Report No. 13187-RU Russian Federation Restructuring the Coal Industry: Putting People First (In Two Volumes) Volume II: Annexes December 12, 1994 Infrastructure, Energy & Environment Division Country Department III Europe and Central Asia 4 ,,,,,,,,. .-,. 7~~~OF r NLS.'t.s',""s ''' 7,''S'' ,~~~~~~~~~~~~. L -_ S I I CURRENCY EQUIVALENTS Currency Unit = Ruble (Rb) Rubles per US Dollar Foreign Exchange Auction/Interbank Market Rate Average for Period December 1991 170 December 1992 420 December 1993 1,190 July 1994 1,998 BORROWER'S FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES METRIC SYSTEM US SYSTEM 1 meter (m) = 3.2808 feet 1 kilometer (Ian) = 0.6214 mile 1 square meter (m2) = 1.196 square yards 1 metric ton (tonne) = 1.102 short tons 1 kilocalorie (kcal) 0.252 British thermal units 1 tonne of coal-equivalent (tce) = 6.88 million kcal 1 kilogram (kg) = 2.20462 pounds (lb) ACRONYMS AND ABBREVIATIONS GDP Gross Domestic Product Oblast Region - a Soviet (now Russian) territorial administrative unit: other administrative units include republics, okrugs and krais NOx Nitrogen oxides SOx Sulfur oxides ugol coal (in Russian) USAID United States Agency for International Development RUSSIAN FEDERATION RESTRUCTURING THE COAL INDUSTRY: PUTTING PEOPLE FIRST VOLUME II: ANNEXES Annex A: Supply Annex 1: Coal Resources, Production, and Employment Annex B: Supply Annex 2: Coal Market Prospects by Region and Basin Annex C: Supply Annex 3: International Experience of Coal Industry Restructuring Annex D: Coal Transport in Russia Annex E: Social Protection in Coal Mining Areas Annex F: Environmental Issues in the Russian Coal Sector Annex G: Costs, Subsidies, and Employment in Coal Mining Annex H: Comments and Observations of Ministries, Agencies, and Other Interested Russian Organizations on the IBRD Report "Restructuring the Coal Industry of the Russian Federation" I Annex A SUPPLY ANNEX 1: COAL RESOURCES, PRODUCTION, AND EMPLOYMENT Supply Annex 1 Russian Federation Coal Resources, Production and Employment Contents Structure of Report Physical Geography of the Coal Industry - resources - quality - location - summary Recent Trends in Coal Output {output by major basin surface versus underground mining output by coal type Coal Production Costs - overview/comparators - regional cost curves Coal Preparation and Transport Costs - coal preparation - transport costs - delivered costs Coal Industry Employment - employment by Mining Association - direct and ancillary employment - employment and productivity Map April 8, 1994 aupplyl .vn2 - page 1 - - page 2 - Structure of the Report Restructuring the Coal Industry 1. Supply Annex 1 is an annex of a joint report by the World Bank and the Government of Russia on Restructuring the Coal Industry in the Russian Federation: - the Main Report was first issued on November 12, 1993 - the Main Report is being updated and revised and will be re-issued 2. The Main Report will be supported by the following annexes: - Coal Markets [to be updated] - Coal Resources, Production and Employment [Supply Annex 1: this annex] - Coal Market Prospects by Region and Basin ISupply Annex 2: under preparation] - International Experience of Coal Restructuring [Supply Annex 3: under preparation] - Coal Transport - Social Protection - Subsidies and Finance [summary of recent consultant studies: to be prepared] - Environmental Issues 3. This annex on Coal Resources, Production and Employment draws on material that is presented in more detail in other annexes, particularly those covering Coal Markets, Coal Transport, and Coal Market Prospects by Region and Basin - page 3 - Physical Geography of the Coal Industry Coal Resources 1. See Table 1 Russia Coal Resources (facing page) 2. Russia has 300-400 billion tonnes of physically recoverable coal resources, ie, more than 1,000 years of output at current production rates 3. Only a small part of these resources is economically recoverable, ie, could be produced and delivered to consumers at a full cost recovery price that the consumers would be willing to pay 4. Three factors determine whether individual coal deposits will be economically recoverable: coal production cost (see Coal Production Costs later in this Annex) coal quality distance from market - page 4 - Table 1: Russia: Coal Resources (billion tonnes) BASIN Hard Coal Coking Anthracite Brown TOTAL (Thermal) Coal Coal Pechora/North 8.8 3.6 12.4 Moscow (Tula) 4.4 4.4 Donbass/South 9.3 0.3 7.0 1686 Urals 0.5 0.3 1.7 2.5 Kuzbass 76.8 38.2 96.5 211.5 Kansk-Achinsk 7&.0 78.0 East Siberia 11.0 2.0 13.0 Far East 5.3 10.4 15.7 North East 7.1 4.9 12.0 TOTAL 118.8 47.3 7.0 193.0 366.1 Source: Prepared by World Bank based on date provided by IEECIRosugol - page 5 - Physical Geography of the Coal Industry Coal Quality 1. See Table 2 - Representative Coal Quality for Different Coal Basins (facing page) 2. Customer requirements: - hard coal can be used by a wide range of customers - coking coal is produced (mainly in Kuzbass and Pechora basins) for the steel industry - anthracite (from Donbass only) has special combustion characteristics - brown coal (from Moscow basin and most basins east of the Urals) is typically used in large power plants 3. Calorific value: - is important for transport costs - can be improved by washing 4. Ash content: - is important for competition with gas (environment) - again, can be improved by washing 5. Sulfur content: - is important for competition with gas - but washing usually yields only small reduction in sulfur content - page 6 - Table 2: Regresentative Coal Quality for Different Coal Basins REGION COAL CALORIFIC ASH SULFUR TYPE CONTENT CONTENT CONTENT (kcal/kg) % % Pechora/North Coking 5700-6000 16-18 0.5-0.7 Hard coal 4000-5500 25-30 1.5-3.0 Moscow Brown 2300-2700 30-40 3.0-4.5 Donbass Anthracite 5500-6000 20-30 2.0-3.5 Urals Hard coal 4000-5000 25-35 3.5-5.5 Brown 2700-3000 35-40 0.5-1.0 Kuzbass Coking 5500-6500 10-20 0.3-0.7 Hard 5000-6000 10-20 0.3-0.7 Kansk-Achinsk Hard coal 5000-5500 15-25 0.4-0.6 Brown 3400-3700 15-20 0.4-0.6 Eastern Brown 3000-4000 15-25 0.5-1.5 Siberia Far East Hard 4500-5500 15-35 0.3-0.5 Brown 3000-4000 20-40 0.3-0.5 North East Coking 5500 15-20 0.3 Hard 4600-5500 15-20 0.2-0.4 Brown 3700-4000 15-17 0.2 Source: Prepared by World Bank based on data from Energaticheskoe Toplivo SSSR (Moscow: Energoatomizdat, 1991) - page 7 - Physical Geography of the Coal Industry Location 1. See MM (last page of Annex) showing: locations of the main coal basins in Russia boundaries of economic regions (used for analysis of coal markets) 2. See Table 3 Key Coal Transport Distances (facing page), eg: the Center (Moscow) market can be supplied by: - Moscow (Tula) basin: 200 km - Donbass: 1,200 km - Pechora basin: 2,200 km - Kuzbass: 3,500 km to be exported, coal must be transported: - Pechora to St Petersburg 2,400 km - Kuzbass to St Petersburg 4,500 km - Far East to Japan 3,000 km 3. See Coal Preparation and Transport Costs (later in this Annex) - page 8 - Table 3: Key Coal TransDort Distances PRODUCING REGIONS DISTANCE BASIN SUPPLIED (km) Pechora North 2,000 Center 2,200 Northwest 2,400 Moscow Center 200 Donbass North Caucasus 300 Volga 400 Center 1,200 Urals Urals 200 Kuzbass West Siberia 300 Urals 1,900 Center 3,500 Northwest 4,500 Kansk-Achinsk East Siberia 900 West Siberia 400 East Siberia East Siberia 400 Far East/North Far East 500 East exports of coking 3,000 coal to Japan - page 9 - Physical Geography of the Coal Industry Summary 1. Coal must compete with other fuels, ie, the delivered cost of energy to the consumer must be lower than the delivered cost of other fuels 2. The main elements of the cost structure for delivered coal are: - production cost at minemouth - plus coal preparation cost (and coal losses), where relevant - 111 I stockpiling and transport cost, ie, mainly rail freight 3. Production cost at minemouth: - capital cost recovery - in the past, investment was grant-financed - in future, coal prices will have to cover costs of financing investment, ,e: - interest and principal repayment on loans - profits (dividends and retained earnings) - Rius2 operating costs (labor & other) note: cost structures (capital, labor, other) for underground mines can be very different from that of surface mines 4. Coal preparation cost: * capital cost recovery (same situation as for mining costs) - plu operating costs (labor & other) note: coal preparation losses (ie, fewer tons come out of the preparation plant) are a major part of the costs of coal preparation-- however, some of these costs may be recovered in the form of lower rail freight costs 5. Transport and storage cost: - stockpiling costs (usually at the mine) - D1it loading and unloading charges for rail freight - plus distance-related charges for rail freight - plus additional trucking costs for distribution to smaller consumers - page 10 - The remainder of this Annex looks at coal supply cost structures in Russia: coal production costs with an emphasis on labor productivity and employment coal preparation costs however, very little information is available: more analysis is needed coal transport costs which now are the main cost element affecting competition between different coal basins - page 11 - Recent Trends in Coal Output Output by Major Basin 1. See Figure 1 Coal Production by Basin, 1980 - 1993 (facing page) 2. Coal output peaked in the late 1980s and has been declining since then 3. In most basins, demand for coal has been contracting more rapidly than coal output: the only regions where coal shortages have been reported on a recurring basis are the Far East and the North East in several other regions, coal surpluses have occurred despite the fall in output 4. In most basins coal output would have declined in any event, ie, even if demand had not declined: coal prices have been too low to support operations (eg, spare parts) and development in the industry as a whole the spare parts problem has been made worse by the collapse of the regional trading arrangements (CMEA) under which the mines previously imported spare parts for Polish mining equipment without making payment in hard currency low-cost mines have been (implicitly) cross-subsidizing high-cost mines instead of retaining the profits needed for expansion of low- cost output--so coal is increasingly at a cost disadvantage in relation to natural gas and fuel oil (both of which are also in excess supply on the Russian energy market) - page 12 - Figure 1 RUSSIAN COAL INDUSTRY COAL PRODUCTION BY BASIN AND DEPOSIT 1980- 1993 (est.) 450 -400 300 200 -150 ... ..... ............. l 1t w ~~~~~~~~~~~~~~~~~~~~~~........ ..... ..... 8 .... . __ .~~~~~~~~~~~~... -O0 1980 1985 1986 1987 1988 1989 1990 1991 1992 Est. 1993 Year ; Pechora/North [111 Tula/Moscow nl Donbass/South MUrals * Kuzbass LII Kansk-Achinsk 1 other Eastern 2 Far East Siberia SOURCE: RosUgol data - page 1 3 - XBASINS.XLS Chart 1 Recent Trends in Coal Output Surface versus Underground Mining Table 4: Russia - Coal Production in Nine Major Basins in 1992 Number of Mines Production (million tonnes) Underground Surface Total Underground Surface Total Basin Share Pechora 18 0 18 24.4 0 24.4 7.5% Tula 18 4 22 7.2 2.0 9.2 2.8% Donbass 42 0 42 22.3 0 22.3 6.8% Urals 25 8 33 9.1 13.4 22.5 6.9% Kuzbass 69 22 91 68.0 46.6 114.7 35.0% Kansk- 3 6 9 2.0 55.4 57.3 17.5% Achinsk Eastern 2 10 1 2 0.5 35.9 36.3 11.1% Siberia Far East 24 12 36 8.9 15.8 24.7 7.5% North 6 4 10 3.3 12.8 16.1 4.9% East Total 207 66 273 145.7 181.9 327.5 100.0% Share of 76% 24% to0% 44.5% 55.5% 100.0% Mining Methods note: surface mines account for 24% of the total number of mines, but 56% of total production, ie, surface mines are typically larger than underground mines Kuzbass (35%) and Kansk-Achinsk (17%) together account for more than half of total production - page 14 - Recent Trends in Coal Output Output by Coal Type Table 5: Production by Coal Type in 1992 (million tonnes) Coking Anthracite Hard (Thermal) Brown TOTAL Pechora 15.5 9.0 24.5 Tula 9.2 9.2 Donbass 1.8 20.5 22.3 Urals 1.0 2.1 19.4 22.5 Kuzbass 45.0 1.5 68.1 114.6 Kansk 6.6 50.8 57.4 Achinsk Eastern 7.6 28.7 36.3 Siberia Far East 24.7 24.7 North 5.6 0.2 9.3 1.0 16.1 East TOTAL 68.9 22.2 102.7 133.8 327.6 Note: Numbers may not add due to rounding. note: coking coal faces declining demand from the steel industry and excess supplies are now being sold in the steam coal market, usually at a lower price brown coal sells almost exclusively to large power & heat producers that are relatively close to the mines--brown coal generally cannot compete outside this market - page 15 - Coal Production Costs Overview 1. See Table 6 Russia Coal Production Costs 1992 (facing page) 2. These costs do not include: - any capital costs or financial charges - social and similar costs - costs involving unpaid debts to suppliers or other third parties - costs involving barter with other enterprises 3. These costs do include: - all wage payments [arrears in wage payments were not large in 1992; also the Tariff Agreements did not play a major role in wage setting until 19931 4. We do not know whether: - costs are recorded at the minemouth or when the coal leaves the coal preparation plant - costs are recorded on a cash basis or an accrual basis - all costs are consistently recorded without omissions 5. These average costs are calculated by dividing total declared costs by total output for 1992 1/ --the cost of producing an additional ton of output in each basin would be higher than the average cost [l1/1992 costs were multiplied by an inflation coefficient to convert them to Jan.-Sept. 1993 rubles: this allows ruble costs to be converted to US dollars by dividing by approx. 1000 RbIlUS$1 6. Costs in RBL/tce (rubles per ton of coal equivalent) provide a better comparison between different basins than RBL/tonne, since each tce has the same heat content--however, this comparison does not take into account the large differences in other aspects of coal quality, eg, moisture, ash or sulfur content 7. The best interpretation of these costs is that they include most variable costs--and therefore provide a first indication of the short-run costs that apply in a period of declining demand and limited investment - page 16 - Table 6: Russia: Coal Production Costs - 1 992 (Jan.-Sept. 1 993 rubles per ton or tce-11) Underground Surface Weighted Average Rb/ton Rb/ton Rb/ton Rb/tce Pechora 8,331 - 8,331 11,426 Moscow (Tula) 4,422 2,239 3,942 11,616 Donbass 7,524 - 7,524 9,603 Urals 7,954 2,074 4,442 10,757 Kuzbass 8,641 5,174 7,229 8,620 Kansk-Achinsk 4,131 995 1,113 2,219 Eastern Siberia 10,088 1,318 1,431 2,810 Far East 12,118 3,123 6,362 14,635 North East 9,938 4,625 5,719 6,961 TOTAL 8,348 2,667 5,195 7,909 1 / tce: ton of coal-equivalent (7 million kcal) Soure: Prered by World Bank bed on dota provkidd bV ROSUGOL note: variable costs of production vary significantly from basin to basin: 995 - 5,174 RBL/tonne for surface mining 4,131 - 12,118 RBL/tonne for underground mining variable costs of surface mining on average are only 30% of variable costs of underground mining - page 17 - Coal Production Costs Comparators Table 7: ComDosition of Mining Costs in Different Countries (percent) Underaround Mining Labor Other Operating Costs Depreciation Total UK 1992/93 36 57 7 100 USA 1989 48 43 10 100 Australia 36 57 10 100 1989 Russia 1991 44 51 5 100 Russia 1993 30 65 5 100 Surface Mining USA 1989 27 64 9 100 Australia 26 59 15 100 1989 Russia 1991 33 52 5 100 Russia 1993 22 73 5 - 100 Source: Prepared by World Bank from data provided by ROSUGOL note: Russian cost data received so far does not provide any useful breakdown of costs into different categories estimates of depreciation costs are particularly uncertain in the Russian context consultants have been commissioned to provide additional data on cost structures in Russia - page 18 - Coal Production Costs Regional Cost Curves 1. On the following pages are Regional Cost Curves for: Western Russia, Siberia and Eastern Russia (3 curves) to show: - the large differences in production costs between these regions - the importance of rail freight costs for competition between these regions (see later section in this Annex) Western Russia (Pechora, Moscow, Donetsk and Urals basins) for steam coal and coking coal separately (2 curves) Siberia (Kuzbass and Kansk-Achinsk basins) for steam coal and coking coal separately (2 curves) Eastern Russia (Far East and North East basins) for steam coal and coking coal separately (2 curves) 2. Production costs in these curves are: - per tonne coal-equivalent (tce) - 1992 costs converted to Jan.-Sept. 1993 rubles - total variable operating costs (see definitions, page 16) - adjusted to reflect the fact that a tce of high quality coal is worth more to the consumer than a tce of low quality coal: - anthracite (high efficiency, clean, long flame): premium of 10% - low sulfur coals (less than 1 %): premium of 10% - high sulfur coals (greater than 2%): penalty of 10% - low ash coals (less than 15%): premium of 10% - high ash coals (greater than 30%): penalty of 10% 3. Steam coal and coking coal compete to some extent: - Russia produced about 1 10 million tonnes of coking coal in 1992 - shipments to metallurgical consumers were about 70 m. tonnes - thermal consumers purchased the remaining 40 million tonnes of coking coal - so coking coal production costs cannot exceed those of steam coal if coking coal is to survive in the steam coal market - page 19 - Coal Production Costs Regional Cost Curves 1. See Figure 2 Russia Regional Supply Curves, 1992 (facing page) 2. All three curves include steam coal and coking coal, together 3. Large quantities of coal are produced in Siberia at costs that are significantly lower than production costs in Western or Eastern Russia 4. All three curves have a "tail" of high-cost mines at which: production costs are up to three times as high as in most other mines output is low: these mines do not add much to total output 5. In the following pages we will compare employment and the number of mines in 1992 with two World Bank scenarios for competitive coal markets in 1997 1/: "low" rail freight tariffs - "high" rail freight tariffs 1/ Supply Annex 2 gives details of the 1997 scenarios - page 20 - Figure 2 Russia Regional Supply Curves, 1992 60000 50000 .~~~ o. 40000 - _ * * Western Russia U ~~~~~~~~~~~~~ Siberia Eastem Russia " 30000 p t * I ~~~~~~~~~~~~0 fl fl ° '20000 10000 0 0 cj 0 -i I i I 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 Calculated 1992 Cumulative Coal Production in million tce - page 21 - XRUSALL.XLC Coal Production Costs Regional Cost Curves 1. See Figure 3 Western Russia - Regional Supply Curves, 1992 (facing page) 2. Western Russia includes Pechora, Moscow, Donetsk and Urals basins 3. Example: at 15,000 Rbl/tce (approx. US$15/tce), Western Russia could produce: - 25-30 million tce of steam coal - 10-15 million tce of coking coal 4. In 1992: - total direct employment: 326 thousand - number of mines: 1 15 mines 5. In 1 997, with "low" rail freight tariffs: - total direct employment: 148 thousand - number of mines: 49 mines 6. In 1 997, with "high" rail freight tariffs: - total direct employment: 203 thousand - number of mines: 72 mines - page 22 - Figure 3 Western Russia -- Regional Supply Curve, 1992 50000 45000 40000 0 35000 0.~~~~~~~~~~ *C o0 30000 0 ~~~~0 c 25000 - u SY D 0 i 20000 8 0 C o° .c 15000 -o g o° _ g 0 |~~~0 C 10000 0 EL 5000 - 0 _ ,8 a* Western Russia Steam Coal * *°0 Westem Russia Coldng Coal * O- II I I I . I 0 5 10 15 20 25 30 35 Calculated 1992 Cunulative Coal Production in million tce - page 23 - XwRusi.XLC Coal Production Costs Regional Cost Curves 1. See Figure 4 Siberia - Regional Supply Curves, 1992 (facing page) 2. Siberia includes Kuznetsk, Kansk-Achinsk and Eastern Siberian basins 3. Example: at 8,000 Rbl/tce (approx. US$8/tce), Siberia could produce: * about 90 million tce of steam coal about 20 million tce of coking coal 4. In 1992: - .total direct employment: 346 thousand - 1number of mines: 112 mines 5. In 1997, with "low" rail freight tariffs: - total direct employment: 110 thousand - lnumber of mines: 52 mines 6. In 1997, with "high" rail freight tariffs: - total direct employment: 91 thousand - number of mines: 42 mines - page 24 - Figure 4 Siberia -- Regional Supply Curve, 1992 25000 . o U oU 20000 0 - 0 15000 - - S.t~~~ 0S 1 Xi D w100000 00 0 0n *--5000 - 0 2 * - Sibeonan Steam Coal 0 Sibenian Coking Coal * I 0 20 40 60 8.0 100 120 Calculated 1992 Cumulative Coal Production in million tce - page 25 - XSIBI.XLC Coal Production Costs Regional Cost Curves 1. See Figure 5 Eastern Russia - Regional Supply Curves, 1992 (facing page) 2. Eastern Russia includes basins in the Far East and the North East 3. Example: at 25,000 Rbl/tce (approx. US$25/tce), Eastern Russia could produce: - about 18 million tce of steam coal - about 5 million tce of coking coal 4. In 1992: - total direct employment: 90 thousand - number of mines: 46 mines 5. In 1997, with "low' rail freight tariffs: * total direct employment: 29 thousand - number of mines: 17 mines 6. In 1 997, with "high" rail freight tariffs: - total direct employment: 45 thousand - number of mines: 24 mines - page 26 - Figure 5 Eastern Russia -- Regional Supply Curve, 1992 60000 . 50000 T~~~~~~~~~~~~~~~~~~~~~~ I~~~~~~~~~~~~~~~~~~~~~ 0. 40000 rx30000 - 0~~~~~~~~ m S~~~~~~~~~~~~~~~~~~~~~~~m a 20000 -_ A di 10000 - . H * * U * Easten Russia Steam Coal *0 0 Eastem Russia Coldng Coal 0 I I I I I I IIII 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 Calculated 1992 Cunulative Coal Production in million tce - page 27 - XERUSI.XiC Coal Preparation and Transport Costs Coal Preparation 1. The World Bank has very little information about coal washing or other forms of coal preparation in Russia--this is a priority for future analysis 2. As in many other countries: - most coking coal is washed - most steam coal is not washed - minemouth power plants are designed to burn unwashed (run- of-mine) coal, and - most brown coals cannot be washed 3. However, in Russia: - coal preparation takes place at large, central washeries that serve several mines or Mining Associations - washery technology is mostly at least 20 years old and cannot meet the standards of a modern coal market - most washeries are worn out and urgently need to be replaced - quality control is poor--sampling and analysis are uncommon - costs of coal preparation are not allocated to specific coal "products" in any detail--as a result, the "quality" dimension of the coal market functions poorly 4. Coal preparation should be part of a broader strategy to improve coal quality in response to customer needs--for example, ash content can be reduced by: - better mining practices, eg, not mining thin seams with equipment designed to mine thicker seams - coal washing - other forms of coal preparation - improved management of blending and stockpiles - page 28 - Coal Preparation and Transport Costs Coal Preparation, cont'd 5. The main benefit of coal washing is to reduce ash content,./ which in turn: - reduces transport costs (per heat unit delivered) - reduces particulate emissions (environmental benefits) - extends boiler life (reduces investment by coal consumers) - ie, preparation plants deliver a higher quality coal for a higher price (per tce)--although some of the lower cost may be recovered in the form of lower transport costs 1 / coal washing may also reduce sulfur content to some extent 6. When looking at the opportunities to increase sales revenue and profits, the managers of the new, commercial (joint stock) mining companies need to: form a clear understanding of the coal quality specifications demanded by their potential customers--and the prices the customers are willing to pay for each coal "product" design an overall strategy for improving coal quality--in mining, preparation, stockpiling/blending and distribution--and set prices that recover the costs of each "product" from sales of that product decide how best to allocate investment resources between mining and preparation plants--with much greater attention to preparation than in the past - page 29 - Coal Preparation and Transport Costs Transport Costs 1. See Table 8 Changes in Rail Freight Rates and Coal Prices in 1993 (facing page) 2. Costs are averages for all thermal (steam) coal and coking coal transported by rail in Russia 3. As a result of hyper-inflation, changes in rail freight's share in the delivered price of coal are very 'lumpy", depending on the timing of the rate increases: for thermal (steam) coal, freight's share varied from 22% to 60% for coking coal, freight's share varied from 14% to 41% (lower than for steam coal, because coking coal is washed) 4. Despite these large fluctuations, it is clear that rail freight's share in the delivered price of coal increased significantly in 1993 and may increase further in 1994 and beyond - page 30 - Table 8: Changes in Rail Freight Rates and Coal Prices in 1993 (Rubles/tonne as of each date) Typeof Coal 1/1/93 7/1/93 9/1/93 11/1/93 Thermal Coal: Coal Price a/ 1,159 1,159 6,975 7,426 Rail Freight 330 1,462 4,090 6,137 Total Delivered Price 1,489 2,611 11,065 13,563 Coal Price 77% 44% 63% 55% Rail Freight 22% 56% 37% 45% Total Delivered Price 100% 100% 100% 100% Coking Coal Coal Price bI 2,761 2,761 23,384 24,533 Rail Freight 431 1,898 5,347 8,022 Total Delivered Price 3,192 4,659 28,731 32,555 Coal price 86% 59% 81% 75% Rail Freight 14% 41% 19% 25% Total Delivered Price 100% 100% 100% 100% a/ A mix of about 75% minehead prices and 25% ex-washery prices b/ Ex-washery prices Source: Russian rail industry - page 31 - Coal Preparation and Transport Costs Transport Costs 1. See Table 9 Rail Freight Rates between Producing Basins and Consuming Regions (facing page) 2. Supply Annex 2 presents a basin-by-basin analysis of: - the tradeoff between mining costs and freight costs - the impact on inter-basin competition for the long distance coal markets 3. An example to indicate the potential for competition (all costs in Jan.-Sept. 1993 rubles): - much of the coal in Western Russia (Figure 3) is produced at a variable cost of 10,000 to 15,000 rubles/tce - the cost of transporting these coals to the Moscow market varies enormously--from 3,000 to 17,000 rubles/tce - the delivered cost in Moscow of coal from Western Russia in some cases will be in excess of 30,000 rubles/tce - much of the coal in Siberia (Figure 4) is produced at a variable cost of 5,000 to 10,000 rubles/tce - the cost of transporting these coals to the Moscow market is very high, starting at about 22,000 rubles/tce - nonetheless, the delivered cost in Moscow of coal from Siberia in some cases will be less than 30,000 rubles/tce - conclusion: at the freight rates prevailing in late 1993, there was still some scope for competition between basins in Western Russia and Siberia for a market as distant as Moscow (see Supply Annex 2 for details) - page 32 - Table 9: Linkaces and Rail Freight Rates Between Producing Basins and Consuming Regions Producing basin Regions supplied Distance (km) Transport Cost (Rbl/tce: in Jan.-Sept. 1993 terms) Pechora North 2,000 12,000 (coke), 15,600 (hard) Center 2,200 13,200 (coke), 17,100 (hard) Northwest 2,400 14,400 (coke), 18,700 (hard) Moscow Center 200 2,900 Donbass North Caucasus 300 1,900 Volga 400 2,500 Volga Vyatka 1,000 6,400 Center 1,200 7,600 Urals Urals 200 1,600 (hard), 2,500 (brown) Kuzbass West Siberia 300 1,900 Urals 1,900 12,000 Center-Black Earth 3,000 19,100 Center 3,500 22,300 North 4,000 25,500 Northwest 4,500 28,600 Kansk-Achinsk East Siberia 900 5,900 (hard), 8,700 (brown) West Siberia 400 2,600 (hard), 3,900 (brown) East Siberia East Siberia 400 4,000 Far East/North Far East 500 5,000 East exports of coking 3,000 17,800 coal to Japan - page 33 - Coal Industry Employment Employment by Mining Association 1. See Table 10 Production and Employment by Mining Association, 1992 (facing page) 2. Source: RosUgol 3. Employment totals in 1992 in this table are slightly different from those in Table 11 (source: Goskomstat). Differences are less than 10 percent and are probably partly due to differences in definitions of personnel categories: - Total Employment (RosUgol: 765,000) corresponds approximately with total Personnel of Industrial Enterprises in the Coal Industry (Goskomstat: 702,000) Number of Production Workers (RosUgol: 433,000) corresponds approximately with Laborers for Coal Production (Goskomstat: 412,000) 4. Productivity (output production per worker) varies enormously from one Mining Association to another: productivity is a more important indicator for underground mines than for surface mines--since underground mining is generally much more labor-intensive than surface mining productivity in underground mines will vary greatly according to factors such as: - depth of current operations - type of transport underground: shaft or incline - distance from the working faces to the shaft/surface nonetheless, low labor productivity is a useful indication that labor costs may be too high for a mine to remain commercially viable - page 34 - Table 10 - Russian Coal Production and Employment by Mining Association, 1992 Mining association Region No. of Total Under- Coking Total No. of Output mines output ground coal Employ- production production output output ment workers worker MT MT MT '0008 'OOOs MT/year Intaugol North 5 7.5 7.5 0.0 18.7 9.4 774 Vorgashorskaya North 1 5.0 5.0 5.0 4.4 3.8 1276 Vorkutaugol North 12 12.0 12.0 10.5 47.3 21.6 554 Tulaugol Moscow 22 9.2 7.2 0.0 41.0 22.5 409 Cukovugol South 15 6.5 6.5 0.9 38.7 21.4 294 Obukhovskoye South 1 1.9 1.9 0.0 6.7 4.8 397 Rostovugol South 26 13.9 13.9 0.9 90.0 49.2 283 Bashkirugol Urals 2 4.5 0.0 0.0 8.7 2.1 2157 CheIjabinskugol Urals 14 11.2 6.0 0.0 36.0 18.9 594 Kizelugol Urals 13 2.4 2.4 1.0 23.8 13.2 162 Shumnikhinskaya Urals 1 0.2 0.2 0.0 1.4 1.1 141 Vakhrushevugol Uralr 3 4.2 0.5 0.0 9.5 4.0 1033 Belovougol Kuzbass 6 5.5 5.5 2.8 16.8 10.6 517 Kiselevskugol Kuzbass 8 4.5 4.5 1.0 22.7 13.2 338 Kuzbasrazrezugol Kuzbass 18 40.3 0.0 16.3 51.4 28.3 1422 Kuznetakugol Kuzbass 18 20.0 20.0 16.6 67.9 45.7 436 Leninskugol Kuzbass 9 14.0 14.0 3.3 33.0 22.5 619 Mezhdurechje Kuzbass 1 4.1 0.0 3.1 4.6 4.1 983 NPK 'Ugol" Kuzbass 4 2.3 0.9 0.3 5.7 3.1 739 Prokopyovskugol Kuzbass 11 7.4 7.4 4.5 42.6 25.8 287 Raspadakaya Kuzbass 1 6.3 6.3 6.1 5.9 5.2 1236 Severokuzbassugol Kuzbass 14 8.8 8.0 5.9 43.1 26.4 336 Vakhrusheva Kuzbass 1 1.5 1.5 0.3 2.6 2.4 640 Borodinskiy Kanak- 1 28.4 0.0 0.0 6.2 2.3 12278 Krasnojraskugol Kanak- 8 29.0 2.2 0.0 19.3 10.9 2644 Vostsibugol East Sib. 12 36.3 0.5 0.0 24.4 11.7 3111 Dalvostugol Far East 5 5.4 0.0 0.0 7.1 2.3 2379 Primormkugol Far East 17 14.8 5.7 0.0 35.6 18.9 780 Sakhalinugol Far East 14 4.4 3.1 0.0 20.4 13.6 326 Jakutugol N. East 5 12.4 1.3 5.6 21.6 5.6 2240 Severovostokugol N. East 5 3.7 2.0 0.0 5.5 3.4 1093 TOTAL 273 327.6 145.7 68.8 764.7 432.9 757 Note: Numbers may not add due to rounding. - page 35 - Coal Industry Employment Direct and Ancillary Employment 1. See Table 11 Employment in the Coal Industry, 1992 (facing page) 2. Under the broadest definition of the Coal Industry, total employment is greater than 900,000 people, of whom: 212,000 (23%) are "personnel of non-industrial enterprises" in the coal industry, including design & construction enterprises and trade & food services 120,000 (13%) are "non-industrial personnel of industrial enterprises", including kindergarten, housing, agricultural and other personnel ie, in a market economy, more than a third of total coal industry personnel would be employed either by independent contractors or by local government 3. Under a narrower defintion of employment, there are 369,000 "workers for the extraction of coal", of whom: 305,000 (83%) work in underground mining, although not necessarily underground 64,000 (17%) work in surface mines - page 36 - Table 1 1: Emgloyment in the Coal Industry. 1992 RLisia 914.331 Fedation 'otsl Pemonnel of 701.896 Industrial Enterprises Iadustridl 81,8081 Personnal Laborers 491,841 For Coal 411,674 Production Of which 388,996 Workers for Extraction of Coal Under- 306.11S ground Mines Under- 223.954 ground Above 81.161 Ground Surface 63.881 Mines Other 80,187 Laborers Office 90,0o0 Staff For Coal 72,303 Production Other Office 17.717 Staff Non-Industdal 120,036 Paronndl J/ Pesonnel of 212.436 Non-industrial Enterprises Construction 106,887 Deign 2,198 Organizttions Other 9106S9 Organizations Trade/Food 13,303 Service jJ Includes kindergarten, housing, agricultural and other personnel. - page 37 - Coal Industry Employment Employment and Productivity Table 12: Russia: Employment and Productivity of Underground and Surface Mine Workers in 1992 Production Workers Output per Worker {tonnes per man year) Underground Surface Total Underground Surface Total Pechora/north 3b,151 0 35,151 694 - 694 Moscow (Tul) 21,147 1,362 22,509 340 1,486 409 Donbass/South 76,078 0 76,076 293 - 293 Urals 32,441 8,461 40,902 279 1,586 550 Kuzbass 153,347 36,227 189,574 444 1,287 605 Kensk-A˘hirnk 2,578 10,685 13,261 771 5,180 4,322 East Siberia 1,960 9,718 11,678 242 3,690 3,111 Far East 28,137 6,725 34,862 316 2,347 708 North east 4,688 4,253 8,941 710 3,012 1,806 Total 355,523 77,431 432,954 410 2,349 757 Source: ROSUGOL 1. Kuzbass and Russian Donbass account for more than 60% of total coal industry employment of "production workers": basin production percent of workers total Kuzbass 189,574 44% Donbass/south 76,076 18% 2. For comparison, labor productivity in new underground mines in the US may exceed 11,000 tonnes per worker per year - page 38 - Coal Industry Employment Employment and Productivity Table 13: Coal Mine Productivity 1992 1/ (tons per manshift) Country Underground Surface Mines Mines U.S.A. 23.7 49.4 Australia 18.1 36.3 South Africa 2/ 7.70 N.A. U.K. 6.34 9.06 Germany 5.22 - Russia 2/ 1.95 11.13 Poland 1.95 - China 4/ 1.33 5.0 India 0.54 3.34 1/ note: - coal labor force statistics in countries such as India and China include many workers with social functions that are not found in other countries - the proportion of washed coal varies between countries and is much lower in China and India than in other countries 2/ 1991 3/ based on production workers only, assuming 210 shifts/year 4/ raw coal 1. differences in definitions and technical conditions make it difficult to compare mining productivity statistics from different countries 2. however, it is clear that in Russia: - in the worst mines, labor productivity is very low by world standards - even in the better mines, there is considerable room for improvement - page 39 - Annex B SUPPLY ANNEX 2: COAL MARKET PROSPECTS BY REGION AND BASIN Supply Annex 2 Russian Federation Coal Market Prospects by Region and Basin Contents Structure of Report - report organization - market adjustment scenario Regional Demand for Coal Competition between Coal Basins - coal production costs - coal rail freight costs Scenario Results, 1997 - coal output by basin charts: production cost versus output, 1997 (delivered prices and minemouth prices - employment charts: employment versus output, 1997 Strengthening the Coal Market - institutional reforms - overview of present conditions - options for improving production efficiency - financing of investment April 17, 1994 *upply2.tmx - page 1 - - page 2 - Structure of the Report Restructuring the Coal Industry 1. Supply Annex 2 is an annex of a joint report by the World Bank and the Government of Russia on Restructuring the Coal Industry in the Russian Federation: - the Main Report was first issued on November 12, 1993 - the Main Report is being updated and revised and will be re-issued 2. The Main Report will be supported by the following annexes: - Coal Markets [to be updated] - Coal Resources, Production and Employment [ie, Supply Annex 1] - Coal Market Prospects by Region and Basin [Supply Annex 2: this annex] - International Experience of Coal Restructuring [Supply Annex 3: under preparation] - Coal Transport - Social Protection - Subsidies and Finance [summary of recent consultant studies: to be prepared] - Environmental Issues 3. This annex on Coal Market Prospects by Region and Basin draws on material that is presented in more detail in other annexes, particularly those covering Coal Markets, Coal Transport, and Coal Resources, Production and Employment - page 3 - Structure of the Report Market Adjustment Scenario 1. The purpose of this Annex on Coal Market Prospects by Region and Basin is to present the methodology and results of the World Bank's medium term projections for coal demand and supply in Russia: - these projections--described as the Market Adjustment Scenario-- should be compared with other medium term projections prepared by Russian agencies - each of the new, joint stock mining companies (former Mining Associations) should take this methodology--or a similar one--as a starting point to develop their own medium term strategies for marketing (including pricing), operations and development 2. The analysis for the Market Adjustment Scenario proceeds in the following steps: taking 1992 as a base year, the World Bank estimates that total national coal sales will contract by about a third, then level off some time in the period 1995-2000 [see Annex on Coal Markets] individual coal basins will have to compete with each other to maintain or increase their share of a smaller market--the basin that can deliver coal of a particular quality at the lowest delivered price will win the sales contract most coal basins in Russia depend on medium to long distance sales for a substantial part of their total sales revenue--so rail freight costs will be crucial to their ability to compete [see Coal Transport Annex and Supply Annex 1 ] - page 4 - Structure of the Report Market Adjustment Scenario, cont'd for each combination of coal basin and regional market, we estimate future delivered prices (ie, prices that would ensure full cost recovery for the companies that produce and deliver the coal) for steam and coking coal, based on: 1992 coal production cost curves (translated into 1993 rubles) for each of the nine major basins a range of rail freight costs: "low" and "high" we then simulate the coal market to estimate the likely range of coal sales for each basin in a target year (1997)--however, this target year could be almost any year in the period 1995-2000, since demand is projected to be fairly "flat" over the whole period we then use the 1992 cost and employment curves to estimate a "low" and a "high" case for: the number of mines that would stay in operation in each basin in 1997--and, correspondingly, the number of mines that would have to close over the transition period the total employment in each basin in 1997--and, correspondingly, the number of workers who could become unemployed over the transition period these estimates of possible mine closures and unumployment--basin by basin--are the starting point for our analysis of severance costs, pensions and other social costs related to the restructuring of the coal industry finally, we look at the scope for the new, joint stock mining companies to improve production efficiency, ie, to cut production costs and improve product quality in order to increase their share of the total coal market - page 5 - Regional Demand for Coal 1. See Table 1 Demand for Coal by Region, 1990-1997 (facing page) 2. The target year (1997) is a "typical" year in the period 1995-2000, during which coal demand will remain relatively "flat" 3. Demand for coal in Russia is changing [details in Annex on Coal Markets] in response to: - changes in the level of GDP - a shift from investment towards consumption expenditure - a decline in the output of heavy industries - continuing penetration of some regional markets by natural gas - in the medium term: changes in the price of coal relative to prices of other fuels and commodities 4. The regional coal demand scenarios in Table 1 start from 1990 data on consumption of steam coal and coking coal in each of the eleven economic regions: World Bank scenarios for 1997 electricity and heat generation--the largest single component of steam coal demand--were used to estimate the regional pattern of steam coal demand in 1997, after taking into account: - likely output of lower-cost, existing hydro and nuclear plants in these regions - likely shares of coal, natural gas and fuel oil (mazut) in the remaining electricity and heat generation loads World Bank scenarios for 1997 output of iron and steel were used to estimate the regional pattern of coking coal demand in the regions where coal competes with natural gas--the Urals and European Russia--the scenarios assume that coal consumers will be more sensitive to coal prices (a price elasticity of 10%) than in other regions - page 6 - Table 1: Demand for Coal by Region 1990-1997 a/ (million tce) 1990 of which 1997 of which coking coking Northwest 3.7 2.2 North 16.8 7.3 10.0 4.6 Center 22.7 8.3 13.5 5.2 Center-Black Earth 5.4 3.4 Volga Vyatka 5.5 3.5 Volga 5.5 3.5 North Caucasus 12.1 7.5 Urals b/ 51.6 21.5 20.4 13.6 West Siberia 56.5 8.6 32.5 5.4 East Siberia 44.0 24.0 Far East/North East 26.6 20.4 5.1 TOTAL 250.4 45.7 144.9 28.8 a/ Excludes coal exports. b/ Includes demand for coal from Ekibastuz (Kazakhstan). Source: RosUgol (1990) and World Bank estimates (1997). Note: Russian experts have prepared an alternative scenario for total coal sales in 1995 of 267 million tonnes (approx. 193 million tons of coal equivalent, tce): this Annex does not examine the Russian scenario because the total is not broken down into different consumption regions while the Russian scenario is much higher than that of the World Bank (Table 1) and is for a slightly different year (1995 instead of 1997), it also implies a continuing decline in coal output--from about 214 million tce in 1992 to 193 million tce in 1995 - page 7 - Competition between Coal Basins Coal Production Costs 1. As in Supply Annex 1, we use Cost Curves to summarize the costs of production in each basin--Figures 1-9 (pages 12-21, below) 2. Production costs in these curves are: - per tonne coal-equivalent (tce) - 1992 costs converted to Jan.-Sept. 1993 rubles - total variable operating costs (see below for definitions) - adjusted to reflect the fact that a tce of high quality coal is worth more to the consumer than a tce of low quality coal: - anthracite (high efficiency, clean, long flame): premium of 10% - low sulfur coals (less than 1%): premium of 10% - high sulfur coals (greater than 2%): penalty of 10% - low ash coals (less than 15%): premium of 10% - high ash coals (greater than 30%): penalty of 10% 3. These costs do not include: - any capital costs or financial charges - social and similar costs - costs involving unpaid debts to suppliers or other third parties - costs involving barter with other enterprises 4. These costs do include: - all wage payments [arrears in wage payments were not large in 1992; also the Tariff Agreements did not play a major role in wage setting until 1 993] 5. We do not know whether: - costs are recorded at the minemouth or when the coal leaves the coal preparation plant - costs are recorded on a cash basis or an accrual basis - all costs are consistently recorded without omissions 6. The best interpretation of these costs is that they include most variable costs--and therefore provide a first indication of the short-run costs that apply in a period of declining demand and limited investment - page 8 - Competition between Coal Basins Coal Rail Freight Costs 1. For analysis of coal rail freight costs, see: - Coal Transport Annex - also Tables 8 and 9 in Supply Annex 1 2. In order to simulate the operation of the coal market uncder the 1997 Market Adjustment Scenario (summarized pages 4-5 in this Annex), we used two scenarios for coal rail freight tariffs: - the "low" tariff is below the current tariff (after adjusting for inflation)- -so tariffs will only fall to this level if tariff increases fall behind the general rate of inflation the "high" tariff is higher (after adjusting for inflation) than the economic cost of coal rail freight in Russia (World Bank estimates)-- however, coal rail freight tariffs may reach these levels if the railways remain unregulated 3. The "low" coal rail freight scenario in rubles per tonne-kilometer (RBL/t-km) is: - 3.0 RBL/t-km for greater than 800 km - 4.5 RBL/t-km for 400-800 km - 6.0 RBL/t-km for less than 400 km 4. The "high" coal rail freight scenario in RBL/t-km is: - 5.0 RBL/t-km for greater than 800 km - 7.5 RBL/t-km for 400-800 km - 10.0 RBL/t-km for less than 400 km 5. These costs are in Jan.