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Hitting the junction

Government greenlights plan to spin off ČD's freight division

By Markéta Hulpachová
Staff Writer, The Prague Post
August 1st, 2007 issue

COURTESY PHOTO
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COURTESY PHOTO
ČD is planning to modernize its passenger fleet with an 860 million Kč loan from Eurofima, including nine new CityElefant regional trains.
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The long-planned privatization of the joint-stock railway company České dráhy (ČD) is chugging along. The Cabinet approved the next steps of the government’s plan to separate ČD’s freight and passenger divisions July 25, preparing the company for an infusion of private investment.
In its last meeting before summer recess, the Cabinet agreed to spin off ČD Cargo, ČD’s freight unit, into an independent subsidiary. The move will allow the state to transform ČD into a holding company, providing the fiscal transparency an investor would demand.
While originally planned for this November, the government has now postponed the separation of ČD Cargo until April 2008.
“The final decision is different from what was originally planned,” said Prime Minister Mirek Topolánek after the meeting. “In November, we will present a time chart of the next steps.”
It’s expected the government could earn up to 12 billion Kč ($586 million) from a partial privatization of ČD. However, such a sale would once again saddle the country with deficits arising out of ČD’s passenger division that could amount to 640 million Kč a year. For the first time in its history, ČD has begun to run a profit this year, thanks to its freight division.
Prior to hiving off ČD’s freight division, the government plans to shift the company’s passenger division to the Railway Infrastructure Administration (SŽDC), the independent, state-controlled operator of national railways, in January 2008.
According to Topolánek, the delay is due to unresolved financial issues within ČD. Extensive financial reforms are needed to disentangle the interwoven financial operations of ČD’s two divisions, which currently make precise monitoring nearly impossible.
“The [current system] is completely nontransparent,” Topolánek said. “It’s not only a question of cross-financing, but also of mutual funding. We are providing the funds, but we have no idea whether or not the unit is profitable.”
While stalling for time, the government faces mounting economic pressure to privatize the company. Aside from incentives to increase the international competency of ČD Cargo, the privatization of ČD is further pressured by the government’s pledge to lower the budget deficit.
Rail time
After cleaning up ČD’s expenditures, the government expects to gain a better perspective on the financial gap between ČD Cargo and the passenger transport unit.
“Passenger and regional transport will be transferred to the [SŽDC], and we will finally know how much it’s costing us,” Topolánek said.
While continuing to subsidize passenger transport by rail, the government could earn billions of crowns through the privatization of ČD Cargo, according to the Transportation Ministry. The freight division has become highly profitable, and just last month announced an 8.7 percent increase in sales.
ČD Cargo has grown to become the fifth-largest rail freight operator in Europe, and it is in prime position — both geographically and financially — to capitalize on Europe’s booming rail freight industry, which is itself growing in response to European Union incentives and traffic-choked highways. Without their troubled passenger unit, ČD Cargo has the potential to become a dominant player on the European market.
The establishment of an independent ČD Cargo is further prompted by successful models in Austria, Germany and Slovakia, where the process of rail freight liberalization is already complete.
“In all these countries, we see cargo entities operating within the structure of national railway carriers,” said ČD spokesman Aleš Ondrůj. “If the Czech Republic wants to maintain its strong position on the European logistics market, this is one of the key tools how to support it.”
While selling off a majority of ČD Cargo stock would secure an immediate profit, the government is currently only considering the entry of a minority shareholder.
“I don’t think selling off 100 percent to German railways, for example, could be a solution,” Transportation Minister Aleš Řebíček told the Czech News Agency.
Although the government considers ČD’s reorganization to be a profitable move, the process may increase its financial obligation toward rail transport in general. And, according to a report submitted to the government earlier this year by ČD’s management, the company expects the state to cover the losses generated by passenger transport.
“This [sum] should not represent a substantial burden for the state budget,” ČD General Manager Josef Bazala told the daily newspaper Právo in June.
While tackling these losses, ČD is also working to modernize its outdated technology. Earlier this month, the Cabinet approved an 860 million Kč loan from the railroad company Eurofima for the modernization of ČD’s passenger trains. Classified as state aid, the government’s guarantee for the loan was subject to approval from the European Commission.
A portion of the loan has been used for the purchase of nine new CityElefant passenger trains for regional transport, replacing the trains’ earlier versions, which have been operating since the 1960s.
If realized, the transformation of ČD Cargo into an independent subsidiary will be ČD’s most dramatic structural development since the company’s 2003 changeover to a joint-stock company. That reorganization placed the Czech Republic ahead of most EU countries by complying with an EU directive requiring member states to open state-owned railways to private carriers by 2005.
Although ČD maintains a dominant position on the domestic market, the presence of privately owned freight companies on railways has doubled since 2005.
“The railway market in the Czech Republic has been fully liberalized,” Ondrůj said. “The railroad infrastructure is owned by an independent state organization, and everybody who complies with general conditions can start activities in this area.”

Markéta Hulpachová can be reached at mhulpachova@praguepost.com


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