RGP "Kazakhstan temir joly": brief description

/IRBIS, June 26, 00/ - Following is a brief description of RGP "Kazakhstan temir joly", prepared by the comments of the Listing commission of Kazakhstan stock exchange (KASE). The characteristics are published due to the fact that the bonds of the company were entered into KASE official list of securities under category "A". GENERAL INFORMATION Date of initial state registration - February 12, 1997. Legal status - Republican state enterprise. Ownership - state. Legal and actual address of the head office - 98, Pobeda Ave., Astana, 473000, Kazakhstan. LICENSES - State license #TJ138735 to engage in railroad transportation issued on June 15, 1999. The license terms - activities in transportation of passengers and cargo; permitted work areas - international. Special terms of the license - the owner should: obey the tax, license, transportation laws, meet the sanitary, environmental, fire protection norms and regulations, road safety norms; possess the record keeping document that confirm the compliance with qualification norms set for this type of activity. - State license #TJ138736 to engage in railroad transportation issued on June 15, 1999. The license terms - activities in transportation of dangerous cargo; permitted work areas - international. Special terms of the license - the owner should: obey the tax, license, transportation laws, meet the sanitary, environmental, fire protection norms and regulations, road safety norms; possess the record keeping document that confirm the compliance with qualification norms set for this type of activity. PRIMARY ACTIVITIES - Cargo and passenger transportation services for the economy and for the population. - Train movement security and safety of cargo. - Security of the passengers. - Maintenance and improvement of inventory. - Efficient management of the Kazakhstani railroads, development of train movement schedules, norms of using railroad vehicles and transportation plans, organization of direct and mixed transportation system by using various transportation modes. - International economic relations of Kazakhstan, exports and imports of goods. HISTORY Till the breakup of the Soviet Union the railroad network of Kazakhstan SSR was controlled by three structural subdivisions: Almaty, Tselinnaya and West Kazakhstan railroads, which were part of the Ministry of Road communication of USSR that had the general management over them. When Kazakhstan received its independence the railroad transportation of the country consisted of three independent legal entities - Almaty, Tselinnaya and West Kazakhstan railroads, which in turn were divided into 14 railroad departments. Their economic activities run based on their own interests, often in disagreement with national interests. Technical renovation has almost stopped, and major overhaul of fixed assets has not been done. As a result, there was a big threat of train movement security, there were great debts to other companies and to the budget. On January 31, 1997 by the decision of the government "On reorganization of the country's railroad companies by merging republican state enterprises: Administration of Almaty railroads, Administration of Tselinnaya railroads, Administration of West Kazakhstan railroads" the Republican state enterprise "Kazakhstan temir joly" was established. The reorganization covered all financial, economic and production departments of Kazakhstan's railroads. Centralized control and the presence of customs representative in each department of RGP "Kazakhstan temir joly" was provided. The number of the company employees was reduced from 159,536 in 1997 to 129,120 in the first quarter of 2000, including the management - from 7,348 to 5,862. CHARACTERISTICS OF THE ACTIVITIES By the cargo turnover the railroad transportation keeps the first place in Kazakhstan. It accounts for more than 76% of cargo turnover against 16% of pipeline transportation, 8% of automobile, and tenths of percent - water and air transportation. Railroad transportation accounts for more than 50% of passenger traffic compared with 36% of that of automobile transportation, and 12% of air transportation. Operating activity of RGP "Kazakhstan temir joly" is made of three components: cargo freight, passenger traffic and secondary economic activities. Cargo freight account for 75-78% of total income, 9-11% comes from passenger traffic, 11-16% comes from secondary economic activities. Cargo freight About 80% of cargo, transported by RGP "Kazakhstan temir joly", is coal, as well as various ores of ferrous and non-ferrous metals, crude oil and petroleum products. Decrease in total volume of cargo, that began in early 90's, continued during the last 3 years. In 1998 it was explained mainly by 2% decrease in industrial production in the country and 14% decrease in exports. As a result, volume of transported cargo had fallen 5.7% by 1997. Only oil transportation grew 4.9%. In 1999 introduction of free floating exchange rate of the tenge had a direct impact on the cargo freight dynamics. Switch to free floating exchange rate had a positive impact on the Kazakhstani exporters, which made the cargo exports to increase. The effect intensified as the world oil and metal prices grew - traditional items of the Kazakhstani exports. Fixing railroad tariffs helped to cut the transportation cost in exported goods, which in turn, served as an additional stimulus to increase the exports. However, the major changes were related to the dynamics of coal shipments. Aggregate decrease in coal shipments in 1999 relative to 1998 equaled 9.7 mln tons, which caused annual transportation to fall 4.3 mln tons, or 3.2%, notwithstanding 4.2 mln ton increase