-Sept. 1993 rubles: - this allows ruble costs to be converted to US dollars at approximately 1000 RBL/US$ - so these tariff scenarios are equivalent to about 0.3 to 0.5 US cents per tonne-kilometer for long hauls (further than 800 km) - page 9 - Scenario Results, 1997 Coal Output by Basin See Table 2 Coal Output by Basin, 1992-1997 (facing page). The scenario results below show 1997 outputs as a percentage of 1 992 base year output (showing results of "low" then "high" rail freight tariff scenario): Pechora 50-62% - will become the dominant supplier of coking coal to the Center region - will stop all production of steam coal, regardless of rail freight tariffs Moscow (TulaJ 57-95% - would be protected by high rail freight tariffs (for sales of low grade steam coal in the Center region) from competition from Donbass and Kuzbass - is very sensitive to rail freight tariffs and would continue to contract if rail freight tariffs remain at the lower end of the range Donbass/South 86-93% - is largely protected by recent rail freight tariff increases and will contI,.t less than most other basins if rail freight tariffs stay inside the range used for the scenarios - will remain an important supplier of steam coals to regions west of the Urals but will continue to reduce output of coking coal Urals 49-70% * twill cease production of coking coal and will continue to reduce output of steam coal, regardless of rail freight tariffs - will also lose some of the local (Urals) market to Kuzbass and Donbass if rail freight tariffs remain at the lower end of the range Kuzbass 55-49% r - will be the dominant supplier of coking coal only in the Urals and so will have to cut total coking coal output to less than 50% of 1992 levels - will also lose some of its steam coal sales west of the Urals - will face the largest reduction of output (about 45 million tce) of any basin - will not be as sensitive to further changes in rail freight tariffs as other, smaller basins Kansk-Achinsk 87-69% - will keep its local minemouth markets at any rail freight tariff - could remain competitive in long-distance sales--both westwards and eastwards--at the lower end of the rail freight tariffs East Siboria 87% - will dramatically increase its share of the local East Siberian market at .he expense of coal shipments from other basins into East Siberia Far East 53-77% - will supply all demand in the Far East region if rail freight tariffs reach the high end of the range - will lose some of the local market to Kansk-Achinsk coals if rail freight tariffs remain near the lower end of the range North East 87-91% - will slightly reduce its output of steam coals to match lower demand for steam coal in the region - page 10 - Table 2: Coal Output by Basin (million tce) BASIN 1992 Base 1997 Low Freight Tariff 1997 High Freight Tariff Scenario Scenario All Coal of which, All Coal of which, All Coal of which, coking coking coking Pechora/North 17.8 12.5 8.8 8.8 11.1 11.1 % 1992 Base 100% 49.4% 62.4% Moscow/(Tula) 3.1 1.8 3.0 % 1992 Base 700% , 18% , .-% Donbass/South 17.5 1.4 15.0 0.4 16.3 0.7 % 1992 Base 100% 85.7% 93t.% Urals 9.3 0.7 4.5 6.6 % 1992 Basse 100% 48.4% 6$9% Kuzbass 96.2 40.3 52.8 19.7 47.4 17.7 % 1992 Base 700% 54.9% 4.9.3% ............... .... X?99?. .............bbh.%t.......... .. * X ................................. ..... .93 ........................ ........- - .................. Kansk-Achinsk 28.7 25.0 19.8 % 1992 Base 100% 87.1% 69.0% East Siberia 18.5 18.1 16.1 % 1992 Base 100% 87.0% 87.0% Far East 10.7 0.2 6.7 8.2 % 1992 Base 100% 63.3% 76,6% North East 13.3 5.1 11.6 5.1 12.1 5.1 % 1992 Base _ 100% 87.2% 91.0% _ TOTAL 215.1 60.2 141.3 34.0 140.6 34.6 % 1992 Base 100% 66.7% 6$3X Source: RosUgol (1992) and World Bank estimates (1997). The World Bank prepared two scenarios of coal output by basin in 1997 based on the following assumptions (for details see Market Adjustment Scenario, pages 4-5 of this Annex): the new joint stock mining companies will set delivered prices that ensure full recovery of variable costs, mine by mine, and full recovery of total costs for the companies that transport and deliver the coal coal consuming regions will purchase the coals that meet their quality specifications at the lowest delivered cost coal rail freight tariffs will lie somewhere in the range from "low" to "high' (see Coal Rail Freight Costs, page 9 of this Annex) - page 11 - Scenario Results, 1997 Coal Output by Basin 1. The charts (Figures 1-9) on the following pages: - present the Cost Curves for each of the nine major basins, ie, coal production cost versus coal output summarize the results of the 1997 Market Adjustment Scenario: - output and minemouth price (ie, production cost) in 1997 for two scenarios of coal rail freight tariffs--low & high 2. Where relevant, separate Cost Curves are shown (on the same chart) for steam coal and coking coal 3. The charts are for the following coal basins: - Pechora steam & coking - Moscow (Tula) steam - Russian Donbass steam & coking - Urals steam & coking - Kuzbass steam & coking - Kansk-Achinsk steam - East Siberia steam - Far East steam & coking - North East steam & coking - page 12 - Figure 1 1992 Pechora Coal Supply Curves 35000 30000 25000 Calculated Cost of 20000 Production in Rubles (JAN-SEP 193) per Ton Coal Equivalent lS000 10000 5000 0 I I I 1 - 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Production (Million Tons Coal Equivalent) - ------ 1992 Pochora Steam Coal -- 1992 Pochora Coling Coal (C) = 1997 Low Rail Tariff Scenario Q 1997 High Rail Tariff Scenario XMINEI .XLS Figure 2 1992 Moscow Basin Coal Supply Curves 50000 - 45000 40000 35000 30000 -_ Calculated Cost of Production in Rubles (JAN-SEP 25000 1993) per Ton Coal Equivalent 20000 -_! 15000-_ ..--- 10000 - ,- 5000 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Production (lMillon Tons Coal Equivalent) -- 1992 Tula Steam Coal (Ii) = 1997 Low Rail Tariff Scenario Q = 1997 High Rail Tariff Scenario XMINEI.ALS - Page 14- Flgure 3 1992 Donbass Coal Supply Curves 40000 35000 30000 - 25000 Calculated Cost of Production in Rubles (JAN-SEP 20000 1993) per Ton Coal Equivalent 15000 10000 - ,. 0 - l l l l l l l 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Production (Million Tons Coal Equivalent) - ---1992 Donbass Steam Coal -O- 1992 Donbass Colkng Coal (Z) - 1997 Low Rail Tariff Scenario 0 - 1997 High Rail Tariff Scenario - Page 15 - Figure 4 1992 Ural Basin Coal Supply Curves 40000 . 35000 30000 - 25000 - Calculated Cost of Production in Rubles (JAN-SEP 20000 - 1993) per Ton Coal -9 Equivalent s 15000 10000 5000 u- .. 0~~~ .-- 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Production (Million Tons Coal Equivalent) --------- - 1992 u Stem Coal 1992 Und Coking Coal (Z) = 1997 Low Rail Tariff Scenario Q 1997 High Rail Tariff Scenario XMINEI.XlI - Page 16- Figure 5 1992 Kuzbass Coal Supply Curves 25000 20000 15000 Calculated Cost of Production in Rubles (JAN-SEP X l 1993) per Ton Coal Equivalent J 5000 U 5000~~~ 0 - I I I III 0.00 10.00 20.00 30.0n 40.00 50.00 60.00 Production (Million Tons Coal Equivalent) ........... 1992 Ku 19 9 1992 KuzbLow RSai Tarf S (X) 1997 Low Rail Tariff Scenario 0 1997 igh Rail Tariff Scenario XMINEI.XI Page 17 - Figure 6 1992 Kansk-Achinsk Coal Supply Curve 25000 20000 15000 Calculated Cost of Production in Rubles (JAN-SEP 1993) per Ton Coal Equivalent 10000 1 anm~~~~~~~~~~~~~~~ 5000 0 - l l l l 0.00 5.00 10.00 15.00 20.00 25.00 30.00 Production (Million Tons Coal Equivalent) | 1992 Kansk-Achinsk Steam Coal = 1997 Low Rail Tariff Scenario Q = 1997 High Rail Tariff Scenario XMINEI MXLS - Page 18 - Figure 7 1992 Eastern Siberia Coal Supply Curve 16000 14000 12000 10000 Calculated Cost of Production in Rubles (JAN-SEP 8000 1993) per Ton Coal Equivalent 6000 4000 2000 0 0.00 5.00 10.00 15.00 20.00 Production (Million Tons Coal Equivalent) 1992 Eastemn Siberia Steam Coal ( = 11997 Low Rail Tariff Scenario Q = 1997 High Rail Tariff Scenario XNMEl.XI - Page 19 - Figure 8 1992 Far East Coal Supply Curves 50000 45000 40000 - 35000 30000 - I Calculated Cost of ) Production in C1 Rubles (JAN-SEP 25000 a 1993) per Ton Coal M Equivalent u 20000 no 15000 C) .D. 10000 5000 0 - l l 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Production (Million Tons Coal Equivalent) - .. ........ 1992 Far East Steam Coal 1992 Far East Coking Coal =D ~ 1997 Low Rail Tariff Scenario Q = 1997 High Rail Tariff Scenario XMINEI.IXL - Page 20 - Figure 9 1992 North East Coal Supply Curves 60000 50000 40000 Calculated Cost of Production in Rubles (JAN-SEP 30000 1993) per Ton Coal Equivalent 20000 10000 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Production (Million Tons Coal Equivalent) 1992 North East Steam Coal f 1992 North East Cokng Coal = 1997 Low Rail Tariff Scenario 1997 High Rail Tariff Scenario XMINEI.XLS -Page 21 - Scenario Results, 1997 Delivered Prices and Minemouth Prices 1. See Table 3 Delivered Coal Prices by Region, 1997 (facing page) 2. Under competitive market conditions, delivered coal prices will vary greatly between regions that are "close" to their coal suppliers (eg, West and East Siberia) and those that are "far" from their coal suppliers (eg, the Center, North and Northwest): - under the "low" rail tariff scenario, delivered prices may be up to 2.5 times as high in the "far" regions as in the "close' regions under the "high" rail tariff scenario, delivered prices may be up to 3.5 times as high in the "far" regions as in the "close" regions 3. Also, delivered orices of both steam and coking coals will be more sensitive to future changes in rail freight tariffs in regions that are further away from the most distant basin supplying their region, eg: - the North Caucasus region will purchase most of its coals from the nearby Donbass--as a result, delivered prices of coal will rise by only 20-30% if rail freight tariffs move from "low" to "high" the Center (Moscow) region will purchase coals from as far away as the Kuzbass--as a result, delivered prices of coal will rise by 36-43% if rail freight tariffs move from "low" to "high" 4. Supply of coking coals will be much greater than demand for coking coal in the period 1995-2000: - some producers of coking coals will have to sell their output as steam coals in order to avoid reducing production to match the collapse in coking coal demand from the iron and steel industry this explains why, in every region, delivered prices (per tonne of coal equivalent) of coking coals will be very similar to delivered prices of steam coals - page 22 - Scenario Results, 1997 Delivered Prices and Minemouth Prices Table 3: Delivered Coal Prices by Region. 1997 (Rb/tce, January-September 1993 prices) Thermal Coking Economic Region Low Rail High Rail Low Rail High Rail Tariff Tariff Tariff Tariff Scenario Scenario Scenario Scenario Northwest 20,925 30,142 21,094 28,923 North 18,925 26,808 19,612 26,454 Center 19,925 28,475 20,353 27,688 Central Black Earth 18,050 25,350 18,588 24,747 Volga Vyatka 15,800 21,600 16,471 21,218 Volga 13,522 17,803 14,102 17,270 North Caucasus 13,142 17,170 13,707 16,612 Urals 13,925 18,475 14,706 18,276 West Siberia 7,925 8,475 9,059 8,865 East Siberia 8,600 10,406 9,047 8,844 Far East 16,264 23,430 17,501 22,935 Source: World Bank estimates. - page 23 - Scenario Results, 1997 Delivered Prices and Minemouth Prices 1. See Table 4 Minemouth Prices by Basin, 1997 (facing page) 2. Under competitive market conditions, differences between minemouth coal prices in competing basins will be even greater than regional differences in delivered prices, eg: under the "low" rail tariff scenario, minemouth prices (per tonne of coal equivalent) in the Moscow (Tula) basin could be up to 5 times as high as minemouth prices in Kansk-Achinsk under the "high" rail tariff scenario, minemouth prices (per tonne of coal equivalent) in the Moscow (Tula) basin could be as much as 16 times as high as minemouth prices in Kansk-Achinsk 3. Also, minemouth prices of steam coals will be more sensitive to future changes in rail freight tariffs in some--but not all--of the basins that are are more dependent on long distance sales, eg: in most basins--Kuzbass, Kansk-Achinsk and East Siberia are the main exceptions--minemouth prices would actually increase if rail freight tariffs moved from "low" to "high", since high-cost local basins would take a larger share of their local market as a result of the location of the Kuzbass in relation to its markets, minemouth prices of Kuzbass coals would be relatively insensitive to future changes in rail freight tariffs within the range from "low" to "high" however, minemouth prices of Kansk-Achinsk coals would fall by more than 50% if rail freight tariffs moved from "low" to "high" - page 24 - Scenario Results, 1997 Delivered Prices and Minemouth Prices Table 4: Minemouth Coal Prices by Basin. 1997 (Rb/tce, January-September 1993 prices) Thermal Coa ing Low Rail High Rail Low Rail High Rail Tariff Tariff Tariff Tariff Scenario Scenario Scenario Scenario Pechora/North 8,925 10,142 12,205 14,108 Moscow/(Tula) 16,396 22,593 - - Donbass/South 12,003 15,271 12,523 14,639 Urals 10,925 13,475 - Kuzbass 6,800 6,600 8,000 7,100 Kansk-Achinsk 3,200 1,407 - East Siberia 5,146 4,524 Far East 12,693 17,478 - North East 12,078 12,703 13,540 16,333 - page 25 - Scenario Results, 1997 Delivered Prices and Minemouth Prices 1. See Table 5 Delivered Coal Prices and Rail Freight, 1997 (facing page) 2. Surce: data in Table 5 come from Table 3 (Delivered Prices) and Table 4 (Minemouth Prices) 3. The share of rail freight costs in the final delivered price of coal will vary greatly, even if rail freight rates remain at the "low" end of the scenario range, eg, for coals delivered to the Center (Moscow) region: - from 18% to 66% for steam coals from 40% to 61 % for coking coals - page 26 - Scenario Results, 1997 Delivered Prices and Minemouth Prices Table 5: Delivered Coal Prices and Rail Freight, 19971 Share of Sample Transactions (Rb/tce, January- Rail Market/Coal Basin September 1993 Freight prices) (%) Center: Steam Coal Minehead Delivered From Moscow/Tula 16,396 19,925 18% From Donbass 12,003 19,925 40% From Kuzbass 6,800 19,925 66% Center: Coking Coal From Pechora 12,205 20,353 40% From Kuzbass 8,000 20,353 61% Source: World Bank estimates. Based on Low Rail Tariff Scenario - page 27 - Scenario Results, 1997 Employment See Table 6 Number of Mines and Employment, 1992-1997 (facing page). The scenario results below show 1997 employment as a percentage of 1992 base year employment (showing results of "low' then "high" rail freight tariff scenario): Pechora 30-45% - would reduce the number of mines from 18 mines to 5-7 mines, depending on freight tariffs - would reduce employment from 70,400 to 21-32,000 - would be responsible for 9-10% of total employment reduction in the coal industry Moscow (Tula) 34-80% - would reduce the number of mines from 22 mines to 9-19 mines, depending on freight tariffs - would reduce employment from 41,000 to 14-33,000 - would be responsible for 2-6% of total employment reduction in the coal industry Donbass/South 71-82% - would reduce the number of mines from 42 mines to 28-33 mines, depending on freight tariffs - would reduce employment from 135,400 to 97-1 11,000 - would be responsible for 6-8% of total employment reduction in the coal industry Urals 20-34% - would reduce the number of mines from 33 mines to 7-13 mines, depending on freight tariffs - would reduce employment from 79,400 to 16-27,000 - would be responsible for 12-13% of total employment reduction in the coal industry Kuzbass 28-24% - would reduce the number of mines from 91 mines to 33-40 mines, depending on freight tariffs - would reduce employment from 296,300 to 72-83,000 - would be responsible for 45-53% of total employment reduction in the coal industry Kansk-Achinsk 50-30% - would reduce the number of mines from 9 mines to 2-4 mines, depending on freight tariffs - would reduce employment from 25,500 to 8-13,000 - would be responsible for 3-4% of total employment reduction in the coal industry East Siberia 59-46% - would reduce the number of mines from 12 mines to 7-8 mines, depending on freight tariffs - would reduce employment from 24,400 to 11-14,000 - would be responsible for 2-3% of total employment reduction in the coal industry Far East 26-43% - would reduce the number of mines from 36 mines to 12-18 mines, depending on freight tariffs - would reduce employment from 63,100 to 17-31,000 - would be responsible for 8-10% of total employment reduction in the coal industry North East 46-52% - would reduce the number of mines from 10 mines to 5-6 mines, depending on freight tariffs - would reduce employment from 27,100 to 13-14,000 - would be responsible for about 3% of total employment reduction in the coal industry - page 28 - Scenario Results, 1997 Employment Table 6: Number of Mines and Employment Levels by Basin Employment in 'OOOs BASIN 1992 Base 1997 Low Freight Tariff 1997 High Freight Tariff Scenario Scenario Number Direct Number Direct Number Direct of Mines Employment of Mines Employment of Mines Employment Pechora/North 18 70.4 5 21.4 7 32.0 Moscow/(Tula) 22 41.0 9 14.0 19 33.0 Donbass/South 42 135.4 28 96.7 33 110.8 Urals 33 79.4 7 16.0 13 26.9 Kuzbass 91 296.3 40 82.6 33 71.8 Kansk-Achinsk 9 25.5 4 12.8 2 7.6 East Siberia 12 24.4 8 14.4 7 11.2 Far East 36 63.1 12 16.5 18 30.6 North East 10 27.1 5 12.6 6 14.1 TOTAL 273 762.6 118 287.0 138 338.0 Direct Employment - corresponds approximately with Personnel of Industrial Enterprises in the coal industry - includes Non-Industrial Personnel (of industrial enterprises), such as kindergarten, housing, agricultural and "other" personnel - excludes Personnel of Non-Industrial Enterprises, such as construction and design enterprises and trade/food services - page 29 - Scenario Results, 1997 Employment 1. The charts (Figures 10-21) on the following pages: - show the relationship between employment and coal output for each of the nine major basins - summarize the results of the 1997 Market Adjustment Scenario: - employment, number of mines and basin output in 1997 - for two scenarios of coal rail freight tariffs--low & high 2. Where relevant, separate curves are shown for steam coal and coking coal in the same basin--either on the same chart or on a separate chart (see below) 3. The charts are for the following coal basins: - Pechora coking steam - Moscow (Tula) steam - Russian Donbass steam coking - Urals steam & coking - Kuzbass steam coking - Kansk-Achinsk steam - East Siberia steam - Far East steam & coking - North East steam & coking - page 30 - Figure 10 PECHORA BASIN Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 45000 1997 Low Rail Tariff Scenario = Mines 40000 35000 p30000 25000 - t20000 x5000 - 1997 High Rail Tariff Scenario = 7 Mines 10000- 5000 -_ _ _ _ _ _ _ _ _ _ _ 0 - l l l l 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Basin Output (million tce) ] * Pechora Basin Coking Coal Mines - 1992 Base (11 Mines) PPECHI.XLC - Page 31 - Figure 11 PECHORA BASIN Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 25000 20000 ~10000 - _ _ _ _ _ _ _ _ _ _ _ _ 5000 *r~ ~ ~~~W 500 -r I 0~~ 0.00 1.00 2.00 3.00 4.00 5.00 6.00 Basin Output (million tce) t * Pechora Basin Steam Coal - 1992 Base (7 Mines) - Page 32 - PPECH2.XLLC EFigure 12 MOSCOW BASIN (Tula) Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 40000- 1992 Base = 22 Mines 35000 - 30000- 1997 High Rail Tariff Scenario = 19 Mines I 20000 - hioo 10000- 1997 ILow Rail Tariff Scenario =9 Mines / 5000- 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Basin Output (million tce) PMOSCOI.XLC - Page 33 - Flgure 13 RUSSIAN DONBASS Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 120000- 1997 High Rail Tariff Scenario = 31 Steam Coal Mines 100000 1997 Low Raiil Tariff / . 3 oo Scenario =27 Steam Coal Mines j 60000 - 40000- 0 - l l l l l l_ 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Basin Output (million tee) * Donbass Steam Coal - 1992 Base (34 Mines) - Page 34 - PDONBASI.XLC FIgure 14 RUSSIAN DONBASS Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 20000 - . 18000 - 16000 - X 14000 - 12000 - ~10000 - 1997 Low Rail Tariff S 8000 - Scenario = 1 Coking Coal Mine 1997 High Rail Tariff = 6000 - Scenario = 2 Coking Coal Mines 4000 - 0- - 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 Basin Output (million tce) |L * Donbass Coking Coal - 1992 Base (8 Mines PDONBAS2.XILC -Page 3 5 - Figure 15 URALS BASIN Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 60000 - 50000 - 1997 High R&H Tarifff nao 7e Scenario =13 Stm Cod Mines X 9 40000 - 2 3 .5.a1997 Low ROil Ta(iff \r s Scenario =7 Steam Co Pa Mines \ i X30000\ '20000 - 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 EBusin Output (million tce) | * Urals Basin Stamu Coal - 1992 Base (30 --{ -Urals Basin Coking Coal - 1992 Bas (8 | ~Mines) Mines) - Page 36 - PURALIALC Figure 16 KUZBASS Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 140000 - 120000 - _ 100000 - 1997 Low Rail Tariff Scenario 25 Steam Coal Mines $80000- 2 60000 - 40000~ 1997 High Rail Tariff f Scenario = 21 Steam Coal M;eP 20000I 0 0.00 10.00 20.00 30.00 40.00 50.00 60.00 Basin Output (million tce) * Kuzbass Steam Coal - 1992 Base (70 Mines) PKUZBASI .IXLC - Page 37 - Figure 17 KUZBASS Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 160000 140000 - 120000 c 100000 - ; ~~~~~~~~~1997 Low Rail Tarifff W ~~~~~~~~Scenario =14 Mines 80000- > 60000 - 40000- 20000 X 1997 High Rail Tariff Scenario = 12 Mines 0 - I I I + t l l l 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 Basin Output (million tce) | * Kuzbass Coking Coal - 1992 Base (53 Mines) - Page 38 - PKUZBAS2.XLC Figure 18 KANSK-ACHINSK BASIN Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 25000 1992 Base = 9 Mines 20000- 1997 Low Rail Tariff Scenario = 4 Mines 15000 1997 High Rail Tariff Scenario = 2 Mines 10000-\_ 5000 - . . _ 0 - l l l 0.00 5.00 10.00 15.00 20.00 25.00 30.00 Basin Output (miflion tee) PKATEKI.XLC - Page 39 - Figure 19 EAST SIBERIA Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 20000 - 18000 ~ ~~~~~1992 Ebase = 12 Mines~> 14000 - 1997 Low & High Rail Tariff Scenario = 7 Mines g12000- ,. iOOOO - ____ a 8000 - t 6000 - 4000- _ _ _ 2000 0 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 Basin Output (million tce) - Page 40 - PESIBI.XLC Figure 20 FAR EAST Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 70000 - 1997 High Rail Tariff Scenario = 19 Mines 60000- ~50000~ 40000 30000 1997 Low Rail Tariff 10000- 0- \ f H 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Basin Output (million tee) - -Far East Steam Coal - 1992 Base (35 - Far East Coking Coal - 1992 Base (1 mines) Mine) PA l.X00C Page 41 _ Figure 21 NORTH EAST BASIN Production vs. Labor Requirements: 1992 Base vs. 1997 Scenarios 20000 1997 High Rail Tariff Scenario = 5 Steam Coal Mines 18000 - 16000 - 140 1997 Low Rail Tariff\ Scenario = 4 Steam Coal Mines 10000 8000v 1997 Low & High Rail Tariff Scenarios = I Coking Coal Mine e 6000-- _ 4000- 2000 -_ _ _ _ _ 0- 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Basin Output (million tce) - North East Basin Steam Coal - 1992 Base North East Basin Coking Coal - 1992 (10 Mines) Base (1 Mine) -Page 42 - PNEASTI.XLC Strengthening the Coal Market Contents Remainder of report Institutional reforms - liberalization/decontrol - enterprise commercialization & privatization - coal industry restructuring - summary: the coal industry in a market economy Overview of present conditions - organization and management - geological and mining conditions - mining technology - mine and preparation plant design Options for improving production efficiency - improved organization & management - limited investments in surface mines - major investments in underground mines Financing of investment - page 43 - Strengthening the Coal Market Institutional Reforms 0. The remaining sections of this Annex look at the scope for the new, joint stock mining companies to improve production efficiency, ie, to cut production costs and improve product quality in order to increase their share of the total coal market. However, the new mining companies will only improve their efficiency if there are real incentives to do so. We assume that the following institutional reforms will pr ovide these incentives (see also the Main Report): liberalization/decontrol enterprise commercialization & privatization coal industry restructuring: - phase 1: by government - phase 2: by companies 1. Liberalization/decontrol: price liberalization: - the Government formally decontrolled coal prices in July 1993-- initially with positive results (see Main Report) - however, prices are not yet "free", since RosUgol now sets coal prices as part of the subsidy allocation process - the Government should ensure that, even Oefore the end of the subsidy phase-out, the new joint stock miping companies become fully responsible for negotiating their own selling prices abolition of recovery requirements: the current requirement to extract all seams of thickness greater than 0.8 meters should be abolished to give mine managers greater control over their own production costs and coal quality - page 44 - Strengthening the Coal Market Institutional Reforms, cont'd 2. Enterprise commercialization & privatization: formation of joint stock companies: this process is underway--in general, it maintains the existing structure of Mining Associations and independent mines privatization: management and employees will initially have minority shareholding in new joint stock companies phasing out subsidies: the new joint stock mining companies (former Mining Associations) will not operate commercially until the Government has eliminated: - as soon as possible: the existing channels for cross-subsidy flows between Mining Associations - within an agreed period: the total subsidy flow to the coal industry strengthening enterprise authority: commercialization also means that full responsibility for operational and financial decisions--including pricing and marketing--should be transferred from RosUgol to the managers of the new joint stock companies reducing excess employment: as subsidies are phased out, the new joint stock companies must have the authority to reduce excess employment in order to improve profitability--however, employment reduction cannot start until an adequate social safety net is in place investment: none of the new joint stock mining companies will become firmly profitable without investment of some kind--however, these investments need to be fully justified by market conditions (see below) - page 45 - Strengthening the Coal Market Institutional Reforms, cont'd 3. Coal industry restructuring (phase 1): summary: the Government should take four key steps to ensure that the new joint stock mining companies can begin to operate commercially: - put in place a social safety net for redundant miners - launch a Mine Closure Program - encourage divestiture of "non-core" functions - ensure adequate competition between the new coal companies social safety net: - see Annex on Social Protection - the social safety net for redundant miners must make it feasible for the new, joint stock mining companies both to close mines and to reduce employment in mines that remain in operation the Mine Closure Program: mines that have no prospect of becoming profitable should be transferred into a government-managed mine closure program: - production must stop at these mines as soon as possible--to avoid the situation (observed, for example, in Poland) where excess production from these (subsidized) mines depresses prices and profits of the newly commercialized (unsubsidized) joint stock mining companies - once they are in the closure program, mines should receive government funds only for social costs and other expenditures directly related to closure--but not for operations divestiture: from its position as the controlling shareholder in the new joint stock mining companies, the Government should require the companies to: - divest "non-core" (ancillary and non-mining) enterprises as separate joint stock companies - transfer social functions to local government, where possible - page 46 - Strengthening the Coal Market Institutional Reforms, cont'd competition: in certain key coal markets, it may be necessary in future to: - break up some of the larger Mining Associations into more than one joint stock company--but only if monopoly power becomes a problem in their markets - combine some of the smaller Mining Associations into larger joint stock companies--but only if they prove to be too small to invest and survive in a competitive coal market 4. Coal industry restructuring (phase 2): summary: after the Government has taken the initial steps to restructure the coal industry (phase 1: see previous page) the process will continue--but with restructuring driven by the commercial goals (profits) of the new joint stock mining companies further mine closures: each of the new joint stock mining companies will own some marginal mines, ie, it is not clear whether these mines can become profitable or not--if the new management is unable to reduce costs enough to make these mines profitable, the company will have to start its own (phase 2) mine closure program expansion of the "competitive core": the mines at the low-cost end of the coal industry could expand their output by 20-30 percent over the next 3-5 years with relatively modest investments in a competitive market, low-cost mines will expand even while total coal demand is still contracting, ie, they will put additional pressure on unprofitable mines to close - page 47 - Strengthening the Coal Market Institutional Reforms, cont'd The Russian Coal Industry Today 1. coal prices are set by RosUgol in consultation with the Mining Associations 2. coal consumers often cannot pay current coal prices because they cannot pass on increased costs to their own customers, eg, power and district heating plants that are price-controlled by local government 3. coal production costs (without subsidies) are higher than customers are willing to pay--particularly in locations where natural gas and fuel oil are available as alternative fuels 4. RosUgol sets prices and subsidies to protect weaker mining companies from competition 5. coal companies pay more attention to quantity of output than to quality and timely delivery 6. companies that own high-cost mines cannot contract their operations or close mines because the social safety net is not in place to take care of miners who become unemployed 7. companies that own low-cost mines cannot expand their operations because they cannot compete with subsidized high- cost producers 8. outside investors are not entering the coal industry because the excess supply of coal is holding down prices and profits 9. worker health and safety levels are poor and there is little progress towards improved environmental compliance--because the coal industry is preoccupied with simply surviving - page 48 - Strengthening the Coal Market Institutional Reforms, cont'd The Russian Coal Industry in a Market Economy 1. coal prices are set in the market place by negotiation between independent, commercial mining companies and their customers 2. other energy prices are regulated in a way that is consistent with free market prices for coal 3. coal production costs are low enough to compete with other fuels (natural gas and fuel oil) without subsidies 4. independent coal companies compete with each other to deliver coal to the customer at the lowest possible delivered price 5. coal companies compete not only on price but also on the quality of their product and the reliability of their deliveries 6. companies that own high-cost mines contract their operations and, if necessary, close high-cost mines 7. companies that own low-cost mines retain enough profits to expand their operations and increase their share of the total coal market 8. outside investors can enter the coal business if market opportunities exist 9. profitable coal companies steadily improve their performance on worker health and safety and environmental compliance - page 49 - Overview of Present Conditions Organization & Management 1. Centralized command-&-control management structures are still in place, ie, managers of Mining Associations and individual mines have very little control over: labor: particularly wages and conditions of employment pricing and marketing of output investment: since this is controlled by subsidies 2. As a result: labor relations and workforce discipline are poor, particularly in underground mines Mining Associations and individual mines lack the marketing skills needed in an independent, commercial mining company managers in the coal industry in general have little experience in evaluating the profitability of proposed investments under market conditions, ie, where grant-financing of investment is no longer available - page 50 - Overview of Present Conditions Geological & Mining Conditions Wide range of conditions: 1. from: thin, low quality and distorted coal seams, heavily faulted and discontinuous, and at depths not suitable for surface mining: - mines in these areas have generally been developed to meet arbitrary "reserve recovery" requirements production in these areas should be phased out 2. to: thick, high quality, continuous coal seams, often at shallow depths suitable for surface mining: conditions in these areas are comparable to the best mining conditions in North America, Australia, South Africa and Europe areas of new reserves are available for expansion of existing low-cost mines in cases where market conditions are suitable - page 51 - Overview of Present Conditions Mining Technology 1. Surface mining: technology is close to international state-of-the-art, eg: - rope shovels (4-20 cubic meters) loading up to 180 tonne trucks - draglines and bucket wheel excavators loading in-pit conveying schemes however, equipment availability and utilization factors: - are low by international standards, where 85-90% is regarded as a minimum - are limited by shortages of auxiliary open-pit equipment, eg, bulldozers, graders, front-end loaders 2. Underground mining: thicker seams are extracted by Russian and Polish mechanized longwall mining equipment which is of lower technological standards than in other major coal producing countries, ie: - under-powered face shearers - low-yield, 2-leg powered supports - low capacity face conveyors typical output per longwall face is in the range 0.3-0.8 million tonnes/year (with productivity typically below 100 tonnes/worker- month), compared with: - 1 .0 mt/y at 170 t/worker-month in the UK - 1 .0 mt/y at 450-600 t/worker-month in the US and Australia insufficient attention to maintenance--including spare parts availability --contributes to poor performance and productivity, particularly where spares are imported, eg, from Poland - page 52 - Overview of Present Conditions Mine and Preparation Plant Design 1. Mines have been designed to maximize extraction rather than to maximize the difference between sales revenue and production costs: .mines continue to extract thin seams when it is no longer economic to do so mines continue to extract coals that no longer suit customer requirements, eg, high-sulfur coals 2. Coal output has been given higher priority than coal quality--coal preparation plants have been under-funded in relation to coal mines: many preparation (beneficiation) plants were designed as large, multi- mine facilities and are now at the end of their useful life in many cases, investing in new single-mine coal preparation plants will be the best way to improve profitability - page 53 - Options for Improving Production Efficiency Improved Organization & Management 1. Improved organization and management: - could significantly reduce production costs and improve coal quality - is an essential first step before making any investment decisions 2. The highest priority is to improve labor-management relations, workforce motivation and discipline in the coal industry as a whole: starting with the problem of wage payment arrears [see separate Annex on Subsidies and Finance] vwith greater emphasis on worker health and safety, particularly in underground operations 3. Management objectives should focus on: productivity: by improving work organization and spare parts management to maximize equipment utilization factors coal quality: by selective mining, blending, stockpile control and tighter washery procedures 4. Commercial business plans are needed, including: targets developed from the "bottom up" through to the management balanced treatment of operations, marketing and investment emphasis on cost control, for example: - competitive contracting-out of major tasks, eg, overburden removal in surface mines could be undertaken by mine construction groups that are currently under-employed - systematic recovery of coalbed methane, either for use in mining operations (eg, pre-heating ventilation air) or for sale to local communities - page 54 - Options for Improving Production Efficiency Investments in Surface Mines 1. After the new mining companies have taken steps to improve organization and management, they will be in a position to respond to future market opportunities, eg, after the Mine Closure Program has reduced excess mining capacity: - when this happens, limited investments in surface mines are likely to be the lowest cost way to increase coal output such investments could be financed out of improved cashflow, ie, from improved organization and management in present surface mining operations (but only if the mine retains control over its own profits) 2. The first priority is to improve utilization of existing major mining equipment (shovels, trucks and draglines, bucket wheel excavator systems) by providing adequate fleets of auxiliary mine equipment (bulldozers, graders, front-end loaders) 3. In-pit housekeeping needs to pay more attention to maintenance and development of haul roads so that trucks will be used more efficiently 4. And, over the medium term: - the proportion of overburden that is hauled outside the pit should be significantly reduced, while trucks should replace locomotives in all hauling of overburden - page 55 - Options for Improving Production Efficiency Investments in Underground Mines 1. In some special situations--eg, where an underground mine is located very close to it customers--the mine may be able to compete successfully with surface mines for an increased share of a particular coal market: if investment in an underground mine is justified by market conditions, it is likely to be larger than the corresponding investment at a surface mine (ie, per additional annual ton of output) such investments probably could not be financed solely out of the mining company's cashflow--the investments would have to be financed by a mix of retained earnings and loans [see Financing of Investment, next page] 2. The basic strategy for underground mines should be to concentrate production at the most efficient faces, ie: - close high-cost faces - re-equip smaller number of longwall faces with heavy duty, high output equipment - rationalize underground transport systems using modern, high capacity equipment - switch to modern technologies for excavating underground roadways and for roof bolting support systems - page 56 - Strengthening the Coal Market Financing of Investment 1. Mining companies may wish to invest for one of two reasons: to improve efficiency: the resulting reduction in operating costs must be large enough to pay for the investment costs and generate a profit, without raising coal prices to levels that coal customers are not prepared to pay to expand output or improve product quality: the selling price of the new output must be low enough to attract customers but high enough to pay for the investment costs and generate a profit 2. In either case--given that the Government can no longer provide grant- financing from the central budget--investment will have to be financed from some combination of: retained earnings: so potentialy profitable mines must be allowed to retain their profits instead of cross-subsidizing unprofitable mines borrowing from commercial banks: so potentially profitable mines must develop medium term contractual relationships with their major customers (power plants, steel mills, etc.) so that commercial banks will be prepared to lend to them supply2.anx - page 57 - Annex C SUPPLY ANNEX 3: INTERNATIONAL EXPERIENCE OF COAL INDUSTRY RESTRUCTURING SUPPLY ANNEX 3 INTERNATIONAL EXPERIENCE OF COAL INDUSTRY RESTRUCTURING DRAFT OF APRIL 12, 1994 TABLE OF CONTENTS Page No. Overview ......................................... 1 United Kingdom (UK) ................................. 6 Germany .......................................... 10 France ........................................... 14 Poland ........................................... 18 United States (US) ................................... 19 TABLES 1. Energy Market Trends in Five Countries, 1973-1991 ... .... 2 2. Coal Industry Trends in Selected Western European Countries and USA, 1960-1993 ........................... 4 Overview 1. This Annex examines the experience of five major coal producing countries over the past thirty years to see what insights can be gained for the restructuring of the Russian Federation Coal Industry. The five countries consist of the three largest Western European hard coal producers (the United Kingdom, Germany and France), Poland and the United States of America. The five countries have faced very different market conditions. With the major exception of the United States, there has been a declining market share for coal in most industrialized countries including the three Western European producers over the past thirty to forty years. What Russia is going through now is in part due to a shift away from coal towards alternative fuels that has already taken place in many other counties. Russia's experience also reflects the macro- economic consequences of the transition from a planned to a market economy. In this regard Russia is following a similar path to Poland. 2. Coal industry restructuring has taken place in each of these countries, but under widely different circumstances and with very different country strategies. The three West European hard coal industries (UK, Germany and France) have undergone major restructuring as a reaction to changing conditions in the international energy markets and the non- competitive nature of underground coal mining from difficult geological deposits. Restructuring has been prompted by a declining demand for coal. The restructuring process started with competition from low-cost imported oil in the early 1 960s, but was later also influenced by nuclear power and natural gas developments. In addition, low-cost coal imports have increased the pressure for restructuring. Restructuring has resulted in significant reduction of uneconomic coal production capacity, dramatic reduction of employment in the coal industry, environmental improvements and regional economic diversification and growth outside the coal industry. 3. Coal restructuring in Western Europe did not always proceed smoothly; different restructuring plans have been debated in each country between industry's management, trade unions, government and the public. However, in all cases the development of the coal industry has still been consistently in the direction of downsizing the industry, improving labor productivity and concentrating mining activities in the best mines. Despite these efforts production costs are still significantly above import parity. Thus, further contraction is to be expected. 