Czechs railroaded by Germans

By bne IntelliNews November 23, 2010

Jiri Kominek in Prague -

Following years of Europe breaking up monopolies and privatising industry, the Czech Republic is giving serious thought to reversing this trend and reconsolidating the country's railway assets along the German Deutsche Bahn model. This has not gone down well in many quarters, including with some foreign investors.

Czech Transport Minister Vit Barta said on October 31 that his ministry is seriously considering re-merging national rail operator Ceske drahy (CD) with elements of rail track management company SZDC into a single holding company, reversing the 2003 split by the Social Democrat-led coalition government of the time.

Under the plan, SZDC would be divided in two parts, with the larger part responsible for operating the rail network becoming a subsidiary or division of CD, similar to the model adopted by Deutsche Bahn in neighbouring Germany. The smaller part of SZDC, which legally owns, builds and maintains the railway tracks, could be merged with the highly controversial Road and Motorway Directorate, which performs a similar task with the Czech Republic's motorways. "The logic remains the same, we want to reduce the number of organisations which we manage at the Ministry of Transport," Barta told Czech media. "Our priority is to begin managing railway operations from one place."

Currently, SZDC pays billions of crowns to CD each year for assorted services related to rail tracks, with this year's figure expected to expected to reach CZK5.2bn (€211m). Barta said, however, that he considers the financing "non-transparent" and difficult to control.

Barta has also said that the only way for CD Cargo, the state-owned freight handler, to survive is to grow, and the only way to expand is eastward. He did not elaborate whether this would entail purchasing cargo carriers or broad gauge terminals - a transfer facility capable of receiving trains using European guage track as well as trains using the Russian guage, in effect a transfer station - in neighbouring countries such as Slovakia or Poland.

This Czech version of Drang nach Osten (German 19th century phrase meaning "thrust toward the East") stems partly from a study commissioned by the Ministry of Transport from the consultants Roland Berger released in November, which bne has obtained exclusively. The study urges a German-style centrally integrated framework based on the example set in China. "In order to compete, in order to survive, Europe must pursue a continental railway infrastructure for both high-speed passenger and cargo rail transport that makes use of economies of scale," Constantin Kinsky, Roland Berger's country manager for the Czech Republic, tells bne.

Kinsky, who can trace his family's aristocratic roots back to pre-WWII Czechoslovakia, says he is convinced the Czech Republic must adopt the necessary legal framework and get on board with the pan-European push for high-speed rail corridors for ICE trains, which will link the continent's major cities. "If the Czech Republic does not move quickly to join this trend now, the country will be bypassed," argues Kinsky.

Great power, great responsibility

Although transport experts agree with the study in principle, a number have voiced concerns over its implementation in the Czech Republic, and particularly how it will affect private sector cargo and passenger operators and their access to state-owned rail tracks. "Currently, CD owns the trains stations and cargo terminals, as well as exercising control over train schedules. SZDC owns and operates the rail tracks. If these two are merged, then private carriers could find themselves on their hands and knees begging at the feet of a giant centralised entity," says one rail transport infrastructure expert who declined to be named.

One such private logistics firm, Advanced World Transport (AWT), owned by the Czech billionaire and coal baron Zdenek Bakala, has been pursuing its own expansion drive eastward via holdings in Central and Eastern Europe and a recently acquired broad gauge cargo terminal in the Belarusian town of Brest near the Polish border. "We do not want to comment on the plans of our competitors," AWT spokesman Petr Jonak tells bne.

Other private rail operators that could be potentially affected by the proposed changes include the highly successful bus carrier Student Agency and its RegioJet passenger service, which is set to compete with CD's Pendolino SuperCity trains linking Prague with Ostrava and other destinations from 2012. Additional competition is also expected from Rapid Express owned by Czech private equity firm Aakon Capital, which plans to launch its own Leo Express service during the same timeframe as Student Agency.

Another source noted that apart from the rail tracks, a reconsolidation of CD and SZDC also begs the question of how the transport ministry would dispense with third-party access to broadband data infrastructure known as dark fibre networks laid by CD during the late 1990s. Although CD uses the dark fibre networks for its own data transfer including the monitoring of train positions, the system can also be made available to third-party access to telecommunication companies seeking to compete with O2, which operates its own network. "Essentially, what is being proposed by Barta is the rail transport equivalent of what CEZ means to the energy sector," another transport expert tells bne.

Critics also have concerns over how the transport minister would wield the power that a newly reconsolidated railway infrastructure would provide with respect to the private sector. Barta has a reputation as a no-nonsense hands-on manager who founded ABL, the Czech Republic's largest private security company, which has been recently implicated in a scandal over spying on rival political parties prior to the municipal elections, as well as extorting business rivals.

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