FSC logo means that this Report was printed on paper that comes from responsibly managed forests Federal Passenger Company Annual Report 2016 Annual Report 2016 Federal Passenger Company In 2016, RZD Holding’s key focus throughout the year was on improvements to customer service. We strove to improve the quality of passenger service by leveraging our own resources and capabilities. Through our efforts undertaken as part of the Year of the Passenger Programme, we succeeded in reversing the negative trend in passenger transportation, carrying 1.37 billion people by rail, a 1.6% increase over 2015. Domestic travel has gained popularity with passengers, including leisure travel, which was particularly visible in strong passenger numbers during the summer holiday period. To make our services even more convenient for our passengers, we started selling tickets for all long-distance trains 60 days before departure. We plan to increase this period to 120 days, to enable customers to plan their travel well in advance. We remained fully aware of passengers with restricted mobility or other special needs, focusing on providing greater comfort to these customer groups aboard trains and at stations. From a message by RZD President Oleg Belozerov JSC RZD Annual Report 2016 – Year of the Passenger Improvement of service quality throughout the customer journey Before travel During travel After travel Care for passengers E-ticket sales New routes New rolling New customer with reduced Passenger Corrective stock experience mobility feedback actions Loyalty Dynamic New travel experience New services Satisfied programme pricing and loyal customer Year of the Passenger 2016 Priorities HIGHER AFFORDABILITY HIGHER COMFORT DEVELOPING A CUSTOMER CENTRIC OF SERVICES AND SERVICE QUALITY APPROACH TO PASSENGER SERVICE • 50% discount off the price of tickets • Development of ticket sales Stronger customer focus among for children • Expansion of the product portfolio the personnel • Lower tariff indexation for third-class • Provision of additional • Passenger feedback sitting and sleeping carriages on-board services • Development of the Revenue Management System and Loyalty Programme SERVICES TO PASSENGERS WITH REDUCED MOBILITY IMPROVED GOVERNMENT RELATIONS • Inter-Regional Passenger Service Long-Term Regulation Concept • Reduction of the VAT rate for passenger services to 0% A new Moscow – Berlin Strizh train was launched in the Year of the Passenger. Its carriages are equipped with a variable gauge system, unique in the Russian market, which automatically adjusts axle gauges for efficient conversion between Russian and European tracks. Moscow Berlin Children on Board Programme Under Children on Board Programme, FPC purchased two double decker inter-regional (open-plan seating) carriages with a children playroom for passengers with children. The carriage has everything a child may need: educational games, cuddle toys, a TV set, and colouring books. The first run of such train took place on the Moscow – Voronezh route on 27 December 2016. Oleg Belozerov President of Russian Railways Content Company Government 4 Profile 60 Relations Geography 4 Investment appeal and key indicators 6 Company history 8 Competitive advantages of long-distance trains 12 FPC peer companies 14 Key events in 2016 16 Message from the Chairman of the Board of Directors 20 Message from General Director 22 Risk 64 Management Overview of the risk management framework 66 Risk management structure 67 Stages of the risk management process 68 Risk matrix 69 Company Risk map 70 24 Strategy Mission, Vision, and Strategy 26 Strategic projects 31 Key objectives for 2017 37 Passenger The Company’s 88 Service Business Model 38 and Assets Quality policy 90 Quality monitoring 90 Business model 40 New carriage types 92 Assets 42 On-board passenger services 94 Organisational structure 45 Projects implemented 102 Expanding the area covered by Daytime Express train services 104 Examples of projects planned for 2017–2018 105 46 Market Overview Macroeconomic environment 48 Russian market of transport services 50 International transport services market 51 Pricing policies 52 108 Safety and Security Train operation safety 110 Fire safety 111 Marketing Industrial safety 112 54 Policy Transportation safety and security 112 Corporate, economic and information security 113 Occupational health and safety 113 Key marketing initiatives in 2016 56 Anti-corruption policy 114 Dynamic pricing system 57 Loyalty Programme 58 Review of Operating and Financial Corporate 116 Results 150 Governance Operating results 118 Overview of the corporate governance model and practice 152 Highlights 119 Share capital 156 Changes in key indicators over 2016 120 Dividend policy 157 Financial results 120 Shareholders Meetings 