4. The three West European hard coal producers have adopted different strategies to restructuring: the UK is now embarking firmly on a privatization program for a small number of remaining mines which will need to be competitive with gas and with imported coal if they are to survive and prosper; Germany is likely to maintain a yet to be agreed minimum protected production capacity for energy security reasons (whether economically justified or not); and France is phasing out coal production in a politically and socially responsive manner. - 2 - 5. The restructuring of the Polish coal industry has been driven by the transformation of the overall Polish economy from a planned to a market-based economic system. In Poland, coal demand has declined sharply not so much because of competition from other energy sources, but because of a significant decline in overall energy consumption. The government set up a State Hard Coal Agency in 1990 to guide the restructuring of the industry. Prices have been liberalized, direct subsidies have been reduced and the mines have been reorganized to form seven autonomous coal production enterprises. 6. A competitive market-place for coal is starting to emerge in Poland with coal prices beginning to reflect the overall coal supply-demand balance. While no mines have closed so far, the labor force has been reduced especially at the underground mines, as the different coal producing enterprises seek to improve their efficiency and competitiveness. Several mine closures are planned and preliminary estimates indicate that competitive pressures will lead to further large declines in coal industry jobs in the next several years. Table 1: Energy Market Trends in Five Countries. 1973-1991 Coal as a % of Coal as a % of % Growth in Share of Energy Electricity Generation Electricity Incremental Consumption Growth Electricity Generation Taken by Coal 1973 1991 1973 1991 1973-1991 1973-1991 France 17 9 19 9 147% 3% Germany 42 33 69 59 43% 37% UK 35 29 69 65 14% 40% Poland n.a. 78 96 96 n.a. n.a. USA 18 23 46 53 63% 63% 7. Contrary to the situation in the West European countries and Poland, the United States has not had to face the problem of a non-competitive coal industry; in fact, coal production has expanded significantly in the US in the past thirty years. From 1973-1 991, the share of coal in total energy usage has increased from 18-23% in the USA, compared to a decrease for the West European producers (Table 1). In Poland it has remained constant at 96%. - 3 - 8. This difference between the USA and the three Western European countries in terms of coals changing share of the energy market reflects two important factors relating to electricity generation which is the dominant market for coal. First, electricity generation and consumption has increased much more strongly in the USA and France than in the UK and Germany in the past twenty years. Second, coal has taken a much larger share of the incremental electricity generation in the USA as compared with the other countries. In the USA, coal was competitively priced and was more readily available than natural gas or nuclear power in the 1970s and 1 980s. But natural gas has become the preferred fuel for new power plants in the 1990s as a result of: (a) the deregulation of natural gas prices and transmission, and (b) improvements in combined cycle technology. In the three Western European countries, nuclear power was the largest source of incremental power generation in the 1 970s and 1980s. 9. Although the coal market has been steadily growing in the US, there has been and continues to be an on-going restructuring of the coal industry. Over the past two decades, most production growth has taken place in new, large-scale surface mines in the western USA. In the eastern coal mines the trend has been to close high cost mines and to consolidate small mines into larger units. Over the past twenty years, over half the mines in the US have closed or merged with other mines to become larger operations. At the same time, labor productivity has doubled. 10. The development since 1960 in production, employment and productivity in four of the five countries is summarized in Table 2. Further details for each country are given in the Attachment. 11. The experience of the five countries offers some important insights for the restructuring of the Russian Coal Industry. First, each of the four European countries has experienced a significant decline in coal production and consumption. * In the case of the three West European countries, the decline has taken place progressively over the past thirty years primarily as a result of competition from other fuels. * In the case of Poland, the decline has taken place over the past five years largely as a result of energy consumption contracting due to macro-economic adjustments. - 4 - Table 2: Coal Industry Trends in Selected European Countries and USA: Production (million tons) and Employment ('000). 1960-1993 United Kingdom Germany France United States (3) Pdn. Emp. Pdn. Emp. Pdn. Emp. Pdn. Emp. 1960 (1) 200 490 142 400 62 320 370 230 1970 145 254 111 176 37 98 543 160 1980 130 231 95 118 20 43 741 260 1990 95 63 77 105 11 9 854 131 1993 (2) 81 33 65 90 9 6 838 110 Productivity (tons Per man year) United Kingdom Germany France United States (3) Production Production Production Production 1960 (1) 410 360 160 1,630 1970 570 633 380 3,390 1980 560 803 470 2,850 1990 1,410 727 1,220 6,170 1993 (2) 2,330 780 1,330 8,180 (1) Extrapolated from annual data starting 1962. (2) Estimated. (3) Employment no. includes estimated 1 5% addition for overhead staff and small unrecorded mines. Source: Coal Statistics for Europe, United Nations, and National Coal Association, U.S. 12. Second, attempts to protect coal production levels in the UK and Germany by protecting coal markets from competition and by subsidizing coal use have been unsuccessful and have only served to delay the decline in production. * The UK coal industry has received US$32 billion in government assistance since 1980. Even so, production has declined by 38% from 1980-1993 and further declines are considered inevitable since all protection and subsidies will be eliminated by 1998. * Coal production has been steadily declining in Germany despite a high degree of protection for both thermal and metallurgical coal production. 13. Third, there has also been significant restructuring of the coal industry in the United States - even though coal consumption and production have been steadily increasing. * The number of coal mines has been reduced from 6,550 in 1976 to 2,750 in 1992. Over 3,000 small mines with production capacity of less than 0.1 million tons per year have closed or merged (mostly in the Appalachian Region). * Most production growth has come from the development of new low cost surface mines in the Western USA (ranging from 2-10 million tons per year production capacity). 14. Fourth, labor productivity has increased significantly in the Western European countries and the USA . * From 1960-1993 labor productivity increased by a factor of more than five in the UK and USA and ten in France. * Coal industry employment has declined by over 50% in the USA and by over 90% in both the UK and France. 15. Fifth, in order to reduce social and political opposition to the downsizing of the UK and French coal industries, special programs of assistance were introduced to help miners losing their jobs and to create alternative employment in areas with mine closures. * In the UK, redundant miners were offered severance payments and British Coal Enterprises was set up as a subsidiary of British Coal to assist in creating new employment in areas with mine closures. * In France, miners were offered substantial retraining assistance and SOFIREM was set up as a subsidiary of Charbonnages de France to provide investments to re- industrialize coal mining areas. -6- United Kingdom 16. Energy Supplies. In 1991 primary energy supply was dominated by oil (38%) followed by coal (30%), natural gas (23%) and nuclear power (9%) (Figure 1). Reduction in coal and oil use in the past twenty years has been offset by increased use of nuclear power and natural gas. Although coal consumption has fallen slightly since the 1970s (from 109 million tons coal equivalent in 1973 to 92 million tons coal equivalent in 1991), coal has continued to play a major role in the energy balance of the UK economy, particularly at power plants. In recent years, coal production has fallen, and imports have played a growing role in coal consumption: Imports accounted for 20% of UK coal consumption in 1991. 17. Coal Demand. The major market for coal in the UK is for electricity and heat generation, which account for 75% of coal sales (Figure 2). At present, almost 65% of electricity production occurs at coal-fired facilities. As electricity generation from nuclear power plants increased (to about 22% of electricity generation), the relative share of coal in electricity generation fell slightly. Coal faces its greatest competition in the UK from natural gas. The competition between gas and coal is particularly strong in the power plant sector; although gas-fired power generation provided only 1 % of electricity in 1991 natural gas is now the preferred fuel for major new power generation projects in the UK. 18. Coal Development. The UK traditionally has been the largest West European hard coal producer. Output dropped from about 200 million tons per year in the early 1960s to 81 million tons per year in 1993. Over the same time period, employment in the coal mining industry dropped from about 490,000 to about 30,000 in September 1993. Manpower productivity increased from 410 to over 2,000 tons per man year. While up to 1985 the changes were relatively modest (employment decreased on average about 5% per year), there was a dramatic acceleration of the downsizing in the late 1980s when the privatization of the UK electricity generation and transmission industry resulted in a sharp decline in the demand for domestically-produced coal. The number of underground mines decreased from about 211 in 1981 to 22 in December 1993. Average production costs have declined from US$93 per ton in 1987/88 to US$64 per ton in 1992/93 but are still about 30% above import parity. 19. Government Strategy. The British coal industry was nationalized in 1947 (creation of the National Coal Board) with the objective to secure and increase coal production for the expanding post-war economy. This objective had to be revised in the early 1960s, when low-cost oil became available and contraction of the industry began. Increasing non-competitiveness and labor disputes led to a government decision of changing the management culture - 7 - Figure 1 Primary Energy Supply in the United Kingdom 350 1973 1991 1980 300 250 200Hyr 150oi C ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~Ca 100 50 0 - 8 - Figure 2 Electricty Generation by Type in the United Kingdom 350000 1973 1991 1980 300000 250000 200000 150000 100000 50000 0 - 9 - towards commercial orientation, which in 1986 was finalized with a change of name (to British Coal). Since then, closing of uneconomic mines accelerated sharply and initiatives to privatize a small core of remaining potentially competitive mines increased. The Bill to privatize British Coal was passed in December 1993. Details of the privatization procedure are still being elaborated, but likely there will be an option for bidders to acquire either all remaining mines or one or more smaller groups of mines. 20. Government Assistance. The British coal industry has been supported by over US$32 billion in grants and government assistance since 1980/81. The most important forms of government assistance to the coal industry have been: (a) the assured sale of domestic coal to the previously state-owned electricity industry through long-term supply agreements promoted by the government, and (b) direct subsidies for British Coal to cover operating losses. These totalled US$23.5 billion from 1980/81 - 1991/92 equivalent to US$19.4 per ton. There have also been labor-related grants, mainly for redundant mineworkers' payment schemes which totalled US$3.7 billion from 1980/81 - 1991/92 equivalent to about US$20,000 per employee laid off. In addition, from 1985/86 to 1991/92, British Coal received US$5.3 billion in social restructuring grants from the British Government and the European Coal and Steel Community. 21. Personnel Reduction. One of the key aspects of UK coal restructuring has been the repeated offering of voluntary departure opportunities. Incentive payments have been increasing over time, as eligibility was extended progressively towards younger staff. Typically, the incentive payment consists of a sum which increases with the years of service, supplemented by a fixed closure payment. On average, the offered payments were equivalent to about one year's salary. Alternatively, miners were offered transfer to another mine. A large majority of miners accepted the redundancy payment. 22. Job Creation. In 1985, British Coal Enterprise was established as a wholly owned subsidiary of British Coal, with the mandate to assist in the creation of alternative employment in areas affected by mine closings. British Coal Enterprise has four areas of activity: (i) to provide loans at reduced interest rates for eligible new and existing businesses which create jobs; (ii) to rent small business units (usually with electricity, heat, phone and other office services) to small scale start-up businesses; (iii) to provide job counselling and placement services; and (iv) to provide partial funding for local non-profit organizations to help small businesses develop. These activities helped create and find about 90,000 jobs (equivalent to about 70% of job losses in coal mining, including retirement), at an average cost to British Coal Enterprise of less than a miner's monthly salary. The impact of the program has helped - 10- reduce unemployment rates in coal mining areas from about 60% above the national average previously to about 20% today. Germany 23. Energy Supplies. The role of coal in the energy balance of Germany has been falling, both in absolute and relative terms. In 1973, coal accounted for 41 % of the energy balance. But in 1991, oil provided the largest share of primary energy supplies (38%) followed by coal (33%), natural gas (17%), and nuclear (11 %) (Figure 3). The decline in coal consumption accelerated in the early 1990s, as industrial production in the former East Germany lagged. Germany is a net importer of coal: coal imports accounted for 6% of coal consumption in 1991. Imported coal is much cheaper than domestic coal, but import volumes are modest because domestic producers are protected through a variety of mechanisms. 24. Coal Demand. The major market for coal in Germany is the electric power and heating sector, which accounts for 70% of domestic coal consumption (Figure 4). Coal-fired power plants account for the bulk of electricity production (almost 60%) followed by nuclear (28%). Generation from coal-fired power plants has been relatively stable for the last ten years. Increases in electricity generation have come primarily from nuclear power, and to a lesser extent natural gas. 25. Coal Development. Germany traditionally has been the second largest West European hard coal producer. Output dropped from about 140 million tons per year in the early 1960s to about 65 million tons per year in 1993. Over the same time period, employment in the coal mining industry dropped from about 400,000 to about 90,000. Manpower productivity increased from 360 to 780 tons per man year. The average annual decrease in employment has been at a relatively constant rate of about 4% throughout the whole period. The number of operating mines has been reduced from 139 to 17. However, production costs remain at a level of about US$150 per ton, about three times as high as the cost of imported coal. 26. Government Strategy. The German coal industry has always been organized into private share holding companies. In 1968, the major shareholders, mainly steel and energy enterprises, united their mines in the important Ruhr district under the Ruhrkohle AG (RAG), which was created with government support to facilitate the rationalization and adjustment of production capacity. The government strategy towards coal mining was built on three major cornerstones: (i) an energy policy aiming at market-driven diversification of energy supplies, but maintaining a minimum share of domestic hard coal for security reasons; (ii) private ownership and operation of the coal mines; and (iii) a formalized unique consensus-building process ("Kohlerunde", - 11 - Figure 3 Primary Energy Supply in Germany 600 1980 1991 500-_ 1973 400 S S300 C~~~~~~~~~~~~~~~~~~~~~~~Ca 200 100 0 - 12 - Figure 4 Electricty Generation by Type in Germany 600000 1991 500000 1980 400000 1973 3300000 MM Gas 200000 100000 0 - 13- or coal talks) between government, industry and trade unions, regarding periodic revisions of the industry's major development and adjustment plans. As this strategy proved to be a very costly one, it is now being increasingly criticized by the public. While a fundamental change of the strategy is unlikely, a reduction of the subsidies and an acceleration of the adjustment process appears unavoidable. 27. Government Assistance. RAG, together with less important non- Ruhr hard coal mining companies, are protected by legislation securing coal market shares and subsidies if the mines cannot deliver at competitive prices. Two important long-term agreements were signed with government sponsorship: (a) an agreement between coal producers and electric utilities for the supply of 45 million tons per year of domestic coal at prices sufficient to cover costs, whereby in principle the price difference between domestic and import coal is compensated through a special fund which is financed by levies on electricity sales (presently amounting to about 10% of the average electricity tariff); and (b) an agreement between coal producers and steelmakers requiring all steel mills to purchase all of their coking coal from domestic sources, whereby the government pays directly the difference between domestic costs and world market prices. 28. These two agreements, further supported by significant special guarantees for rationalization investments, provided over 90% of all government assistance to the coal industry. The remaining aid consisted mainly of labor-related assistance (in particular to finance early retirement and mineworkers' bonuses), tax advantages and a 3% investment aid. In line with the government's strategy, and greatly facilitated by the two major assistance agreements, German coal mining companies, in contrast to UK and French producers, always maintained significant investment programs to improve long- term production (typically investments were equivalent to about one half of all assistance received). However, despite impressive technical progress, modernizations and concentration on a small number of large mines, production costs have never been lowered significantly, and the German coal mining model has proved to be very costly. 29. Personnel Reduction. The German hard coal mining industry has been adjusting its personnel level basically through normal and early retirement and, in case of mine closures, reassignment of younger staff within the parent enterprise. While slow and expensive, the process did improve productivity significantly without social or political disturbances. 30. Job Creation. Unlike the UK and France, Germany does not have a special organization within the coal industry for promoting regional development. However, transformation of mining regions has been quite successful, in particular in the Ruhr district, which today is industrially - 14- diversified and advanced, with significant improvements in environment and new recreational and cultural facilities. This can be partly contributed to a variety of initiatives sponsored by the Federal Economy Ministry, regional government, as well as by private associations. Advertising and image improvement are important aspects of these initiatives. RAG, the dominating coal producer, has been increasingly diversifying its own business activities into energy, chemistry, technology, services and environment. Today, about 40% of RAG's revenues are from non-mining activities, which employ about 20% of the total staff. France 31. Energy Supplies. Coal plays a relatively small share in the energy balance of France. In 1991, oil accounted for 40% of primary energy supply, followed by nuclear (37%), natural gas (12%), coal (9%), and hydro (2%) (Figure 5). Coal consumption has been declining, both as a share in the energy balance and in absolute terms. Imports account for two-thirds of coal consumption in France. 32. Coal Demand. Electricity generation in France is dominated by nuclear power, which provides about 75% of electricity production (Figure 6). Increased generation from nuclear facilities first acted to displace oil consumption (in the late 1970s and early 1980s) and then coal (in the mid- to late-1 980s). Coal now accounts for only 8 to 9% of electricity generation, as compared to almost 30% in the late 1970s. 33. Coal Development. Among the three countries, France is the smallest coal producer with poorer coal resources and lower labor productivity than the UK or Germany. Output dropped from about 50 million tons per year in the early 1960s to less than 10 million tons per year at present. Over the same time period, employment in the coal mining industry dropped from about 320,000 to about 6,000. Manpower productivity increased from 160 to 1,300 tons per man year. The average annual decrease in employment has been at a relatively constant level of about 10% through most of the period (only during the last 5 years the rate increased to more than 15%). As in UK and Germany, the number of operating mines has been greatly reduced. Some previously important coal mining areas, including Pas de Calais, stopped coal production altogether. Average production costs in recent years have been about US$ 100 per ton, about twice the cost of imported coal. 34. Government Strategy. Like the British coal industry, and with similar objectives, the French coal industry was nationalized in 1946, when Charbonnages de France (CdF) was created. However, in the early 1960s, the French government embarked on an energy strategy which heavily depended on the development of nuclear power and the gradual closing of the coal - 15- Figure 5 Primary Energy Supply in France 1991 350 -_ 300 -_ 1980 1973 250 _ E~~~ ~~~~~~~~~~~~~~~~~ Other . 200 - E Hydr 8 Is 150 - i 0~~~~~~~~~~~~~~~~~~~0ca 50 - 0 - - 16- Figure 6 Electricty Generation by Type in France 1991 450000 400000 350000 300000 1980 XHydro 250000 Nuclear ; 11 111111~~~~~~~~~~~~~~~~M Gas 200000 1973 oil _ _ , . , . , l *~~~~~~~~~~~Coal 150000 100000 50000 0 - 17- industry. As in the UK, the adjustment process accelerated in the mid-1 980s. Since then, CdF's goal is to stop coal mining as soon as socially and politically feasible. The focus is fully on reconversion of the labor force and job creation. There are no more rationalization investments (they always have been much lower than in the UK and Germany). 35. Government Assistance. The most important forms of government assistance have been the government-backed sale of domestic coal to Electricite de France (EdF), direct grants to cover operating losses of CdF, and significant labor-related assistance. The long-term supply agreement with EdF is based on a guaranteed tonnage, valued at prices which are based on the average price of imported coal plus a minor adjustment. Operating grants have been provided with the understanding that they are not to delay the closing of the most uneconomic mines, but would allow some rationalization of the most promising mines so that the adjustment could be executed at a socially and politically acceptable pace. 36. In the recent past, direct operating grants have been principally approved on the basis that they would cover 50% of anticipated operating losses, while the other half would be applied to financing closure of unprofitable mines. Today, by far the greatest part of the government's financial aid is being applied to finance the social costs of mine closures, in particular early retirement and retraining (labor-related aid surpassed $50 per ton of domestic coal produced, or the cost of imported coal). 37. Personnel Reduction. CdF has good experience of steady and significant employment reduction without major social and political disturbances. More than in other countries, focus has been put on retraining and reinsertion of coal miners. These programs are elaborate, time consuming (starting two years before a mine closure) and expensive (costs per person are equivalent to two years of salary). Since the mid-1 980s, also several thousand miners have been transferred to EdF (this arrangement was part of the government-backed coal supply agreements). 38. Job Creation. France has the longest experience of systematic industrial promotion for coal mining areas. In 1967, SOFIREM, a government- supported financing instrument for re-industrialization of coal mining areas, was created as a subsidiary of CdF. Despite some expensive investments with modest returns, overall SOFIREM appears to have been quite successful in contributing to regional development. In recent years, annually about 6,000 jobs were created with an annual SOFIREM financing volume of about $50 million. - 18 - Poland 39. Energy Supplies. The primary energy balance in Poland is dominated by coal. In 1991, coal accounted for 78% of the primary energy supply, followed by oil (14%) and natural gas (8%). Unlike other countries of Eastern Europe, Poland did not import large amounts of natural gas from the former Soviet Union, and consumption of gas has remained rather stable. Poland is a net exporter of coal. While exports have fallen in recent years, this decline paralleled production activities, and exports account for about 1 5% of Polish coal production (in terms of energy equivalents). 40. Coal Demand. Since 1987, when coal consumption peaked at 151 tons coal equivalent, coal consumption has declined by almost one-third before stabilizing in 1993. In terms of energy equivalents, power plants (including co-generation facilities accounted for 55% of coal consumption in 1991, and district heating systems accounted for another 13%. Almost all electricity production is based on coal. In 1991, hard coal accounted for 51 % of electricity generation, and brown coal 40%. Oil-fired generation provides only a tiny share of electricity production, as does hydro; natural gas has not been used in power plants. 41. Coal Development. Coal has been the backbone of the Polish energy sector. The bulk (approximately two thirds) of Polish coal production consists of hard coal. Production of hard coal was slightly more than 190 million tons annually through most of the 1980s. However, production started to decline in 1989. By 1993, production of hard coal was 130 million tons. Hard coal is produced at 70 underground mines in 3 basins. Brown coal output, in contrast to hard coal, has fallen only slightly in recent years, and remains at about 70 million tons. All brown coal is surface mined. Productivity in underground mines increased steadily between 1960 and 1977 (from 328 tons to 541 tons per employee), due to increased use of mechanization and long-wall technology. However, in the late 1970s, productivity started to decline as more employees joined the work force. In recent years, production has fallen faster than employment, resulting in a continued decline in labor productivity (to a level of 400 tons per miner in 1993). In 1993, coal production costs averaged US$32.5 per ton, well below import parity of US$50 per ton. Lower cost producers are competitive in the export market and in 1992 Poland exported nearly 20 million tons. 42. Government Strategy. The Polish coal industry used to be highly subsidized, but direct subsidies are being progressively phased out. Price liberalization began in July 1990 (at that time, prices averaged about $6/ton), and throughout 1990 and 1991 prices continued to increase (averaging $26/ton by the end of 1991). Coal prices were fully liberalized in 1992 (and explicit subsidies curtailed). However, even with increased coal prices, - 19- operating losses are still incurred by the coal industry. While in 1991, subsidies averaged about $3 per ton, by mid-1993, losses were averaging over $7 per ton. The mines deteriorating financial position resulted from lower prices (caused by excess supplies driving prices down) and rising costs due to inflation. Complicating matters is the inability of consumers to pay the higher prices, resulting in sizeable arrears. A State Hard Coal Agency (PAWK) was established in September 1990 by the Ministry of Industry in order to assist in the restructuring of the coal sector. While decisions on the first round of mine closures (consisting of 7 mines) were reached in December 1990, they have not implemented. Since this time, 2 additional mines have been included for closure. In 1993, the Ministry of Industry and Trade (MOIT) and PAWK collaborated on a Hard Coal Restructuring Program and the Government created 7 mining concerns out of 63 mines in Upper Silesia. Government Assistance 43. Personnel Reduction. Employment in hard coal mines peaked in 1987 at 450,000, 353,000 in 1991, and 336,000 in 1992, and 319,000 in 1993. Between 1989 and 1993 alone, almost 100,000 employees were shed by underground mines. Surface mines account for a much smaller labor force, although this too has been falling (from approximately 18,000 in 1989 to 14,000 in 1991). Explicit plans for addressing social dislocations were not originally part of the Polish restructuring program. The concerns of the workers and communities, however, have caused them to be included as critical issues in recent years. Preliminary estimates indicate that another 100,000 positions will need to be eliminated in the next few years. United States 44. Energy Supplies. The United States has abundant coal reserves which can be extracted at low costs and is a net exporter of coal: approximately 13% of US coal production is exported. In 1991, oil accounted for the largest share of primary energy supply in the United States (38%) followed by natural gas (24%), coal (23%), and nuclear power (9%) (Figure 7). Between 1973 and 1991, coal consumption increased by almost 50%. This increase was driven entirely by the power sector. During the 1970s and 1 980s, coal was the dominant fuel for power generation since oil reserves were modest and natural gas exploration and development was constrained by price and transmission regulation. But the deregulation of natural gas prices and the introduction of common carrier transmission arrangements has brought forth new gas supplies. With the improved availability of gas and with improvements in combined cycle gas generation, natural gas is now a more economic as well as cleaner fuel for power generation than coal. Thus, natural gas is now expected to be the dominant fuel for future power generation plants in the United States. - 20 - Figure 7 Primary Energy Supply in the United States 3000 1973 1980 1991 2500 _ 2000 i~~~~~~~~~~~~~~~~~~~~~~E Nuclear* 11500 C~~~~~~~~~~~~~~~~~~~~~~~Ca 1000 500 0 - 21 - Figure 8 Electricty Generation by Type in the United States 3500000 1991 3000000 1980 2500000 1973 2000000......... 1500000-_ =3L 1000000-_ 500000- 0....... ..... - 22 - 45. Coal Demand. The electric utility sector is the largest consumer of coal in the US, accounting for 85% of domestic coal consumption (Figure 8). In 1991, coal-fired power plants provided about 55% of electricity generation, nuclear 20%, natural gas 12%, and hydro 8%. Oil consumption by electric utilities declined dramatically after the oil price shocks of the 1970s now provides only 4% of electricity generation (as compared to 1 7% in 1973). In the 1980s, many oil-fired plants were converted from oil to coal. 46. Coal Development. Compared with the European countries, the US is a much larger coal producer. Output increased from 370 million tons in 1960 to 838 million tons in 1993. Employment dropped from 230,000 to 110,000. There has been a clear shift to large surface mines: from 1970 to 1990 the share in total production of surface mines increased from 44% to 59%. Today, about 70% of US coal is produced by 7% of the mines (those with an annual output of more than 1 million tons each per year). Average production costs have been brought down to about US$20 per ton (they used to be US$30-35 per ton in the 1980s). 47. Changing Industry Structure. US coal statistics are aggregated for three coal producing regions: Appalachia (including Pennsylvania and Ohio), Interior, and West. Historically, the Appalachian Region has been the principal source of coal in the United States. Although this region is still the dominant supplier of US coal, its share has been falling (from 70% of U.S. coal production in 1970 to 45% in 1992) as thousands of small and relatively inefficient Appalachian mines were closed, particularly as coal prices fell in the 1980s. Underground mines account for 65% of coal production in this region. In the Interior Region, production has increased slightly, but as a share in total U.S. production it has fallen from 24% in 1970 to 20% in 1992. Surface mines dominate production in the Interior Region, accounting for 62% of coal production. 48. Most of the growth of US coal production has been in the Western Region with the development of large, low cost mines producing low sulfur coal. The Western Region accounted for 35% of US production in 1992, compared to just 5% in 1970. Surface mining accounts for 90% of production. The Clean Air Act Amendments of 1990 increased the demand for the low-sulfur coal mined in the West to meet the restrictions on sulfur dioxide emissions from power plants. With the advent of unit train service, coal from the Western Region could be shipped economically over to consumers in the mid-West and Southern States including Indiana, Illinois, Arkansas and Louisiana. 49. As a result of these changes, the number of mines declined from 6,550 in 1976 to 2,750 in 1992 of which 1,390 were surface mines and 1,360 underground mines. Average mine size increased to 260,000 tons per - 23 - year capacity in 1992 compared with 83,000 tons per year capacity in 1976. Today, the Appalachian Region has 89% of U.S. coal mines, with 8% in the Interior Region and 3% in the Western Region. 50. Labor productivity increased steadily in the 1960s but declined in the 1970s primarily due to the introduction of new health, safety and environmental regulations which increased employment requirements for non- mining personnel. Subsequently, labor productivity has increased steadily from 2,850 tons per man year in 1980 to 6,170 tons per man year in 1990. Much of the productivity gains reflect the increasing share of surface mining which has much higher labor productivity than underground mining. But, underground mining productivity also increased largely due to the introduction of highly mechanized mining methods using longwall and continuous mining equipment. 51. Government Strategy. There is no special government strategy for the coal industry. All coal mining is private business and energy supplies are subjected to market forces. Tight regulations regarding electric utilities, as well as anti-monopoly and environmental legislation (in particular the Clean Air Act) have had an indirect impact on the development of the coal industry by increasing the incentives for users to shift to low-sulfur coal from high sulfur coal. 52. Government Assistance. There is no direct government assistance for the coal industry, except research funding which may or may not affect the industry (e.g., the recent funding for clean coal technology). 53. Personnel Reduction. Personnel programs for reductions and mine closures are the full responsibility of the mining companies. The government does not take part beyond provision of normal unemployment benefits. 54. Job Creation. Any special job creation efforts are the full responsibility of companies, local communities, municipalities and individuals. The government maintains no special program for miners or any other population group beyond the normal employment services for job location and retraining. New job assignments are greatly facilitated by the mobility of American workers. Attachment Page 1 of 4 1973 1980 1991 i i 1973! 1980 1991 U.K. ;_ Total Energy Supply, mtce 316 287 3121 _ _ I Coal 1091 98 921 351 34 29 Oil 159 117 118i 51 411 38 Gas 36 58 731 11. 201 23 Nuclear 10 14 26 3 51 8 Hydro O 0 1 i oO 0 Other 0 01 1 0 0. 0 UK I _ Coal Balance 109 98 92 l Electricity and heat 65 74 68 601 75 75 Industry 22 10 1 01 201 10 11 Other 19 12 7 17| 121 8 Residual 3 3 51 i 3 31 6 UK Production (GWh) 2S1352 293471 320636 L Coal 194133 207372 209375 69 73 65 Oil 72307 33151 30140 26 12 9 Gas 2729 2'31 3784 1 1 1 Nuclear 27995 36929 70540 10 13 22 Hydro 3855 3892 4489 i 1 1 1 Attachment Page 2 of 4 ________________________________ 1973 1980 1991 1973 19801 1991 I I °'I % % Germany Total Energy Supply, mtce 473 51 3 496 Coal 199 l 205 164. 42 401 33 Oil 214- 210 190 451 411 38 Gas 41 73 83 9 14, 17 Nuclear 5 2 t 55 i1 4 11 Hydra 2 2 2 0 0 0 Other 4E 4 4, 1 1| 1 Germany Coal Balance 199 202 164 Electricity and heat i 104 t 16 117 52 57 72 Industry 50 48 29 25 241 17 Other 35 30 15 18 15 9 Residual 10 9 3 5 4 2 Germany Production (GWhl 374352 466340 535583 Coal 258303 293329 317601 69 63 59 Oil 44847 26721 14729 12 6 3 Gas 20702 65987 36259 6 14 7 Nuclear 1 2092 55588 147446 3 12 28 Hydro 15236 19866 14675 4 4 3 Attachment Page 3 of 4 ______________________________ _1 1973 19801 1991 1973. 1980 1991 France I l l | % % Total Energy Supply, mtce 1 2531 272' 3321 _ j Coal 421 47, 31 i 17 17 9 Oil 1781 158! 132 701 58r 40 Gas t91 31! 401 81 11I 12 Nuclear 5_1 23 1231 | 2 j 81 37 Hydro 61 9 ! 7 _ 2' 3 2 Other 3 4 6_ 1 2 2 France I I _ _ _i_I Coal Balance 421 47 31 _ ii Electricity and heat j 15| 241 151 351 52! 48 Industry 17 l ' 13' 212 41 291 38 Other 81 5 3 ! 20 10i 8 Residual 1 5 2 3 10 6 France _ . l Production (GWh) 182508 256896 450125 1 Coal 35352' 69927 43212, 19 27 10 Oil 73313 48451 142691 401 19 3 Gas 10093 7013. 28361 6 3 1 Nuclear 14747 61244 331337 , 8 24 74 Hydro 47689 69105 56716 26 27 13 Attachment Page 4 of 4 1973. 19801 1991 1973 19801 1991 l l__----.-r.