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2019 April 28

End of river shipping?

The long-running dispute between inland shipping community and Russian Railways (RZD) over discounts during river navigation periods has entered a new phase. Oleg Belozerov believes the industry should decide on whether the country needs this “inefficient fleet”. However, there is no guideline available as yet for acceptable balance between the modes.

Aging fleet: very little room for optimism

Recently, a meeting of the Commission of the Russian Union of Industrialists and Entrepreneurs (RSPP) was held in Moscow. The meeting chaired by the Russian Railways president Oleg Belozerov addressed issues related to transport and transport infrastructure development. The participants noted that the country's inland freight transportation sector is in serious condition. There are a few factors: some restrictions on inland waterway infrastructure, ruble devaluation, a surge of bunker fuel prices and besides, the discounts that Russian Railways offer cargo owners for the rail transportation of petroleum products during navigation periods.

Roman Trotsenko, Chairman of the Marine, Inland Transport and Port Industry Subcommittee, told the meeting that freight rates fell two to three fold, which, coupled with the above negative factors, entailed a 20-25 times slump in profitability of inland traffic.

"Today, the river fleet is unprofitable and the situation continues for 4 years in a row," said Roman Trotsenko.

He says the circumstances lead to an exodus of market players from the sector, to a downturn in shipbuilding sector and, eventually to underperforming of shipbuilding and supply enterprises. Trotsenko added that the current order book for new civilian mixed sea-river vessels accounts for only 15 to 17% of projected shipbuilding capacity, and those contracts were largely signed before 2018. “If this trend persists the shipyards orderbooks will soon be empty,” Roman Trotsenko is quoted as saying.

The unfolding situation may lead to the loss of competencies and bankruptcy of a number of shipyards, which will make it impossible to expand the Russian fleet in Russia in the future if the situation changes.

To solve the problem, Roman Trotsenko said, it is necessary to work out a long-term strategy for the development of the industry for at least ten years.

Yury Kostin, Director of the State Policy Department for Maritime and River Transport of the Russian Transport Ministry, who participated in the meeting, said that currently only about 2% of Russian foreign trade cargo is transported by Russia flagged vessels, and the average age of the mixed class fleet in the country, although decreasing, still remains at 27 years. As an example, Yuri Kostin referenced to China as an example, where the authorities were tasked with bringing to 70% the share of overseas trade cargo carried by China flagged vessels.

Rosmorport has set up a task team, which is working out a number of solutions aimed at development of inland water transport. The programme includes among others tightening of control over navigational safety and making it hard for unscrupulous players to enter the market.

As Sergey Buyanov, General Director of Central Marine Research and Design Institute (CNIIMF) told the RSPP meeting, to support the industry it is necessary to think how to ensure booking of shipping of Russian government or Ministry of Defense cargoes for vessels flying the national flag, to encourage the partially state-owned companies to place orders for inland transportation with domestic fleet, and to put forward the requirement of transportation by Russia flagged vessels as a condition for granting cheap loans and other forms of soft-term financing.

He noted that the Russia flagged fleet is capable of carrying 25% of overseas trade cargo and that it is necessary to build 90 new vessels for projected freight volumes by 2033.

Yet another speaker at the meeting Bakhtimir Kasimov, General Director of Moscow River Shipping Company, proposed that the operation of vessels older than 40 years be banned. There are 93 such vessels operating in the European part of Russia, he said. At the same time, it is worthwhile to increase funding within the scrapping subsidy programme, reduce harbour dues and increase insurance premiums for old ships. He added that it is necessary to prohibit the servicing of ships older than 40 years in Russian ports to prevent schemes for their re-registration under foreign jurisdiction.
 
Railway, shipping vs pipeline

When it came to such an important factor as competition with rail transport, the discussion took an unexpected turn.


Igor Romashov, Chairman of the Board of Directors of Stroytransgaz and Transoil and the former head of the Federal Agency for Railway Transport of Russia, said he believes that it is incorrect to speak about competition between rail and river transport. “We are not rivals, we are actually competing with a pipeline,” Igor Romashov was quoted as saying. He suggested that laying of pipelines along existing railways and inland waterways be banned. In addition, RZD pledges not to offer discounts for the river navigation period, discounts are provided under long-term guaranties for freight loading for the entire supply chain and suggested removing the RZD discount item from the draft resolution.

His action plan was backed by Oleg Belozerov, who believes that “we should think over the “main issue” of whether Russia needs an inefficient fleet”. As a compromise, he suggested that vessels carry cargo during railway infrastructure scheduled maintenance and repair.

Yury Kostin spoke in support of inland shipping, noting that the construction of the Bagaevsky and Gorodetsky water development facilities will help resolve one of the main challenges facing inland water transport — the limitations of allowable draft and navigation. Once the project completed vessels will be able to take on board more cargo and the profitability of river traffic will increase. Yuri Kostin also pointed to the decisions of the State Council on the problems of water transport, which imply support for this industry.

Following the discussion, it was decided to collect proposals for the development of water transport from stakeholders until May 22 and submit them to the Russian government, and maybe to Prime Minister Dmitry Medvedev. At the same time, CNIIMF was contracted to prepare an analytical study of current condition of water transportation.

I might add here that there were periods in the market economy history when governments did not interfere with the market processes, when its entire segments would close immediately when they did show profits. However, this led eventually to the Great Depression and the abandonment of the unregulated market. If the railway does not have a competitor like water transport, those discounts will hardly be provided by rail operator. And in the end, there will be no gain to shippers, because monopolization of the market inevitably entails tariff hikes. And it will not be so easy to roll back: you will have to create again a fleet from scratch, placing orders either with China, or investing in the shipbuilding sector revival, which will also suffer a loss. But then everybody will lose: both the state and the shippers. In such a scenario, the efforts of the state to build new hydro-engineering structures and increase in funding for the maintenance of inland waterways will be in vain, that is, public money going down the drain.

By Vitaly Chernov