158 Board of Directors 159 Board of Directors’ Report 164 Report of the Audit Committee 171 Report of the Human Resources, Remuneration and Corporate Governance Committee 174 Report of the Strategic Planning Committee 177 External evaluation of corporate governance 180 General Director 180 Deputy General Directors 181 Investment Report on compliance with the Bank of Russia’s Corporate Governance Code 186 Management 134 Audit Commission 187 Investments ranking 136 Structure of investments 137 Priority investment areas 138 Mid-term investment 139 Sustainable 190 Development Personnel 192 Social Policy 198 Environmental Impact Management 202 Charitable Activities 204 140 Procurement 206 Appendix Glossary and List of Abbreviations 206 Disclaimer 207 International FPC’s Registrar Details 208 144 Activities Contacts 208 Improvement of the Pricing Policy and optimisation of international rail services 147 Promotion of transport products on international markets 147 Improvements to the international regulatory framework 148 Expansion of bilateral cooperation 149 Company Profile Geography Russian Railways rail infrastructure Murmansk Kaliningrad Riga Saint Petersburg Arkhangelsk Vorkuta Norilsk Vologda Salekhard Novy Urengoy Moscow Kostroma Kiev Kirov Voronezh Ulyanovsk Nizhnevartovsk Yekaterinburg Samara Rostov-on-Don Ufa Chelyabinsk Tomsk Volgograd Krasnoyarsk Krasnodar Elista Omsk Novosibirsk Vladikavkaz Astrakhan Astana Tbilisi Baku Russian regions FPC route network includes European and Asian countries FPC provides passenger several routes within FPC carries passengers on 40 international 77 rail transportation in 77 Russia which have no other 19 long-distance routes to 19 countries in of 85 Russian regions alternative modes of transport Europe and Asia – Germany, France, and ensures transport available, such as: Italy, Poland, Austria, the Czech Republic, accessibility and Tynda – Komsomolsk, Latvia, Lithuania, Estonia, Finland, China, connectivity between Petrozavodsk – Kostomuksha, Mongolia, North Korea, Azerbaijan, locations. Kamyshin – Moscow, Tomsk – Kazakhstan, Kyrgyzstan, Uzbekistan, Bely Yar, etc. Belarus, Moldova. 4 Federal Passenger Company Annual Report 2016 Types of activities FPC is engaged in the following types of activities. FPC is a national passenger rail carrier of the Russian Federation, and an entity subject to antimonopoly Rail passenger transportation on regulation. Russian Railways domestic routes in the regulated rail infrastructure forms the sector using: basis of FPC’s route network • third-class sleeping carriages; (over 85.3 thousand km as at • third-class sitting carriages; 1 January 2016) – the world’s • multiple unit trains. third longest rail network. Passenger transportation on Khabarovsk domestic routes in the deregulated sector using: Blagoveshchensk • luxury and saloon carriages; • first-class carriages; Chita • compartment carriages; carriages with open-plan seating; Ulan-Ude • passenger transportation by special Vladivostok • order and regular tourist trips; Irkutsk • provision of third-party carriages in FPC trains on domestic routes. International long-distance passenger Baggage, unaccompanied baggage, Other types of business transportation: and mail transportation: activities include: • passenger transportation • baggage transportation; • repair and maintenance of clients’ rolling on international routes; • unaccompanied baggage transportation; stock; • provision of third-party carriages • provision of freight forwarding • provision of additional services on trains; in FPC trains on international routes. companies’ carriages in FPC’s trains. • other types of activities: • lease of rolling stock; • lease of real estate and equipment. Federal Passenger Company 5 Annual Report 2016 FPC’s investment appeal 1. Monopolistic position in the 3. The Company’s high social 4. Strategic importance for long-distance rail passenger and strategic importance for the implementation of long- transportation market in Russia. the state as the main transport term objectives of state-owned operator for long- and medium- RZD Holding. 2. Low competition in the domestic distance travel covering most rail passenger transportation of Russia, including regions with 5. State regulation of fares for long- market from international extreme climatic and natural distance passenger transportation, companies due to challenges conditions which lack road and income loss compensation paid in entering the Russian market. transport infrastructure. by the state. Key indicators Indicators 2014 2015 2016 2016/2015, % Passenger turnover, billion passenger-kilometres 94.6 86.1 89.5 103.9 on trains made up by FPC 87.5 81.1 85.1 104.8 deregulated segment 28.7 24.2 26.0 107.2 domestic traffic 25.2 22.7 24.3 107.1 interstate