-% %I % USA | Total Energy Supply. mtce 2462 25731 27621 ___ _. i Coal 444 537 6421 181 211 23 Oil 1157' 1131 10611 47 441 38 Gas 735 681' 6571 1 30 261 24 Nuclear 33 991 242 1 1 41 9 Hydro | 33 341 331 1' 1 j 1 Other 58i 87, 1251 21 31 5 Electricity imports ii 41 311 _ USA _ i Coal Balance 444 5381 642i l i Electricity and heat 310 417 5481 i 70 781 85 Industry 112 85i 741 1 251 161 12 Other 19 11 12!1 4 2 2 Residual 3 24 8 1 41 1 Production iGWh) 1965509 2427320 3197530 i I _ Coal 907279 12427881 1688296 1 46 51 53 oil 335905 219915r 124704 17 9I 4 Gas 364798 370409, 3817851 1 19I 15 12 Nuclear 89234 288851 649099 5 12' 20 Hydro 265344 279142 2689121 14 12 8 - 24 - BIBLIOGRAPHY OECD. "Energy Statistics of OECD Countries", 1993. OECD. "Energy Policies of IEA Countries, 1991 Review", 1992 US Energy Information Administration. "The United States Coal Industry 1970 - 1990. Two Decades of Change", November 1992. US Energy Information Administration. "The Changing Structure of the United States Coal Industry: An Update", July 1993. US Energy Information Administration. "Quarterly Coal Report", May 1993. International Economic and Energy Consultants. "Privatization of a Major Coal Industry, the United Kingdom Experience", January 1994 (Draft Report). US Department of Commerce. "Survey of Government Assistance for the World's Hard Coal Industries", 1989. Liabeuf, J-J and Drouard, J. "Charbonnages de France et La Conversion des Bassins Houillers", 1992. Ruhrkohle, A.G. - various Annual Reports. SOFIREM - various Annual Reports. Charbonnages de France - various Annual Report. Commission of the European Communities. "Mid-term Peport on Establishing Community Rules for State Aid to the Coal Industry 1987 - 1990, 1991. Annex D COAL TRANSPORT IN RUSSIA Coal Transport in Russia Overiew The coal industry in Russia depends primarily upon the railway for transport; and, in tum, coal transport is the backbone of the railways' business. On a ton-kilometer basis, over 97% of the coal tkm's are accounted for by rail. For the railways, on a tkm basis, coal is the single greatest conmmodity carried. In 1992 coal represented 20.2%, in terms of tonnage, of all commodities hauled on the Russian railway system, second only to construction materials. Coal is hauled longer distances in Russia than it would be elsewhere in the world, in part because rail transport has been so comparatively inexpensive. The average length of haul of coal transport was 1237 kmn in 1992. The coal industry's dependence upon the railway system reflects the critical role that the railways has played in the entire economy. Excluding pipelines, the railway system carried 98% of land tkm in 1988, the peak level before the breakup of the FSU. The extensive reliance on transport reflects Russia's vast distances but also the fact that industrial production was often concentrated in a few number of huge complexes whose location was sometimes based more on political than cost considerations. Under the command economy where traffic demand and operational planning could be organized at a central level well in advance, the integrated former all union railway system was highly efficient. The forrner All-Union or Soviet Railways (SZD) carried half of all the world's railway freight traffic, about one-fourth of all the world's passenger traffic and had the highest traffic density of any railway in the world (By comparison, the United States and Canada combined carry about 23 percent of the world's railway freight traffic). If its services were priced at rates charged by US railways in 1990, the total revenue would have been about US$100 billion. The system operated as a series of separate regional railways (19 of which now remain in Russia), each of which is a "geographic" monopoly, contiguous to another, with no competition among themselves for freight traffic. The network itself is concentrated on highly used main lines, with ownership of the feeder routes, industrial sidings and branch lines belonging to the railway industrial customers. The resulting high density (some lines carried 250 million gross tons annually and ran 300 trains daily) is a major reason why railway tariffs in Russia were, and indeed, remain, low by world standards. Another key factor is that rates were both explicitly and implicitly subsidized by Government. Rail rates were not set at levels needed to cover construction costs of the network or 1 Coal Transport Annex capital costs of rolling stock since these were included in Government budgets, nor did rates cover the full cost of energy used to operate trains. Indeed the railways have benefitted enormously from Governrment's implicit subsidy of energy, which in 1992 was by far the largest subsidy in Russia, exceeding GDP in terms of opportunity cost measured at the market exchange rate. In terms of rail transport, analysis showed that transport's share of the implicit subsidy of electricity consumption, which relates primarily to rail transport, is equivalent to 6% of GDP. Government can no longer afford to maintain these direct or indirect subsidies. In fact, reducing subsidies and rationalizing the energy sector are essential to stabilizing and restructuring of Russia's entire economy and, if implemented, will help reduce the fiscal burden of the transport sector. At the same time, removing the subsidies will force a restructuring of tariffs and a passing on of real increases to the transport users. As fuel and other input/output prices reach world levels and transport tariffs reflect true economic costs, the competitiveness of coal, as well as that of Russia's other industries, will be eroded. In terms of formulating a plan for the restructuring of the coal industry, thernfore, the key question is the extent to which rail service can be maintained and rates kept low enough so that the total price of coal to the end user is lower than the price of alternative fuels within Russia and, in the case of exports, lower than the delivered prices of competing coal exporters. Making rail transport more efficient to offset cost increases in basic inputs will be necessary before long to prevent the complete erosion in the competitiveness of coal and other natural resources located far from their points of end use. Unfortunately the railway system is hardly in a position ,o recognize that its long term health, and that of the Russian economy, rests upon its ability to minimize costs, maintain service levels and keep rates low in real terms. The dissolution of the FSU, and Russia's current economic difficulties have had an extremely deleterious effect on the system and undermined its ability to operate. The financial performance of the railways is declining as the result of declining demand, rising fuel prices, inflationary pressure on wages, and reluctance to increase passenger tariffs. And, the people who run the railways are not prepared for the massive transformations necessary to meet the need of a market economy. Thus despite its monopoly position, Russia's railways are now facing serious problems. Rail freight traffic has declined by about 26% and passenger traffic by about 17% since 1988 and the Bank projects that railway traffic will not recover to 1989 levels until well into the next century. Rather, as reforns take hold, market forces will make the economy less transport intensive and will dramatically affect the nature and mix of commodities carried as well. A shift from rail traffic to road is also inevitable, particularly for time-sensitive shipments and for short-haul traffic. Railway officials do not seem to understand that the economic framework they will inevitably change and necessitate fundamental reforns in their industry. Instead, MPS has hired additional workers and its capital plans still focus on constructing employee housing, expanding the network, continuing electrification and even to promoting a high speed rail line with no chance of financial viability. These trends suggest Russia's competitiveness in coal and other industries dependent upon the railway will be reduced by the railways' continued production focus and lack of conmmercial orientation and sense of accountability to press for the service quality r!quired by a market economy. Moreover, the railways' present structure impedes their ability to change. Inappropriate centralization at the Ministry of Railways (MPS) level, together with inappropriate decentralization at the regional railway level, has resulted in a giant railway monopoly that is difficult to control politically and completely unresponsive to shipper quality and service needs. At the samne time, regional railways operate as a fragmented set of individual, geographic fiefdoms, each focusing on its "own" traffic and each wielding an inordinate degree of power over local customers. Coal Transport AAncr These generic operational problems have been magnified by those stemming from the breakup which have led to controversy in such critical managerial areas such as rate setting, revenue divisions and wagon management. In addition, traffic patterns and levels have been interrupted, new borders are delaying transit times, and inter-railway interchanges have increased. Other operational difficulties relate to the disruption in equipment supplies that has accompanied the breakup of the FSU. These problems are affecting, and will continue to affect, both the price and the service levels of all freight transport customers. Financially, many of the railways' problems relate directly to the process of reform and subsequent adjustments already taking place. Fuel and electricity costs are beginning to increase at rates faster than inflation and the result is pressuring the railways to raise tariffs. An analysis of MPS expenditures for 1991 and 1992 indicates that fuel and electricity costs have been increasing more rapidly than labor and other input prices. In fact as a percentage of total costs for the railways, electric energy has increased from 8.1% in 1991 to 11.8%; diesel fuel from 3.7% to 7.5% while labor actually decreased as a percent of costs from 33.8% to 27.8%. The increasing costs are being passed on by the railways to its customers in the form of higher rates. Nevertheless, the rising costs of wages are also sources of financial pressure although the railways seem reluctant to tackle problems of overstaffing. Instead, officials seems convinced that traffic levels will rebound and that there is little need to downsize. Despite a decline of 13% in network-wide labor productivity and a planned cost cutting program to reduce personnel by 50,000, staffing levels actually increased in 1992. This is unfortunate as studies show that railway productivity was about 2.5 times less than that of the United States even before the decline in traffic. The financial burden of overstaffing has been made worse by the fact that rail wages are now indexed to the consumer price index which in turn has led to an agreement to increase rail rates on a monthly basis. Another large source of financial difficulty stems from the fact that recovery of passenger costs through revenues was only 22% for 1992. In its planning, MPS estimated that passenger losses for 1993 would be Rb451 billion. Passenger costs as a percentage of total operating costs increased from 3.9 % in 1991 to 5.4% in 1992 despite a 1 % decrease in passenger km (although freight kms dropped 15%). These skyrocketing passenger losses are a serious problem for the all freight customers, including the coal industry. Government has apparently put no pressure on the railways to increase the percentage of costs recovered through passenger revenues. To the contrary, it appears govermnent's present tariff policy explicitly endorses the cross-subsidization of passenger losses by freight customers. The passenger losses (of Rb82.6 billion) of 1992 were largely covered by freight revenues although for the first time ever, the Federal budget for 1992 did include some subsidies for rail passenger transport. Yet the ability of freight customers to finance passenger losses in future is eroding. Profit margins on freight revenues have decreased significantly in the last several years. Revenue per tkm in constant 1990 rubles dropped from 10.01 in 1991 to 6.52 in 1992. The freight operating ratio in 1992 was 79%, with the ov;erall operating ratio of 97%, a far cry from the 33% operating ratio earning in 1989. Worse, freight rates are being driven up at a rate faster than inflation and the increases are beginning to affect the viability of the major industries moving goods by rail. From 1989-1992 rail rates increased 81.1 times compared to the GDP inflator of 35.28 times. Subsequent to the 81.1 increase, which was in effect at the end of December 1992, rail rates have been increased an additional 12.39 times or 1239%. This compares with inflation of consumer prices in 1993 as of the 3rd quarter of '155 times (consumer price indexed to 1992). Rapidly rising rates are not, in and of themnselves, evidence that the competitiveness of the coal industry will be hurt relative to other fuels, or to other countries. The real questions to ask in terms 3 Coal Trnsport nna of assessing coal competitiveness for the future is whether rates are sufficient to cover the real costs of transport, how they compare with rates elsewhere, and what the future is likely to bring. According to MPS analysis, the cost of coal transport is about 13%-14% less than network-wide average operational costs since most coal moves in unit trains, the bulk of coal moves alorLg electrified route with an average cost of 163.5 Kopeks per 10 tariff ton-kilometers (equivalent to US 0.12 cents per tkan at an exchange rate of Rbl200 - US$1), 16% lower than the network-wide operational cost of 187.1 kopeks (equivalent to 0.156 US cents per tkm at an exchange rate of Rbl200 - US$1), and since coal loading and unloading operations are predorninantly on the industrial lines. One reason this is so is that coal trains move largely in unit trains, thus by-passing much of the railway's costs of operating marshalling yards. Accordingly, the railway cost of transporting coal in 1992 was 16 kopecks per tkm. Since the average tariff paid by coal customers in 1992 was 16.9 kopeks per tkm, it would appear that the railways made a 'profit" of only 5% on coal transport in 1992. As this analysis is based on average transport costs, it does not really help in assessing the degree to which the rates or costs reflect the costs of hauling coal in the long term. At best the analysis demonstrates that the railway's profit mnargin is rather slimn; on the other hand, it did not need much profit in the past as many capital investments were funded from the budget. To address these questions, as described in more detail in the attached coal transport, the mission undertook to assess the underlying economic costs of coal transport in Russia. Exhibit A World Bank Estimates of Coal Transport Econonic Costs and Current Tariff Levels Economic Cosa MPS TaAff Levels (September 1993) l Smenm Cost per tkm Cost per ton Cost per dl Cost per ton Cost per tkm Cost per ton . above Distn in USS in US in Rb in Rb in US* in US$ Econoniic Costs 50-100km 0.013 0.90 16.7S 1,175 0.014 0.97 7% (70 km 250In 0.006 1.40 5.92 1,479 0.0049 1.23 -12% 500 hM 0.004 1.98 5.30 2,654 0.0044 2.21 12% IOD0m 0.003 3.21 4.36 4,368 0.0036 3.64 13% 1600M m 0.003 5.33 4.19 6,709 0.0035 5.60 5% 2500 km 0.003 7.94 3.94 9,859 0.0033 8.22 3% 3500km 0.003 10.93 3.81 13,359 0.0032 11.13 2% 5960km 0.003 21.03 3.74 22,288 0.0031 18.57 0.1% 1127 km 0.003 4.28 5.64 5,684 0.042 4.74 averase i J[ The Bank's resulting estimate of economic costs in US$ per tkrm (at an exchange rate of Rb1200 = lUS$) average US 0.3 cents. This estimate assumes that input costs approximate world price levels except for rolling stock, which are assumed to remain for some time at 60% of world price levels according to an EBRD-financed study of the Russian railway system. At full world price levels, the economic cost rises to 0.4 US cents per ton-kilometer. This estimate also assumes that 64% of coal flows move on unit trains and 36% on mixed trains and that all coal trains outside of terminals move on electrified tracks. The estimate includes capital costs for track, rolling stock, inforrnation systems, and maintenance equipment. By comparison, the average rate of current MPS tariffs is equivalent to US 0.4 cents. Exhibit A compares economic costs with September d Coal Transport Annex 1993 tariff levels by major coal transport distances. Thus, according to this analysis, existing MPS coal tariffs exceed the economic costs of coal transport, although only by about 10%. These transport costs reflect only the costs of moving wagons from their originating point to their destination on the MPS main railway network. Loading and unloading and transport from the mines to the loading point and from the network unloading point to the destination on the siding of the ultimate coal customer are not handled by MPS. These costs are therefore not reflected in the base transport rate. The loading of coal into rail wagons and the transport of these wagons from the mines to MPS is handled by individual coal transport enterprises (PTUs). At the unloading end, industrial sidings and unloading equipment are owned by the customer. Altogether, the industrial coal lines owned by these PTUs total 6271 Iom, over which 6.5 billion tlm are expected to be carried in 1993 at Rb22/tlan, for a total of Rbl43 billion. This total represents a cost of about Rb444 per ton, or US$0.37 at an exchange rate of Rbl200 = US$1. It should be noted, however, that the PTU ton-kIn figure includes moving coal from mines to preparation plants as well as to MPS lines for shipment. Perhaps, therefore, the total can serve as a proxy for total loading and unloading costs. To assess the reasonableness of the Bank's estimate, the result was compared to coal transport costs by rail in the United States since the US railway system is most comparable to Russia's in terms of traffic levels and geographic size. According to a major US iailway, tl-.e a erag2 financial cost (to the railway) of moving coal over one of its major coal routes is US.8 cents. To translate this cost into economic costs, one should exclude payroll taxes (about 7 %), corporate income taxes, and higher rates of depreciation for existing rail assets. According to the AAR, average US. railway costs are profiled as follows: labor -- 38.8%; payroll taxes -- 7.6%; depreciation- 9%; fuel -- 7%; loss and damage -- 6.7% and other - 39%. To be comparable, therefore, one should deduct the payroll taxes, much of the depreciation for buildings and structures, and a large portion of the loss and damage since MPS does not assume much liability for losses. As these alone total 33.3%, it would seem reasonable to assume that US economic costs of coal transport would be at least 30% less than the financial costs and perhaps as much as 35%. If so, a reasonable estimate of economic rail costs for coal transport in the US would be about US 0.5 cents per tkrn. To be comparable to the Bank's assessment of the economic cost of transporting coal in Russia, the US figure must be further reduced to reflect the facts that (1) coal is transported by diesel-powered locomotives in the US rather than by electric tiaction; and, (2) the Russian estimate does not incorporate loading or unloading costs. According to MPS, the network average cost of electric-powered freight was Rbl.635 per 10 tkrn while the network average cost of diesel-powered freight was Rb2.516 per 10 tkTn, a differential of 54%. If the same differential were applied to US fuel costs, 54% of the 7 % (or 3.8%) fuel costs should be subtracted from the US cost estimate. This adjustment would reduce the estimate of economic costs in the US to about US 0.48 cents per tkm. To adjust for loading and unloading, perhaps the best way would be to add back these costs to the Russian estimate. If we take total PTU costs as a proxy for both loading and unloading costs, it would be necessary to increase the total costs of coal transport by about 7% before any adjustments are made to convert this cost to economic prices. The difference between current costs and the Bank estimate of economic costs of coal transp:)rt in Russia is about 2.33 times (0.4 cents compared to 0.16 cents per tkm). If this factor is applied to the storage costs, it could be inferred that one should increase the economic costs of coal transport in Russia by about 16.3 %. This would make the Bank's estimate of the economic cost of coal transport, assuming full adjustment to world price levels, about 0.47 cents per tkm, and estimate very close to the 0.48 cents estimate of US economic costs, as adjusted above. Another comparison should perhaps be made to China's railway system. A World Bank analysis (1988) found that the national average economic cost for freight was 0.6 - 0.7 cents/tkm, but this figure includes loading and unloading costs and a high percentage of diesel- operated trains. 5 Coal Transport Annex What implications does this finding have for railway rates in general and for the coal industry in particular? First, given the increasing costs of coal production and the vulnerability of coal to substitution for other fuels, Government may wish to take all measures to try to help keep the price of coal as competitive as possible to avoid even greater declines in production. If so, one measure to this end would be: To avoid permitting coal freight rates to increase faster in future than inflation as they already exceed economic costs. Fortunately, the most recent tariff agreement for the railways allows automatic increases tied to the wholesale and consumer price indices, but reduced somewhat by a special formula. In theory, therefore, this policy is already in place (provided the coal seller can overcome the problem of working capital erosion associated with having to pay transport costs "upfront" when freight is taken 'on-board, " and getting reimbursed sometime later after accounts have cleared from the buyer). Since the Bank's calculations of costs includes capital costs for locomotives, wagons, track rehabilitation of 12,000 km/year and a capital program (including interest) for acquiring more modern MIS systems, upgrading telecomnnunications, purchasing track maintenance equipment necessary to tackle deferred rnaintenance, as well as normal operating expenses, the present level of tariffs should be sufficient to sustain the railways over the longer terrm, provided the freight revenues from coal and other commodities are actually used to th.a end. Zhforrnacely, Mr S is not currently in a position to do so as it instead is diverting cash flow to cover passenger losses. To ensure the integrity of the rail freight network, Government should ensure that cross- subsidization of passenger losses by freight traffic cease. In addition, Government should ensure that the right railway investments are made. This means that proposed railway investments should be reassessed and prioritized to meet the most urgent needs of the freight railway system. Moreover, it must be remembered that railway input costs have not yet reached world levels, yet its current tariffs are about equal to the Bank's estimate of economic costs. This means that railway tariffs are likely to rise in future beyond economic costs unless the railway makes every effort to cut costs to match demand and become more productive to counter future increases in energy and other inputs as Russia's economy undergoes further adjustments to world price levels. Government should thus ensure that NPS' costs are cut to match demand and to at least maintain productivity levels achieved in the past. Russia's current rail tariffs for coal are close to its economic costs. In the US, however, coal tariffs are almost double the financial costs. In Europe, Australia, and Canada, rail rates for coal are even higher. In terns of the competitiveness of Russia's, industry, however, one must recognize that the average transport distances coal is moved in Russia are far greater than in these countries. Thus, although still below railway costs elsewhere in the world, the current trends regarding rate increases, together with the failure to date of MPS to recognize the need to restructure and rationalize the railway system suggests that the competitive advantage once afforded Russia as a result of having the world's most intensively operated rail-vay system is in jeopardy. Based on experience elsewhere, it is unlikely the railways will be able to solve their problems thermselves. Governrment will have to assist in a restructuring effort or otherwise risk: * further erosion in rail transport service with its attendant cost; * possible predatory behavior on the part of the railway as it attempts to defend its market position; * continued large and unsustainable deficits which pose a serious mnacroeconomic challenge for the overall economy. Coal Transport Annex Restructuring an industry as complex as the railways, however, can take years. In the meantime, there are some actions Government could take to protect the competitive positions of all MPS's freight customers: * Reverse the policy of cross-subsidization of passenger losses by freight revenues and instead provide for passenger losses from the federal budget; * Make subsidies for these losses conditional on increasing passenger service cost recovery to 25% by December 1994 and 50% by December 1995. * Cease further investments in (a) rail passenger service, (b) electrification of new and existing lines, (c) new industrial lines, and (d) the Baikal-Amur railway until in depth economic and financial analyses are undertaken for each project. * Cease giving any preferential treatment to railways for provision of foreign currency, particularly for passenger investments which have low cost recovery and earn little foreign currency. * Ensure no high speed rail project is undertaken unless all capital and operating costs are funded by a private investor so that neither Government nor freight customers bear the burden of what is likely to be a costly, uneconomic investment. * In order to separate the policy, planning and regulatory functions of the railways from its operational activities, consider turning the MPS into an operating company under the aegis of another Government body, such as the Ministry of Transport. * Improve cost accounting and develop network flow models in order to determine profitability by line of econornic activity. * Initiate a study to determine the degree to which regional railways could be reorganized to permit intra-rail competition. The Industrial Railway Lines Besides the MPS rail system, some 151,000 km of industrial railways exist throughout the CIS. Many of the industrial lines are internal to the industries they serve; industrial coal lines form one of the largest networks of these. The coal-related industrial lines from an integral link between the coal enterprises and MPS. As of January 1, 1993, their total track length was 6,271 kin; on these they expect to carry 6.5 billion net tonlkms in 1993. The mission assessed the system of industrial coal lines and founds several issues that could affect the restructuring efforts of the coal industry. Previously, the former Ministry of Coal Industry used to include the Directorate of Industrial Transport which controlled the operations of coal transport units of coal enterprises, known as P'TU's. The Directorate was responsible for fulfilling coal transport plane industry-wide and had broad authority to control the work of individual PTUs. Under the abolishment of Minugleprom, its functions were taken over by a transport directorate within RosUgol. The reformed directorate, however, is no longer responsible for fulfilling the coal transport plans, this responsibility is now decentralized among individual coal enterprises. The PTU's have become autonomous joint-stock companies with the majority share of their stocks usually belonging to the Board of Directors of a local coal enterprise. The PTU's own the coal loading complexes (CLC's) and the coal warehouses (CWH's) from which all coal is sent onward to customers. About 50% of total freight flow within the industrial lines is unprocessed coal between the mouth of a mine and a coal-concentrating factory (CCF). Another 11.5% of total coal tons moved along the PTU lines do not leave the industrial network. Major mines and pits have their own CCF's. This development would appear to have created a situation where control over the movement of coal from the mine, critical loading and unloading facilities and stockpiles of the coal itself are in the 7 Coal Transport Annex hands of new, monopolistic companies owned by individuals. Although these individuals undoubtedly have the interests of the mines at heart, it would probably be far safer if these companies were owned by the coal producing associations. The should not be owned by MPS because that would divorce responsibility for the prompt loading of coal. Moreover, MPS has no business governing the transfer of coal between mines and washeries. One other important issue arose in assessing the relationship between PMU and MPS. coal transport system in Russia. Most coal trains in Russia move in lower cost, more efficient unit trains. The PTU's are responsible for assembling these unit trains and in the past, received incentives (bonuses) to do so. Currently the rate of inflation has eroded the entire incentive and MPS has made no move to reinstate it. Another problem associated with the erosion of the ruble's value is the increasing meaningless of fines created to ensure efficient delivery of coal and high utilization of wagons. Currently MPS can fail to comply with its contract to deliver wagons and the fine is so trivial that it is meaningless. In the past, concentration of the entire coal transport network as a department in the coal ministry meant that if something like this happened, pressure from the coal industry at the center might change MPS behavior. Now, the PTU is somewhat at the mercy of the local railway chief whom some have referred to as a 'petty tyrant.' It may be that in future Goverrnent will have to augment its regulatory oversight of MPS in order to counter the counterweight of centralized railway customers. v Coal Transport Annex 7This coal transport annex is divided into three parts. Part I describes coalfreight transport on the MPS system; and assesses the relationship of coal rates to current MPS tariffs and to estimated economic costs of nwving coal. Part II describes the system of coal transport from the mines to the railway system over a series of industrial lines that are operated independently of the MPS system. Part IX describes the railway system in Russia and assesses the recent financial and operating performance of the Russian railway system. PART I: COAL TRANSPORT ON MPS Coal transport in Russia moves almost entirely by rail; on a thn basis more than 97% of coal transport is by rail. The remainder moves by water (about 2%) and by truck (about 6%) for relatively short hauls (exhibit 1). Coal hauled in on Russian railways totalled 382.7 million tons in 1990; 340.3 million tons in 1991 and 219 million in 1992; since 1990, therefore coal tonnage hauled has dropped by 16%, less than the decline of other freight carried by the railway. Coal remains the single greatest Exhibit 1 Percentages of Common Carrier Shipments by Type of Transportation (tons) Inland Freight Category Rail Shipping Water Trucking Pipeline Total Coal 90.1 1.3 2.3 6.3 100 Coke 95.8 1.9 0.3 2.0 100 Petroleum products 32.8 7.7 2.9 4.7 51.9 100 Iron & manganese ore 93.2 3.6 2.4 0.8 100 Nonferrous ore & sulphur raw materials 76.0 6.4 3.0 14.6 1 100 Ferrous metals 75.9 3.6 1.4 19.1 1/ 100 Chemical & mineral fertilizers 88.0 4.1 3.0 4.9 100 Cement 85.6 1.7 1.1 11.6 100 Forest products 60.0 4.4 24.4 11.2 100 Perishable food products' 95.0 4.9 0.1 100 Grain & milling products 51.4 7.2 2.1 39.3 100 Combined feed 70.5 5.4 1.5 22.6 100 a. Including meat, poultry and animal oil. Source: Goskomstat USSR, Transport i Svaz, Statisticheski Sbornik, Moscow, 1990, p 36. commodity carried by the railways in termns of tkm. Total coal tkm in 1992 was 394.6 billion, or 20.1 % of the total. The dissolution of the USSR caused the disruption of economic lincks between the former Union Republics and changed the overall pattern of inter-railway coal transportation. But the rmajor suppliers and consumers of coal have preserved their technological and economnic links. Thus the most important directions of coal flows remain relatively stable. Exhibits 2, 3, and 4 show data on the inter-railway traffic of coal within Russia and with other CIS member-states (the Moldavian Railway is not included in the table, because it carries only internal coal traffic). Coal flows over Russia's railway network are depicted in Exhibit 5 (map) which charts major directions of flows with annual tonnages of more than 2 million tons per year. Segment names and distances are shown in the tables accompanying the map. 9 _______________________ Avg. Daily Loading, Statistical Shipment of coal, Receipt of coal, ______________ ______ # of wagons Loading (tons) 1990 (tons) 1990 (tons) Oclobcr 21.0 71.65 1,026,000 11,616,000 Moscow 487.1 72.46 13,432,000 22,244,000 Gorkiy (Niziiniy Novgorod) 1.1 68.35 28,000 10,067,000 Norlhem 1250.4 71.42 32,637,000 23,253,000 o Norlhern Caucuses 1066.9 73.10 28,493,000 19,055,000 South-Enstern | 1.3 67.03 33,000 11,185,000 Volga 1.0 68.59 24,000 2,045,000 Kuibyshev (Sarnara) 236.2 63.63 5,487,000 7,802,000 Svcrdlov (Yekaterinburg) 266.5 72.71 7,073,000 34,767,000 o Soutlhern Ural 373.7 71.79 9,792,000 41,208,000 Westem Sibcria 24.0 73.20 642,000 38,153,000 Kenierovo 6239.0 71.39 162,599,000 57,450,000 Krasnoyarsk -~ 1941.1 68.93 48,843,000 26,211,000 Eastem Siberia 1154.9 70.88 30,299,000 35,046,000 Trans-Baikal 749.1 65.42 17,979,000 19,176,000 Far Eastem 365.7 67.03 8,993,000 30,290,000 BAM 594.2 70.53 15,297,000 j ,090,000 Sakhalin _ . Kaliningrad l I I I _I rn Recipient October Kaliningrad Moscow Gorkly Northern North Caucuses South East Volga Kuibyshev Sverdlovsk Southern Urals Shipper Dctober 1 Kaliningrad Moscow 268 | 28284| 49 33 1 53 4 Gorkiy 4 57i 9 3 1o 1~~~~~~~~~~ Northern 4560 665 52 15291 12 1374 2 North Caucuses 362 1472 76 65 134291 1097 689 7 3 2 South East 6 | 741 Volga 1 1 =421- Kuibyshev 11 306 305 7 14 148 67 4031 4 27 Sverdlovsk 881 1 1829 5 6 38171 1 7 7. Southern Urals 1 1 916 1 187 1421 66751 0 West Siberia 14 69 1 1 19 103 32 2. Kemerovo 3455 6322 4689 2973 849 5332 541 2559 6548 9698 °Q Krasnoyarsk 30 36 93 6 170 36 102 17 147 2 East Siberia 1 2 2 Trans-Baikal Far East 1 Sakhalin g BAM 2 1 1 39 1 73 413 3 Total Received 10322 0 17214 8108 18384 14517 8103 1375 6894 10710 17013 (by railway) -o 0 TOTAL COAL RECEIVED . _ _. . z~~~~~~~~~~~~~~~~~~~~~~~~~~ Recipient West Siberia Kemerovo Krasnoyarsk East Siberia Trans-Baikal Far East Sakhalin BAM Total Shipped TOTAL COAL (by railway} SHIPPED Shipper October 7 741 Kaliningrad 0 Moscow 8692 Gorkiy 156 Northern 6 21962 North Caucuses 3 1 1 1 17208 South East 80 Volga 43 Kuibyshev 4920 Sverdlovsk 3 6 6565 Southern Urals 3 394 8320 West Siberia B316 164 96 815 Kemerovo 185271 496721 746 58 2 2184 114135 Krasnoyarsk 8394 15211 24558| 8955 1072 2922 518 48577 East Siberia 10 51 239601 1899 1583 185 27647 Trans-Baikal 29 152131 3196 101 18539 Far East 7 241 107041 3 10739 Sakhalin 0 BAM 293 160 560 8631 2769 12943 Total Received 27552 51372 25310 33165 18770 29697 0 3576 (by railway) 302082 TOTAL COAL 302082 RECEIVED kIorter October Kaliningrad Moscow Goskly NoWIhem North Caucuses South East Volga KuilbVhey Sverdlovsk Southern Urals West Siberia Kemarovo Krasnoyarsk Eanst Siberia Exportar October Kalk*inrad Moscow Goikly Nonhern Noth Caucuses South Enst Volga Kuibyshav Svwdlovsk Soutten Ure ls West Sbdaera Keme,ovo Krasnoyarsk East Siberis Trmne-BSlkal Far East Sakhalin BAM BELARUS 37 6 0 0 2 7 0 0 0 0 0 0 0 0 UKRAINE 631 312 21 14 440 607 a 2 1B 4 0 6 18 15 KAZAKHSTAN 132 2111 9 21 188 641 262 4 19754 17774 6820 0 0 0 CENTRAL ASIA 0 1 0 0 0 0 0 0 0 0 1 0 2 0 TURKMENMSTAN 0 0 0 0 0 0 0 0 0 0 0 0 0 0 BALTIC RAIL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 TotalRecoavad 700 0 2430 30 35 630 1165 271 6 19772 17778 6621 6 20 1S Iby railway) TOTAL COAL RECEIVED TOTAL RUSSIAN CIS IMPORTS Importer TiansBaikal Far East Sakhalln SAM BELARUS UKRAINE KAZAKHSTAN CENTRAL ASIA TURKMENISTAN BALTIC RAIL Total ShIpped TOTAL COAL TOTAL RUSSIAN (by rallwaV) SHIPPED CIS EXPORTS ExPorter October 1 3 1 8 S Kstil rad O Moscow 7 1467 1 79 1475 Gorkiy 2 2 Northern 142 2815 3 1322 2960 Nonh CauuAss 292 8493 5 2 199 6792 South East 4 16 4 Volga 3 1 4 KtibVshwv 208 13 2 185 285 408 Sverdlovsk 1 4 1 1 a Southern Urals 6 53 7 59 West Siberia 2 33 64 1 16 100 Kemerovo 129 5640 6351 290 4089 14410 Kraanoyarak 191 8e6 12 1575 180 2646 East Siberia 30 1 4 6 35 Trans-Saikel 0 For East 1 2 13 Sakhahn 0 BAM 1 49 1 27 51 0 BELARUS 0 0 0 0 172 1430 15 1654 UKRAINE 0 0 0 0 1430 16737 23 2 808 172189 KAZAKHSYAN 0 0 0 0 39 18601 737081 2203 810 125226 CENTRAL ASIA 0 0 0 0 0 0 1678I 70 8889 TURKMENISTAN 0 0 0 0 0 0 0 BALTIC RAIL 0 0 0 0 0 21 1 554 TotalReced 0 0 0 0 2617 189457 83913 11472 0 7867 Iby railway) 336928 28970 TOTAL COAL 336928 RECEIVED TOTAL RUSSIAN 49469 CIS IMPORTS >< Recipient October Kaliningrad Moscow Gorkiy Northern North Caucuses South East Volga Kuibyshav Sverdlovsk Southern Urals % Shipper October Kaliningrad 2372 Moscow 250 _ 728 191 Gorkiy 1211 Northern 5628 491 165 137 1516 391 North Caucuses 330 1075 104 145931 1403 718 0* South East 1< Volga Kuibyshev 575 470 234 4228 Sverdlovsk 477 1738 3447 0 Southern Urals 923 196 150| 7448 e West Siberia 121 105 Kemerovo 4175 4781 4293 3751 1574 6028 446 2207 5887 9931 0 Krasnoyarsk 159 420 191 103 218 131 364 M East Siberia Trans-Baikal Far East Sakhalin SAM 107 876 _ Total Received 11747 2372 15298 8196 17542 16270 9399 1164 6762 9589 19010 - (by railway) %r TOTAL COAL RECEIVED Recipient West Siberia Kemerovo Krasnoyarsk East Siberia Trans-Baikal Far East Sakhalin BAM Total Shipped TOTAL COAL (by railway) SHIPPED ShIpper October 728 Kaliningrad 2372 Moscow 8169 Gorkiy 121 Northern 21982 North Caucuses 18223 South East 0 Volga 0 Kuibyshev 5507 Sverdlovsk 574 6236 Southern Urals 8717 West Siberia 2811 101 608 Kemerovo 18757 45620 649 165 1767 149 110180 Krasnoyarsk 7948 869 21192 7959 1056 1968 223 683 43484 East Siberia 22337 1681 2014 117 26049 Trans-Baikal : 15383| 3223 18606 Far East 1 00 73091 7409 Sakhalin 1 2289 BAM 288 367 6653 433L24971 11221 Total Received 27274 46590 21841 30461 18487 23508 3094 3297 (by railway) 291901 TOTAL COAL RECEIVED 291901 huportar Octobe Kaktingred Moswo GFkiy Notheam Nowh Caucuses South East Volga Kuibyshev Sverdtovsk Southern Urals West Siberia Komewovo Krasnoyarsk East Sibriia Exportar Octob e Ka | _ad Moscow Gorkiy Noonhetn Nonh Caucuses South East Volga Krd~ysItev_ Sv,dkovsk Southen Ukats West Sibtial Kemaovo Kiasnoyafsk East Sibat Trans-Baikal Fw East Sakhahn SAM BELARUS UKRAINE 432 113 123 444 KAZAKHSTAN 471 1770 224 165 16872 16072 6875 CENTRAL ASIA TURKMENISTAN TotalReceived 903 0 1770 0 113 123 668 165 0 16872 16072 6875 0 0 0 (by rariwayl TOTAL COAL 0 RECEIVED Q TOTAL RUSSIAN i CIS IMPORTS 0A 00~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C Imporso. Ttans-BikM FM East SkhaIn BAM 6ELARUS UKRAINE KAZAIh1STAN CENTRAL ASIA TURXMENISTAN Total SNIppd TOTAL COAL TOTAL RUSSIAN a (by radwayl SHIPPED CIS EXPORTS Ocrobrn 0 Kalmgrad 0 Moscow 0 Golkiy 0 Nolhtain 1155 2728 38B3 No#ih Cauc.ses 197 4233 4430 Soulh East 0 Volga 0 Kulbyshev 0 SveIdioosk 0 Soutthgn Ursts 0 West Siberii 103 103 Kaemovo 2094 6797 4376 13266 Kr->roy4f1k 445 2534 316 1353 4647 fas S.beurt 0 Trars EOkal 0 Far East 0 S.kr almfl 0 HAM 0 0 BELARUS 277 277 UKRAINE 13041 16606| 168502 KAZAKHSTAN 673 2393 72496 461 118472 CENTRAL ASIA 112' 50361 212 6373 TURKMENISTAN 0 ToialReceived 0 0 0 0 6145 184874 78311 6850 212 tby ril*eyl 319953 26329 TOTAL COAL 319953 RECEIVED TOTAL RUSSIAN 43561 CIS IMPORTS Coal Transport Annex Exhibit 5 Map of Major Coal Flows with Supporting Segment-Specific Data I J C) /; t_ 00 E-~ - C ~~~~E - rC 0 CD E , ~~~O L O O 0 00 " C-~~~~~~C E- E- E- E- \C, CO 0 CO C) In 19 Coal Transport Annev CHICOii Y4ACT{OB (x cxeme ?K..n.) OrpaR,WsPl:tBo0¶,le CTa-ImiTh Fpy30060pOT fnlilmia Cue,rH. MT.1H. THM HM vHTeHc.3Hocl MJH . T KM/'(M I 06o3epciaff-H{oHowa I 1024,3 294 3,48 2 HoHoIga 1-Bonorna 3346,5 21I I5,86 3 Bojnorga - ni 1145,5 203 5,64 4 VjfmlHO - A.neK I009,3 I8I 5,58 5ioTeJibHwr" - flarr- 381I,4 53I 7,I8 6 Bonorna - Ht{OTa 2I94,0 134 I6,37 / BoplyTra - Ho,O;14M 4309,6 335 I3,04 8 O?KMTM - {OTJTnC Y3JI. I7731,2 874 20,29 9 r{OTAaC - i{OHOLUa I 650 , 2 363 I9,25 IO ?;IOCc 3a-T06 5XT.-iyaoqo T- , 530 2,45 11 HOTTa - BOXiCOBCTPO I1948,4 3a4 5,56 12 BonxoBCTpo0-06yo0Bo 435,1 IIO 3,96 13 PaTtzHa Tos.-HapBa 963,1 I12 2,35 14 POCTO11HO -FIpecH;S 38,5 I7 2,20 15 POCTOVHO-HaHaTT41h4OBO 84,9 27 3,14 Io BzHCE JIbr. - CywHwtu4 48I,7 122 3,95 I? CTCTAH;wT4>r-3exacOBO 405,3 I95 2,03 18 pcHcx JIbr.-3ae-olnbTTbe o75,2 234 2,69 L9 AAeKcaHaBpos-:xzie3o 775,2 209 3,57 20 H..HaBropog-OpexoBo-3ye3d I383,5 352 3,93 2I PaqcK-BocKpeceHc:-C 548,9 224 2,45 22 QepyCTZ-,#locTBa-nacc.Xa3aHc.. 803,0 T56 5,T5 23 P,cx-n1TexaHoBo 769,8 208 3,70 2 4 Ty.ra --CyxmHHit.4w 750,8 I74 4,31 23 Y3:ToBag-%zcx I 50T,T I50 3,34 26 'i.mnemo - Y3WIOBaa 320,6 I32 2,43 27 Cpexocc-3yeno - 'Moc:X3a tro. 267,7 87 3,0I 23 EOCT 3I5FK,A - 2Awm4HCX 243,1 93 2,67 29 LAHMMYUmHCX - PoR3Xi 422,4 60 7,04 30 F"030 - HoBozmrneux T1T9,9 23 5,21 3I DFDR3' - 1 TA o;(Ka 23I,6 108 2,14 32 BnqroaaTx - {Ho,4eToB-?a 13I27 ,5 274 4,80 33 3Fel3a - aaaoB 2919,6 11I I8,I3 34 DSiasaoi - B-my-K114' 3789,6 469 8,38 35 J1TlaR - flHciCH 723,1 383 T,94 36 VOH:I1'aa-?OCTO3 F.1. 1044,9 278 3,?6 20 Coal Transport Annex OrpaHlraatouma e CTaHiam1 r'py30060pOT AJIMHa CpegIH.R MJIH. TKM KM WHTeHCMB!O MIH. TKM/ S: 37 PocToa Pn. - ApMaBMp 769,0 307 2,50 38 IeH.a - P1cx I369,7 394 3,4. 39 DaiiHo - uIepycT' 4478,T 623 7,I9 40 KoTeIbH!lq-H.HoBropoa I66I,5 369 3,I5 4I -WHZHO-DgZHO 7697,2 793 9,70 42 -ee. o3cK-CopT.-KOTeJTbHHq I3882,I 927 I4,9I 43 iT n.-PHc3a I 2II24,5 I393 I5,I6 44 Ttjj*o - YmlioBc, I3II,I 583 2,24 45 Tso- a.H - r./AepTay 243,5 73 3,34 46 HoBonepeJi-3cKaz-HyraT1eBc. 280,7 92 3,05 47 ^ :p .... --: i9n ,3 91 9,Tn 48 OoeHi7fp pr _ HeRnb 2122,4 377 5,63 49 HdreAb - OpeH6ypn 2537,7 32I 7,90 50 Hxejb - HMeJlb-Tay 238,5 I04 2,29 5I KaOTaJMT I - HRxKenb 3493,6 279 I2952 52 HapTaAbr I - To50ni 259,3 I42 22,95 53 HapTanrs I - MaTH6ToropcK I2I9,9 I4I 8,65 C4 HaTDTaJTi - _ e.i3mHCK I693,8 26I 6,49 55 KaOTaTiL I - 3oJIoTaF ConKa I023,0 I30 7,8; 56 3oiioTaq ConKa - l4e.iYdMuHCK 329,3 131 2,51 57 KypraH - l4eniH6Hcx 6098,1I 258 23,64 58 RypraH - IyTeBxa I2583,4 353 35,65 59 l4en4q6HcK. - Ka-AeHcK YpanbcK. 349,5 I52 2,30 60 T4ycocKca.i - Hep,Ab CopT. 330,2 I36 2,43 6I CBena,:oBcK TOB. - CMbrmxa 729,1 I5I 4,78 62 AiuanaeBcK - EropcMo 206 ,O 59 3 50 63 THaweF-cx-Yp. - EropUMHo T565,8 II2 14,V0 64 AnnaparTHaH - pyMHZHO 770,8 90 8,5 65 7-oraaHo3tZi - C3epn.noBCH COpT. I2I0,7 I09 II,II 6O Hao6braeBO - 3O,raHoBTUW 7396,4 794 9,32 o7 7 aD6bTmeBO - {ypraH I9519,4 535 3O6,48 68 H{ac-i.2{eAie3HFK-CepoB COPT. 47,6 23 _ 2,0 09 CeoOB CoOT.-7opo6jiarogaTcKaR 400,4 198 2,27 70 Oib - Kao6imeso 24515,4 6T8 39,67 7I FlpecHOPOrbKOBciaPJ - YTrX 3I66,2 I16 27,3 72 ApTFnnCXOe - Hap66rnEeBo I449,2 165 8,7' 21 Coal Transport Annex OrpaHtxU4;aI3aoe CTaHqHVM FDy30050pOT elIJlHa CpeiHiz I MJIH. T\M KM UHTeHCvBM, MJIH.TKM/ K 73 VIpThbTCmcoe-H3bTrJ-Ty I264,2 172 7,35 74 CpeaHecxvHpcKaF-VIpTb1nUCKoe 9969,2 592 I6,84 75 MLocKo3Ka - KOM6MHaTCKaR 99,2 20 4,96 76 KYHry.aa - TaTapcKaR 2345,0 366 6,40 77 SapHayA - Ky.iymna 3449,6 343 10,06 78 AnTa3CIcaR - JIOKOTb >I0,5 32I 9,69 79 AITacKaff - S-vrAcX 352,8 I47 2,40 80 A.TTbFlTa 2 - A.rTaTCaRI '709,4 200 56,05 81 A.Ta.-cHaf - Hepyi-io3 Bo 68 5,923 82 HOBOCZ6VnCH - AITaSICKa5 I94g,J 213 9,I2 83 SOJIOTHaF - QOb 2877,3 I43 20,I2 84 Ta-."r - TOam.iC 246,0 87 2,83 85 ApTiw,-a I - 06b I1103,8 361 30,76 86 AWMHCK - 5OJIOTHa5i - 6409,9 46I I3,90 67 TonH - 1O1CT I49 XM 789,I 102 7,74 88 AH?vepc:Xam - ApTbrnTa I 78,4 314 4,7I 89 Toimii - AH;KepcKaq 877 ,3 I47 5,97 90 HoBOxy3HeuK - ApTbrmTa I362,4 95 I4,34 91 TyHn6a-RoBoKy3HevK 223,0 91 2,45 92 ToMYCUHcxaA - APTELna 3776,0 129 29,27_ 9~~ I{aPa Ti4 =aH ToYCH803,33,16 HKa a hoso OBO y3Heip( -483 ,3 64_ ,29 94 FypbeB7apal T4698 it 2,29 l--YPbeBCK - BeJIoBo 60 5 28 2,6IO 95 HIoAoCyYXXHo-HoBoKy3Her~ 69,2 I6 4,32 960 KORbeBo - AqUHCK T443,0 195 7,40 97 Ba3mp - H-pacHaq Comma 470,2 87 5,41 98 TzreT - HapaiS 7IO1,8 298 2,39 99 Haloal - TzreA 643,2 i 2,I6 IOO tIepHOropcxme Hormn-Tame6a 6I,2 I6 3,83 IOI Tamne6a - Ta,!SeT I628,8 657 2,48 I02 .A6aFaH - Tame6a 90,9 10 2,62 I03 KpaCHOrPCK - A.TAHCH 500,0 I84 3,05 I04 ANUmCcK - Y94 -o 116I,4 315 3,69 I05 Yqp - KnacHORPCK: I40I,4 I3I 1i,I2 106 YRP - IOlTYl 3435,7 26I I3,I 107 HaHC:x-EH'Ce!1CKHwM - Yzp 554,9 11 4,78 I08 Ta,,11eT - ',ICOrYZOH 2326,2 284 8,19 I09 %IOD7yanOH - OPaTC 50,0 17 2,88 ITO '/EIJOOryH - 1(Oe5TO2aa 200,2 292 4 33 22 Coal Transport Annex orDaHU'4UBaoLuie CTaHLT4WT Fpy30060pOT AjimHa CpeaHi. MJIH. TVE.T KM 14HTeHCT4B1jOCt TII XpetTO3aIaF-YCTb-VIVMMCK 429,2 214 2,06 II2 Z4DKyTCX - PeTpOBC1(EM' 3aBO0 5829,3 597 9,76 II3 [OpTbl - Yga 2 I839,4 I98 9,29 II4 Yaa 2 - 3zm4a 379I,9 247 I5,35 II5 3lca - TAD"YTCH 5359,3 250 2I,44 IIO 11eTPOBC. 