SPECIAL STUDY The EBRD’s projects in the Russian railway sector March 2016 EBRD EVALUATION DEPARTMENT The Evaluation department (EvD) at the EBRD reports directly to the Board of Directors, and is independent from the Bank’s Management. This independence ensures that EvD can perform two critical functions, reinforcing institutional accountability for the achievement of results; and, providing objective analysis and relevant findings to inform operational choices and to improve performance over time. EvD evaluates the performance of the Bank’s completed projects and programmes relative to objectives. EvD’s Special Studies review and evaluate Bank activities at a thematic or sectorial level. They seek to provide an objective assessment of performance, often over time and across multiple operations, and to extract insights from experience that can contribute to improved operational outcomes and institutional performance. This report has been prepared by EvD and is circulated under the authority of the Chief Evaluator. The views expressed herein do not necessarily reflect those of EBRD Management or its Board of Directors. Responsible members of the relevant Operations teams were invited to comment on this report prior to internal publication. Any comments received will have been considered and incorporated at the discretion of EvD. Whilst EvD considers Management’s views in preparing its evaluations, it makes the final decisions about the content of its reports. Nothing in this document shall be construed as a waiver, renunciation or modification by the EBRD of any immunities, privileges and exemptions of the EBRD accorded under the Agreement Establishing the European Bank for Reconstruction for Development, international convention or any applicable law. This report was prepared under the supervision of Keith Leonard, Deputy Chief Evaluator, EvD by an evaluation team consisting of Bruce Murray, Senior Evaluator/Team Leader, Andrei Evdokimov, Consultant/Senior Russian Railway Expert, Olga Mrinska, Consultant/Policy Evaluator and Chiara Bocci, EvD Evaluation Manager. EvD staff, Beatriz Pérez Timermans, Saeed Ibrahim, Natalia Lakshina and Stephanie Crossley, undertook research and provided analytical and administrative support. © European Bank for Reconstruction and Development, 2014 One Exchange Square London EC2A 2JN United Kingdom Web site: www.ebrd.com All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature. Coverphoto: © Jupiterimages Special Study: The EBRD’s projects in the Russian railway sector 2 Abbreviations 4 Defined terms 4 Executive Summary 5 1. Introduction 9 2. Setting the context: the Russian railway sector 10 3. The Russian railway portfolio 11 4. Overall performance rating 12 5. Assessing relevance 13 6. Achieving results 27 7. Assessing efficiency 36 8. Findings, lessons and recommendations 41 9. Additional study documents 46 Annex 1: Results framework for the Russian railway sector evaluation 47 Annex 2: Summary of the reform of the Russian railway sector 49 Annex 3: Russian railway projects 51 Annex 4: TCs provided to support the Russian railway portfolio 52 Annex 5: Performance ratings for the Russian railway portfolio 54 Annex 6: Performance ratings for completed Russian railway projects 57 Annex 7: Five principles for restructuring the Russian railway 58 Annex 8: Assessing policy dialogue after 2001 60 Annex 9: Addressing corruption 62 Annex 10: Transition impact of the railway reform programme 64 Annex 11: Evolution of the freight wagon fleet and indicators of rail sector efficiency 66 Annex 12: RZD’s financial performance 68 Annex 13: The EBRD’s investment profitability for Russian railway operations 69 Annex 14: Assessing Bank handling 70 Annex 15: Management Comments 72 Special Study: The EBRD’s projects in the Russian railway sector 3 Abbreviations CRR Capital Resources Review EIB European Investment Bank EU European Union FAS Federal Antimonopoly Service FTS Federal Tariff Service IFC International Finance Corporation IFI International Financial Institution IFRS International Financial Reporting Standards IPO Initial Public Offering MPS Ministerstvo Putei Soobschenia (Ministry of Railways) MRO Moscow Resident Office OPA Operation Performance Assessment OPAV Operation Performance Assessment Validation PPP Public Private Partnership PSO Public Service Obligation RAB Regulated Asset Based RZD Rossiyskie Zeleznye Dorogi (Russian Railway) SEI Sustainable Energy Initiative TC Technical Cooperation TIMS Transition Impact Monitoring System Defined terms pkm passenger kilometre TEU Twenty Foot Equivalent Unit (standard container unit of