INTERVIEW: Brunswick Rail makes tracks

By bne IntelliNews October 19, 2011

Ben Aris in Moscow -

Brunswick Rail's timing was immaculate. Russia's only independently owned leaser of freight railcars was set up in 2004 just as the government launched a massive reform programme for the railway sector.

The western founders, Martin Andersson and Gerald De Geer, had made a fortune after they sold their investment bank Brunswick to UBS in 2003 and were looking for something new to do. Their partner Garry Wendt, who they had brought in from GE Capital, suggested setting up an independent railcar leasing firm, because the government had just embarked on a wholesale liberalisation of the sector. The business hasn't looked back.

Rail is Russia's lifeblood and probably the most advanced of all the state's plans to improve infrastructure, bar the electricity sector. As some 85% of all cargo in Russia is delivered by rail, against 15% in Europe and 45% in the US, it is a reform that the state has to get right. "You have no other choice," says Vladimir Lelekov, CEO and managing partner of Brunswick Rail. "The sea in the north freezes and is only navigable for four months of the year, and most of the rivers run south to north but the cargo runs east to west. If the government doesn't deliver on its promise to reform, then Russia faces severe transport problems."

Fleet of foot

Brunswick Rail is unusual, as nearly all the other companies operating in the industry have either an oligarch or large Russian company standing behind them, whereas the biggest shareholder in Brunswick Rail owns just 15%. The company has been built up in the classic western way: the founders invested some money and bought their first rail cars in 2004. Once the business was up and running, there were three rounds of fund raising that brought in first high net worth individuals; then funds and strategics like UFG Asset Managers, VTB Capital, Macquarie Renaissance Infrastructure Fund, Sumitomo and the World Bank's International Finance Corporation. In all, the company has raised about $350m, says Lelekov, and has assets worth $1.4bn.

Brunswick Rail is also unusual in that it has built up its fleet of 20,000 cars from scratch. "Rail is a capital intensive business, but 90% of our cars are brand new, whereas the average age of cars in Russia is 17-18 years against a useful life of 25," says Lelekov.

The main thrust of the government's reforms so far has been to split off the cargo business from the state-owned monopolist Russian Railway (universally known by its Russian acronym of RZD) to attract investment into the aging rolling stock. Freight One is the next daughter company to go under the gavel on October 24 and owns 200,000 cars.

The two likely buyers - Gennady Timchenko, who owns oil trader Gunvor, and Vladimir Lisin, who owns the Novolipetsk Steel mill - highlight one of the difficulties of privatising this sector, as both deal in commodities and need rail services. If these two investors win the auction, their competitors will be in the uncomfortable position of buying an essential service from a rival.

Despite this, Lelekov says he is mostly happy with the efforts of the government, which has "largely delivered on all the promises it made at the start of the process."

Still, the government did make some mistakes. For example, it turned out that putting all of RZD's railcars in commercially oriented companies wasn't an entirely good idea. "RZD discovered that some small company at the end of a branch line that needs four cars were being ignored because all the operators only wanted the contracts that call for 400 cars," says Lelekov. "So in the end, RZD had to lease back 200,000 cars - a fifth of Russia's entire fleet - to make sure these small and medium-sized companies are still served. There is a social aspect to this reform."

More reform is still needed. As the volumes of rail freight goes up, the efficiency of RZD goes down dramatically, says Lelekov. This is because while volumes are rising, they aren't rising fast enough to keep pace with demand.

And the sector needs to see a lot more consolidation. In the US, half a dozen private operators own half the rolling stock; in Russia there are thousands of car operators, most of them small local affairs. Indeed, a quarter of the cars that Brunswick Rail owns came from acquisitions and the work of buying out small local operators has really only just begun. "Since we launched in 2004, the company has been developing the railcar fleet rapidly with a [compound average growth rate] of 33% a year, excluding this one," says Lelekov. "And we will continue to grow; we hope to have 50,000 cars in a few years. The market is volatile at the moment, which makes it harder to raise financing. Growth will probably slow going forward, but are still only half way through the liberalisation process so we still have plenty to do."

INTERVIEW: Brunswick Rail makes tracks

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