3aBog-H{apbimCHaS 460I,6 5IO 9,03 IUT' :McKaH - tI1Ta 433,7 99 4,38 a- ar:^xECaqT - Apxapa 2I399,I 1788 O P35q - 1aPbNmcxaq I903,1 240 Y j 12lJ Dype¶ - Denioropcia 358,2 I64 2, . T .' -:vc:~ Tr- r;e I26,4 41 3,08 122 HepNoHppz - Tbffiaa 209°,7 229 b I23 Tbria- BamOBcKaF 553, 58I 3,00 12 '4ergoMbrH - Y13BeCTFo3aF I927,0 356 5,4T- 125 Yporai - CG^iTHa I0I7.5 487 2,09 I26 SeCTy;eBO-HOBbzI Ypraii 6944,5 I029 6,75 I27 APxapa - MI3BeCTOBaJR I833,4 I54 I2,23 I28 Z33eCTTKOBaF-Xa6aOOBCF I 4956,8 289 I7 ,I5 I29 Xa6apOBCX I-YnO.nbHagf 830I,8 733 1I,33 130 YroJibHaq - Mbic ACTabbeBa I176,2 I93 6,09 I3I YnOZbHaq - albTic 'ypR1K4H I34,3 42 3,20 23 Coal Transport Annex Major routes carrying more than 20 million tons include: Kemerovo (Kuzbass area) to Chelyabinsk Kemerovo (Kuzbass area) to Ekaterinberg Vorkuta to Kotlas Kazakhstan to Kartal to Magnitogorsk Major flows between 10-20 million tons annually include: Vorkuta to Cherepovets Kuzbass to Lipetsk Karymskaya (Kansk-Achinsk region) to Vladivostok Presently, there still exists a formal system of annual planning of coal traffic - by destination railway with breakdown by quarters, but the main form of operational planning is a quarterly plan of originating freight with breakdown by months. All traffic outside of the monthly plan, as well as traffic with additional requirements (especially local) can be carried by regional railways for a negotiated tariff. Coal transport is carried out on MPS' technically better equipped mainlines, mainly electrified double track, with up-to-date signals and communications systerns that can handle the high level of traffic and heavy loads associated with the movement of coal. The use of these lines for massive flows ensures minimization of operational costs, which is an important consideration for coal flows. With the overall decline of freight levels on the MPS network, capacity of these main lines is sufficient to handle even the most robust of coal projections. Even if normal railway operations are ensured, NPS experts estimate that the existing capacities or main lines would be sufficient to support an additional 20% - 30% growth in coal transport. W'hile the network-wide average share of electric traction in freight traffic was 73.0% in 1992 (official statistics), the corresponding share in coal traffic (that is mostly carried on double-track electrified mainlines) was estimated to be much higher. electric traction - 90% of coal traffic (ton-kilometers) double-track routed - 75% of coal traffic (ton-kilometers) Rolling Stock Used in Coal Transport The coal industry rail fleet can be divided into two major categories: (i) mainline wagons (general- purpose box cars, hoppers, tank-cars), and (ii) special-purpose equipment (industrial electric shunters, mine traction units, 105-ton dump-cars, etc.). Industrial locomotives and special fleet never leave the PTU network (except for capital repair). The most dominant type of wagons used for carrying coal is general-purpose box car. Coal is transported only in "topless" box cars, sometimes termed "half-wagons." This results in a considerable increase of the turnaround time of coal wagons that have to be unloaded 'manually' (especially, in case of a solid frozen coal mass in winter). The strong central efforts for the inter- agency unification of wagon fleet, biased by a big influence of metallurgy industrial transport needs, have resulted in the large-scale production of hatchless modifications of box cars that do not perfectly suit the coal transport requirements (especially for decentralized and minor customers who cannot afford buying specialized unloading equipment, like wagon-tipplers). Clients may also transport coal in rented or owned wagons that are allowed to go out to the MPS mainlines (which is determined by their technical and commnercial status. Mainline wagons owned by 24 Coal Transport Annex PTU's and coal enterprises are also mostly (though not entirely) for internal use. Only 3.5 % of total freight carried in industrial wagons has actual destination outside of the PTU network. Simnilarly, less than 3% of coal leaving the PTU network is carried in industrial wagons. (100 % of exported coal is carried in the MPS wagons). That means that the 259% tariff discount for the transport of coal loaded in non-MPS wagons cannot play any significant role in the economic relations between railways and coal enterprises. Minor repair of wagons (like fixing holes in box cars, replacement of wheel brakes, etc.) is routinely arranged 'as needed" on a contractual basis between the railway (MPS) and the PTU (mine). That means that both the PTU can repair the MPS wagons and the MPS can repair the industrial wagons - billing each other for every individually repaired wagon at a negotiated price of service. PTU's also have some limited facilities for routine repair of their track, locomotives and specialized fleet. But the bulk of the repair of mainline-type wagons (hoppers, box cars) and locomotives - even those owned by the PTU - is mostly contracted out to the MPS repair facilities. Wagon Capacity. The present day inventory of box cars is more than adequate to serve coal traffic although the percentage of box cars that require repair is extremely high. In 1990 Russian railways; broad gauge fleet of box cars was reported to total 197,000. Since most coal is transported over electrified and double-track routes, the average freight speeds are higher for coal than for all freight. According to the World Bank's analysis (see attachment at the end of this part detailing methodology used to assess the economic costs of coal transport in Russia), it is estimated that only 64,000 cars are needed to handle coal flows within Russia. This assumes 350 days of operations, 65 tons per wagon, an availability factor of 85 %, an average transit speed of 35.7 kph, 29 hours for loading and unloading, and 2.13 hours' delay for every yard encountered en route for unit trains and 10.19 hours for mixed trains. Average wagon turnaround time is not reported separately for box cars of the MPS general-purpose fleet, but it can be calculated for different scenarios of coal transport demand level. Operational statistics of the Russian (and FSU) rail sector reflect the average wagon turnaround times for the whole network and by regional railways, without breakdown by directions (the 1992 network-wide average freight wagon turnaround time was 6.81 days). Since coal in Russia is mostly transported in the MPS fleet of general-purpose box-cars, data on the average coal transit time can be used to estimate the loaded haul component of the box-car turnaround time. While network-wide (former USSR) average freight transit times for 1 ton of freight (not only coal) in 1991 and 1992, the average speed of freight movement are shown in Exhibit 6 (February and September are accounting months). These data are not broken down by specific corridors and segments in the railway performance statistics. Exhibit 6 - Coal transit times in the FSU rail network February September Average Average Average Average Comumodity Year transit time, speed, transit time, speed, l___________ days km/day days km/day 1991 4.9 215 4.8 226 All freight 1992 3.9 256 4.2 260 1991 4.3 239 4.6 242 Coal 1992 3.5 268 3.7 279 25 Coal Transport Annex Coal Trains. Coal moves primarily in unit trains: In 1991-1992 the network-wide share of freight tonnage carried by unit trains was 34.7-34.9% for all freight and 67.0-64.8% - for coal. If the problem of providing better economic incentives for the coal senders to form unit trains by themselves could be resolved, this would have yielded a sizable economic effect to the railway transport. In 1992 the network-wide average length of non-stop haul of a coal unit train (without stopping at marshaling yards) was 837 kilometers. The industry-wide average number of wagons formed in unit trains is estimated by RosUgol experts as 65% out of all PTU-loaded wagons, while for specific coal flows, like Vorkuta -Cherepovets, Vorkuta - Novolipetsk, etc., it exceeds 80%. (It used to reach 98% for coal originating from the Ekibastuz Coal Basin in Kazakhstan, where experiments with super-heavy trains of 36,000 tons of coal were being held in late 1980's.) Currently the MPS normative weight of a coal unit train varies between 2,300 and 4,500 tons, depending on the local conditions. A regular box car should nornally carry 67 tons of coal, but the continuous shortage of coal wagons mnakes the PTU's overload by 10-15% those that are available, thus causing additional losses of coal in transit and coal-dust pollution of atmosphere and soil along the major coal transport routes. The average number of wagons in a unit coal train is determined according to the normative gross weight of train for the given railway segment or direction, wagon gross weight (up to 92-93 tons for a coal-loaded metal box car), as well as operational length of arrival/departure tracks at the stations of the given segment (direction). Thus, with the normative train weight of 4,600 tons (without locomotive) such train can consist of 50 box cars weighing 92 tons each. These trains can be handled if the station's operational track length is 850 meters and more. Freight train locomotives do not stay with the unit train as they are operated along specified traction segments. Independent of the number of locomotive units (2 or 3) all locomotive crews consist of two people - engineer and assistant- engineer. In 1992 the network-wide average static load for a box car was 59.4 tons (on standard-gauge tracks). The same number for coal-loaded wagons was 67.0 tons, the difference being explained by the existence of a certain number of 8-axle box cars capable of carrying 125 tons of freight. Train weight varies for different directions of coal flows and depends on the normative gross weight of train for a given direction, as well as on the normative length of train that determines the maximum number of wagons in a unit train (as shown in Exhibit 7): Exhibit 7 Number of box cars in a 1 55 60 65 1 coal train 5 Average amnount of coal 3,130 3,440 3,760 4,070 in a train, tons _ Marshalling, transfer and train operations at the MPS stations and routes are carried out for coal trains in the same regular way as for any other freight. If a unit coal train consists of wagons traveling to one destination station (or one destination area), i.e. if it is a freight-owner's or technical unit train, it passes through marshalling yards without reclassification. The network-wide average time spent by such trains at technical stations is 2.13 hours. If a coal train must be reclassified at a technical station, it stays there 10.19 hours (network-wide average for 1992). 26 Coal Transport Annex The number of marshalling yards along specific coal transport directions is shown in Exhibit 8: Exhibit 8 Depending on the organizational form of wagon r_____________________ - - flows (freight-owner's unit trains, technical unit Kuzbass - Urals 3 trains, throughway trains, etc.), trains can pass through these yards either with or without Vorkuta - Cherepovets 3___ relasiictin reclassification. Kuzbass - Urals - Penza 6-7 Coal loading and unloading and ownership of Neryungri - Far East 4 terminals. Exhibit 9 Volumes of Coal Loaded by RosUgol Coal is loaded almost entirely, and unloaded Associations and Preparation Plants in the First Half predominantly, by freight-owners and are thus of 1993 (%) not charged by the railway. (For an idea of the volumes and shares involved in coal loading/unloading operations, see Exhibit 9 and data provided in the statistical appendix ROSUGOL Grand Total 100.0 attached.) In case these operations are done by mechanized loading/unloading railway units RostovUgol 5.28 that are cost-accounting enterprises within the tuGbkhovUaskyMinc 0.46 railway divisions, this work can be charged at DONETSK BASIN Total 7.85 negotiated prices. These prices (fees) can be differentiated depending on the volume of TULAUGOL 261 work done. In principle, rates for these fees Novosiban=ite 0.20 may also depend on other factors that affect SeverokluzbassUgol 1.77 Belovougol ~~~~~~~~~~0.98 the cost of operations, etc. Sibkor 2.51 Raspadskxya Mine 1.71 There are major specialized coal terminals LeninskUgol 4.07 with high-capacity loading/unloading ProkopyevskUgol 2.51 KCiseleyskUgol 1.60 equipment and appropriate track development KsnevskUgol 5.10 within the industrial rail networks of coal, Joint-Stock Company Mezhdurechye' 1.35 energy, metallurgical and other sectors, as Kuzbassugleobogashcheniye 4.31 well as at a number of sea and river ports. ouizntbVenturezUgmli Coa 073 These terminals belong to corresponding Yuzhniy Kuzbass 3.46 agencies, associations, enterprises. UN BASIN Tota 39.31 Vorgashorskaya Mine 1.20 At present MPS-owned coal-unloading Vorkut Ugot 3.42 equipment is located at open-access premnises IncaUgol 3.68 of freight-handling stations. There are 4,177 PECUOPA BASIN otal 8.29 such stations within the rail network Of Borodinsky Mine 8.72 Russia, having 616 elevated tracks (with KxasnoyarskUgol 3.27 average operational length of track being 155 KANSACHINSK BASIN Total 1J.99 meters). These devices can be used for KizelUgol 0.49 unloading box cars with hatches in the floor Shumikhinskaya Mine 0.05 that carry coal or other cargo. In the past, VakhrushevUgoL 1.36 the rail sector used to be a major consumer of CbelyabinskUgol 31.94 BashkirUgol 19 coal up till 1960's, through the period of uRALS REGON otal 7.18 steam traction dominance. At that time coal unloading equipment could be found at every IOaSugZOI 2.23 technical station, at major passenger stations Dal vostUsol 2.69 and a number of freight stations. This PnmorskUgol 2.82 equipment was also an important component YakutUgol 3.32 FAR EAST REGION Total 22.75 27 Coal Transport Annex of steam locomotive depots, fuel storage bases and warehouses, railway power supply units. Now this equipment is being used only partly - for meeting the railway enterprises' and organizations' demand for coal. Coal Tanffs Transportation of coal in the main type of wagons (box-cars) is charged according to Tariff Schemes N°1 and N°2 with adjustrnent coefficients set by the Committee for Price Policy of the Russian Federation. As for other freight, current tariffs for coal transport are based on the average costs of transportation by wagon weight at various distances. Differentiation by weight of wagons are calculated according to Part 2 of Tariff Instruction No. 1. Tariffs listed therein vary by wagon load and by ton-kim, and, as decreed, must then be multiplied by the official inflation adjustment coefficients. In addition, these rates must be multiplied by a VAT of 20%. The mission reviewed the official tariff book and examined the variation of rates over distances for wagon loads of between 64 and 66 tons. To approximate the changes therein, rates should be calculated according to the methodology outlined in Exhibit 10. For all domestic shipments, coal is priced in Russia on the terms of FOB (Free on Board) at the origin MPS station. That means that the seller is only providing coal transport to the MPS junction station, and all further freight and insurance costs are included by the MPS in its transport tariff that has to be paid by the buyer, as well as any further claimns for mishandled cargo have to be addressed to the MPS. In practice, however, the buyer pays the MPS tariff only upon delivery. So, the seller (either a coal mine, or a PTU, or a coal sales company) who is at the same time executing the coal forwarding functions, has to pay the advance on the IPS tariff at the origin station. Now that most industrial enterprises are dramatically short of funds and rail tariffs are constantly growing, these advanced payments become a heavy burden on the coal enterprise's meager circulating assets and decrease his financial viability. The burden is particularly heavy with respect to coal exports. According the marketing arm of a coal association in Kemerovo, the coal sales company does not get reimbursed by the buyer or the coal mine when selling coal for export. Except for advancing the transport tariff payments, practically all other funancial relations between a PTU and a railway are concentrated around wagon handling. The 5-year contract on transport services signed between the coal enterprise and the railway (see para 1.6) regulates the basic forrn of assessing the wagon handling performance and mutual charges and sanctions. The two parties decide on whether to use fines against the violations of normative wagon turnaround time or wagon demurrage charges (the latter being a fairly recent innovation). In case the PTU wagons are damaged, misplaced, withheld or even lost on the MPS routes (which is not infrequent with ever-lacking tank- cars), the wagon owner claims fine sanctions on the MPS. And the most recent practice is to ship out valuable cargo escorted. Before the contract is signed, the status of industrial lines and loading facilities is jointly examined by the two parties and registered in a special act. The purpose of examination is to determine the normative wagon turnaround time for the particular industrial siding (calculation is based on maximum technological capacities of a coal-loading facility and on the nominal length of haul along the industrial line - a wagon-tippler at a large coal-concentrating factory can operate for up to 20 hours a day at a rate of 20 minutes per wagon). This technical normative is included in the annex to the contract - 'Joint Technological Process", and becomes one of the two most important criteria in mutual economic sanctions for wagon mishandling (see the table below for the current economic sanctions for failing to meet these normatives). On the other hand, the railway is always interested in decreasing the normnative wagon turnaround time for the PTU. Formally, PTU's may claim for increasing this time if their length of haul has grown during the 5-year period because of the mine development and extension of tracks. But 28 Coal Transpon Annex Exhibit 10 Russian Railway Freight Rates for Coal Rates listed below are taken from the railway tariff book as of 1989. To get current rates, one must multiply the base tariff times the inflation factors provided below. * To obtain rates as of December, 1991, multiply by 1.88 * To obtain rates as of December, 1992, multiply by 81.1 * To obtain rates as of September, 1993, multiply by 1,005.64 THE FINAL RATES MUST THEN BE MULTIPLIED BY A VAT OF 20%. BASE TARIFF RATES FOR COAL BY WAGON The following rates apply to one wagon load of coal, containing an average load of between 64 through 69 tons. For Distances of: Tariff is: 0 - 50 km 61 Rubles 51 - 100 kmn 61 + .18 (total distance minus 50) 101 - 300 km 72 + .18 (total distance minus 100) 301 - 600 km 107 + .19 (total distance minus 300) 601- 1000kan 170 + .17 (total distance minus 600) 1001 - 1500 kmn 247 + .17 (total distance minus 1000) 1501 - 5500 kmn 348 + .19 (total distance minus 1500) 5501 - 11,190 km 1122 + .21 (total distance minus 5501) BASE TARIFF RATES FOR COAL BY TON Assuming an average load of 66 tons per wagon, the following rates apply to 1 ton of coal: For Distances of: Tariff is: 0 - 50 kmn .92 Rubles 51 - 100 km .92 + .0027 (total distance minus 50) 101 - 300 kmn 1.091 + .0027 (total distance minus 100) 301 - 600 kmn 1.62 + .0029 (total distance minus 300) 601 - 1000 km 2.58 + .0026 (total distance minus 600) 1001 - 1500 kmn 3.74 + .0026 (total distance minus 1000) 1501 - 5500 km 5.27 + .0029 (total distance minus 1500) 5501 - 11,190 kmn 17.00 + .0032 (total distance minus 5501) Examples: I toncarried 1000I k = (3.62*1,005.64*1.20) = 4,368.5 Rb. or4.3685Rb/tonlan. At exchange rate of 1200 Rb/US$ = $3.64 per ton for 1000 kmn. 1 ton carried 2000 km = (6.72*1,005.64*1.2) = 8,109.48 Rb. or 4.05 Rb/ton kmn. At exchange rate of 1200 Rb/US$ = $6.76 per ton for 2000 kmn. 29 Coal Transport Annex multiple disputes between railways and PTU's about the revision of this normative are rarely resolved in favor of the PTU, because according to Article 75 of the still active Charter of Soviet Rail Roads (federal legal code enacted in 1964) the highest instance for resolving conflicts that involve a railway unit is the Minister of Railways. According to RosUgol, the new draft Rail Road Charter (submitted by the MPS) is also based on this old 'monopoly-power' approach. The use of wagon demurrage payments instead of fines could probably be considered more financially lucrative to PTU's, since these payments are accounted for as rented fixed assets that can be included in the cost of production (unlike fines). But in practice, this would only make sense if the appropriate adjustments are made to the MPS transport tariffs, that now, according to RosUgol, include the charge for the use of wagons by the PTU during the normative tumaround time. Otherwise, the PTU's would be paying twice for the first hours of wagon use - as demurrage and as tariff. Exhibit 11 Penalty Charges Usedfor the Violation of Wagon Handling Schedude by MPS and RosUgol (effective since May 1993) A. Non-compliance with the plan of coal shipment: (1) for traffic planned both in tons and in wagons 162 Rbl./ton (2) for traffic planned in wagons only 811 Rbl./wagon B. Delay of wagons handling (against normative time - for freight owner, and against schedule - for carrier): 1-6 hours 48.66 Rbl./hour 7-12 hours 97.32 RbI./hour 13-18 hours 145.98 Rbl./hour over 18 hours 243.30 Rbl./hour C. Delay leading to failure to forn a scheduled unit train: 6,882.5 Rbl./train The second normative included in the S-year contract and the Joint Technological Process agreement is the scheduled supply of empty wagons by the railway. Naturally, since the overall revenues of a coal enterprise are entirely determiined by the number of coal wagons shipped to customers, PITU's are interested in the adequate and timely supply of empty wagons, because the lack and/or irregularity of wagons makes the mine accumulate the extra coal in storage pits (which doubles the unproductive loading/unloading operations, increases operating costs by 25 %. (Before the liberalization of prices, coal storage at mine added Rbl.5 to the Rb6-7 per ton cost of produced coal (this included additional energy consumption for coal unloading, crushing, ventilation, storage equipment and maintenance). Currently coal storage at mine adds Rbl,000 to its ex-mine cost.), deteriorates the quality of coal and increases its losses caused by spontaneous burning). Fines that the railway has to pay for the violation of the agreed wagon supply schedule have also been raised. But, again, according to the current Rail Road Charter, railways assume only LIMITED LLABILITY for the losses caused by the violation of schedule. Since May 1993 these fines are only 'n Coal Transport Annex 162 Rubles per ton, or 811 Rubles per wagon, or per 6,882.5 Rubles per unit train. And the still existing monopoly power of carrier allows the MPS railways to impose 10-fold direct and indirect charges on their customers in the form of various penalties, wagon-cleaning costs, etc. Unit trains are another hidden burden on PTU's. Officially, it has never been PTU's duty to deliver wagons with coal to the MPS junction station forned in unit trains. 5-year contracts and JTP agreements between PTU's and railways have been and still are compiled and monitored in terms of tons and wagons, not trains. Moreover, RAIL TARIFFS FOR TRANSPORTING COAL DID NOT AND STILL DO NOT DEPEND ON THE FORM OF HANDLING (BY WAGON OR BY UNIT TRAIN). Nevertheless, under the previous system of relationships between PTU's and railways, the latter used to have a wide range of "carrots" and "sticks" to encourage the PTU to form unit trains of coal by themselves (e.g. the railway paid bonuses to PTU traffic controllers for their additional train-forming work; also, most cooperative PTU's would more likely get longer wagon-loading time norms when revising the JTP specifications with the railway). Currently PTU's have virtually no incentives to keep forming unit trains for the railway. Under the current inflation rates, the MPS quarterly bonuses do not even cover the costs of this extra-work done by the PTU's. But still the percentage of coal wagons arranged by PTU's in unit trains is rather high. Assessment of Coal Transport Costs and Rates MPS' cost accounting system does not stratify costs by commodity groups so estimates of the cost of carrying coal must be derived from network wide operational costs on the basis of coal's share of overall traffic on the system. Since the network-wide operational costs for freight traffic in 1992 (all types of traction) totaled in Rb368 billion and the traffic share of coal was at the level of 20%, the operational costs for coal traffic were not higher than Rb73.6 billion (in 1992 the network-wide traffic was 1,967.1 billion tariff ton-kilometers, and the cost of 10 tariff ton-kilometers was Rbl.871). But this estimate has to be adjusted for the following specific peculiarities related to coal traffic: (i) high static wagon loads and above-average gross weight of coal unit trains; (ii) the bulk of coal traffic is carried along the electrified routes with the average traffic cost of 163.5 Kopecks per 10 tariff ton-kilometers, which is 16% lower than the network-wide average (187.1 Kopecks); (iii) coal loading and unloading operations are predominantly done on the industrial lines. These peculiarities decrease the railway cost of transporting coal by 13-14%, thus totaling in 1992 in about Rb63-64 billion instead of the mnaximum estimated level of Rb73.6 billion. Hence, the railway cost of transporting coal in 1992 was 16 Kopecks per ton-kilometer. Consequently, with the total 1992 volume of loaded coal being 322.1 million tons (of which 319.0 million tons on standard gauge) the railway cost of transporting coal was RbI97-200 per ton. In 1992 the network-wide average income rate for coal traffic was 168.86 Kopecks per 10 ton- kilometers. So, with the average length of coal haul being 1,237 kilometers, the total income of railways for transporting coal was Rb66.6 billion. Thus, in 1992 railway clients paid about Rb208-210 per ton of coal carried and 16.9 Kopecks per ton-kilometer of coal traffic. 31 Coal Transpon Annex World Bank Assessment of The Economic Costs of Coal Transport From MPS's own calculations, it is clear that the cost of moving coal is at least 13% - 14% cheaper than other types of freight. At the same time, although coal rates in Russia today are used to subsidize passenger losses, as is all freight, MNPS' coal rates result in a "profit of only 5 %, according to MPS' calculations of coal transport. These calculations, however, are based on average transport costs of the entire MPS system, including the operation of BAM and other less intensively used lines in the MPS system. To assess the current "fairness" of coal rates in Russia, the mission has attempted to estimate the economic costs of moving coal. In doing so, the analysis first attempted to estimate the wagons and locomotives needed to transport coal traffic at 1992 levels, taking into account coal transit times, locomotive speeds, loading and unloading times, average tons per wagon, availability and utilization levels of rolling stock "dedicated' to coal transport and provided a basis for assessing the amount of capital cost, depreciation, and operating costs (including crew costs, maintenance and energy costs) associated with these assets that should be charged to coal transport. To these costs, portions of the railway other costs must be added including: track maintenance; signalling and telecommunications, transport costs, administrative/commercial costs and capital improvements necessary to the preservation of freight operations in the long term. Specific assumptions are detailed in an attachment to this part of the Annex. The results of this analysis are summarized in Exhibit 12 and detailed in Exhibits 13 and 14 at the end of this part. According to MPS analysis, the cost of coal transport is about 13%-14% less than network-wide average operational costs since most coal moves in unit trains, the bulk of coal moves along electrified route with an average cost of 163.5 Kopeks per 10 tariff ton-kilometers, 16% lower than the network-wide operational cost of 187.1 kopeks, and since coal loading and unloading operations are predominantly done on the industrial lines. Accordingly, the railway cost of transporting coal in 1992 was 16 kopecks per tkm. Since the average tariff paid by coal customers in 1992 was 16.9 kopeks per tkm, it would appear that the railways made a "profits' of only 5% on coal transport in 1992. As this analysis is based on average transport costs, it does not really help in assessing the degree to which the rates or costs reflect the costs of hauling coal in the long term. At best the analysis demonstrates that the railway's profit margin is rather slim; on the other hand, it did not need much profit in the past as many capital investments were funded from the budget. To address these questions, as described in more detail in the coal transport annex to this report, the mission undertook to assess the underlying economic costs of coal transport in Russia. The Bank's resulting estimate of economic costs in USS per tkm (at an exchange rate of Rbl200 = lUS$) average US 0.3 cents. This estimate assumes that input costs approximate world price levels except for rolling stock, which are assumed to remain for some time at 60% of world price levels according to an EBRD-financed study of the Russian railway system. At full world price levels, the economnic cost rises to 0.4 US cents per ton-kilometer. This estimate also assumes that 64% of coal flows move on unit trains and 36% on mixed trains and that all coal trains outside of terminals move on electrified tracks. The estimate includes capital costs for track, rolling stock, information systems, and maintenance equipment. By comparison, the average rate of current NMPS tariffs is equivalent to US 0.4 cents. Thus, according to this analysis, existing MPS coal tariffs exceed the econornic costs of coal transport, although only by about 10%. These transport costs reflect only the costs of moving wagons from their originating point to their destination on the MPS main railway network. Loading and unloading and transport from the mines to the loading point and from the network unloading point to the destination on the siding of the ultimate coal customer are not handled by MPS. These costs are therefore not reflected in the base transport rate. The loading of coal into rail wagons and the transport of these wagons from the mines 11 Coal Transport Annex Exhibit 12 Economiic Cost of Coal Transport by Distance Shipped Economic Costs MPS Tariff Levels (September 1993) ____ Segment Cost per tam Cost per tDn Cost per tkm Cost per ton Cost per 1km Cost per ton % above Dusance inUS$ inUS$ inRb in Rb inUS$ inUS$* Economic __________ __________ ~~~Cosas 50-100 km 0.013 0.90 16.75 1,175 0.014 0.97 7% (70 km average) _____ ___ 250 km 0.006 1.40 5.92 1,479 0.0049 1.23 -12% 500 km 0.004 1.98 5.30 2,654 0.0044 2.21 12% 1000km 0.003 3.21 4.36 4,368 0.0036 3.64 13% 1600km 10.003 5.33 4.19 6.709 D.0035 5.60 5 % 2500km 0.003 7.94 3.94 9,859 0.0033 8.22 3% 3500 lm 0.003 10.93 3.81 13,359 0.0032 11.13 2% 5960 km 0.003 21.03 3.74 22.288 00031 18.57 0.1% 1127 k O.D 14.28 56484 0- 1:042 4J74 to MPS is handled by individual coal transport enterprises (PTUs). At the unloading end, industrial sidings and unloading equipment are owned by the customer. Altogether, the industrial coal lines owned by these PITUs total 6271 kmn, over which 6.5 billion tlcin are expected to be carried in 1993 at Rb22tIacn, for a total of Rb143 billion. This total represents a cost of about Rb444 per ton, or US$0.37 at an exchange rate of Rb 1200 = US$1. It should be noted, however, that the PTU ton-kmn figure includes moving coal from miines to preparation plants as well as to MPS lines for shipment. Perhaps, therefore, the total can serve as a proxy for total loading and unloading costs. To assess the reasonableness of the Bank's estimate, the result was compared to coal transport costs by rail in the United States since the US railway system is most comparable to Russia's in termns of traffic levels and geographic size. According to a major US railway, the average financial cost (to the railway) of moving coal over one of its major coal routes is US.8 cents. To translate this cost into economic costs, one should exclude payroll taxes (about 7 %), corporate income taxes, and higher rates of depreciation for existing rail assets. According to the AAR, average US. railway costs are profiled as follows: labor - 38.8 %; payroll taxes - 7.6 %; depreciation - 9 %; fuel - 7 %; loss and damage - 6.7 % and other - 39 %. To be comparable, therefore, one should deduct the payroll taxes, much of the depreciation for buildings and structures, and a large portion of the loss and damage since MPS does not assume much liability for losses. As these alone total 33.3%, it would seem reasonable to assume that US economic costs of coal transport would be at least 30 % less than the finacial costs and perhaps as much as 35 %. If so, a reasonable estimiate of economic rail costs for coal transport in the US would be about US 0.5 cents per tlam. To be comparable to the Bank's assessment of the economnic cost of transporting coal in Russia, the US figure must be further reduced to reflect the facts that (1) coal is transported by diesel-powered locomotives in the US rather than by electric traction; and, (2) the Russian estimiate does not incorporate loading or unloading costs. According to MPS, the network.average cost of electric-powered freight was Rb 1.635 per 10 tkmz while the network average cost of diesel-powered freight was Rb2.5 16 per 10 tkan, a differential of 54 %. If the same differential were applied to US fuel costs, 54 % of the 7 % (or 3.8 %) fuel costs 33 Coal Transport Annex should be subtracted from the US cost estimate. This adjustment would reduce the estimate of economic costs in the US to about US 0.48 cents per tlkm. To adjust for loading and unloading, perhaps the best way would be to add back these costs to the Russian estimate. If we take total PTU costs as a proxy for both loading and unloading costs, it would be necessary to increase the total costs of coal transport by about 7% before any adjustments are made to convert this cost to economic prices. The difference between current costs and the Bank estimate of economic costs of coal transport in Russia is about 2.33 times (0.4 cents compared to 0.16 cents per tkm). If this factor is applied to the storage costs, it could be inferred that one should increase the econornic costs of coal transport in Russia by about 16.3 %. This would make the Bank's estimate of the economic cost of coal transport, assuming full adjustment to world price levels, about 0.47 cents per tkm, and estimate very close to the 0.48 cents estimate of US economic costs, as adjusted above. Another comparison should perhaps be made to China's railway system. A World Bank analysis (1988) found that the national average economic cost for freight was 0.6 - 0.7 cents/tkm, but this figure includes loading and unloading costs and a high percentage of diesel- operated trains. What implications does this finding have for railway rates in general and for the coal industry in particular? First, given the increasing costs of coal production and the vulnerability of coal to substitution for other fuels, Government may wish to take all measures to try to help keep the price of coal as competitive as possible to avoid even greater declines in production. If so, one measure to this end would be: To avoid permitting coal freight rates to increase faster in future than inflation as they already exceed economic costs. Fortunately, the most recent tariff agreement for the railways allows automatic increases tied to the wholesale and consumer price indices, but reduced somewhat by a special formula. In theory, therefore, this policy is already in place (provided the coal seller can overcome the problem of working capital erosion associated with having to pay transport costs .upfront' when freight is taken "on-board," and getting reimbursed sometime later after accounts have cleared from the buyer). Since the Bank's calculations of costs includes capital costs for locomotives, wagons, track rehabilitation of 12,000 km/year and a capital program (including interest) for acquiring more modem MIS systemns, upgrading telecommunications, purchasing track maintenance equipment necessary to tackle deferred maintenance, as well as normal operating expenses, the present level of tariffs should be sufficient to sustain the railways over the longer term, provided the freight revenues from coal and other commodities are actually used to this end. Unfortunately, MPS is not currently in a position to do so as it instead is diverting cash flow to cover passenger losses. To ensure the integrity of the rail freight network, Government should ensure that cross- subsidization of passenger losses by freight traffic cease. In addition, Government should ensure that the right railway investments are made. This means that proposed railway investments should be reassessed and prioritized to meet the most urgent needs of the freight railway system. Moreover, it must be remembered that railway input costs have not yet reached world levels, yet its current tariffs are about equal to the Bank's estimate of economic costs. This means that railway tariffs are likely to rise in future beyond economic costs unless the railway makes every effort to cut costs to match demand and become more productive to counter future increases in energy and other inputs as Russia's economy undergoes further adjustmnents to world price levels. Government should thus ensure that MPS' costs are cut to match demand and to at least maintain productivity levels achieved in the past. Coal Transport Annt Russia's current rail tariffs for coal are close to its economic costs. In the US, however, coal tariffs are almost double the financial costs. In Europe, Australia, and Canada, rail rates for coal are even higher. In terms of the competitiveness of Russia's, industry, however, one must recognize that the average transport distances coal is moved in Russia are far greater than in these countries. Thus, although still below railway costs elsewhere in the world, the current trends regarding rate increases, together with the failure to date of MPS to recognize the need to restructure and rationalize the railway system suggests that the competitive advantage once afforded Russia as a result of having the world's most intensively operated railway system is in jeopardy. Based on experience elsewhere, it is unlikely the railways will be able to solve their problems themselves. Government will have to assist in a restructuring effort or otherwise risk: * further erosion in rail transport service with its attendant cost; * possible predatory behavior on the part of the railway as it attempts to defend its market position; * continued large and unsustainable deficits which pose a serious macroeconomic challenge for the overall economy. Restructuring an industry as complcx as the railways, however, can take years. In the meantime, there are some actions Government could take to protect the competitive positions of all MPS's freight customers: * Reverse the policy of cross-subsidization of passenger losses by freight revenues and instead provide for passenger losses from the federal budget; * Make subsidies for these losses conditional on increasing passenger service cost recovery to 25% by December 1994 and 50% by December 1995. = Cease further investments in (a)rail passenger service, (b) electrification of new and existing lines, (c)new industrial lines, and (d) the Baikal-Amur railway until in depth economic and financial analyses are undertaken for each project. a Cease giving any preferental treatnent to railways for provision of foreign currency, particularly for passenger investments which have low cost recovery and earn little foreign currency. 3 Ensure no high speed rail project is undertaken unless all capital and operating costs are funded by a private investor so that neither Government nor freight customers bear the burden of what is likely to be a costly, uneconomic investment. * In order to separate the policy, planning and regulatory functions of the railways from its operational activities, consider turning the MPS into an operating company under the aegis of another Government body, such as the Ministry of Transport. * Improve cost accounting and develop network flow models in order to determine profitability by line of economic activity. * Initiate a study to determine the degree to which regional railways could be reorganized to permit intra-rail competition. 35 Coal Transport Anner Exhibit 13 World Bank Analysis of Economic Costs of Coal Transport by Russian Railways in USS (assuming Cost of Rolling Stock = 60% of World Price Levels) Capial Capital Capital Track Capital Main Loco Coal Shunting Main Rehabtilton Improvernent Electridty Wagons Locos Locos Costs Program Costs us$ US$ US$ US$ usS us$ Segmen 50-100 14.002.350 550,967 1,052,607 524.306 73.432 4,088 250 Km 16.351,643 550,967 3.759,309 1,872.522 367,161 52,140 500 km 23,997,274 734,623 10,024,825 4,993,393 979,097 278,080 1000 km 21,290.581 550,967 15.037,237 7,490.090 1.468.645 834,240 160 km 27,569,627 550,967 34,370,828 11,984,144 2.349,832 3,050,934 2500 km 23,106.867 372,209 35.802,946 12,483,483 2,447,742 4,965.713 3500 km 20,334.275 257,118 35,086,887 12,233,813 2,398.787 6,812,958 5960km 11,954,633 110,193 25.606,267 8,928.187 1,750.625 8,466.723 Total 158,607,250 3,678.011 160,740,905 60,509,938 11.835.321 24,464,876 Main Loco Shunter Shunter Loco Wagon Track Transport Crew Crew Fuel Main. Main Maintenance (inc.terminals) Costs Cost Cost Costs Costs Costs Costs USS US$ us$ usS USS USS USS 50-100 447 301 2.714 2,129.877 23,144,059 2,428,398 774,774 250 Km 5,698 327 2.947 6,189.931 27,027,133 8,672,848 2,767,052 500 km 30.387 436 3,930 15.771,860 39,664,364 23,127,596 7,378,804 1000km 91,161 327 6,128 23.106.823 35.190,553 34.691,393 11,068,206 1800 km 333,388 379 3,414 52.107,209 45,568,997 55,506,229 17,709,130 2500km 542,823 270 2,432 54,076,627 38,192.637 57,818,989 18,447,011 3500 km 744,479 213 1.920 52.887,448 33,609.904 56,662,609 18,078.071 590 km 925,192 91 823 38,519,593 19,759,448 41,352,141 41,352 141 Total 2,873,373 2,344 24,308 244,789,368 262.157,096 280,260.203 117,575,189 Signalling Admistrative teiecoms Commercial Total Costs/ Costs/ Costs Costs Costs Ton Km Ton US$ US$ us$ US$ US$ Segment 50-100 482,552 277,531 45,428,403 0.013 0.90 250 Km 1,651,971 991.183 70,262,833 0.006 1.40 500 km 3,303,942 2.643.154 132,931.764 0.004 1.98 1000 km 6,607.884 3,964,731 161.398.966 0.003 3.21 1600km 10.572.615 6,343,569 2688021.261 0.003 5.33 2500 km 11,013.141 6,607,884 265.880.572 0.003 7.94 3500 km 10,792.878 6.475,727 256,377.086 0.003 10.93 5960km 7,876,598 4,725,959 211,328,615 0.004 21.03 Total 52,281,582 32,029,738 1,379,599,762 0.003 4.28 Coal Transport Annex Exhibit 14 World Bank Analysis of Economic Costs of Coal Transport by Russian Railways in USS (assuming Cost of Rolling Stock = World Price Levels) Capital Capital Capital Track Captal Main Loco Coal Shuntig Main Rehabitaibon Improvement Eleincty Wagons Locos LocoS Cots Program Costa US$ US$ us$ USS usS usS Segrnent 50-100 19.768,024 777,836 1,754,344 524,306 73.432 4.088 250 Km 23.084,673 M7,836 6.265,515 1,872,522 367.161 52.140 500 km 33.878,505 1.037,114 16,708.041 4,993,393 979,097 278.080 1000 km 30.057.291 777.836 25,062,062 7.490,090 1,468,645 834,240 1600 km 38,921.826 M77836 57,284,713 11.984,144 2.349,832 3,050,934 2500 km 32,621.459 518,557 59,671.576 12,483.483 2.447,742 4,965,713 3500 km 28.707,212 362,990 58,478,145 12,233,813 2.398,787 6,812,958 5960 km 16,877,128 155,567 42,677,111 8,928,187 1.750.625 8,468,723 Total 223,916,117 5.185,572 267,901,508 60,509,938 11,835,321 24.464,876 Main Loco Shunter Shunter Loco Wagon Track Transport Crew Crew Fuel Main. Main Maintenance (Ind terminals) Costs Cost Cost Costs Costa Costs Costs USS USS USS USS USS USS USS Segment 50-100 1.173 790 2,714 3.409,352 23,144,059 2,428,398 774,774 250 Km 14.956 858 2947 10,176,109 27.027,133 8,672,848 2.767,052 500 km 79,768 1,145 3,930 26,099.178 39,684,384 23,127,596 7,378,804 1000 km 239,297 858 6,128 38,370,929 35,190,553 34,691,393 11.068,206 1600 km 875.142 994 3,414 86,704,905 45,568,997 55,506.229 17,709,130 2500 km 1,424,385 708 2,432 90,025,921 38,192,637 57,818,989 18,447,011 3500 km 1,954,257 559 1,920 88.080,207 33,609,904 56,662,609 18,078,071 5960 km 2,428,630 91 823 64,171,234 19,759,448 41,352.141 41,352,141 Total 7.017,605 6,005 24,308 407,037,833 262,157,096 280,260,203 117,575,189 Signalting Adminstratve telecoms Commerial Total CostsW Costs/ Costs Costs Costs Ton Km Ton USS US$ us$ US$ US$ Segment 50-100 462,552 277,531 53,403,373 0.015 1.06 250 Km 1,651 971 991,183 83,724,905 0.007 1.67 500 km 3,303,942 2,843,154 160,176,107 0.005 2.39 1000 km 6.607,884 3,964,731 195,830,143 0.004 390 1600 km 10,572.615 6,343.569 337,654,281 0.004 6.72 2500 km 11,013,141 6,607,884 336,241.638 0.004 10.04 3500 km 10,792,878 6,475,727 324,650,035 0.004 13.85 5960 km 7.876,598 4.725,959 260.522,407 0.004 25.93 Total 52,281.582 32,029.738 1,720,173.152 0.004 5.34 37 Coal Transport Anncr Assumptions Used in The Calculation of Economic Costs for Coal Freiglht Rates in Russia ..Traffkczee. i'; ' '' i ' ' ',' ' i- L , :E S: ' : S: ,:''',>:S '.. . .. . . t ' : _: S ,d'f':"' 'i' :: . . ....."' . :ased on data submitkeA by Kemerovo railways regadigm coal trafic. flows in Seizwbe> l99' lnte ioul coal Ilow's via tfor I992fom MWS afro oanalyss of ' s ov* two millin tons via iinesgment, and.data from Rosu,glebyt, it is e d for puo o:: iyis,;bat 1992'snaol trauspq,o ESows (319 1ilon tons onbroad.gezracka 3r. . -:distriuted- in Russia as shown In the table below, a distrbution that approximates the avenge lenigth of Wau for oa in Ruissi fOr 192 c 3 m Th anproeo thLseeriwa to try tD de themajor istaices of coal ovemen soas to utt nuer o the r1afi might itraerse, te transit tnes. and tot trarou tims o. f wagons ;Ad .::.locomotives. .n tAerms of Actual: tonnage- carriedt 'was. assuned 'that rail wagons.8nd. locomotives wouldbe needei to ensate:for coal lost instransport. It wasWreported thas nuca 5 - 6 tons.per agon are.lost,.w:ich i. somew here etwen 7 9 percen A t21 average ta ass 5pc w.ud b lost in trant. ioa onniage rnOVed 5-10k 1ai5:.: -: WHO: m;.i 2,400rnio '00km 2() D6'8;$; +/'"-X :s00'4 JlIi~n 3 0; 12, 000 tion 1~~~~~~~~~~~~~~~~~: 000km1 6 million wQ0~lo O16hR--001w;-i 15 R7 4Smlllion -6,8t ; ;0 |90ni 3 a~~~~~~~~~~~~~~~~~~~ M# D : 0 ;500km 7* 22millio*i i:: :: :: .ThOOOxnifl6o0 4 : f RR8 R .'' km ' i- 10 m.lio 5, 60mi.o Transit and totalturnaround times were derived by assumngan average transit time of35.7 kms- : 0 per Vhour times the distance t:bed travelled . 6To this, 29 houwere adde for jach la a i 1::unioadixgperationand,dependinupon theimberuofyardsasieto beencountered O s rote, yr2.1-3 hor s-font traisad 19 h our$sfo mie ais It w ed : of coal. was sent in mixed trains: and 64% it unit trais. `As te average distance travelled by a unit train: withou stopping was reported t be 837 kni. the ;ber of: yards encountered for each routewas estimated by ividmdn this nuber into the total distance travelled. Fdor greater asccuracy,: this:uwberwas cross-referenced.with the railway map and description of routes, and * R , ~~~~~~ifre6:. .ii th - i. f in a few cases, ncresed to takeaintoaccount the specific nrumber of marshallingyards along spc: : ic: coal routes as d cri in he man port.