budget spending section had to be adjusted accordingly for the purpose of making a forecast for 2014. Taking into account the decision to move the planned indexation of rail freight transportation rates from 2014 to 2015, the company was faced with the need to continue stable operation, to prevent a decline in its ratings and to ensure the physical volumes of its investment programme.
The baseline scenario for 2014 included industrial production growth at 2.2%. However, according to the adjusted forecast, which has not yet been approved by the government, the freight load on Russian Railways’ will amount to 1.240 million metric tonnes in 2014. In terms of the percent change, there will be an increase of 0.4% from the 2013 estimate. The distribution across the various cargo groups will be pretty stale based on the key industries responsible for single-industry towns.
Apart from the general macroeconomic measurements, the financial results will also be influenced by the cancellation of property tax breaks, the rise in electricity price for industrial consumers and other factors.
To maintain the financial balance in 2014, Russian Railways has introduced additional policies aimed at reducing costs by nearly 85 billion roubles by cutting its major facilities repairs programme by 36 billion roubles, by avoiding additional material costs, reducing spending on procurement as compared with the 2013 level by nearly 26 billion roubles, and optimising the number of employees (around 30,000 people), and by other measures.
The 2014 financial plan calls for improving and repairing over 5,000 kilometres of rail, including 4,000 kilometres where major modernisation and repair methods will be applied. The government decision to allocate in 2014 the 26 billion roubles formerly intended as a contribution to the Russian Railways’ charter capital for the development of its Eastern projects (including the Baikal-Amur Mainline and the Trans-Siberian Railway) will help stabilise the company’s finances this year.
While the planned major repairs in 2014 will be reduced from 2013, the length of the rail sections that put through excessive tonnage will resume growth and will account for 17% of the system by 1January 2015. This means that they have simply postponed the repairs costs, which will have to be compensated for later.
On the whole, the financial plan is balanced and will ensure loss-free operation in 2014 and an estimated profit of 100 million roubles. However, this estimate depends on several assumptions. For example, an income of 16 billion still has to be arranged by indexing the idle run rates or the bulk oil cargo shipment price.
Speaking of Russian Railways’ investment programme, I must note that the company plans to invest 1.2 trillion roubles in 2014-2016, including 395.6 billion in 2014, 415.2 billion in 2015, and 438.4 billion in 2016.
Maxim Sokolov: “The government decision to allocate in 2014 the 26 billion roubles formerly intended as a contribution to the Russian Railways’ charter capital for the development of its Eastern projects will help stabilise the company’s finances this year.”
In the medium term, the company plans to invest mainly in projects that stem from presidential and government orders, with the Eastern infrastructure development being the largest among them. The total worth of Russian Railways’ Eastern projects is estimated at 562 billion roubles. The government tentatively plans to provide 260 billion roubles in financial support, while the amount of investment will have to be reconfirmed based on the projects’ technological and price audit.
Other important projects sponsored by the government include development of the railway infrastructure of the Moscow transport hub, which is also expected to increase the capacity and general reliability of the transport system in Moscow and the suburbs. There are also projects to develop the railway section between Mezhdurechensk and Taishet that will provide additional access for the Kuzbass and Tuva coal supplies to the Trans-Siberian Railway and further to the Asian and Pacific countries, to conduct a comprehensive renovation of the access to the ports of the Azov and Black seas, and to construct a bypass around the Krasnodar railway hub.
Our company plans to spend 418 billion roubles of its own money and loans, or 33% of the total investment budget, on state-funded projects within the next three years. The government support of the Russian Railways investment programme, including the funds of the National Wealth Fund and the funds provided funnelled into the registered capital within the current budget cycle, will amount to almost 352 billion roubles.
Another important application of the company’s investment funds is for projects that do not require large-scale construction of new facilities but are supposed to remove infrastructure restrictions from the railway network. Within the next three years, these projects will receive 360 billion roubles, including 125.7 billion or 29% of the total investment budget next year. The money will be spent on complex projects to increase the capacity of the railway network, repair the tracks, and construct and renovate facilities. In general, over 9,300 km of railway tracks, 660 km of overhead lines and some 245 km of signaling blocks will be renovated as part of the investment programme.
We also intend to spend significant funds, about 281.5 billion roubles, to upgrade the rolling stock between 2014 and 2016, including over 101 billion roubles in 2014. The bulk of the money, some 224.5 billion, is required to upgrade motive power. The investment to be provided by the proposed investment budget will allow as many as 1,529 new locomotives to be purchased within the next three years, including 629 locomotives next year, 450 locomotives in 2015 and 450 locomotives in 2016. These will be locomotives with increased capacity and energy efficiency compared to the locomotives currently in operation. The new locomotives are produced in Russia.
Over the next two years, we also plan to spend 133.5 billion roubles, including 45 billion roubles next year, on technology for the production process and for increasing railway safety, on supporting the current railway capacities, as well as on ensuring transport and fire safety and upgrading the civil defence facilities.
Maxim Sokolov: “The investment to be provided by the proposed investment budget will allow as many as 1,529 new locomotives to be purchased within the next three years, including 629 locomotives next year, 450 locomotives in 2015 and 450 locomotives in 2016.”
To succeed in the planned investment programme, Russian Railways will continue to build up its credit portfolio. According to forecasts, the financing gap of the investment programme covered by the company’s infrastructure bonds and Eurobonds will amount to 124 billion roubles. It is highly important to reserve the opportunity for Vnesheconombank to purchase at least 50 billion roubles worth of infrastructure bonds of Russian Railways on the terms previously agreed on by the Government. This year’s total credit portfolio is expected to rise by just over 58 billion roubles and reach almost 685 billion roubles with a debt-to-EBITDA ratio of 2.6.
That being said, the financial plan and the investment programme have been balanced out and generally correspond with the current goals. Please approve the details of the investment programme and the financial plan for Russian Railways for the next three years, from 2014 to 2016. In order for the financial plan and the investment programme to remain balanced in the medium term, a decision is required on freezing or decreasing the procurement costs that we discussed when the decision was being made on zeroing fares in 2014.