in the volumes of other cargo. Besides general reduction in coal production, decrease in coal shipments was caused by the restrictions imposed by RGP "Kazakhstan temir joly" on coal companies of Ekibastuz base (April - May, July - August of 1999) due to their big debt arrears. The restriction were removed as long as the debt was repaid. The indicators of the fourth quarter of 1999 were much bigger than those of similar period of 1998. The data of RGP "Kazakhstan temir joly" on January of 2000 show that the transit cargo freight growth trend is maintained. The volume of transit freight equaled 447 th. tons, income - 14.4 mln Swiss francs, which is by 21% and 7.7% more than those of January of last year, respectively. Preliminary data of this year show 30% increase in transit cargo freight in February relative to February of 1999. The most of cargo freight of RGP "Kazakhstan temir joly" is based on the output of production industry of Kazakhstan, with 30 enterprises providing 80% of freight. In coal industry the major cargo shippers are the enterprises of Karagandy and Ekibastuz coal pits, where 80% of all coal production of Kazakhstan is focused. The main consumers of Karagandy coking coal - JSCOT "Ispat- Karmet", metallurgical plants of Russia, Karagandy and Bishkek head and power stations. About 67% of coal, extracted at Ekibastuz coal pit, is consumed within the country, the rest is exported to Russia. There are ground to believe that due to economic growth, outlined in Russia and Kazakhstan, and residual deposits of coal at the Kazakhstani sites, the coal shipments will not decrease noticeably in next decades and may grow in the future. In oil industry the major clients of RGP "Kazakhstan temir joly" are LLP "Tengizchevroil" and OJSC "SHNOS". Main part of oil extracted by LLP "Tengizchevroil" is exported, with the most of it being transported by railroad. Thus, 7.5 mln tons of 9.5 mln tons extracted in 1999 was transported by railroad. RGP "Kazakhstan temir joly" plans further increase in production, though when CPC pipeline is put into operation significant decrease in volumes of railroad shipments of oil in Kazakhstan should be expected. In mining industry RGP "Kazakhstan temir joly" services the transportation between the producers of ore (OJSC "SSGPO", Donskoi and Lisakovskii GOK) and its consumers (JSCOT "Ispat-Karmet", Magnitogorsk, Kuzbass, Novolipetsk metallurgical combines). In non-ferrous metallurgy the main cargo shippers are OJSC "Corporation Kazakhmys", OJSC "Kazzinc" and OJSC "Aliuminii Kazakhstana". After the decrease in ferrous metal and ore shipments in 1998, a growth was noticed in late 1999 and early 2000 due to production increase, the world demand and price increase for these ores. In 2000 a growth in gross domestic product of the country is observed, which also affects positively the freight. Passenger traffic The number of passengers carried on railroads decreased by 2.7 mln, or 12.8% in 1999 relative to 1998, which was caused both by the decrease of outgoing passengers by 46% and by the decrease of the passengers received from neighboring countries (54%) for their further movement. Moreover, the length of transportation decreased by 4.7%. All these was caused mainly by the decrease in purchasing power of the populations of Kazakhstan and neighboring countries. Secondary economic activities For the most part, secondary economic activities are done at the enterprises that are part of RGP "Kazakhstan temir joly". The income decline in 1999 (from 192 to 125 mln U.S. dollars) was mainly caused by the devaluation of the tenge after the introduction of free floating exchange rate. This revenue article will grow in the future because the enterprise plans to undertake a major overhaul and other services by itself. THE MAJOR FACTORS AFFECTING THE COMPANY'S ACTIVITIES General economic situation in the country Internal freight of RGP "Kazakhstan temir joly" is positively correlated with the production of major cargo and purchasing power of the population. The company accounts for 2/3 of the country's cargo turnover. Production decrease in 90's caused the need for transportation to fall. In 1999 cargo turnover of railroad transportation fell by almost 20% relative to 1996. In Kazakhstan industrial production remains to be at low levels, however, the growth observed in 1999-early 2000 has already affected the increase in demand for cargo freight, and it is possible that it would continue to grow further. Meanwhile, purchasing power of the population keeps falling, which makes RGP "Kazakhstan temir joly" to forecast passenger traffic decrease by 10% in 2000. Situation on the world commodity markets This factor affects international freight made by the orders of export oriented branches of Kazakhstan and cargo importing enterprises of Kazakhstan. Economic growth in the world and overcoming of the crisis by South East Asian countries causes the demand for main export items of Kazakhstan to increase (oil, petroleum products, coal, metals and ores, grain), which should increase international freight significantly. Favorable geographic location of the country This factor means attraction of significant volumes of transit cargo and passengers on Transasian railroad that passes through the country. Observed improvement in economy of Russia, continuing growth in Europe and China, ending of the crisis in South East Asia causes the trades between Europe and Asian countries to accelerate and it should increase transit freight noticeably. State ownership As in other CIS countries, the company that controls railroads of the country has a status of a natural monopoly and is an object of state regulation. State ownership determines complete