-., Wagon Requfr4efiets Assuming 350 days of operis (tere e downtimes oughout the system as a et of snow) and 65 tons per wagon (a conservative assumption since the average coal wagon contans. 66.7 tons of coal according to theemrierovo railway), the required number of wagons loaded per day to service each year's demands for each segment group was calculated. Dividing this number by an assumed 60 wagons per train (the actual average is 70 for the Kemerovo raUlway), yielded the numlber of trains loaded per day, The number of wagons needed to meet this demand was then derived by assuming the turnaround times shown above for each sector, and by allowing for a wagon availability factor of 85%. Coal Transporr Anmen, The capital cost of the calculated wagons required was derived by using EBRD) consultan f. estimates of the economic cost of wagons for Russia. Essentially, their estimate assumes 'thie cost of Russian made equipment is 60% of world price levels. This estimate was Rb2U,000, :i.... i 1990 rubles when the exchange rate was Rbl = US$1.70._ This yields a pnrce of US$42,5.0 per wagon. Current estimates of world prices, per wagon are in the. US$5000- ,000A so the use of a US$42,000 figure is actually between 70% - 80% of world prices. These 'cstS were apportioned to coal traffic by assuming art economic life per wagn of 2 yr.sw the normative operational life of box cars according to WS), a cost of capital of 15% and an' availability factor of 90%. Main Line Locomotive Requirements Based on the above determined number of loaded trains required per fday, 'the number of..", locomotive kilometers required to meet this demiand was calculated.' Itwas assumed that the number of locomotive kilometers for each train. would be double the distance travelled for ea-, train on the assumption that there were no backhauls for coal wagons, i.e. 100% empty returns.: .' Annual requirements assuming daily operations for 350 days per year, and an inefficienct factor of 10%. Then, assuming 153,000 kmflocomotive per year (PS average) and an availabiity factor of 85%, the nuniber of locomotives needed per year-was calculated. WPS data' as' recorded that each locomotive's amnual haulage .averaged 1.1 million gross tkni per .day:n.. travelled an average of 420 km per day. The capital cost of.the calculated locomotives required was derived by 'using 60% Qf tbeworld price levels for a double unit electric. Iocomotive of.US$3.0 million. It was assumed that''a. locomotives would. be electric (W0% of .oal tr'ansported mv onhelectriclines 'ese co were apportioned to coal trafficby assumning an economic life per locomotive of 30 years (w..hi is the normative operaiional life according to MS), a cost of capital,of 15% and an avilabil:,. factor of 85%. Shunter Locomotives The number of shunter wagorLs needed was -derived from the number of days spent by.coal trains in terminals and in yards. To calculate yard time, it was assumed that 65% .of the traint were unit trains and thus would stay in yards an average of 2.13 hours, while 35% of the trains were mixed and would stay in yards an average of 10.17 hours. It was also assumed that the average number of train kilometers moved per hour in yards was 6 lan, the average number of annual kilometers per shunter was 46,000 kam, availability was: 85%, there would be 350 days of operations, an inefficiency factor of 10% and a cost of capital of 15%. Capital costs were:'' allocated as for main locomotives, assuming an economic price per .shunter by EBRI) consultants. This means that each shunter is US$765,000. It was: also assumed that ach shunter would have 'n economic, lif- of. 20. years, which is the operative life of diesel locomotives according to MPS, and of shunters with hydraulic gear'(15 - 20 years), dependi!g. on the engine powver rating (eg. '20 years for. locomotives with electricgear is 25years,. sothe 20 year assumption in the analysis seerms reasonable..: 39 Coal Transport Annex ;,Operating Costs *'t 7Electricity Costs. The costs of electricity needed to rin- coal trains was calculated by'. ,multiplying the total train kilometers required for: ech segment. by the- aerage kwh per trami ki.lometer on MPS of 31.928 by EDRD coultants estimiate of( the' world price of electricity of i0 jUS$0.06 per kwh. For the:record,iP$S':anialysts 'eporte d an average-lwhltrain hou to b:e.i '1,162.18 and 1,004.189 kwh per locomotive trai .our' Diesel Fuel Costs. The costs of diesel fuel needed to:run the shnters (allyard trains are diesel powered) was calclatied by multiplying total shunter1tain kIilometersby the average diesel consumption per train kilometer of,:9.9: liters at, theworld priceof US$0.21 petAliter w ich translated into costs of US$6.27/km' (29.85 liters @: US$0.21 per liter). Tis takes ino. consideration the fact that 59.41kg of diese 4iiel are consmed. per 10,000grosstkm; iththe Iverage calculated gross weight of one coal train being 4372:tons,-and tie resuItant consumtion- of diesel fuel per one gross train kilometer being 29.85 liters-bed on converting kilograms to liters. 'Crew Costs. Costs were calculated sscrw, costs o S60 person, which is about 8 times present ratesa in order toappimtworld price levels.dThe nmultiplication factor ce foma cmparisnof manpower productivit WS toUS railways that showed US railways-were at lea't 2.5etimes more prouive (in ternis of . per employee). Assuning an aftetax income of US crews of Ua$40,000pr c ,:ew ..mme (average salary in the US is about U 6,00o reand dvidiln by '2.5 y'ided2a leve o' US$16,000 per person-. :Locomotive Maintenance, Cstwer .assumdto be ,O5% ofc l cts peroot. :-Wagon Maintenance--. ,Costs were calcuiate4 baing FlBR- consulants' estirate of thc economic cost of wagon m cof Rb20mi,19rbe s.,Usngand eca e ate ':4of Rh! = US$1.7 these costs' werbrougt to':doilr vaus.. Track Rehabilitation.T..rkrehabilitation epeiturefo niret workwere assumed to, be as estimted by b 4onsltants s 12,000 kt therte 'f Rb 100,000 per kIn inr1099 pices'. . Th eretrslae ntodla the rate of :Rbl. - US$1.7 which was used in 'the:EB ra,il- sector surey' report.T: he ependitures necessary were apportioned over ti ioa traffic o a tof co t to to , in 1992, assumiiig an economic life of the rail' replcnts: of 8 . Capital Investment. Based: on an assessment' of pIS 'apital needs for freight traffic by EBRD consultants, it was estimated -thatoPS should.s d about US$5 millionper year:for five years on expendituresr'elatedg: 'to track :0maintennce machinery'- iS systems, including ::":0-0:'wagon: tracking,: telecomunications, 'etc..-'nhe'-figurewas '-assuimed to 1beara cost of capita of 15% and to be depreciated o'vr- a ten ye li f e. ditwaa ss tha tse exenditures .. 0.*-would be apportioned over the.co ffic on artio of coal:tk tototal tlcin 1992,. .-dA: .:: : S : : -.: f:::-i :: -:.; :--.::::: : ::::::::C :: . ::::A; :: : f : :f Coal TransporrtAnnex Transport Costs, Signalling and Telecomrmunication Costs, Administrative Costs and Track Maintenance Costs. These costs were all handled in the same manner. The costs were taken as a percentage of total railway operating expenses (meaning that it was assumed that none of these costs would be borne by the passenger services) according to MPS's own analysis of their percentage costs by category of expense. These costs were then adjusted upward to increase their labor component to a more reasonable level in terms of economuc prices. It was assumed that the labor portion of each was equal to 29% '(on the grounds that labor represented 29% of all expenditures) and that these labor costs should be increased by 8 times to bring them to world. price levels. The resulting costs were apportioned over the coal traffic on a ratio of coal tkm to total tkm in 1992. Sensitivity Analysis The model was also run using all of the assumptions above but increasing the prices of rolling stock fully to world price levels rather than using the EBRD consultants' estimates. This meant that main line locomotives were assumed to cost US$3.0 million, shunter locomotives US$1.08 million and wagons US$60,000. OPERATIONAI STATISTICS SUPPORTING ABOVE ASSUMPTIONS Indicator Kemerovo RR MPS, Russia 1991 1992 1991 1992 Average wagon turnaround time, in days 1.78 1.89 6.54 6.82 Wagon downtime under one freight operation, hours 28.57 29.72 28.68 29.57 Downtime of a wagon at one technical station, hours 4.03 4.16 4.87 4.79 Average daily wagon productivity, ntkm 5729 5447 8287 8424 Proportion of time a wagon in transit is empty 27.1% 29.1 % 34.0% 36.6% .Average daily distance traveled by a loco, in km 379.7 399.8 419.7 419.2 Average daily locomotive productivity, gtkm (000's) 978 1004 1098 1074 Freight train sector traffic speed, all traction, km/h 31.3 31 34.3 35.7 Freight train technical traffic speed, all traction, km/h 41.3 40.8 44.1 44.3 Average freight train gross traffic weight, all traction, t 3295 3300 3093 3089 Average daily distance traveled by a wagon, in km 258.5 266.8 % unit/block trains 34.7% 34.9% % of task performed by electric traction 72.6% 73.2% 4 1 Coal Transport Annex PART II: COAL TRANSPORT ON THE INDUSTRL4L LINES MPS moves coal along Russia's railway network but, for the most part, is not responsible for loading coal at the mine sites or unloading it at power plants, district heating plants, steel mills or other sites belonging to the end users of coal. Nor does MPS transport coal from mines to washeries or coal-concentrating factories (CCF's). These activities are carried out by transport enterprises that operate on Russia's extensive network of industrial lines. The almost sole source of revenues for the PTU's is coal transport. A minor addition for PTU's is providing transport services to other, non-coal, enterprises within the network (see para 2.7); these services are provided by contract, using negotiated tariffs (such tariffs are usually much higher than those for coal, since they include the maintenance and partly capital costs of the non-coal, i.e. underused, track siding lines). Organization of Industrial (Coal) Lines. The former Ministry of Coal Industry (Minugleprom) used to include the Directorate of Industrial Transport which controlled the operations of coal transport units of coal enterprises, the PTU's. The Directorate was responsible for fulfilling coal transport plans industry-wide and had broad authority to control the work of individual PTUs, ranging from setting up normative technical standards (which often differ significantly from those of MIPS) and operating regulations for new equipment and monitoring occupational safety to stopping the coal traffic and firing transport unit managers. Upon the abolishment of Minugleprom and most of the other sectoral ministries in late 1991, its functions were taken over by the newly established state enterprise "Coal of Russia", which was again reorganized in April 1993 into the state enterprise 'Russian Coal Company' (RosUgol). The reformed Transport Directorate of RosUgol has retained its predecessor's functions of technical and operational safety standards, industrial statistics, and (optionally) new equipment procurement and coal marketing/sales. It is not, however, any longer responsible for fulfilling the coal transport plans - this responsibility is now decentralized among individual coal enterprises. PTUs have become autonomous joint-stock companies with the mnajority share of their stocks usually belonging to the Board of Directors of a local coal enterprise. Relationships between the Transport Directorate of RosUgol and individual PTUs are now based on contracts that coal enterprises voluntarily opt to sign with RosUgol for the provision of specific services. The size of the contract is determined individually, most commonly depending on a certain percentage of the coal amalgamation's revenues from coal sales (e.g. Production Amalgamation KrasnoyarskUgol pays 0.27% of its annual revenues as a contract to RosUgol). Actually, only one coal transport unit (P'TU Usinskoye in Kuzbass) has chosen not to sign any contract with RosUgol and to become a totally independent coal transport company (though, according to RosUgol specialists, its perfonnance has dropped significantly ever since, because it could not afford repairing and replacing its fleet at free- market prices, which are much higher than the industry-wide prices negotiated between suppliers and RosUgol). Another responsibility of RosUgol's Transport Directorate is to develop industry-wide specifications for the purchases and capital repair of specialized rolling stock (locomotives, track maintenance equipment, etc.). In general, they differ from those of the MPS mainline fleet. For instance, due to lower traffic speeds, maximum allowable vertical profile of track for coal industry is up to 60% gradient (like at Korkino coal mine near Chelyabinsk), as opposed to 25 % gradient for MPS lines. Similarly, in coal industrial transport maximum axle loads are 32 tons per axle (22 tons in MPS), and minimal track curvature radius is 80 m (350 m in NIPS). PTU/MPS Interactions and Planning. Interactions between individual coal enterprises and MPS junction stations are govemed by a conurac for transportation services signed every 5 years between the PTU and the adjoining MPS railway administration. In the vast majority of cases any individual 42 Coal Transport Annex PTU is geographically confined to deal with onlv one regional railway, such a monopoly being the cause of many serious problems for PTU's. Several coal production amalgamations seem to be happy exceptions from this rule (see: TulaUgol of the Moscow Basin (Moscow and October Railways), GukovUgol of the Rostov Oblast (North Caucasus and Donetsk Railways), ChelyabinskUgol (South Urals and Tselinnaya Railways), VostsibUgol (East Siberia and Trans-Baikal Railways), Dal'vostUgol (Trans-Baikal and Far East Railways) and PrimorskUgol (Far East and Baikal-Amur Railways). Though it might be worth taking a closer look at these examples to compare their experience of operational and financial interaction at the Railway Administration - Amalgamation Direction level, even in these amalgamations each individual coal enterprise and each transport unit deals with only one railway (railway division). Wagon planning starts as a upward process. Every year individual coal enterprises assess their existing/projected coal production capacities AND contracts with customers to deternine their daily demand for wagons, which is then summed up by the PTU that submits its total daily request (with breakdown by month and by 10-day period, as well as by destination) to its MPS counterpart. The railway revises the PTU request; theoretically it must accept it "as is", since coal is a top-priority centralized freight, but in practice railways almost always cut down the PTU requests justifying this by 'underdevelopment of station capacities". Then these revised requests are included into the railway's draft annual operating plan to be approved by the federal Ministry of Railways. After the MPS approval this railway operating plan becomes the basis for signing 5-year Joint Technological Process agreements with PTU's. These MPS plans refer only to the "centralized freight traffic plans," as opposed to the "local freight traffic" plans that regional railways have the right to develop independently. RosUgol is also collecting the PTU wagon requests on a monthly basis and submits them directly to the MPS for operative adjustments of railways' monthly plans, if needed. In case of force majeure conditions (such as major technological failures, forbidding weather, etc.) the parties have to provide a 3-day advance notice to alter the wagon supply schedule. Routine monitoring of loaded coal (by coal amalgamation and by railway) is done by RosUgol in the form of the daily statistics report Form 4- OP that specifies the scheduled and actual amount of coal loaded in tons and in wagons and how much coal was behind schedule because of the carrier (railway) and because of the shipper (PTU). Operational Aspects Technologically, coal is loaded by PTU's for shipment in rail wagons in two different ways: (1) during the extraction process directly from the mouth of mine/pit through the use of specialized transporter equipment arranged in coal-loading complexes (CLC's); (2) from 'coal warehouses' (CWH's) - special coal storage pits near major coal enterprises through the use of coal-crushers, conveyor systems, etc. Both CLC's and CWH's are owned by PTU's. These should not be confused with the system of municipal and/or district coal warehouses, which are local corimmercial entities that distribute coal for decentralized heating and through operate under the supervision of the Coal Marketing and Sales Directorate of RosUgol. Also, the term "coal terminal" is not usually applied to coal-loading complexes (CLC's) of coal enterprises, but rather to specialized coal unloading and transfer facilities at sea ports and other freight transfer locations (equipped with wagon-tipplers). Traffic Flows on the PTU's On average, 11.5% of total coal tons moved along the PTU lines does not leave the industrial network and ends up in nearby power plants. The heaviest internal coal flows are in the Khabarovsk Kray in the Far East (where the Luchegorsky Mine sends annually 4-6 million tons of its coal directly 43 Coal Transport Annex to the nearby Primorskaya GRES Power Plant without using the MPS routes) and in VorkutaUgol that feeds its coal directly to the Vorkutinskaya TES Power Plant. Other important internal flows are in the Kansk-Achinsk coal field (KATEK) in Eastern Siberia. Exhibit 15 Components of Freight Traffic on the RosUgol Industrial Lines in 1993 Total traffic, % 100.0 of which: in MPS wagons - all freight II 39.9 total 60.1 interal all freight 58.0 coal only 5.4 in own wagowns outbound all freight 2.1 wagons ~~traffic I coal only 1.6 Total Estimated Volume: ca. 400-450 million tons. A very substantial internal flow within the industrial lines is unprocessed coal (together with rock) between the mouth of a mine and a coal-concentrating factory (CCF). According to RosUgol experts, this category of traffic accounts for about 50% of total freight traffic along the PTU lines. It is all carried by the PTU fleet of locomotives and wagons. Exhibit 14 gives a breakdown of freight traffic on RosUgol industrial lines by type of traffic. Most typically, CCF's are located near coal mines, so that a wagon of coal rock does not leave the PTU rail network. Major mines and pits have their own CCF's; a cluster of smaller mines is usually served by a central CCF of the coal amalgamation, also located within the PTU network. Still, there are a few distant coal enterprises that have to use the MWS routes to deliver coal from the mouth of a mine to the nearest CCF. In such cases, these flows of coal rock have to be included in the MPS daily operating reports, even though the wagons are owned by the PTU and no loading/unloading of coal takes place on the MPS lines. Apart from this technological necessity to use the MPS routes to carry coal to a CCF, there used to be rather substantial mainline flows of unconcentrated coal from Kuzbass and Vorkuta to Donbass - to utilize the frequently underused capacities of the Production Amalgamation "Yuzh-Koks' - huge coal-concentrating and coke-chemical factories in the Ukraine. It was an economnically affordable practice under the negligible rail transport tariffs and central planning system of the former Soviet Union. But with today's growing transport (and export) tariffs these flows have become virtually negligible. Coal is not the only commodity carried by the industrial transport. In many areas (especially, in such one-industry towns as Vorkuta in the Pechora Basin, Sharypovo, Prokopyevsk, Kiselevsk and Mezhdurechensk in the Kuzbass) the PTU infrastructure provides the overall transport services for the whole range of vitally important bulk and general cargoes, such as food, construction materials, timber and metals. These additional freight flows account for up to 10% of total industrial rail traffic. Some of these non-coal clients located within the PTU network also hire PTU wagons for their own purposes. 44 Coal Transport Anner Roughly 5-10% of the PTU's shunting locomotives fleet is entirely devoted to forning unit trains (this proportion being lower for major open pits, such as in the KATEK, and much higher for small and dispersed mines, such as in TulaUgol of the Moscow Coal Basin): Rail transport operations can be constrained by climatic conditions in a number of coal-mining areas. For example, there have been 5-6-day halts in PTU operations in Vorkuta because of heavy snowstorms (occasional 6-meter snowpack is not unusual there). Tracks can be frozen out in the Kharanor Mines (Chita Oblast) or in Neryungri (South Yakutian Basin), or flooded by a monsoon rainstorm in the Primorskiy and Khabarovsk Krays. Track Characteristics All industrial rail network (except for the Sakhalin Island) has standard-gauge track - 1524 mm. About 15% of track-kilometers are electrified. Double-track lines are built only for large-capacity mines and pits (14% of total route-kilometers). The choice of type of track is done at the very beginning of the mine development, based on the expected coal production rates and required transport capacities, so that no upgrading from single-track to double-track be needed any further. Operating and track maintenance costs for industrial rail transport are covered in 2 different ways depending on the organization of the coal enterprise: (1) for the transport units that are structural parts of the coal enterprise (which is often the case with large open coal pits), their operating and maintenance costs are included in the total ex-mine cost of coal; (2) for the PTU's (which in most cases are autonomous companies within coal amalgamations and concerns) their operational and maintenance costs are covered from the coal enterprise's revenues per ton-kmn of freight (coal, inert cargo and dumnp rock) carried. Investment Aspects The RosUgol Company serves as a 'united customer" for all individual coal enterprises in terms of equipment purchases (being able to negotiate lower prices with manufacturers for wholesale orders). But capital costs in industrial transport have always been covered according to the 'leftover' principle - coal production per sc was and still is top priority. With the current lack of funding purchases of new specialized fleet have become virtually unaffordable. With the dissolution of the CMEA and the Soviet Union equipment from many traditional manufacturers have become unavailable. Huge investments were made in the Ukraine in past to start the production of specially-designed rail switches for industrial lines (shorter modifications). Specific types of equipment (like 105-ton dump-cars 2BC105, formerly produced only in Poland) have not been purchased for already 3 years. Now that similar equipment has started to be manufactured in Kaliningrad (dump-cars) and in Chelyabinsk (switches), no one can afford buying it. Similarly, the most developed industrial locomotive repair capacities were located in Makeyevka (Ukraine) and Karaganda (Kazakhstan). A major supplier of industrial electric locomotives in Russia is located in Lyudinovo (Kaluga Oblast). New construction of tracks is virtually stopped (with one noticeable exception of a new coal field in Kuzbass). The present decline in coal traffic, associated with the low paying capacity of customers, would temporarily allow for providing coal transport services on the existing assets without major investments. But in general the technical performance of industrial rail transport is degrading, so if it were not for the present severe financial constraints, the demand for specific types of new equipment would have been extremely high. 45 Coal Transport Anncr In RosUgol's view, it would be strategically more profitable to invest into a significant expansion of the coal wagon fleet and into the development of specialized coal-accumulating railways stations at transfer points (to keep coal in loaded wagons), rather than to have enormous operating losses through the need to store coal at mines because of the lack of wagons. 46 Coal Transport Annex PART III. The Railway System Russia's railway system mnakes up the bulk of the world's largest and most intensively operated system. Operated as a unified system among all the Republics, traffic density of the whole CIS system is the highest in the world; in 1990 average density was 51 million gross tons and the heaviest sections carried over 250 million gross tons annually and operated 300 trains daily. The Russian trunk-line railway system consists of 85,869 km of railway line operated as an intergrated system by 19 autonomous regional railway administrations under the direction of the Ministry of Railways (MWS). MPS was established by Presidential decree in February 1992 as the legal successor to the former All-Union or Soviet Railways (SZD). Its responsibilities are limited to the ownership and operation of railways within the Russian Federation, two of which were created since the break-up, in Sakhalin and Kaliningrad. The 19 railways within Russia represent roughly 60 percent of the former SZD. Each of the 19 Russian regional railways is a "geographic monopoly," contiguous to another; thus there is no competition for traffic among Russia's regional railways. In addition to the principal system, there are some 151,000 kmn of "industrial" railway lines in the former Soviet Union belonging to individual enterprises. Exhibit 16 lists the former Russian railways by name and shows their relative importance in terms of percentage of the total system's traffic levels. Exhibit 17 contains the main indicators of operating performnance for the Russian railways as a group. Rail Traffic Levels Freight Traffic. MPS' freight traffic, which amounted to 1.63 billion tons on the broad gauge network in 1992, makes up the for-hire, or common carrier, portion of rail freight traffic. Industrial railways that haul their own freight carried 5.789 billion tons, or almost three times the common carrier tonnage, in 1991 (though typically over very short distances). Exhibit 16 Coverage and Performance of Russia's Regional Railways, 1990 - 1992 RUSSIA 19 199 _1992 19 Percent Pcent Pec Percen Percent Reiori of Runai Ton-Km of Rusia Ton-Km of RussiA Ton-Km of Ruaia Pass-Km of Runim Railway Nam Lne Km Total (million) Totl (million) Total (million) ToUl (million) Total OCtDber 10,186 11.64 160,982 6.38 147,793 6.35 119.003 6.05 32,256 12.74 Kaliningrad 759 0.87 2,213 0.10 2.125 0.11 1,154 0.46 MoaOw 9.360 10.69 178,303 7.07 159,508 6.86 130,143 6.62 67,955 26.84 Gorkiy 5,672 6.48 191,926 7.61 176.309 7.58 152.797 7.77 19.167 7.57 Northem 6.027 6.88 170,977 6.78 152,943 6.58 136.594 6.95 11,994 4.74 North Caucasus 6,486 7.41 142,884 5.66 123,207 5.30 86.500 4.40 16,347 6.46 SouthEas 4,444 5.08 144,90 5.74 142,117 6.11 113.065 5.75 13,343 5.27 volga 4.098 4.68 74,292 2.94 70.051 3.01 61,375 3.12 6.664 2.63 Kuibirbev 4,835 5.52 178,457 7.07 166,116 7.14 140.570 7.15 13,965 5.52 Sverdlovsk 7,070 8.08 186,610 7.28 170,227 7.32 152.465 7.75 15,988 6.31 South Urmls 4.937 5.64 258,374 10.24 237.288 10.20 200,930 10.22 10,934 4.32 Wcsa Siberia 4,181 4.78 232,994 9.24 206.601 8.U8 180.769 9.19 12,361 4.88 Kenerovo 1,916 2.19 68,065 2.70 62.425 2.68 55,442 2.82 3,789 1.50 Khswyark 3.167 3.62 112,317 4.45 105,318 4.53 89.385 4.55 5,662 2.24 Eas Sibria 2,665 3.04 132,389 5.25 124.385 5.35 106,200 5.40 6,518 2.57 Tans Baial 3,436 3.92 163.i71 6.47 156,496 6.73 135,928 6.91 5,587 2.21 Far Eas 3,379 3.86 93,037 3.69 84,S51 3.65 71.604 3.64 6,252 2.47 Baikal Amur 3,853 4.40 36,231 2.44 35,970 1.55 30,005 1.53 1,576 0.62 (RAM) Sakhalin 1,072 1.22 2.063 0.09 1,489 0.08 587 0., 87,543 100.00 2,522,915 100.00 2,325.881 100.00 1,966,399 100.00 253,200 200.00 TOTAL ssc:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ............... - r, Source. 47 Coal Transport Annex Exhibit 17 Main Indicators of Operang Performance of the Railway Network of Russia in 1991-1992 Indicators 1991 j 1992 Opeational route length, '000 mn 87.6 87.5 Elecuified routes '000 kmn 38.1 38.4 Diesel trcton routs, '000 krm 49.5 49.1 Freight trffic, billion t-kn 2325.9 1967.1 Freight originated (broad gauge), million t 1946.8 1632.2 Avg. freight traffic density, million t-km/km 26.2 22.5 Passenger traffic, billion passenger-km 255.0 253.2 Passengers origiated, millions 2676.6 2372.3 Average pusenger traffic density, milion pas skm/hn 2.9 2.9 Electrc auction share of freight traffic. % 72.6 73.0 Diesel trction shre of freight taffic, % 27.4 27.0 Avg. wagon stay at one loading/unloading operuion. bours 28.68 29.32 Avg. wagon sty at one technical sation, bours 4.87 4.79 Same, with eclassification 10.71 10.19 Sae, without reclasifcation 2.05 2.13 Avg. freight wagon turnaound tune, days 6.58 6.81 Segment speed of freight tnain, km/h 34.3 35.7 Same, for electric taction 36.7 38.0 Same, for diesl taction 29.8 31.2 Technical speed of freight tnin, km/h 44.1 44.3 Same, for eectric action 45.7 46.0 Same, for diesel trction 40.7 40.9 Avg.gross weight of freight train, tons 3093 3090 Same, for electric traction 3204 3210 Sam, for diel raction 2833 2803 Segment speed of pasenger trains (all types of taction), km/h All raffic 47.1 46.4 Intcr-city taffic 50.1 49.5 Suburban tffic 40.0 39.2 Elecric energy consunpion, kW-hours par 10.000 gros H-n 127.9 131.2 Diel fuel consumption, kg (coal equivalem) per 10,000 gls ts-ktm 57.0 59.4 Unit train shar of originated freight, * 34.7 34.9 Labor productivity, '000 adjusted t-kn per employee 2295.9 1994.9 Unit taffic cost, Kopecks per 10 adjusted t-km 10.38 213.45 48 Coal Transport Anner With some exceptions, rail carries at least Exhibit 18 Rail Traffic Composition 60 percent, and often more than 80 percent, lr of all commodity tonnage transported in the Freight Tonnage, % country (Exhibit 18). Petroleum travels Commodities 1991 1992 primarily by pipeline: agricultural grain and - milling products account for much of the All Freight 100.0 100.0 trucking tonnage, since trucks provide the Biack Coal and Coke 17.9 20.2 first journey from farm to collecting point. B C a1 On a percent of tkm basis, rail's dominance oil 12.0 13.0 is even greater because the average length of Iron and Manganese Ores 4.9 5.5 haul for rail is almost 1,000 km, whereas the average length of haul for trucking is Ferrous Metals 4.5 4.5 barely 30 km. Only for oil products is rail's Tinber 5.7 5.9 tkm share less than its tonnage share. Construction Materials 22.6 21.8 Coal is the railway's single greatest Cement 3.2 3.0 commodity in terms of tlam but second to construction materials in terns of tonnage Grain and Flour 3.6 3.9 (Exhibit 19). Russia's railways carried 319 Chemical and Mineral 3.5 3.2 million tons of coal in 1991, a decline of Fertilizers . l 7% over 1991. In percentage terms, coal represented 20.2% of all freight carried Other Freight 22.1 19.0 compared to 21.8% for construction materials. Exhibit 19 Freight Traffic on Russia's Railways By Conmnodity Passenger Traffic. , , WPS is also the world's Indicator I 1991 1992 1992 as % of largest passenger carrier, l 1991 with over 15 percent of Total Freight Dispatched the world's rail pass-kn (broad gauge), mln.tons 1946.8 1632.2 83.8 in three separate mnarkets: Qf Which: S Intercity passenger Coal 340.3 319.0 93.7 services, for which UPS had one of the longest Coke 10.0 10.9 109.0 average trip lengths in the Oil Products 234.5 211.8 90.3 world and was the largest Iron and Manganese Ores 96.2 89.8 93.3 carrier in passenger volume. Ferrous Metals 89.5 74.1 82.8 Timber 115.5 96.4 83.5 * Suburbanpassenger sermces. Construction Materials 465.5 355.4 76.3 Cement - 62.3 49.7 79.8 * Commuter services, Grah and Flour 69.6 63.3 90.9 which in the past included 6 6 operation of metro Chemical and Mineral Fertilizers 68.8 51.6 75.0 subways, now operated Moved in Containers 26.5 17.5 66.0 by their respective municipalities. Same, As % of Total Freight 1.4 1.1 -0.3p Moved in Unit Trains. % 34.7 34.9 +0.2p Freight Traffic, Bln. tkm 2324.1 1965.5 84.6 Avg. Static Wagon Load, tons 54.18 54.34 100.3 49 Coal Transport Annex The Industrial Railway Network Besides the MPS rail system, some 151,000 km of industrial railways exist throughout the CIS, making the entire CIS track length about 300,000 Iam, more than the paved highway network in Russia. Many industrial lines are internal to the industries they serve, the two largest networks serving the metallurgical and coal industries. Others are shuttle lines between raw materials, plants, or main railway lines. The industrial railways throughout the CIS hauled some 11.4 billion tons in 1990, but the average length of haul was only 7 km. Within Russia, industrial railway transport enterprises moved 393.6 million tons of freight in 1992 and loaded/unloaded 191.6 million tons of freight. Annual revenues from freight traffic operations were Rb6,712 million, from loading/unloading operations - Rb2,083 milllion, and Rb3,153 mililion - from other activities. Freight traffic costs were Rb5,399 million, loading/unloading costs - Rbl,690 mnillion, and other costs - Rb955 million. Unit traffic cost was Rb29.53/10 tlan, and freight handling cost was Rb3.82/ton. According to MPS figures, the overall 1992 profits of industrial railway enterprises were Rb2,357 nillion, out of which Rbl,313 million - from freight operations. The coal-related industrial lines form an integral link between the coal enterprises and MPS. They expect to carry about 6.5 billion net tonne/kms in 1993 (19% less than the record 8 billion tkrn in 1989). As of January 1, 1993, the total length of track was 6,271 km. In addition to transporting coal and dump rock, this network carries sizable amounts of other goods such as construction materials, timber, metals and food. Rail Traffic in Decline Rail traffic in Russia and throughout the CIS has fallen precipitously from its 1988 peak. Between 1988 and 1991, freight volumes are about 26 percent lower, and passenger traffic has declined by 17 percent. From 1991 to 1992 for Russia alone, freight tkm fell an additional 15.4%. Tonnage levels by commodity are shown in Exhibit 4. The overall economic decline has resulted in the decrease of freight traffic, including that of coal. But the levels of decline vary for different railways, directions and segments. For example, while at a number of segments of the North Caucasus Railway it dropped by 3040%, a similar decrease was about 10%-20% for the railways of the Central and Northern parts of Euorpean Russia and only 5-15% for the railways of Siberia and the Far East. These declines reflect the drop in overall economic activity in Russia, but also presage a changing economic role. In broad terms, the shift to a market econonmy in Russia is expected to have a significant negative impact on the relative amount and composition of rail traffic. The expected decline in the rail freight share is attributable both to the general economic conditions and to long-term changes in the amounts and types of traffic carried. This is the clear lesson of the Western economies, ana is the strongly emerging trend in the restructuring CEE economies. Changes in rail traffic will first come from the rationalization of spatial distribution of industry in accordance with economic principles. Major regions of the coal industry, for example, may become uneconomic once market prices are applied for inputs (especially energy and labor). It is also expected that more oil and petroleum products are likely to be transported by pipeline as the industry becomes profit-oriented and greater technological investments are made. In 1991 about 35% of petroleum tonnage travelled by rail whereas the comparable figure in the U.S. is only 2%. Another part of the change will be an inevitable shift from rail to road transport for shorter haul traffic; far more rail traffic is carried over relatively short distance in Russia (nearly 18 % of tonnage moves less than 100 km) than elsewhere, including China or the United States. Finally, recent Bank reports have suggested that Russian agriculture, if restructured along the lines of market-based 50 ; Coal Transport Annex agricultural systems, would greatly shift the location and amounts of grain production, and of resulting grain transport. Other forces will eventually have even more impact on rail demand that these shifts. The growth of competition from an increasingly private and efficient trucking sector, combined with increased shipper choice based on the quality as well as quantity of service offered, will further erode rail transport. Thus, the transition to a market economy will lead to drastic changes in the role of the railway and will require changes in policy, organization and labor force. A total change in management culture will be needed as MPS and the regional railways as currently constituted simply will not function adequately in a market context because they will not have the proper incentives to repond to either customer or government pressure. The consequences of this malfunctioning could be severe, resulting in: (i) poor transport service with its attendant economic cost; (ii) predatory behavior on the part of the railway as it attempts to defend its shrinking market position; and (iii) as was the case in the U.S. and Japan (and is currently the case in nearly all westem European economies), huge and unsustainable deficits which pose a serious macroeconomic challenge for the overall economy. Financial and Operating Performance Declines in traffic levels and increasing costs have rapidly cut into MPS' once steady profits. Despite its virtual monopoly on internal surface traffic, MPS has been caught in an inflationary spiral well known to railways elsewhere: costs go up rapidly, but government pressures, regulatory interventions, or market forces constrain price increases. As a result, financial performance deteriorates. On a consolidated FSU basis, rail freight services, which had always eamed a steady profit of about 6 billion rubles (constant 1991 prices) fell to zero in 1991 and were only RbO.73 billion in 1992 (constant 1991 prices). Passenger earnings, which used to average about Rbl billion, collapsed in 1990, fell to a loss of Rb2.6 billion in 1991, and are continuing to deteriorate steeply. The 1993 federal budget estimated MPS' 1992 passenger losses at Rb53 billion and forecast losses of Rb451 billion for 1993. The suburban commuter rail business lose money, but are operated for social or other reasons. In 1992 the federal budget was amended to provide subsidies to cover the operating losses of commuter services, but generally it is expected that profits generated by the rail freight business will be diverted to keeping the suburban services operational. According to data obtained by the mission (Exhibits 20 and 21), actual passenger losses in 1992 totalled Rb82.6 billion while freight operations earned Rb97.5 billion. 51 Coal Transport Annex Exhibit 20 Transport Cost Analysis of Russian Railways 1992 Data Ton Km % Total Transport % Total Cost in 7 in bilions Railway Costs in 000 Rbs Railway Costs Kopeks/10 Ton Km Fraght Transpon Electric 1,440,776 65% 235,600,449 50% 163.523 Diesel 626,305 24% 132,443,116 28% 251,647 All Types 1,967.081 89% 368,043,565 77% 187,101 Passenger Trnaport Elecuic 128.392 6% 52.187,578 11% 406,471 Diesel 507,904 23% 31,351,669 7% 617,840 Total IntercityPassenger 636,296 29% 83,539,247 18% Suburban 713,036 32% 22,326,218 5% Electric 709.904 32% 20.205,593 4% 284,971 Diesel 3,132 0% 2,120,625 0% 677,013 All Types 253,172 11% 105,865,465 22% 418,156 Totl Railway 2,220.253 100% 474,917,665 100% 214.085 Average cost per 10 ton km . 214Rb Average tariff peo 10 ton km - 300 Rb TOTAL FREIGHT REVENUES - Rb485.5 billion TOTAL PASSENGER REVENUES - Rb23.3 billion TOTAL FREIGHT EXPENSES - Rb3a8.0 billion TOTAL PASSENGER EXPENSES - RblO5.9 billion FREIGHT OPERATING PROFIT _ Rb97.5 billion PASSENGER LOSSES - Rb82.6 billion FREIGHT OPERATING RATIO - 79% COST RECOVFRY OF PASSENGER SERVICE Revenues/Expenses - 22% TOTAL RAILWAY REVENUES - Rb488.8 bilion TOTAL RAILWAY EXPENSES - Rb474.9 biflion PROFIT - Rb97.5 bllion OPERATING RATIO - 97% Structure of Operational Expenditure by Element of Expenditure. MPS and Kemerovo RR MPS, 1991 MPS, 1992 Element of Expenditure in % in % 000 RubIes Kemerovo RR, 1992, in % and '000 Rubles Labor Wage Fund 33.8% 27.8% 132,164.266 30.1% 4.896,837 Electric Energy 8.1% 11.7% 55,743,172 12.8% 2,073,641 Fuel Diesel) 3.7% 7.5% 35,714,073 1.6% 251.809 Materials 3.4% 2.7% 12,561,889 2.2% 355,891 Depreciation (amortization) 7.9% 8.1% 38,651.795 6.7% 1,087,763 Other expenditures 43.1% 42.1% 200,082,470 46.8% 7,625,346 indluding: Repair Fund 18.9% 15.1% 71,763,535 19.6% 2.392,301 SocialInsurance 12.7% 10.3% 48,718,818 11.0% 1.783.980 TOTAL 100% 100% 474,917.665 100% 16,291,287 Coal Transporr Annex Exhibit 21 Russian Railways Financial Results by Type of Traction 1992 Electric Diesel Overall Railway Cost of Cost of Cost of Rank Revenues Expenses Profit/Loss Transport Transport Transport Pax & Freight Pax & Freight Pax & Freight Rb/10 tkm Rb/10 tkm Rb/10 tkm million rubles million rubles million rubles October 1.998 2.535 2.69467 14 40100 41166 -1066 Kaliningrad 5.393 5.97669 18 2227 2043 184 Moscow 1.86 2.397 2.2158 11 45468 42824 2644 Gorkiy 1.327 2.345 1.65204 3 28371 28774 -403 Northern 1.176 2.066 1.98195 6 30813 29157 1656 North Caucuses 2.364 2.33 2.6115 13 28868 27319 1549 South East 1.605 2.008 2.00642 7 27622 23839 3783 Volga 1.918 2.043 2.44313 12 16764 16409 355 Kuibyshev 1.488 2.479 1.87632 5 31575 29191 2384 Sverdlovsk 1.607 2.889 2.11685 9 35296 35477 -181 Southern Urals 1.292 1.954 1.54301 2 32334 32803 -469 West Siberia 1.258 1.686 1.53197 1 29312 29699 -387 Kemerovo 2.25 5.583 2.74856 15 17352 16201 1151 Krasnoyarsk 1.516 2.935 1.85692 14 17673 17509 164 East Siberia 1.801 5.887 2.13933 10 24350 23887 463 Trans-Baikal 1.758 2.255 2.07103 8 29630 29459 171 Far East 3.186 3.426 3.58421 16 28312 28468 -156 Sakhalin 16.757 17.56078 19 3894 3608 286 BAM 4.823 4.283 4.90855 17 16751 16042 709 486712 473875 12837 Network Average 1.635 2.516 of which, freight revenues: 464192 of this, additional revenues generated by negotiated tariffs: 8036 Source: Novosibirsk Railway Engineering Institute and TsNIITEI MPS ;~~~~~~~~5 Coal Transport Annex The operating ratio for Exhibit 22 FSU/Russian Rail Revenues, constant 1988 Rubles freight operations was 0.79 % F while the ratio of revenues to Year GDP Freight Revenue Passenger Revenue per expenses (cost recovery) for Deflator Revenues per tkm Revenues passenger-km passenger services was only 1990 (FSU) 1.087 20,198 5.43 3,574 8.57 22%. The operating ratio for the railway as a whole was j 1991 (FSU) 2.069 33,703 10.01 5,157 13.46 97%, slightly better than the 1992 36.305 12,822 6.52 641 2.53 99% ratio in 1991 but well off the 32% ratio earned in 1988, Overall, therefore, the railway made a profit of RbI2.8 billion, or about US$47 million, hardly sufficient to finance capital investments or even the cost of borrowing capital at levels needed by the railway system or to improve track maintenance. The decline in income after adjusting for inflation makes the situation worse, as shown in Exhibit 22. But while MPS' financial results from railway operations are deteriorating, profits are still being earned from other MPS enterprises. Total profits from the railways and other MPS enterprises were RB60.0 billion; as railway profits were Rbl2.8 billion, profits from other enterprises apparently amounted to Rb47.9 billion. Adjusted for inflation of 17.55 times, the profit of other enterprises was equivalent to Rb2.7 billion in 1991 rubles, compared to freight earnings in 1991 of about Rbl.0 billion. This means earnings from ancillary activities in 1991 were 2.7 times railway earnings, while in 1992 they were 4.4 times railway earnings. An indication of problems to come can be seen in the railway's assessment of asset utilization in 1992 as compared to 1991. Although re-evaluation of the railway's fixed assets may be largely responsible for much of the decline, comparison with the GDP deflator from 1991-1992 of 17.55 times seems to indicate a real decline in asset productivity. In terms of tkm, 1992's level of 2tkm per 1 ruble of fixed assets for freight traffic represented a decrease of 17 times over 1991, slightly less than the GDP deflator. The financial problems are already leading to the well-known railway practice of deferring track and equipment maintenance, calling into question the validity of the financial perfornance of even the last few years, and creating a deepening problem for the future. In 1992, despite a 15.4% decline in traffic, delayed freight deliveries have increased, and non-productive expenses of railways were 13.2 times more than in 1991. Losses from spoiled or missing cargo were 10 times greater than in 1991. After years of stability and a comfortable existence, MPS has reasons for concern as it looks at the future. Cost of Labor and Declining Productivity. Aside from loss of traffic, the outstanding cause of the fall in performance throughout the system was the rapid increase in expenses compared with the lack of increases in rates. The 1992 operational costs of railways were Rb473.9 billion, Rb447.5 billion higher than the 1991 level. According to MPS analysis, the main reason for this sharp increase was the growth of material prices and labor salaries. As shown in Exhibit 21, however, it would appear that the largest source of increase in the rising cost of fuel and electric energy. The percentage of railway costs related to electric energy increased from 8.1% in 1991 to 11.8% in 1992. Notwithstanding the increase in prices for fuel, rolling stock, spare parts, rails, and sleepers, the cost of labor is proving to be an additional burden. On the basis of the 1992 Tariff Agreement between the Russian government, MPS, and the Central Committee of the rail sector's trade union, transport workers' incomes came under a quarterly indexing scheme beginning April 1992. The fiscal impact of this agreement will be felt in 1993, when wages are expected to be two and one half times those paid in December 1992. This development compounds the effect of significant levels of redundant labor on the MPS payroll (besides non-transport employees), perhaps as much as 30-50 percent. Equitable schemes must be developed and implemented if unnecessary employees are to be shifted to more productive activities. Wage indexing makes the task of improving the railways' financial position that much more difficult and restricts management's options. 