Regulation of tariffs for rail freight: the effectiveness of reserves

6 april 2015

Experts of the Directorate for Competition Policy studied the regulation of tariffs for rail freight, including the basics of the tariff making for rail freight services and possible ways of their optimization.

Experts note a significant consolidation of the role of rail freight in the Russian economy over the past four decades: its share in the total turnover of the country (excluding pipelines) increased from 70% to 85% between 1970 and 2009. The value of the transportation component in the final price of products and the availability of transport infrastructure are essential factors of the domestic production competitiveness of a number of industries.

The share of the transport component varies considerably by industries and depends on the distance of transportation. According to the Russian Railways, the transport component of the final price of products ranges from 10% to 30% for the main amount of transported goods. Such high figures indicate the importance of effective charging not only for the transport sector, but also to ensure the competitiveness of domestic products in general.

Authors of the paper remind, that the operator activity under the railway reform in Russia was almost entirely derived from the Russian Railways and now the vast majority of cargo is carried in private wagons. The payment of their rent is set by owners of the rolling stock in the free mode, and the Russian Railways gets a profit for the use of infrastructure and the provision of locomotive traction according to the Tariff FTS (the Federal Tariff Service) of Russia.

The high competition from other modes of transport (primarily the cars) leads to an outflow of highly remunerative cargoes from railways and the replacement of them by low income cargoes. The annual report of Russian Railways for 2013 indicated, that 60.5% of goods transported by rail in 2013, belonged to the category of low-income, 27.2% - to the middle-income category, and only 12.3% were in the category of high-yielding.

Experts say about the current tendency to reduce the effectiveness of rail transport. Reasons lie in the achievement of thresholds for the capacity of roads in some areas, and in excess of wagons. However, the main factor hindering the normal development of the freight sector, is the opacity of the tariff making.

The usage of a set of correction factors makes it difficult to identify patterns of tariff setting, which increases the risk of unjustified preferences to individual participants of the transportation process. "Since 2013, organizations of rail transport were granted the right to change the level of tariffs for railway transportation for cargo inside the tariff band, set by the FTS of Russia in the form of indexes to existing tariffs of the Base price schedule № 10-01 in the range from -12.8 to 13.4%", experts write. The index of changes in tariffs for freight traffic is set according to decisions of the Government of the Russian Federation on an acceptable level of indexation of tariffs for these services for the corresponding period of regulation and the Forecast of socio-economic development of the Russian Ministry of Economic Development. However, rail freight rates show steady growth and were not reduced even in a crisis of 2008-2009. From 2002 to 2014, the prices rose by 4.1 times, while producer prices in the manufacturing sector during this period increased by 3.7 times, in the mining sector - by 6.8 times.

Authors of the paper remind that in 2013 it was announced about the freezing of tariffs for gas, electricity and rail freight industry in 2014, and in 2015-2016 these tariffs were to be indexed to inflation. "The increase in transport costs of shippers creates a number of negative effects on the economy, as the increase in the cost of goods in the domestic market, reducing the competitiveness of domestic producers in the world market, higher inflation", said in the bulletin.

To improve the efficiency of the sector, experts suggest increasing the transparency of tariffs for rail freight, not forgetting the achievement of the required level of loading and logistics optimization. According to them, review of methods of freight tariff making will help to resolve the situation, namely the allocation of 3 components of it - infrastructure, locomotive and wagons. According to analysts, the amendments' arrangement and changes to the current List № 10-01 are necessary as well.

Read more in the bulletin on the development of competition number 10 "Regulation of tariffs for rail freight: the effectiveness of reserves." (In Russian)

Other editions of papers on the development of competition can be found in the Publications section.