Deregulation and development of the Russian and Commonwealth of Independent States rail sector is a good example of the public sector partnering with private business in order to resolve a sector capacity issue and facilitate economic growth at the macro level.

Deregulation and development of the Russian and Commonwealth of Independent States rail sector is a good example of the public sector partnering with private business in order to resolve a sector capacity issue and facilitate economic growth at the macro level.

In the 1980s, the Soviet railroad was the largest rail system in the world, accounting for half of the world’s total railroad turnover. This is no surprise: given the size and the terrain of the country, rail was historically the main mode of transportation and the bloodstream of the country’s economy, accounting for the bulk of goods transport (without taking pipelines into account). But after the disintegration of the Soviet Union, the country’s rail system was divided among 15 newly independent states, which included the infrastructure and rolling stock. In the end, Russia inherited approximately 1.1 million freight rail cars (1992 data), all held by the state.

During the Russian economic collapse of the 1990s, the declining cargo turnover and low earnings of the rail system led to very little investment in the replacement of the rolling stock. Just one decade after the record-breaking statistics of the 1980s, rail traffic in Russia bottomed out in 1998. At 60 percent of the peak reached in 1988, a large proportion of the rail car fleet was now parked idle. Worse, because the cars were aging, thousands of them had to be scrapped and very few were replaced due to the lack of finance. As a result, only slightly over half of the initial number of rail cars survived through the 1990s (630,000 cars).

Starting over

At the start of the twenty-first century, Russia’s promising economy grew by some 7 percent per year on average between 1999 and 2008. This resulted in an increasing demand for the transportation of goods, especially commodities—which need to be moved by railcars. A lot of railcars. But the aging fleet could not meet the demand, as the state still lacked funding to quickly provide new rolling stock for the growing traffic.

To tackle the problem, Russia’s government decided to turn to private finance. It embarked on a long-term rail sector liberalization program, a part of which addressed the issue of providing access to the state-owned rail track to private rail car owners and incentivizing them through the tariff system to invest in rolling stock. Spin-off and privatization of state-owned rail car operators followed suit.

The private sector responded quickly with a massive acquisition of rail cars. In 2003 the number of private rail cars in Russia reached 200,000; by contrast, at the end of 2011 this number shot up to 530,000, representing over half of Russia’s 1 million strong rail car fleet. Another benefit accompanied this development: private fleets tend to be much younger and in better condition than those of the state-controlled entities. By 2010, there were a whopping 2,000 private rail car owners (leasing companies and logistics operators) in the country.

As these numbers demonstrate, the rail sectors liberalization and creation of a favorable investment environment for the private sector helped alleviate the rolling stock shortage in Russia and facilitate the economy’s growth. Other countries of the former Soviet Union took similar steps to attract private sector investment in rolling stock.

But the crisis is not quite over. Having addressed the rail car availability constraints, Russia is now facing increasing track capacity shortages in certain parts of the rail network, especially in proximity to major sea ports. Cooperation between the public sector (which owns the infrastructure) and private business may offer a solution to the fixed infrastructure capacity issue, just as it helped solve the country’s rail car deficit.