54 Coal Transport Annex According to MPS data, network-wide labor productivity of traffic-related personnel was 1,994.9 thousand tkm in 1992; this represents a 13.1 % decline compared to a decline in volume of 12.8 %. However, productivity in 1991 was already well below 1989 levels since employment levels have not been reduced despite declines in traffic of 25% from 1988 to 1991. MPS had envisoned the cutting of 50,000 personnel during 1992 as part of a program of cost reduction but in fact the operational staff grew by some 4,600 employees (a 0.4% increase). Labor productivity declined from 22.96 million tkm per employee in 1991 to 19.95 million tkm per employee in 1992, a decline of 13%. Overstaffing and Improved Productivity. The railway system employs some of 2.22 million people, 1.64 million in transport, the remainder in ancillary activities such as clinics, schools, manufacturing and so forth. World Bank analysis shows railway labor productivity to be less than half that of U.S. railways, the most comparable in size and traffic levels to the Russian system. While it would probably be uneconomical for Russia to attain equivalent productivity, it should be possible for MPS to operate its freight service with at least 20 percent (roughly 200,000) fewer employees. Since transport employment levels fell by more than 10 percent from 1990 to 1992, this may not prove so difficult. These problems are compounded by the attitude of the work force: operating discipline for train movements has deteriorated, with four times the number of violations in 1992 as opposed to 1991. Absenteeism increased in 1992 by 12 percent over 1991, and in some divisions of the railway reached 30 percent. Intoxication on the job has also apparently been a significant problem, but little administrative action has been taken to curtail its incidence. MPS' Investment Plans. The financial difficulties of the railways are becoming so serious that increased assistance is being requested from the government. The budget includes support to operations as well as outlays for investments. MPS FY93 budget request included outlays to fulfill the terms of the wage Tariff Agreement as well as an allocation of Rb204.4 billion to cover losses incurred on passenger transport. A request was also made to have the Rb 140.4 billion debt amassed by MPS for the purchase of rolling stock imports may be forgiven and absorbed by the budget. An additional RblOO billion was requested to be made available at preferential rates to replenish current assets of enterprises in the industry. There has been a substantial decline in the production and delivery of railway equipment. MPS requested capital investment budget totalling US$490 million for the purchase of 30 reefer cars, some diesel locomotives, 600 passenger cars, and other equipment from Germany; US$79 mnillion for the purchase of electric locomotives from the Czech republic; and US$200 million for the purchase of a computerized passenger reservations and ticketing system. Many of these funds will be made available through centralized bank credits. An additional US$400 million purchase of French-designed two storey passenger cars is planned to be financed by allocation of raw materials and materials for export. It is expected these will generate US$250 rnillion more foreign exchange for the production of two-story passenger cars for suburban conmmuter services. According to MOF, however, the approved federal investment budget for 1993 includes only Rb 109 billion investment support to MPS. Of this, Rb59 billion was allocated to rolling stock and Rb5O billion for construction. In addition to budgeted support for equipment and rolling stock purchases, the MPS investment plan includes major capital construction projects aimed at network capacity expansion and further electrification of existing lines. Completion of the AYaM spur linking Yakutia to BAM is being contemplated. Construction of an extremely costly high-speed rail link between St. Petersburg and Moscow is underway. While the total construction cost of BAM will probably never be fully known, it was huge; one estimate is US$30 billion. Operation of BAM is so uneconomical that it has caused MPS' entire rate and tariff structure to be distorted. About 8 percent of each railway's revenues is said to support BAM. This means that all freight customers, including coal, are carrying theburden of this uneconomic investment. As financial resources worsen, regional railways will increasingly resist the requirement to cross-subsidize MPS' losing operations. In the future, BAM should be set up as an 55 Coal Transport Annex independent carrier, receiving support from Exhibit 23 Structure of operational whichever level of governmnent (defense or otherwise) costs, by subsector (%) believes BAM's services justify their cost. costs,Cby lrr I SUBSECTOR ||1991 |1992 -COST OF FPREGHT TRANSPORT Locomotives 32.0 36.4 Exhibits 23, 24, and 25 show the details of MPS's Tracks 25.2 21.0 operating costs. Fuel and electricity costs are beginning to increase at rates faster than inflation and Wagons 14.1 12.4 the result is pressuring the railways to raise tariffs. Traffic operations 6.6 6.7 An analysis of MPS expenditures for 1991 and 1992 indicates that fuel and electricity costs have been Passenger traffic 3.9 5.4 increasing at a more rapid increases than labor and Signals, communications, 4.8 4.0 other input prices. In fact as a percentage of total and computers costs for the railways, electric energy has increased Freight and commercial 2.9 2.4 from 8.1 % in 1991 to Electrification and 2.6 2.1 Exhibit 24 Stru cture of I 1 . 8 % electric power supply operational costs, by diesel fuel TOTAL COSTiII 100.0 1 component (%) from 3.7% TOTALCOST ii 100 10 [COMVPONENTS OF 1991 1992 whl %ao l COST ll lwhile labor l - actually decreased as a percent of costs from 33.8% to Labor 33.8 27.8 27.8%. The increasing costs are being passed on by the Electric energy 8.1 11.8 railways to its customers in the form of higher rates. Fuel 3.7 7.5 The rising costs of wages are also sources of financial Materials 3.4 2.6 pressure, although the railways seem reluctant to tackle - -atenals 3.4 2.6 problers of overstaffing. Instead, officials seems convinced Depreciation 7.9 7.3 that traffic levels will rebound and that there is little need to Other expenses, 43.1 43.0 downsize. Despite a decline of 13% in network-wide labor of which: productivity and a planned cost cutting program to reduce - - personnel by 50,000 in 1992, in fact personnel have been - repair fund 18.9 15.0 added. This is unfortunate as studies show that railway - social insurance 12.7 10.6 productivity was about 2.5 times less than that of the United States even before the decline in traffic. The financial burden | TOTAL COST 111000 1100.0 of overstaffing has been made worse by the fact that rail wages are now indexed to the consumer price index which in turn has led to an agreement to increase rail rates on a monthly basis. Exhibit 25 Traffic costs, by type of traction (Kopecks) According to MPS analysis, the cost of coal transport is about 13 % -14 % less than Type of traffic network-wide average operational costs Type of traction Freight Passenger since most coal moves in unit trains, the l (per 10 ton-km) (per 10 pass.-km) bulk of coal moves along electrified route Electric locomotives 163.523 406.471 with an average cost of 163.5 Kopeks per 10 tariff ton-kilometers, 16% lower than Diesel locomotives 251.647 617.840 the network-wide operational cost of Electric trains - 284.971 187.1 kopeks, and since coal loading and unloading operations are predominantly Diesel trains - 677.083 done on the industrial lines. Accordingly, LL 'li i 4 the railway cost of transporting coal in [ ALLTYP 1 418.156 56 Coal Transport Annex 1992 was 16 kopecks per tkm. Since the average tariff paid by coal customers in 1992 was 16.9 kopeks per tikn, it would appear that the railways made a "profits" of only 5 % on coal transport in 1992. As this analysis is based on average transport costs, it does not really help in assessing the degree to which the rates or costs reflect the costs of hauling coal in the long term. At best the analysis demonstrates that the railway's profit margin is rather slim; on the other hand, it did not need much profit in the past as many capital investments were funded from the budget. To address these questions, as described in more detail in Part 11. Freight Tariffs Freight tariffs are set on the basis of the network-wide cost of traffic. The current tariffs are calculated by the same formulas for the entire MPS network, as well as for virtually all other national railways over the territory of the former USSR. There is no variation by type of commodity except to the extent that different types of commodities use different wagon types and weigh different amounts. Transportation of coal in the MPS general-purpose wagons is priced by Tariff Scheme N°1, and in the freight-owner's or rented wagons - by Tariff Scheme N`2. The rates vary by distance. Russian railways do not use separate tariffs for transporting cargo in unit trains. Current tariffs are based on the average cost of transportation by wagons, wagon groups and unit trains. Loading and unloading operations provided by freight-owners are not charged by the railway and their costs are not included in the tariff. The unit of transportation "product' (10 net ton-kilometers) is the basis for calculating tariffs. Usually, unit transportation cost decreases with longer hauls. To this end, since 1974 the tariff is composed of two components (origin/destination operations and traffic operations) so that the total tariff is lower for longer hauls. Proper freight traffic costs (without ancillary operational costs) are subdivided through calculations into traffic and O/D components. The O/D component consists of all costs of traffic-related wagon and cargo hanling operations are origin and destination stations. These O/D operations can include: O/D operatons can include: acceptance and transmittal of carog, assembling and disassembling trains, acceptance and dispatch of loaded trains, examination and routine repair of MPS wagons and containers before loading, capital repair and depreciation costs of MPS wagons and containers for their time spent under O/D operations. All other costs are related with the traffic component. In order to determine tariffs and fees, the total cost is divided into proper freight traffic costs (that are recovered through the collection of carrier fees according to Part 2 of Tariff Instruction No. 1 and ancillary operational costs (that are recovered through the collection of fees for: cargo storage, weighting, shunting of wagons by a railway locomotive on an industrial line, rolling wagons on/off the ferry, provision of cargo slings and tighteners, advance notive of the client about arriving cargo). Bargaining on tariffs that are set by the State Committee for Price Policy is not allowed. Currently railways may negotiate with freight-owners about fees and duties for all ancillary operations and services, except for the freight carrier tariffs, cargo protection fees and mandatory railway loading/unloading operations that are controlled by the Russian Committee for Price Policy and revised as a rule together with tariffs. Among services charged by negotiated tariffs (fees, duties) are: transportation of freight in "closed loop" (round-trip) unit trains with fixed arrival/departure times; transportation with speeded-up delivery; organization of cargo handling at stations not equipped for freight operations; transportation of express cargoes and other freight not included in the monthly plan; freight forwarding; and freight transportation in owned/rented wagons with express return of wagons to the loading/unloading station, etc. More recently, negotiated fees are being introduced for premium services, such as providing 57 Coal Transport Annex wagons or containers on demand, feeding wagons (containers) for loading/unloading at the time specified by freight-owner, i.e. by day of the week, time of day or night, etc. Tariff variations include: 0 Tariffs for transporting cargo in owned or rented wagons and containers are lower than for MPS wagons, since they do not include their maintenance, repair and depreciation costs. Transporting coal in the owned box-car would on average be 13% cheaper, and for short hauls (under 200 km) - up to 20 % cheaper. At the same time, empty back hauls of the owned wagons are charged by a separate fee, since these wagons (unlike the MPS working fleet of box-cars) are not subject to centralized dispatching. Empty hauls of owned wagons are normally equal to loaded hauls and are approximately 2.5-3 times higher than those of the MPS wagon fleet. For this reason, for haul distances over 200 km the total round-trip (loaded + empty) tariffs for owned wagons become higher than for MPS wagons - by 20% for average haul distances and by 27% for a 6,000-km haul. At the same time, transportation in owned wagons can be much more attractive than in MPS wagons, if arrangements are made to load them in the back haul direction. * Feeding wagons along the industrial line by an MPS locomotive is charged at the rates that are considerably lower than fees for the similar work on the MPS-owned line (28.5% cheaper - according to Tariff Instruction N°1, Part 1, Section 36, Tables 8 and 9). The reason is that the fees for industrial lines do not include their maintenance, repair and depreciation costs. Adjustment of Tariffs for Inflation. The base tariff books were established in 1989. SInce then, there has been significant inflation and Government has approved the application of infaltion- adjustment coefficients for rail freight transport. The effective dates and level of coefficient to freight tariffs is shown in Exhibit 26. Exhibit 26 Inflation-adjustment coefficients for railfreight transport tariffs. Coefficient Effective Date Destination 10/8/92 1/1/93 4/21/93 8/1/93 9/1/93 4/10/93 815/93 Russia 81.1 162.2 356.8 785 1,005 ] CIS 1 132.6 265.2 583.4 1,283 1,642 For CIS destinations. The coefficents above were implemented to enable the railway to recover through revenues, the rapid increases in costs experienced by the railway. Given MPS' enormous passenger losses, however, it is possible that MPS is trying to recover more cost increases than justified through freight rate increase. To assess this possibility, the mission compared freight rates to World Bank figures for GDP deflators. GDP Deflator Year to Year 1984 = 1.0 1988 = 1.003 1989 = 1.029 1990 = 1.087 1989- 1990 = 1.0564 1991 = 2.069 1990 - 1991 = 2.069 1992 = 36.305 1991 - 1992= 17.5471 58 Coal Transport Annex For the period 1989 - 1992, the GDP inflator for 1992 over 1989 was 35.28 times. By comparison, during this same period, rail rates increased 81.1 times. Since the increase of 81.1 times, which was in effect at the end of Decemberl992, rail rates have been increased an additional 12.39 times, or 1239%. The mission has no comparable GDP deflator so instead, comparison was made to the consumer price index. According to World Bank figures, the consumer price index for 1993, is as follows: 1992 = 100 1st Quarter 1993 = 357 2nd Quarter 1993 = 635 3rd Quarter 1993 = 1155 4th Quarter 1993 = 1705 Average for 1993 = 963. Given these rates, it would seem that rail rates are increasing faster than inflation in 1993 as well. Starting from August 1993, Government has decided to replace direct revisions of freight tariffs with a system of automatic inflation. From hereon, rail rates will be increased on the first date of each month by a system of indexation that ties the increase to the official index of wholesale and consumer prices for the part period, reduced by a special formula. If so, this would mean that increases in future will not exceed official inflation rates and will gradualy fall behind the growth of prices in this country. Organization, Institutional and Managerial Issues IPS is an independent ministry, reporting directly to the Council of Ministers. MPS has its own budget and policies and is responsible for coordinating all railway operations as well as for determining rail policy, the legal framework governing railway operations, and the planning and allocation of investments including construction of new railways. MPS itself is a coordinating body with a staff of about 2,300. About 2.24 million railway employees, of whom aboutt 1.6 million are actually engaged in railway operations, work for the regional railways, which typically enjoy great independence from the center. As a coordinating agency, MPS (a) defines general system policies and technical standards, (b) sets tariffs, (c) collects and apportions revenues among the regional railways, (d) schedules trains system- wide (up to one year in advance!) (e) coordinates investment planning among the regional railways (f) allocates centrally controlled investment funds, and (g) generally serves as the interface between central government and the railway system. MPS is also the single buyer of rolling stock, track machinery, and other equipment for the individual railways, on a contractual basis with the railways financing their own purchases. At the time of its creation, there was considerable discussion of having MPS become an operating entity reporting to the Ministry of Transport (MOT). On the grounds that the railway system was too important to the country to be made subservient to another ministry, or put on a level with other transport modes, MPS argued that its ministry status should be continued. Although MPS' view ultimately prevailed and it does not report to or through MOT, the responsibility of coordinating rail policies within the overall government transport policy context rests with MOT. MOT's ability to carry out this coordination is severely limited because MPS has no incentive to share information openly about its operations or problems. 59 Coal Transport Annex Organization for a Market Economy. MPS' organization was geared to carry out a centralized plan in a disciplined, quasi-rnilitary manner. The general quality of SZD's technical management was entirely adequate to this task. On a technical basis, MPS has earned the respect of railways worldwide, but current organizational structure is not suited to providing the flexible, efficient, and reliable service required in a market economy. Because traffic was assigned to it, MPS needed no marketing organization and only limited concern with customer service to maximnize its business. This will not suffice in a market economy. Each MPS enterprise has control over its local resources and is designated a profit center with its own revenue and income statement. Each regional railway (a) owns and controls its own locomotives and (to a lesser extent) passenger coaches, (b) controls a major portion of its capital planning and spending, and (c) controls loading of wagons while on its property. While MPS is charged with assigning traffic and developing system-wide schedules, each railway controls its own operation and is less subject to control from the center than is the case in most other railway networks. The system actually operates as a fragmented set of individual, geographic fiefdoms, each focusing on its own interests and none fully aware or concerned about the interests of the system. It is also fair to ask whether MPS actually represents the interests of the national transport network, the regional railways, or its own interests as a control bureaucracy. Despite the best efforts of central planners and organizers, the MPS system actually does a rather questionable job of delivering reliable and effective service to the customer. MPS has only limited ability to control train operations within a given railway; to track wagons, containers, or unit trains throughout the system; or to offer effective and reliable service to higher paying customers. The fact that the entire system was centralized into a single monopoly has also made MPS difficult to control politically. The designation of each regional railway in MPS as a profit center is a form of decentralized railway organization that has vanished from the world's market-based railways. Besides an unusual degree of operating autonomy, this system of regional profit centers has fostered a system of behavioral incentives that cause regional railways to act against the interests of the railway system as a whole. Examples of these questionable incentives include: * Locomotive Utilization. Since locomotives are owned by regional depots, no locomotive can travel farther than its depot boundary. The practice of changing locomotives reduces locomotive utilization, adds unnecessary switching costs, and extends travel times. * Traffic Handling. Revenues are divided among regional railways on the basis of an MPS formula tied to relative work performed. By manipulating this formula, each railway can maximize its profitability at the expense of the system as a whole. Regional railways try to influence the calculation of work on which the revenue is divided. The solicitation and handling of individual types of traffic is also distorted, because the revenues received are not necessarily related to the costs incurred from handling such traffic. * Parochial Focus. Regional railways inevitably focus on their own traffic, and have limited incentive to provide adequate service to traffic which originates or terminates off line. Because they cannot control the service provided by others, they may not profit at all from their efforts. * Capital Expenditures. Each regional railway shapes capital planning according to its own interest, and not that of the system or shippers originating or terminating out of the region. Although MPS tries hard to coordinate investment plans, the system leads to poor asset utilization and higher- than-necessary capital expenditures. Moreover, as financial problems worsen, keeping each railway responsible for its own capital expenditures could lead to the same reluctance to operate a pooled wagon fleet as now being experienced among the republics. 60 Coal Transport Annex Effect of the Break-Up of the USSR. Because of its highly integrated operations, few institutions were more heavily affected by the break-up of the USSR and the subsequent troubled relations among CIS states than was Russia's railway system. The breakup has had a number of adverse effects on rail operations, as well as on managerial areas such as rate setting, revenue divisions, and wagon management. Given so many uncertainties over the future of the CIS and the form of railway management structures, there are no imnmediate prospects for resolution. * Traffic Levels and Patterns Disrupted. Existing traffic patterns, based on traditional sources of supply and consumption, have been greatly disrupted. Much traffic that used to flow as a result of the larger planned economy no longer flows, and traffic will never return to the patterns of the past. * New Borders Delaying Transit Times. Although trains are still scheduled centrally, border formalities have increased and trains continue to be stopped to change crews and locomotives. These disruptions to schedule are costly, both to the railways involved and to the service needs of the shipper. * Inter-Railway Interchanges. An enormous amount of what once was single-line traffic must now transit two or more systems, each with its inevitable delay and processing time. Although only about 17 percent of Russia's traffic originates or terminates outside Russia, over 40 percent of Kazakhstan's originated traffic, and about half of Belarus' originated traffic, terminates elsewhere. About 60 percent of the traffic terminating in the Baltics, and 75 percent of the traffic terminating in Moldova actually originates in another state. The weakest points of all railway networks are always at the borders, and the CIS has created a large number of interchange points where none previously existed. * Freight Wagon Management. The division of rolling stock among republics has put an end to centralized wagon control and maintenance as well as to the former free flow of wagons throughout the system. This breakdown will have a major effect on asset utilization and maintenance costs. The difficulties of coming to grips with this issue were demonstrated at the February 1993 meeting of the CIS Railway Transport Council in Almaty, where reportedly the most heated debate centered on charges for using freight cars and a system for settling those charges between railway administrations. The railways at the council meeting could not even reach agreement on the system for distributing expenses for development of such a system. Even without these problems, Russia's wagon control system is a barrier to efficient operations. Compared with North American and European practice where wagons and locomotives can be located and dispatched continuously and in real time, Russian wagon and locomotive management is well behind. Creating an up-to-date management system requires new computers and software which, while complex to specify for use in the Russian environment, would not be particularly difficult to implement. Such a system, however, is also likely to require several generations of advanced communications facilities and a different approach to wagon ownership and maintenance than now exists. * Disruption in Equipment Supplies. Sources of equipment and spares critical for MPS, which used to be available within the ruble zone, are now only available for hard currencies. Freight diesel locomotives came primarily from Ukraine, passenger coaches from the former GDR, electric suburban passenger coaches from Latvia, and electric passenger locomotives from the former Czechoslovakia. Although declines in traffic currently enable railways to cannibalize surplus equipment in the near term to cover shortages, the disruptions are highly threatening for the longer term. Out of necessity the situation is prompting development of local sources of supply within each republic. 61 Coal Transport Annex Other Problems Physical Infrastructure. There is considerable evidence that the physical state of the MPS infrastructure is deteriorating as financial and operating problems increase. In a study done for EBRD, consultants rated the need to address deferred track maintenance as the most serious problem facing MPS. World Bank missions have noted the deterioration in track quality. The number of kilometers of track subject to slow orders where the normal speed has been reduced because of poor track conditions has increased since 1986, reflecting inadequate replacement of rails and sleepers and inadequate cleaning of ballast. Decreasing funds and the fall in purchasing power are causing serious deferral of maintenance and investment. The rate of locomotive replacement fell between 1989 to 1990, and all evidence points to further declines in 1991 and early 1992. The average age of diesel locomotives has been increasing a clear sign of an impending problem. Environmental Problems. Serious environmental concerns within the Russian railway system are evident, including asbestos in ballast and fuel spillages. On roughly 5,000 lan of line, ballast contains between 0.5 and 1 percent asbestos. Studies indicate that this does not, in most cases, pose a serious health hazard, but the issue warrants independent examination and assessment. Because fuel has always been cheap, a problem that will presumably be corrected through price reforms, careless spillage and overfilling has been rampant at locomotive fuelling facilities. These facilities now have serious groundwater pollution problems. A similar problem may also exist at locomotive maintenance facilities through dumping and spillage of lubricating and insulating oils. Another environmental problem is that Russian passenger trains do not have retention toilets. Although this practice is acceptable in rural areas where train density is not high, it is an increasing problem in more populated areas, and where passenger train density is high. Obsolescent Technology. Russian railway equipment is justifiably known for being robust: it works, under some of the most severe conditions in the world, although much of it is relatively inefficient to operate and expensive to maintain. Given the trying circumstances MPS will face in the coming years, improvements in railroad technology could make a significant contribution to reducing costs, providing better services, and dealing effectively with growing truck competition. Moreover, much Russian railway equipment is obsolete. * Russian diesel locomotives use about 30 percent more fuel than their counterparts in the United States, even though the typical locomotive service cycle in Russia should permit maximum fuel efficiency. If locomotives were brought up to world class levels, Russia could save up to 1 billion gallons in diesel fuel, or US$1 billion equivalent in annual savings, at US$1 per gallon. * The MPS telecommunication system is inadequate even for normal voice communication. Data transmission for a Russia or CIS-wide wagon location and control system like that used in the United States and Europe does not exist. * MPS' management information system (MIS) is not adequate for a railway operation in a market economy, even if the set of data appropriate to such purposes is available and collected. The MIS currently employed by MPS is designed for public accountability and, most important in the FSU, for reporting progress against an annually approved centralized plan. Computer equipment available to MPS is several generations out of date by western standards, and lacks the capacity and speed necessary to handle important problems such as real-time wagon tracking or system-wide passenger reservations. Most important for the immnediate future, existing MIS capabilities do not enable the railways to determine revenue and costs by line of business, consequently inhibiting assessment of real profitability for types of traffic or the value of cost-cutting operating proposals. MPS is in no position to undertake the strategic planning necessary to manage its transition to the structure of rail system needed in a market-based economy. 62 Coal Transport Annex * Equipment available for track maintenance, especially cleaning track ballast, uses excessive track time, does not perform to modem standards, and is not sufficiently mobile. In sum, although quite well managed in an operational sense, MPS is not well organized to respond to customers demands or market-delivery competition. Moreover, MPS has been weakened by changes in the level and structure of economic activity in Russia and the CIS. If the natural resistance to change can be confronted and overcome, technical and managerial improvement is possible. 63 Coal Transport Annk COAL TRANSPORT ANNEX STATISTICAL APPENDIX 64 Coal Transport Annex Key to Sample Dafly Report of Volumes of Coal Loaded by RosUgol on September 21, 1993 (with Cumulative Monthly Total) C hRow 34- CQtyabinskUgo Total 35 - ChelyabilAkUol to South Utra RW A - Day Tota I - JtOSUGOL 36 - ChelyabiaskUpol to Telinna RW 37 - bahtkirUgol to Kuybythv RW I - Sdieduled 2 - RomtvUol to North Caucasus Railway (RW) 38- KraoyukUgol Total la - Tons 3- GukovUSol total 39- o which - Nazarovky Mine lb - Wagons 4 - GukovUSol to North Caucau RW 40 - Bertovsky Mine 2 - Arualy LoAded 5 - GukovUSol to Donetsk RW 41 - Borodiesky Mine 2r- Tons 6 - ObukbobVtsyr 42 - KhkakUSol 2b- Loaded Mimnt Scheduled Tons 7- Total t North C a RW 43 - Total w Krasnoyarsk RW 3 - Underloaded through tRailay's Fault 3 - TulbUgol total 44 - VostbUgol Total 4 - Underloaded tbrough Shipper's Fault 9 - TulaUgol to Morcow RW 45 - of whic - ChezenikhovoUgol 10- TuaUgol to October RW 46 - Azeysky Mine B - Cumulative Monhly Total 11 - Novosibanthracite to West Siberia RW 47- Guainoozerkoye Mide 12 - SeverokuzbassUgol w Kanerovo RW 48- Tunguysky Mine 5 - Loaded 13 - LeninskUgol 49 - VostbUgol to Eaut Sibia RW 5a - Tons 14 - BelovoUSol 50 - ZabaikalUgol to Trans-Bakl RW 5b - Loaded Minus Scheduled Tons 15 - KitelevakUgol 51- DLl'vostUSol Total 6 - Underloaded through Raiway's Fault 16- ProkopyevskUgol 52 - Dal'votUSol to Trans-Bailal RW 7 - Underloaded through Shipper's Fault 17 - KuzbasraezUpol 53 - Dal votUpol to Far Eat RW 1I - luzbaugleobogsdcheniye 54 - Total to Trans-Baik]l RW 19- KmmcukUgol 55 - PrimorskUSol Total 20 - Raspadh kya Mine 56 - PrimnorskUgol to Far Eaut RW 21 - Sibkon 57 - PrimorokUpol to Baikal-Amur RW 22 - Yurhnyi Kuzba 581- Totel to Far Eat RW 23 - Mezbdurechye 59 - YakutUpol to Baikal-Amur RW 24 - Russia Coal' 60 - Total to BaIkul-Amur RW 25 - Total to Kenerovo RW 61 - Xumnetk Basin Total 26- VorkutaUgol 62 - Donetsk Bain Totl 27 - Vorgashortya Mine 63 - Pechom Basin Total 28- IntaUpol 64 - KanakAhinAk Bain Total 29 - Totel to Nortbern RW 65 - LeninsradSlantt 30- KizelUgol 31 - Shurnikbinskaya Mine 32 - VakhnmshevUgol 33- Total to Sverdlovsk RW 65 ; 4-on 3 ; A C Y T K 0 ( I C HA4AIA MECeUA A ) :- ------ w w --- --.- --- - .- . ^ .------------ E : no FPA@UKY : PorPyWEHO W :HEAOrPY- HE OrPY'! 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AAAbHEBOCT.w.A. 1420 21 211 -1209 0 is 4534 o2566 0 39 3AbAAKAAbCKAP-BCEro 43115 681 S0447 7332 0 58 230743 15168 0 137 np,71MoPcKYrolb I8255 283 15038 -3217 0 53 90549 W726 9 96 AAI1bHEBOCT. W.4. 15760 246 12264 -3496 0 53 76996 .1804 9 96 bA4 W.A. 2495 3? 2774 279 0 0 13553 1078 0 0 AAAbHEBOCT.-BCEro 17180 267 12475 -4705 0 71 81530 -4370 9 135 AKyTYrOAb-6AM W.M. 24925 383 27085 2160 o 0 ¶31168 6543 98 105 6AM W.A.-BCErO 27420 420 29859 2439 0 0 144721 7621 98 105 KY31I4FUK, EACCE0H 264917 4006 303663 38746 63 j7 1489683 165298 179 256 AOHEUKH8R 6ACCERH 60645 913 44615 .16030 115 14I 233186 .70039 423 ?04 ne4OPCKWA EACCEPH 69570 1047 74193 4623 0 0 355692 7842 19 138 KAMCKO-A40HCK.6ACCERH 106948 1610 113598 6650 0 0 S64228 29488 0 0 mtHmily P*A GAHEU -- 0 st27 5127 85 O* -3 W a -38 5 8- 8s- - -68 Annex E SOCIAL PROTECTION IN COAL MINING AREAS ANNEX SOCIAL PROTECTION IN COAL MINING AREAS SOCIAL PROTECTION IN COAL MINING AREAS' I. Employment Implications of Restructuring the Russian Coal Industry 1. This report focuses on the increasingly difficult economic and social situation of Coal industry employees and their families in Russia. All studies of Russia's coal sector indicate very high levels of overmanning and labor hoarding. Radical changes in mining practices and the organization of above ground colliery activities are necessary to raise productivity levels towards those found in market economies. This is a process that, however soon it is begun, will continue over a number of years. More immediately, the legacy of central planning and the current high dependence on subsidies (an important source of cash to cover the material costs of the mines) mean that coal production by individual collieries currently fluctuates much more over the year than in market economies. This results in large- scale labor hoarding to meet peak production levels. Commercialization of the mining companies and a running down of subsidies should help reduce this labor hoarding. 2. The implication is that virtually all mines can expect to shed sizeable amounts of labor in the years ahead. It is not just a question of uneconomic mines being forced to close. For the Russian coal industry to have an economically viable long run future, many mines with the high labor productivity levels will need to reduce their employment levels,in many cases substantially. 3. Findings from the field missions demonstrate that, while there is no overt unemployment in the coal industry, there are significant levels of labor under-utilization in all the regions visited. In spite of falling production, the coal industry is not shedding labor. Indeed, in Vorkuta, the overall level of employment in the mines has actually risen over the past two years, despite adverse economic trends. This paradoxical situation can be traced to the employment maximizing objectives of the Association, and, of course to continuing government subsidies. 'This Annex haa been prepared by Mary Canning and forms part of a joint Rosugoll World Bank report. It draws on the work of two World Bank missions which visited Vorkuta, Chelyabinsk,Kemerovo and Moscow in September, 1993 ( Jeni Klugman, Tanya Proskuryakova of the World Bank, Paul Hare, Andrew Newell and Jon Stem, consultants). In Washington, Natalia Koliadins supplied the fiscal and employment data in Section m. We are grateful for the auistnce of Rosugol, and of the Coal Associations of Vorkuta, Chelyabinsk, and Kemerovo. PIER, through Michael Bernstam and his team of Russian researchers provided much vsluable data on Kemerovo Oblast. Table 1. 1992 Employment Figures for the Russian Coal Industry Rlsian 914,331 f.dratdon Total Personnel of 70189B Induetriel Enterpribes Indusal 581.8c1 P6monnrt Laborers 491,841 For Coal 411,74 Production Of which 368,998 Worker for Extraction of Coal Under- 306,116 ground Mines Under- 223.954 ground Above 81,161 Ground Surface 63.S81 Mines Other 80,187 Laborers Offke 90.020 Staff For Coal 72,303 Production Other Offlco 17,717 Staff Non-Industrial 120,035 Paonnel ,21 Personnel of 212,435 Non-industrial Enterprise Conetructien 10S,887 DOWan 2,196 orgwti!atlcns other 91,069 Osw*ations TrYd.JPoo 13.303 sarvina jjlncludes kindergarten, housing, agricultural and other personnel. 2 4. There is a built-in incentive for the mines and their workers to go on unpaid leave instead of being laid off. Mine Directors hoard labor in this manner and workers keep their employment record book on which pensions are based. Unpaid leave is reflected in the workbook as income earning and the worker is still entitled to unemployment benefits at the minimum wage level as well as other benefits. The mission was unable to get accurate figures of those on unpaid leave but in the Kuzbass the numbers were said to be substantial. The local branch of NPG (Independent Mine Workers' Union) are quoting the example of Belovo Mine with a workforce of 2,100 which was operating for most of the summer of 1993 with 400 actually working. 5. A particular problem is the low level of labor productivity above ground in the collieries and the mining support services. Around 70% of coal industry employees are overground workers in the Russian coal industry as against the 30%-40% that would be expected in a market economy given the observed share of deep and open cast mining. 6. In the long run, high levels of output and employment in the Russian coal industry will only exist if over the coming years productivity (and labor productivity) in the mines is greatly increased. Unless productivity greatly increases, the cost of coal production will likely lead to coal losing its market in the long run to gas and other fuels on a large scale. The only way to prevent this contraction would be high and rising levels of subsidy to coal prices. 7. It is generally expected that by the year 2000,the demand for coal could fall by 50% compared with 1990. This could imply employment reductions of the order of 400,000. The key issue is that there will need to be major reductions in mining employment over the next 10-15 years under any realistic projection of the demand for coal. The scale of adjustment required to obtain an economically viable industry operating without large scale subsidy cannot feasibly be made by changes in productivity and wages alone. 8. This general picture is confirmed by the studies that have been done by the Study Missions to Chelyabinsk, Kemerovo and Vorkuta as well as the IEEC project currently being carried out in Rostov- on-Don. For example, in Rostov there are now more mine workers producing less coal than in 1980. Surface workers at the mines have increased by 38% and underground workers by 9% between 1989 and mid 1993. Non-mine workers have increased their numbers by 19% and labor productivity has fallen nearly 20% between 1980 and 1992. These in-depth local area studies confirm the general picture of labor hoarding, overmanning, low productivity and high costs which results in an acute dependence on continuing high levels of subsidy to maintain employment at anything like current levels. 