The physical and relative technological deterioration of railroads, related infrastructures and the mobile stock represents a rapidly aggravating problem for Russia's railways; it requires huge investments. The government has adopted a program aimed at upgrading the country's transportation complex and is busy preparing an investment program for the industry for the next year. As it does not appear possible to finance the whole program from the budget, the government is now planning to attract funds from various private and foreign investmentors.

The situation is rapidly getting worse: From 1992 to 2000, the rate of deterioration in the industry grew from 36 percent to 56.7 percent while the volume of investments in the industry declined dramatically. According to sources in the Ministry of Railway Transport, more than 50 percent of train cars and 70 percent of engine cars will have to be scrapped over the next 10 years.

According to the results of an independent audit conducted by auditing company Arthur Andersen, Russian railroads require 785 billion rubles to be invested over the next five years, which comes to approximately 185 billion rubles per year.

"The investment plan for next year is set at 161 billion rubles," said Alexander Misharin, first deputy minister of railway transport. "We understand fairly well that it is impermissible to finance the program at the expense of transportation price hikes. Of the planned 161 billion rubles, 123 billion rubles will be provided from the owned funds of the ministry, including 110 billion rubles taken from the industry's depreciation fund and 13 billion rubles taken from next year's profit, as well as 38 billion rubles raised as investments or borrowed."

Therefore, the Ministry's budget will constitute 96 percent of the program's financing, and only 4 percent will be raised from external sources. It is worth recalling that borrowed funds constitute much bigger proportions in the upgrading programs of other industries. In Russia's Unified Energy Systems (UES), for example, the figure is 12 percent, and in Gazprom it is 37 percent.

According to Misharin, in the next five years the program is expected to result in a 27 percent increase in the volume of cargo transportation, a 9 percent increase in the volume of passenger transportation, a 10-15 percent reduction of costs and a 10 percent reduction of the accident rate.

"Beginning in 2003, the volume of investments in the industry will reach 180 billion rubles per year," Misharin said. "What is important is that we will not need to raise the tariffs to achieve the volume of investments recommended by the auditor."

A total of 50 million rubles were allocated from the state budget to finance modernization of the railroad industry in 2000, which represents less than 1 percent of what was required, while in the 1990s the corresponding figure stood at 21 percent.

Arrival of private capital in the industry is a possible way to resolve the problem, but capital will not start flowing unless appropriate prerequisites are created. First of all, it is necessary to ensure equal access to the market of transportation services, provide capital-return guarantees and do something to reduce the risks caused by the presence of a huge monopoly on the market.

It is unrealistic to expect large investments to arrive before clear rules of the game are established and adequately enforced. That's why many pin hopes on the planned transformation of the industry into a joint-stock company. But it would be naive to overestimate the consequences of this step in relation to the industry's ability to attract investment. If it comes to the creation of a 100 percent state-owned company, it will only be able to raise external funding through credits and bond placement. On the other hand, if it is decided to step aside from the condition of 100 percent state ownership, the result may be industry's destabilization, as has happened with UES. Another bad example is river transport, where credits were provided on vessel-mortgage conditions. Eventually, the vessels wound up in offshore zones at the disposal of companies named by the creditors.

In terms of loan attraction, a federally subordinate unitary enterprise has better opportunities than a joint-stock company just because it can count on government guarantees of loan repayment. The only advantage that a join-stock company has over a federally subordinate unitary enterprise is the right to issue bonds without the need to coordinate such a decision with anybody. It is difficult, however, to make any forecasts about the fate of such bond issues, especially given skeptical attitudes toward Russian securities after the August 1998 crisis.

Investment policy in the industry should be aimed at increasing the efficiency of railroad transportation and reducing, on this basis, the proportion of transportation costs in the products' final prices.

The most important directions in the industry's development include the introduction of modern IT systems, digital-communication networks, modern infrastructure and mobile stock.

(The author is an Associate Professor at the Moscow State University of Railway Transport.)