Bulgarian railways veer off track

By bne IntelliNews November 9, 2011

Branimir Kondov in Sofia -

While the focus these days remains on the international effort to save Greece from default, neigbouring Bulgaria must move fast to avert a looming Greek-style debt crisis in its state-run railways company despite the threat of strikes, economists and government officials say.

Laden with some BGN800m (€411m) of debt it is unable to service, the Bulgarian State Railways company BDZ cannot stay afloat any longer unless it lays off nearly one-sixth of its staff, makes deep cuts in other costs and increases revenue in order to qualify for a bailout loan from the World Bank, Transport Minister Ivailo Moskovski told state television BNT on November 8.

Naturally enough, the government's plan - unveiled on November 4 - to make redundant 2,000 of BDZ's 13,000 employees by the end of the year, reduce the frequency of train traffic on 150 destinations that generate most of the company losses and increase passenger fares was rejected by trade unions. They are now threatening to begin an indefinite strike on November 24, bringing trains to a standstill all over the country for eight hours a day.

The unions say the government has backtracked on an agreement the two sides reached in March to cut just 2,800 BDZ employees in steps by the end of 2014. However, Moskovski argues the new, more drastic cuts in workforce are needed because Bulgaria's economic growth in 2011 will be lower than projected half a year ago. "That is why we cannot stick to what was signed," said Moskovski.

Finance Minister Simeon Dyankov said in October that Bulgaria's economy will grow by 2.8% this year, lower than the initial forecast of 3.6% due to the debt crisis in the Eurozone, which is dampening growth in the country's main trading partners.

Georgi Angelov, senior economist at the Open Society Institute - Sofia, agrees, telling Bulgarian National Radio that if the government fails to act as quickly as possible to stabilize the company's finances, BDZ may turn into a mini-Greece, sliding down the spiral of default to the point of no return. "The sooner the reforms are completed, the easier it will be for BDZ to halt its sinking," said Angelov. "A delay of one or two years will change nothing."

Laughing stock

Notorious for its outdated locomotives and railcars, obsolete railroad infrastructure, poor maintenance and slow train speeds, BDZ has been losing passengers to bus companies and airlines despite its lower fares for the last 20 years. The purchase of 25 modern trains from Siemens in 2005 with a €156m loan from German development bank KfW didn't do much good to improve the poor image of the company, as the new trains can travel only at a fraction of their design cruising speed on the Bulgarian railroads.

Despite these deficiencies, several fatal fire accidents in passenger trains and reports of cases where it has been used by senior officials to siphon off state money, BDZ has survived thanks to transfers from the state budget that have kept this means of transport accessible and affordable for the public. "Railways in Bulgaria are characterised by a productivity of assets and staff that is equivalent to one-third of EU average," read the memorandum of understanding on cooperation in railway sector reform, which Bulgaria signed with the World Bank in December 2010.

Technically speaking, BDZ is already bankrupt, as it is unable to repay its debt should any of its creditors seek its insolvency and embark on selling its assets placed as loan collateral, Moskovski noted, adding the restructuring programme at BDZ currently underway has already helped to halve the company's operating loss, to an expected BGN25m this year from BGN50m in 2010.

This improvement alone, however, won't save BDZ from bankruptcy and ensure that it will stop accumulating losses in the next two years to qualify for some €300m from the EU's Operational Programme Transport for the purchase of new railway cars in the 2014-2020 period, BDZ board chairman Vladimir Vladimirov told a roundtable of trade unions and economists on November 8. The planned cuts in workforce, the reduction of train services and the sale of non-operational assets like properties, land and outdated railcars will provide around BGN50m that BDZ will use to repay debt to banks. An additional revenue of some BGN2.5m a year is expected to come from the planned increase of passenger fares by 15% for express trains from December and by 9% for the other trains from January 1 next year.

A potential key source of revenue for BDZ - up to an estimated BGN200m - could come from the sale of the company's freight services division, which holds a share of around 82% of the railway cargo traffic in Bulgaria. Moskovski said in September that Bulgaria will only receive the much-needed World Bank loan of BGN460m for BDZ if it sells the freight services unit.

To endorse the loan, which is considered state aid, the European Commission requires BDZ to secure from its own sources at least 50% of the financing it needs. These own funds can come either from the sale of BDZ Freight, or from relinquishing part of BDZ Freight's market share. The second option means that BDZ Freight would lose a big part of its value, Moskovski has said, adding the sale can take between six and 12 months to complete.

The estimated value of BDZ Freight's assets is BGN320m. The freight unit generates revenue of BGN1m a day, operating around 3,000 railcars, 200-300 short of its actual needs, according to its managers. It closed the first half of this year with a loss of over BGN3.3m.

BDZ Freight is already competing with several private freight operators such as Bulgarian Railway Company (BRC) and Bulmarket. The collapse of local Kremikovtzi steel mill took away some 40% of BDZ Freight's revenue, while the slump in production and exports of mineral fertilizers of Bulgarian chemical plants dented the company revenue further in the last decade. Given BDZ Freight's very high cost structure and obsolete rolling stock, it is important to give the company the chance to compete freely in the very competitive freight market in Bulgaria and allow it to be run as a private company free of government and bureaucratic control, the World Bank has said.

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