dependency of RGP "Kazakhstan temir joly" on state bodies that control the transportation tariffs, thus, controlling the main source of RGP income. Complicated hierarchical management structure of the country's transportation system, including RGP "Kazakhstan temir joly", often causes inflexibility and insufficient response. On the other hand, this type of ownership makes it possible to rely on attracting large volumes of foreign investments under the guarantee of the state. Tariffs Based on the law of Kazakhstan "On natural monopolies", RGP "Kazakhstan temir joly" can change its tariffs not more than once in a quarter. The tariff changing procedure is similar to offering discounts on base tariff rate. Internal cargo and passenger tariffs are regulated by the price current 1001, which was used in Soviet Union, and given in KZT. International tariffs are regulated by international tariff standards, and the company began using it in July of 1999. Import, export and transit tariffs are tied to Swiss francs. Tariffs are differentiated based on many factors, such as: type of engine and cars used, load capacity usage and capacity of the cars, distance, transportation speed, and etc. The system of tariff discounts has a great importance for RGP "Kazakhstan temir joly". The discounts are set by Agency of Kazakhstan on natural monopoly regulation by the request of the shipper and after the coordination with RGP "Kazakhstan temir joly". From April 2000 Agency of Kazakhstan on natural monopoly regulation set following decreasing rates on cargo freight made by railroad: - 0.75 on iron ore, concentrate and rolled briquettes, dolomite, limestone for fluxing. - 0.5 on sulfuric acid; - 0.7 on copper ore; - 0.6 on rolled ferrous metal. The first increase in tariffs from the establishment of RGP "Kazakhstan temir joly" (January 1997) took place on January 1, 2000, when oil and petroleum products export tariffs doubled, except for the transportation to Aktau port. From April 1, 2000 railroad tariffs for various cargo (ferrous and non-ferrous metals, limestone, alcoholic and tobacco items, cotton fiber, lumber and others) were increased from 20 to 100%. PRODUCTION AND MATERIAL-TECHNICAL BASE According to international accounting standards, the management of RGP "Kazakhstan temir joly" made a decision to conduct the re-valuation of fixed assets based on the recommendations of Price Waterhouse Coopers and Ernst & Young companies as of December 31, 1997. RGP has conducted re- valuation of all fixed assets, except for buildings, with the adjustments to market value of fixed assets purchased when RGP "Kazakhstan temir joly" was first created by making corresponding records that decreases the amount of additional capital. The structure of RGP "Kazakhstan temir joly" includes a number of entities that have their own management and fixed assets. Fixed assets of track facilities Fixed assets of track facilities of RGP "Kazakhstan temir joly" include superstructure of a road, artificial constructions, subgrade and various machinery and mechanisms. The proportion of fixed assets that belong to track facilities exceed 50% of all fixed assets of RGP, of which 53.4% is superstructure of a road. Total length of main roads of RGP "Kazakhstan temir joly" is 18,676.3 km, with 13,601.1 km of exploitation length. The length of stationary and special roads is 6,451.2 km. The number of tracking vehicles is currently at 629 units. Average depreciation of all fixed assets of the tracking facilities is 61.4%, including superstructure - 58%, artificial construction and subgrade - 65%, machinery and mechanisms - 53.1%. Fixed assets of engine facilities As of January 1, 00, main part of fixed assets of engine facilities is made of 2,162 engines, including 1,446 diesel engines, 629 electric engines and 87 steam engines. Moreover, the engine depo has 924 buildings. Despite a significant wear and tear of engines, they are kept in working condition. From 1999 RGP "Kazakhstan temir joly" repairs engines by itself at Atbasar depo station (before this the repairs have been made in Russia). Fixed assets of car facilities are made of cargo cars, buildings and equipment. As of January 1, 00, RGP "Kazakhstan temir joly" had 86,472 cars. There are also 1,068 buildings and 2,402 units of equipment in car facilities. Wear and tear degree of cargo cars is higher than that of engines: 41% has been used for 20 to 30 years, 8% for more than 30 years. Service life of 10 to 30% of the cars (depending on the type) exceed specified limits. Fixed assets of passenger facilities. As of January 1, 00, RGP "Kazakhstan temir joly" had 2,078 passenger cars. By the data of RGP, average service life of the cars is less than that of cargo cars, and service lives of the most of passenger cars do not exceed the norms (32 years). Fixed assets of power facilities. There are 9.9 th. km of power lines in use. Despite the fact that 25% of the network has been used for more than 30 years, in general, it provides a good power supply. About 26 th. off the ground power lines are used, 504 transformer substations, 18 mobile and 77 stationary power stations of various powers. Also, fixed assets of RGP "Kazakhstan temir joly" includes 9,026 buildings, of which 9.5% require major overhaul for KZT102 mln. Fixed assets of signaling and communication facilities. 78%, or 10,223 km of used length of the roads is equipped with autoblocking. 2,375 switches of electrical signaling, or 15% of the total number has been used for more than 30 years. 880 km of dispatcher centralization, or 10% of total length is physically and morally obsolete. However, all fixed assets of signaling and communication facilities is kept in working condition.