measurement) tkm tonne kilometre Special Study: The EBRD’s projects in the Russian railway sector 4 Executive Summary Findings This report evaluates the European Bank for Reconstruction and Development’s (EBRD’s) operations Combined projects, TCs and policy dialogue in the Russian railway sector. contributed strategically to achieving Evaluated portfolio from 1996 transition and sector-reform objectives to 2013 in numbers: The EBRD: led international finance institutions in the sector 24 rail projects worth during the period; helped shape the broad sector reform programme to €1.8 billion the early 2000s. 34 TC initiatives worth Specifically it assisted in: corporatizing and unbundling Rossiyskie Zeleznye €6 million Dorogi (Russian Railway) (RZD) by supporting two major subsidiaries, and; developing a competitive, market oriented freight Russian railway portfolio wagon industry through significant lending to private performance assessment highlights companies. The portfolio performed well across the multiple Greater impact at sector level would have been possible dimensions of the Bank’s operational mandate. EvD through: rated overall performance good bordering on more vigorous promotion of stalled reforms to open outstanding; based on fully satisfactory relevance opportunities for private sector investment; and, and results and excellent efficiency.1 more effective support of RZD’s transformation into The three mandates of additionality, transition a commercially viable, financially profitable company impact and sound banking were rated excellent, without reliance on government subsidies. fully satisfactory and fully satisfactory respectively. Results were delivered on the ground at both the Coherence and synergy in the use of the project and sector level. EBRD’s instruments was limited from the Providing financial additionality and crowding in early 2000s commercial financing were strengths of the EBRD’s operations. While there were good synergies between projects, TC and policy dialogue during the mid to late 1990s, Russian railway operations demonstrated the TC was not a major feature of the EBRD’s operations principles of sound banking, particularly Bank in the 2000s. The evaluation does recognise that it handling, implementation efficiency and the EBRD’s became progressively more challenging to mobilise investment return on the debt portfolio. TC for the Russian railway sector from 2005 The Bank’s integrity management system worked onwards. well and succeeded in ensuring that corruption did In the 2000s, although there were a few successes, not infect the Russian railway portfolio. the EBRD’s engagement in sector level policy Client companies hold Bank staff in high regard and dialogue was sporadic and generally not effective in the increased delegation of responsibilities and staff overcoming resistance to major stalled reforms. The to the Moscow resident office had a positive impact EBRD placed more emphasis on processing and on the quality of services provided to clients. implementing transactions than on using its other instruments (policy dialogue; TC) despite broad There were a few areas where actual performance guidance given in corporate strategy documents and fell short of expectations such as limited support to the use of one of the EBRD’s first integrated help complete stalled reforms; use of TC; approaches. demonstrated non-financial additionality; limited support to help improve the RZD’s financial Railway reforms have resulted in performance; the EBRD’s losses on its equity investments in Russian railway companies. macroeconomic efficiency gains However, the many areas of fully satisfactory to The government’s Russian railway reform programme excellent performance far outweighed the few areas was broadly consistent with the advice provided by in which performance fell short of expectations. the EBRD. Rail operations were separated from the policy regulatory functions, the Ministry of Transport became responsible for policy matters, the railway was regulated by independent agencies, RZD was commercialised and some of its subsidiaries were Special Study: The EBRD’s projects in the Russian railway sector 5 fully or partly privatised, a competitive, private sector Finding a new niche in the Russian railway dominated freight wagon industry developed and the sector railway sector diversified its sources of financing. The EBRD’s private sector financing was dominated After implementing the reforms, the rail sector’s by providing funding to acquire freight wagons. For macroeconomic efficiency improved in terms of lower much of the period covered by the evaluation