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Most state-run company chief executives gripe at having to please the whims of one government. But the head of pan-Eurasian railway firm UTLC Eurasian Railway Alliance, which is controlled by three countries, is convinced that international collaboration is the only way to get things done as competition among Belt and Road Initiative transportation businesses increases.
“The transport industry, especially in the Eurasian context, needs alliances. You cannot be effective by yourself in this network. You have to synchronise your developments with your neighbours,” says Alexei Grom, UTLC’s president. UTLC runs a railway freight network that, in 2015, began running trains from China to Europe through Kazakhstan, Russia and Belarus, three countries whose state-run railway monopolies each own 33 per cent of the company’s shares.
That structure makes it one of the more politically ambitious belt-and-road projects, but one with major potential for growth — if UTLC can pull it off. “There are no barriers between the countries, thanks to the infrastructure laid down by [the former Soviet Union, of which they were all members] and there is a lot of capacity,” Mr Grom told the FT in an interview.
UTLC shipped the equivalent of 176,000 20ft containers across the Eurasian steppe last year, increasing revenue 67 per cent and more than doubling its sales profit. Shipment volumes should hit 1m containers before 2025, Mr Grom says, with six trains departing each day to make the 5,430km average journey from Dostyk on the Chinese-Kazakh border to Kaliningrad on the Baltic Sea.
Using railways for Eurasian shipping is a new concept. The first commercial shipment took place only a decade ago. And while growth has been strong in the past few years, trains accounted for just 2.1 per cent of China-Europe trade by value in 2016.
Air freight, which costs about six times more than rail but takes about a third of the time, according to research by the Center for Strategic and International Studies (CSIS), accounts for twice as much cargo as railways by weight and 14 times by value. Cargo ships — which offer far larger volumes and lower prices — account for the lion’s share: 94 per cent by weight and 64 per cent by value. “In the past, lack of co-ordination between countries made rail too slow and too expensive,” says Jonathan Hillman, director of the Reconnecting Asia Project at CSIS.
“The additive costs of tariffs, permits, duplicative paperwork, mandatory inspections and other requirements is a primary reason why the routes were barely used a decade ago. “The main gains in speed for the China-Europe railways have come mostly from operational improvements, like more efficient terminals at borders, consolidated customs paperwork, and so on. [They] have been critical for making rail a more attractive middle option between sea and air shipping.” Rail freight also faces a challenge of scale, Mr Hillman says, noting that the largest modern ships have more than 100 times the cargo space of a typical train. Mr Grom, a Russian national, says that UTLC is learning from its larger rivals. After recognising that its original approach of offering a “door-to-door” freight service was not successful, the company now seeks to mimic the business model used by sea freight companies.
“The reaction to the first business model was that ‘we don’t need UTLC in China’. They want to make money themselves in first and last-mile deliveries. So we created the pipeline between the two borders,” he says. “When we came into this project, the first thing was to go to the major sea shippers and ask how their business model works. Then we went to the customers and asked what they wanted.
They said they have been using this shipping model for 30-40 years and they want the railway model to be the same.” The company’s network runs between two crossings on the Kazakh-Chinese border — Dostyk and Altynkol — through Kazakhstan, Russia and Belarus, to three crossings on the Belarus-Poland border, and the Russian exclave of Kaliningrad, Russia’s warm-water port. This is bordered by Poland and Lithuania. And it is the exclave on the Baltic Sea where Mr Grom says the company sees the most potential for expansion. “There are not too many problems on the Chinese border . . .
But it is another story on the European border,” he says, explaining that Brest has become very busy with coal and oil transportation. This has prompted UTLC to look north to other ports. “One of the most promising is in Kaliningrad. This is where sea meets rail. It has a [land] border with Poland, which can handle 10 trains a day. And we can also ship goods to Hamburg, to Rotterdam,” Mr Grom adds.
“You can be in any northern European port within 24 hours. Often faster than rail.” Much of UTLC’s potential growth depends on ensuring co-operation between the three state railway monopolies and keeping the border crossings running smoothly. Previously the Russian government owned 99 per cent of the company but in April Kazakhstan and Belarus were given equal stakes in a cashless reorganisation designed to make relations smoother.
That, says Mr Grom, means there is a financial incentive for the governments to not only help the trains run on time but also to work collaboratively. “We are profitable. Shareholders are looking for dividends,” he says. “The business model is about increased capacity and returns for the shareholders.
This article first appeared on www.ft.com
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