9. One of the most worrying issues is the lack of preparedness by almost all local Coal Association management to deal with the consequences of any restructuring of the coal industry. Our studies have shown a lack of awareness among regional managers or local coal association managers of the extremely fragile economic outlook for coal in the medium to long term let alone any appreciation of the requirement to reduce employment over the next few years if the industry is to provide stable levels of employment in the future. In all of the areas studied, the mines are still recruiting and local vocational schools controlled by the mines are still preparing young people for a job in mine related activities and not much else. 3 10. In all the regions visited, Management's solution to the industry's transition dilemmas is to find new reserves and move miners to work in new mines. For instance in Kemerovo, Rosugol has stated that 6 out of 13 mines in Kemerovo Oblast should be closed in the near future. The team could find little planning or preparation among the local Coal Association management teams to meet the consequences of such extensive mine closure. In Vorkuta,the Coal Association believes that workers displaced by a couple of mine closures will be reabsorbed in other mines. This belief can be traced to the almost total ignorance of the destination of output and of likely trends in demand for its output - explicable in the context of continuing subsidization and the structure of incentives facing the Association. The management of ChelyabinskUgol believe that demand for their output will remain roughly at current levels in the medium term, up to the turn of the century and some way beyond.No major changes in employment levels are foreseen for the next ten to twelve years and they are quite clear that there is no need to put special measures in place as the mines will be safe from mass redundancies. 11. There are also differences between the attitude of Rosugol and of the local coal associations towards potential unemployment. This is well illustrated by the situation in Rostov where RostovUgol's general director has given the assurance that no miner need change his profession and stated that no mines would be closing. This scenario is at variance with Rosugol's estimate of a closure of 3-4 mines in Rostov with a loss of approximately 5,400 colliery jobs and the IEEC (British) estimate that 10 mines might close with a loss of 14,000. Furthermore,if average productivity was raised in Rostov, the British estimate that with the scenario of 10 mine closures, 18,000 jobs might be lost. 12. There are two Miners' Unions: the Official Union and the Independent Union Of Miners (NPG). NPG have been quite proactive in their approach to the threat of mine closures and have organized surveys of personnel at several mines slated for closure.2 The Fund for Social Guarantees for the Miners has also played a role in raising awareness among coal Association employees and their families of the socioeconomic effects of industry restructuring and has been involved in the various mine surveys. 13. There are differing perceptions in Oblast and Raion administrations about the likelihood of labor shedding in the coal industry. In Rostov and Chelyabinsk it appears that the municipalities have recognized that there is a potential emerging unemployment problem. The Employment Services in Chelyabinsk and Korkino are well aware of the consequences of the proposed mine closures and do not share the optimistic view of ChelyabinskUgol Management. In fact they are anticipating the introduction of unpaid leave and short-time work among miners in Chelyabinsk in the near future. In Vorkuta even the municipal authorities appear to share the Association's optimistic view of the future and believe that the main task is to open new mines. 14. The results of the Study Missions show clearly that the problems for social protection are very different in different mining areas. For instance, the problems in Vorkuta which depends for its economic life on the coal mines would be very different from Chelyabinsk where it could be expected that eventually there will be economic diversity. In areas where alternative employment prospects realistically exist in the locality or in neighboring areas, the employment effects from mine closures and workforce 2 Identification and Aseument of the Principal iuues involved in Social Protection at Dimitrova Mine (1993); Questionnaire at Yagunovskays Mine (Dec. 1993); Anzherskays Mine Personnel Structure Survey, Kemerovo, 1994. In all of these surveys/questionnaires the issues of impending lay-offs, unemployment and retrining are explored with the employees of the mines. 4 reductions should be able to be handled without imposing impossible burdens on the Employment Service and local government - provided that they have the time, the financial resources and the management capability to organize their response. 15. Rapid employment reductions in the mines would have a dramatic effect on unemployment levels in mining areas. For instance, the immediate direct impact effect of a 20% reduction in Association employment in Korkino (Chelyabinsk Oblast) would be to raise unemployment by 8 percentage points. To this should be added multiplier effects, although, because of the integrated nature of the Association's activities and the range of other industries in the area, these were thought likely to be smaller than for a comparable West European coal mining area. In Vorkuta, realistic projections of the demand for coal suggest direct employment reductions in the mines of at least 25% and possibly 50%. Because of the remote location and high dependence on mining in Vorkuta, the multiplier effects would be rather larger than in Korkino, resulting in potential unemployment rates for the area of the order of 30%. 16. Reductions in the output and employment levels on the potential Vorkuta scale would present massive problems for the economic viability and social fabric of mining areas, particularly if they were to take place at all quickly. The Study Mission postulated that the Vorkuta reductions be phased in over 5 years for the central projection. Even so, there would still remain serious questions over the long run economic viability of the area. Large scale and long term assistance would be required if the area is to survive and, even with such assistance, the burden on social protection agencies will be enormous. (See Section VI for a discussion of the factors affecting the appropriate speed of adjustment). 17. Fortunately, the potential scale of the problems in Vorkuta is not typical of mining areas. In Rostov-on-Don and in Chelyabinsk, the role of coal in the local economy was much smaller. This not only reduces the impact on the local unemployment rate of mining employment reductions, it also - and more importantly- means that the prospects for economic regeneration in the area are much better. In particular, the greater levels of industrial and employment diversification in these areas mean that unemployed ex-mine workers are more likely to find new employment. In addition, there is more scope for new industry to move into the area and for ex-mining employees and others to build up economically viable small businesses. The evidence from Rostov-on-Don and, to a lesser extent Chelyabinsk is encouraging in this respect. 18. Of course, the more that it is possible for people to absorb and adjust to the economic shock arising from major reductions in coal mining employment in their areas, the lower is the burden on social provision. There is less danger that oblast, rayon and local Employment Service facilities will be overwhelmed by the challenge. Further, not only is the scale of required assistance lower, the type of assistance required is different. In Rostov-on-Don, much more of the Employment Service activities can usefully be given as help in finding and/or training for existing job vacancies in other industries. The scope for useful counselling and training in setting up and running small businesses is also considerable. The possibilities exist for current mining workers to try alternative employments, for instance by working in a nearby town or by taking on a second part-time job. The potential for this type of response is much smaller in areas like Vorkuta. 19. This brings out an important general conclusion. The degree to which mining areas will require large scale and long term assistance from social protection agencies to cope with the shock of mining employment reductions on the potential scale expected varies considerably by area. The key feature is 5 the nature of the local labor market and the dependence of the area on coal. For areas where this dependence is moderate rather than overwhelming, the problems should be manageable. The fieldwork for this study indicates that there are many mining areas where the potential alternative employment opportunities are sufficient to allow the social protection agencies to design and implement an appropriate response provided the changes are properly anticipated and the mining employment reductions are phased in over a period of a few years rather than a period of a few months. However, it is necessary for the Federal Government, Ugol, oblast and rayon officials to begin as soon as possible to make detailed appraisals of the appropriate scale and type of assistance in each mining area. The World Bank and other international agencies should be able to provide useful assistance to the Russian authorities in the design and implementation of these detailed studies of local need if that were required. 20. The most important argument for maintaining subsidies to coal mines on employment grounds is the heavy dependence on mining and the physical isolation of areas like Vorkuta. Another less important case (but one frequently argued and mentioned to the Study Missions) is the possibility that the economic viability of other local industries and the maintenance of their employment may depend on the continuation, at least in the short term on the maintenance of local supplies of coal. Claims are frequently made for such production interdependencies and the claims can often be shown to be incorrect. Further, in the long term, there are virtually always alternative fuel supplies or methods of reducing the transport costs of fuels to the area. Nevertheless, there can be circumstances where early closure of the coal mine could lead to dramatic increases in the production costs of other local industry and consequent employment losses. The social protection issues as well as the economic costs of these must be carefully considered where areas make claims for such interdependencies. If the claims are correct, they can provide an important argument, in the short to medium term, for keeping open uneconomic mines with appropriate subsidy arrangements until alternative and economic sources of coal energy can be made available to the area. 21. The Study Missions have come across two instances of claims for such production interdependencies. The first was the dependence of the local power stations in Chelyabinsk on the type of coal mined locally. The second was the dependence of efficient Northern steel mills on coking coal from Vorkuta. It is not clear that these claims are correct and the alternative supply possibilities should be examined. For instance, it may not be costly to convert the Chelyabinsk power stations to natural gas given the proximity of the gas pipeline. Similarly, the northern steel mills may be sufficiently profitable to be able to pay the full economic cost of the specific Vorkuta coking coals. Nevertheless, the key point remains that it is essential to examine the total employment effect in mining areas to estimate the economic and social impact of mine closures and not just the effect on mining employment alone. 22. It is the view of the World Bank that no mines should be closed until a social safety net is in place to deal with the effects of closure on mine employees, their families and on the local labor market. The process by which the necessary employment reductions are handled by the Associations, mine managers and the various social protection agencies (including the pace of adjustment) is as important as the overall scale of adjustment. This statement is true for the mines where ill-prepared and badly managed labor reduction programs can easily lead to a low productivity labor force either because of a bad age/skill mix and/or because of demoralization. The same statement applies to the Federal, regional and local government agencies responsible for social programs in the mining areas. In this latter case, ill-prepared and badly managed programs will impede and delay economic regeneration, threaten unnecessary problems of long duration unemployment in the area and jeopardize the social fabric. 6 II. The Level of Social Provision provided by Coal Associations 23. Although not unknown, it is unusual for firms in market economies to be the major source of provision of housing and health services or child care. They may provide some of the funding (for instance, paying a share of the costs of health insurance) but they do not provide the services; for the most part,that is left to hospitals and private sector or local authority specialist providers.3 24. In Russia, however a job has meant much more than work for wages. The job is the means to a house, pension, clubs, sports, paid vacations,pre-school education, day care, loans. These benefits are extensive and enough to support families for some time without payment of money wages which, in current circumstances, are frequently paid at least 2 months late. 25. A World Bank Survey of Newly-Privatized Russian Enterprises, conducted in Moscow Oblast and Vladimir Oblast in October 1993 showed that 89% of enterprises offered social services to their employees. These social services represented the typical mix of housing and associated utilities, health and child care facilities, vacation, transportation and farming. With privatization, the ownership of some facilities had shifted to municipal governments, while in many cases, provision of the services themselves remained the responsibility of the enterprise.4 The same type of provision of social services by Coal Associations was found by the Study Missions to the mining areas. In Chelyabinsk, housing accounted for 37% of the Association's social expenditure, up from 19% in 1992. In Vorkuta, housing represented 73% of the Association's social expenditure and around 60% of the population lived in Association accommodation. 26. Table 2, shows the component costs of expenditures of a typical mine in the Kuzbass. Note that in-kind benefit as a percentage of wages increased from 38% in 1991 and 1992 to 42% in 1993. ' In Western Europe, these social benefits are very largely provided by local authorities (frequently with a user fee which meets most or all of the cost) or purchased in the market. However, in virtually all Westem economies, firms provide a small proportion of these benefits, often at either a subsidized price or free. Typically,.these in-kind benefits are received only by a small proportion of the labor force. Housing is often provided at low cost or free to special groups such as the police or agricultural laborers. A particular example of such benefits is the provision of free coal to coal miners, their families and to retired coal miners in the United Kingdom. 'Newly-Privatized Russian Enterprises: A Survey. Leila Webster et al.,World Bank,December, 1993. This Survey produced the following information re the provision of social services by enterprises in two oblasts: 89% of firms sampled offer social services to their employees; 87% provide housing; 60% provide health, child care and education assistance; nearly half provide vacation facilities; about 33% provide utilities, transport, and farming plots. 7 Table 2: Distribution of Expenditures of Volkhov Mine (Kuzbass) 1991-1993 1991 1992 1993 Money Wage 38.5% 45% 35% Social in-kind 14.5% 17% 15% Investment 17.2% 13.9% 1 9% Inputs 29.8% 24.1% 41% Source: Michael Bemstam Research 27. Details of the composition of the Chelyabinsk Association's social expenditures are given in Table 3 below. One particularly noteworthy point is the very high percentage (34% in 1993) spent on a variety of miscellaneous services, such as subsidies to canteens and kindergartens, allowances for holidays and meals. Table 3: ChelyabinskUgol Social Sector Expenditures 1992 1993 (Ist haif) Expenditure Shares (%) Pre-Schools 5.4 4.5 Social and Cultural Facilities 3.1 5.3 Houxing and Public Utilities 19.4 37.3 Fuel for Pensioners 4.2 2.5 Personnel Training 0.1 1.0 Construction 16.6 4.8 Other Expenditures (*) 49.8 34.1 Agricultural Subsidies 2.2 4.3 Total expenditure in Rb rrin 858.2 1390.6 Spending as a percentage of Association Revenues 7.3 9.3 * Other expenditures include: meal allowances, canteen subsidies, vacation grants and kindergarten subsidies. Source: ChelysbinskUgol. 28. The dependence of mining areas on enterprise provision of social services is shown for Kemerovo in Table 4 below. Besides the financial dependence on the enterprises, they also accounted for 59% of construction activity in the area. 8 Table 4: Funding Sources for Social Provision in Kemerovo 1992. (%) Type of Provision Federl Budget Oblast Budget Raion Budget Enterprises Non-Budget Funds. Housing* 17% 83% Education 25% 75% Kindergartens 29% 71% Health Care 2% 19% 77% 2% | Road Building 22% 78% Percentage of people living in housing facilities financed by each institution. Source: Kemorovo Oblawt Administration 29. Provision of a high volume and a wide range of social benefits by the Associations has a number of adverse consequences. It is an important distraction from the business of running a commercial company and uses up scarce managerial resources. It imposes sizeable costs on financially hard-pressed enterprises. In Vorkuta, non-productive outlays represented around 5 % of total costs. Perhaps most importantly, the firm ends up by paying for benefits to its ex-employees and others who are now working for other firms. Thus, in a 1992 sample of Moscow firms, nearly 40% of tenants in the houses owned and rented out by the firms were not current employees of the firms. 30. Although there are these obvious disadvantages,the provision of these social benefits by the firms also provides certain advantages to both the firm and its employees. For the firm, it provides a way of attracting new recruits and rewarding workers who are particularly valuable to it. This is particularly important when unemployment is virtually non-existent and firms are keen to recruit, as was generally the case up to 1990. Even in September 1993, in all the mining areas visited by the Study Missions the number of job vacancies exceeded the number of unemployed and the structure of money wages was compressed. For employees, employer provision provides a predictable way of obtaining access to these scarce and valued benefits. 31. It is not sensible for the Mining Associations to carry the management responsibilities and costs of this social provision beyond some essential minimum necessary for their commercial purposes. However, there are no policies governing the transfer of social provisions to local government and there remain the complex matters of the transfer of social subsidies from the coal associations and the provision of funds to municipalities to maintain services. So, in many cases, (Vorkuta for example) municipalities have refused to assume responsibility for social services because they lack the funds to run them. 9 32. The difficult problem of miners' housing encompasses5 all the financial and institutional problems of divesting the other social benefits, only on a much greater scale. Rapid rates of inflation mean that the rents have fallen considerably in real terms over the last few years. Previous World Bank research suggests that rents in mid-1992 covered, on average, only 3-5% of housing maintenance expenditure. Conversely, they constituted only around 0.5% of the expenditures of urban working households. This is leading to acute problems of maintenance in a housing stock which is generally not of good quality to begin with. Expenditure on housing maintenance by enterprises appears, not surprisingly, to be falling sharply both in Russia as a whole and in mining areas. 33. The October 1993 Survey of Newly-Privatized Enterprises has some very interesting findings in relation to the provision of housing by Enterprises. The survey finds that this issue is the "most critical and knotty problem in the area of social services". 87% of sample firms provided housing for their employees; 57% still owned housing; 28% transferred to municipal governments and 14% transferred directly to employees. "But, regardless of ownership, the financial burden of maintaining housing facilities and providing utilities remained with the enterprises"6 34. The ownership by miners of their houses is not a legal issue. There are several new laws in the Russian Federation which will provide the necessary legal framework for a housing market (i.e. the Law of the Russian Federation on the Basic principles of Federal Housing Policy, passed in December 1992, and the recently drafted Condominium Law ). The maintenance of the housing stock which has become increasingly run down in recent years and the continued provision of the utilities infrastructure will however be major problems in the process of coal enterprise divestitures of social services. Table 5: Expenditures on Housing Stock Maintenance The Kuzbass. 1992-1993 1992 1993 Federal 0 24.2% Enterprise 62.7% 38.5% Municipal 11.1% 11.1% Private 24.2% 24.2% Condo 2% 2% Source: (Michael Bernstam Research) 'Rosugol estimates national housing costs and the total number of apartments that they own based on the following calculations: 35 million s.meters of housing owned by Rosugol, divided by the standard 55 s. meters per person, give 800,000 apartments/houses housing approximately 2 million people. 6 A footnote in the Newly-Privatized Enterprises Survey reads ' Where housing stock had been privatized, employees apparently purchased their flats at a set rate per meter of floor space and the enterprise continued to pay for all maintenance and replacement costs for the buildings and utilities. Several managers reported that efforts to get employees to pay a higher share of housing costs had failed with employees considering access to subsidized or free housing a basic social right". 10 35. Therefore, what appears to be happening at the moment in Russia in general and, in the context of this report, in the Coal Associations in particular, is that an impasse has developed. Tenants may own their houses and apartments, but these resources are in poor condition and neither the municipality nor the enterprise can afford to pay for even the most essential repairs. Reports from various Bank coal missions together with information from the Coal Associations reinforce the view that maintenance of enterprise housing is now almost non-existent. The general problems associated with the low quality of the housing stock are particularly evident in mining areas. In Korkino, mining induced subsidence has caused considerable damage to a number of apartment blocks. In Kemerovo, where 83% of the population live in enterprise housing, of whom 37% lived in Mine Association housing, families live over long-wall tunnels and methane gas fields. Not surprisingly, in these areas the municipalities were refusing to take over responsibility for the housing stock unless and until the enterprises had carried out much of the necessary maintenance work. KEMEROVO OBLAST: MINE HOUSING SETLEMENTS Most miners live in mining setlements, created when the mines were first developed between 50 and 90 yea ago. There has been little if any maintenance or upgrading of the facilities or infrastructure since. These Siberian Settlements are isolated and ame self contained. The homes are single fardly, wood-frame dwellings with outdoor sanitation facilities. Many do not have running water. There is limited if any infrastructure, the roads are muddy, heat is by coal stoves, and electrical wires hang off trees and dip to the gmund. Some of the housing is situated on the methane gas fields and there are accounts of cellars filled with the gas. Other homes are built over long-wall tunnels where the risk of subsidence is considerable. Located in settlements are al the food-stores, medical facilities, schools, sports clubs, and the are also some farmn which gow food especially for the nriners. In some settlements new housing units have been built. These are traditional apartment buildings. There is a housing shortage and this newer type of housing is fairly rare and in high denmd since they feature indoor plumbing. Generations of miners have grown up in these settlements. Their extended families and sposes' famiLies live with or nea them. Leaving the settlement would be difficult for most miners, as miners traditionaly have a strong sense of tradition and community. 36. Seen in this perspective, it is clear that unravelling the current impasse on housing in Russia must involve divestiture to current tenants, to municipalities and to others (condominium and tenants' associations) with a policy for diverting subsidies for maintenance. It will be more difficult to privatize the apartment blocks which make up the bulk of the accommodation (and is probably impossible for the barracks accommodation) because of the acute co-ordination problems associated with the provision of common services in general and maintenance in particular. One possibility worth further examination would be to split management responsibilities from ownership responsibilities. In this way, for some of the housing, ownership might be retained by the municipality or enterprise, but the management responsibilities might be assigned to a private company or a non-profit making association. The role of non-governmental housing agencies should also be considered. They may have particular attractions in mining areas with their traditionally high levels of social solidarity. Finally, to address the urgent maintenance problems, serious consideration 11 should be given to the formation of tenants' and owners associations where responsibility for public area and exterior maintenance programs could be developed using resources from the Employment Fund earmarked for public works programs and community development programs. 37. It is clear that adjustment to mining redundancies will be easier the greater the mobility of labor. This means that the development of a market in rented housing is a priority. Similarly, for municipal housing, it will be important to encourage the maximum development of exchange arrangements for people living in different municipalities. The attractiveness of owner occupation in this perspective increases as housing markets expand and mortgage institutions develop. That raises questions of financial sector reform that will need to be considered in other studies. 38. Rapid and large-scale progress in this area will be difficult. It will depend on the resolution of a number of issues that are outside the control of the mining areas. These include the fiscal problems of municipalities, subsidy arrangements, financial sector reforms, social security reform and others. The existence of these major structural difficulties does not, however, mean that no progress can be made. It points to promoting a wide range of small-scale and local options for divestment and contracting out of social services particularly in housing, but also for the other employer provided social benefits. 39. TariffAgreements. There are two Tariff Agreements for the 2 mining unions in the Coal Industry. The purpose of these agreements is to establish a minimum wage for the miners and to fix hours, conditions, holiday entitlements, sick pay, compensation etc. The Tariff Agreements also specify the particular conditions and benefits for the Communities of the Far North and the separate and differing conditions for a list of Oblasts and Krais which broadly include Siberia and Primorsk and Khabarovsk. As far as we can establish the only difference between these two Tariff Agreements is that the NPG (the Independent Miners' Union) negotiated an Agreement in March 1993 which extends for three years, while the Official Miners' Union Agreement lasts for one year only.7 7The Tariff Agreement sets minimum wage levels for the lowest paid worker. A number of indexes are used to calculate final wages. Wages are determined by type of work and by qualifications as well as by shift; as of January 1994, the minimum was 65,000 r/month, based on a 30 hour work week. Detailed conditions related to signing on/off at the workplace, transport, rest periods of 10 minutes in each hour are factored in as are indices relating to work plan performances and norms, Wages in 1993 were also indexed to minimum wage levels in general and to the growth of the consumer price index. Finally, there is indexation relating to location with Vorkuta and the Northem Communities given a climate indexation of 2.4. 12 SEVERANCE PAY IN RUSSIA Article 40.3 of the Russian Labor Code of September 25,1992, stipulates the following conditions and parameters of severance pay: Compensation for layoff from existing enterprises: (a) Severance pay = one average monthly wage. (b) Additional severanee pay average monthly wage for a period no longer than two months after layoff. (c) Additional severance pay for a third month may apply. For this the authorization of the Employment Officer is necessaiy and the unemployed person must have applied for a job at the Employment Office within two weeks of layoff. (d) The individual must have had an uninternupted period of employment of three rnonths prior to layoff. Compensation for layoff due to bankruptcy or enternrise restructuring (a) Severance pay = one average monthly wage. (b) Three month compensation ( three months' average wages) while registered with the Employmont Office and actively looking for work. (c) An uninterrupted employment record of at least three months. (d) Other compensation can be provided aocording to specific laws and regulations. 40. The NPG have effectively negotiated special treatment for their members by stipulating that funds be allocated from the Federal Budget to facilitate mine closure and provide for infrastructure maintenance, and for job creation. Special measures which will be the joint responsibility of the Federal Employment Services and the Ministry of Fuel and Energy include: a one year notification of layoffs by Management to the Employment Services; the reduction or outright termination of recruitment of new employees; short-time working hours for employees; procedures for transferring workers to other mines; special training and employment programs; a retirement policy of 2 years prior to the pension age, with the retirement pension to be paid from the funds of the mine during the pre-pension period; special retraining allowances paid by the Coal Association to bring miners up to the level of the average mining wage; continued right to housing and to maintenance of housing; right of miners's children to use pre school facilities until they reach school age. 13 41. Health and Safety Issues. There are serious problems related to health and safety throughout the Russian coal industry. An analysis of the injury rate for the entire industry in 1992 makes grim reading: deaths and injuries were widespread and attributable to a range of causes: rock falls, malfunctioning equipment, unsafe mine transport systems, methane gas, fires, suffocation and poisoning. The report for 1992 blames inadequate technological upgrading together with poor maintenance of mine shafts and of aging equipment as the main causes of accidents. Allied to the accident reports are those detailing rising levels of disease - an increase of approximately 50% being reported in 1992, over the 1990 incidence of pneumonia, bronchitis and "vibration disease." Table 6: Incidence of Injuries at Vorkutaugol' Jan-June 1991 Jan.-June 1992 variance l |of injuries. 666 719 +53 7.9% non-fatal injuries 660 716 +56 8.5% fatalities 6 3 -3 -200% accidenti at 517 610 +93 10% underground mines. at open pit mines 119 107 -12 10% ' This infornation was supplied by the Independent Mine Workers' Union (NPG). With regard to the decrease in fatalities, the overall figures are somewhat different: at Vorkutaugol the fatality rate for the four years, 1989-1992 is as follows: in 1989 there were 13 deaths in mnine related accidents; in 1990 there were 22; in 1991 there were 17 and the figure for 1992 overall was 11. 14 III. Adequacy of Policies and Institutions at Oblast and Raion Level 42. A discussion of the social services provided by enterprises should not overlook the fact that most of these services are in fact financed indirectly by subsidies from the federal budget. Another factor to be considered is that enterprises enjoy a tax exemption, determined by the government, for part of their profits. If social assets were to be divested from enterprises to local government a problem would exist as such a divestiture would have to be accompanied by the simultaneous reallocation of financial resources from enterprises to the budgets of local administrations. Furthermore, the Ministry of Finance has no clear idea of the share of subsidies spent by enterprises on social provision. 43. There is a Presidential Decree "On the System of Minimal Social Guarantees", December 1993 which covers the provision of: (a) the minimum wage; (b) minimum old-age pension; (c) the provision of social insurance benefits, to include unemployment benefit, sick pay, maternity leave, childrens' allowance, welfare benefit; and (d) a minimum package of free health care, and access to education and culture. The financing of these benefits will come from both federal and regional budgetary funds: the Pension Fund, the Social Insurance Fund, the Fund for Medical Insurance, the Employment Fund and other funds which are designed for the social protection of the population. 44. The financing of these benefits is to be a joint responsibility of the federal government and regional governments. It was intended that the 1994 budget should address the financing of this law on minimum social guarantees. However a mechanism for financing social provision has yet to be established and there is no clarity about responsibility sharing between federal government, local governments and enterprises for the divestiture of social services. 9 During 1993, the Ministry of Finance shifted the responsibility for financing social provisions to the regional level. Meanwhile, extra-budgetary funds are experiencing problems with the redistribution of resources between the regions. This issue could create problems for the coal regions when closures of the coal mines might result in both regional budget and Extra-Budgetary shortfalls. 45. There are now legal provisions which allow the transfer of kindergartens, some other educational facilities and urban services to the municipalities. Local Governments are becoming the passive recipients of social services divested from enterprises without the provision of funds to maintain and deliver these services. An added problem is the decreasing taxation base which follows from enterprise restructuring. Even to cope with the provision of the most basic of services is in many case beyond the resources of many municipalities and is posing major problems. The central issue appears to be a lack of funds at the raion level; the lesser ability of municipalities to obtain subsidies from Federal and oblast governments than enterprises; the lower earnings levels of social provision staff in municipalities relative to people doing the same job in the enterprises; and last (but by no means least), resistance to paying higher prices for the services. 'According to the new Constitution, the decisions of the Federal Government are not mandatory for Regional Government, if such decisions are not also supported by appropriate financing. 15 46. In spite of the lack of funds, kindergartens in many places visited by the Coal Missions had already become (or were in the process of becoming) the responsibility of the municipality (Vorkuta, Chelyabinsk) and in places some housing had too, most notably in Rostov. In Chelyabinsk Oblast, the municipalities, in addition to kindergartens, had taken over responsibility for most of the water supply, garbage disposal and partial responsibility for the vocational schools. 47. The Study missions examined the capacity of Oblast and Raion Social Protection and Employment Services (programs, staff, offices, and equipment) to cope with rising numbers of unemployed. This analysis would reflect the situation were any large industry to restructure in these areas, although some observations are particularly relevant to the requirements of those laid off from the mines. The general conclusions from the four regions visited are that the existing resources would be unable to cope with any substantial increase in unemployment. 48. The groups who would be most at risk in the event of any coal restructuring would be mine pensioners, young people who might have found jobs in the mines and women who continue to make up the largest proportion of the unemployed and who are being laid off first from surface and ancillary jobs in Coal Associations. It is expected that this list will also be expanded to include the long term unemployed who have exhausted Unemployment Benefit (of whom there are very few at the moment)"0 There is, as yet, no fiscal framework to address the needs of these groups generally in the Russian Federation, practical programs are not yet well developed and the financial resources to execute them will be inadequate given the present arrangements for the extrabudgetary funds. 49. Social Assistance Benefits: Cash benefit packages consist in the main of pension benefits, family allowances and unemployment benefits. Sick pay, maternity benefits and family allowance to "working" mothers with children under 18 months are paid from the Social Insurance Fund."t These benefits are administered by the enterprises. All these benefits, except the birth grant are related to actual wages (100%). The Birth Grant is equal to five minimum monthly wages. As most social benefits are financed on the regional level, the profitability of the enterprises and the size of the wagebill are important for the financing of social assistance benefits. For the coal regions both of these factors might have a negative impact on the financing of social benefits. Given that 23.5% 12 of the Coal Industry enterprises are unprofitable, both the amount of the profit tax and payroll contributions are questionable. 50. In the Coal Regions visited by the World Bank Missions, the concept of a publicly provided social safety net is a novel and as yet largely undeveloped service. Only over the past 18 months have local authorities begun to finance and deliver in-kind and cash assistance to the needy. The staff 1' Those unemployed who have exhausted benefits after 12 months are eligible for 'Material Assistance'. This is a scheme whereby the minimum wage can be paid, together with a lump sum of two minimum wages in case of hardship. This assistance is entirely at the discretion of the Employment Service Officer and applies only to those who have registered as unemployed and have signed on regularly at the Employment Office. The assistance lasts for six months. Because unemployment is such a new phenomenon in Russia,it is difficult to find out how this scheme is working at local levels. " For a description of Social Assistance Benefits and a discussion of policy issues and options, see Russia: Social Protection during Transition and Beyond. World Bank. February, 1994. "2State Tax Service Report for the first quarter of 1993. 16 involved appeared to have done a commendable job with limited resources for organizing and financing programs However, the Missions found that at local level the Social Protection administration is uncomfortable with their lack of finance to cope with at risk persons other than those who are targeted inside the existing system (and at current levels) while the Employment Services are concerned that budget to pay benefits may run out at oblast level thus requiring fiscal transfers. 51. Pensions. Underground miners are eligible for old-age pension benefits at the age of 50 years for men and 45 years for women, if they have had at least 10 (7.5) years of underground service after 20 (15) years of total service. These pensions are paid by the Pension Fund. Non underground miners are eligible for pensions at age 55 (men) and 50 (women), if their service period at the mine was at least 12.5 (10) years, and if they have total service period of 25 (20) years. Pension benefit is defined as 55 % of wage and it is raised by 1% for every full year of service beyond the required service period. For those who work in the Northern Regions, pensions are subject to the northern coefficient increase. 52. The share of the working old-age pensioners in coal regions is higher than the average in Russia: Russian Federation 23.0% Komi AR 26.1% Rostov Oblast 23.5% Kemerovo oblast 24.9% Chelyabinsk Oblast 27.2% 53. Inflation and the increasing costs of all the normal benefits that are continued for pensioners mean that many miners choose to continue working and draw their pension and their salary. Rosugol estimates that approximately 27% of all coal employees are of pensionable age. Only Kemerovo oblast has a share of pensioners receiving maximum pensions at a higher than average Russian level - 53% compared to 22.8%. Other regions are far behind this threshold. Thus, only 9% of Komi Republic pensioners get maximum pensions, for Rostov oblast the figure is 10.9% and for Chelyabinsk only 2.8%. The reason for this could be that pensioners who are more financially secure are moving to more hospitable climatic regions. 54. Unemployment Benefits are paid to those who are registered with the Employment Service; recipients are eligible for benefits for a period 12 months. Individuals working in the Northern Territories are entitled to special provisions if they become redundant which include a payment of average wage for six months after layoff and one month's extra severance pay. High inflation has meant that in 1993 the replacement rate for unemployment benefit was 11.3%. During the three month period between being laid off and receiving benefits it is calculated that the real value of benefits to an unemployed individual can decrease from 75% to 30% of average wage. This unsatisfactory situation may improve somewhat in 1994 as a new decree on the mechanism for calculating the average wage which promotes retrospective indexation of average wages takes effect. 17 Table 7: Employment Fund Budget (R. billion) Year 1992 Q.1,1993 Six m.,93 Nine m.,93 Payroll contributions 35.00 45.80 141.49 309.18 Local budgets 0.12 0.03 0.87 0.23 Federal budget 0.05 0.14 0.44 0.95 Other revenues 0.64 1.27 3.97 14.02 Voluntary contributions 0.20 0.00 0.05 0.14 TOTAL REVENUES 36.01 47.24 146.82 324.52 Training/retraining 0.28 0.47 1.45 2.68 Public works 0.03 0.02 0.25 0.59 Unemployment benefits 1.86 3.35 10.05 20.74 Early pensions 0.00 0.28 0.88 2.69 R&R 0.00 0.03 0.11 0.40 Transfers to the FES n,a. n.a. n.a. n.a. Job creation 1.94 4.55 10.21 41.69 Others 1.31 3.35 11.92 28.87 Operational costs 5.11 6.05 18.88 39.82 TOTAL EXPENDITURES 10.53 18.10 53.75 157.00 SURPLUS(+),DEFICrr(-) 25.48 29.13 93.07 167.51 55. Employment Fund. The Employment Fund is financed by payroll contributions from all enterprises. In January 1993 contributions increased from 1% to 2%. Contributions are collected at the raion level. Of each Rb 100 collected, the raion keep Rb 45 and transfers Rb 55 upwards. The Oblast keeps Rb 45 and transfers Rb 10 to the Federal Employment Services. According to the latest unemployment data, as registered unemployment is so low ( i.e. 0.3% in Rostov Oblast to 1.25% in Komi) the provision of benefits together with active programs such as training and public works amount of approximately 25% of the Regional Employment Fund. In fact, in two cases out of the four regions under discussion, the provision of benefits and programs amount to less than the cost of operating the Regional Employment Service. Hence the surpluses of the regional Employment Funds are substantial: 31.6% in Rostov; 53.2% in Komi; 73.9% Chelyabinsk; and 87.0% in Kemerovo. The corresponding figure for the Federal Employment Fund is 51..6% Table 8: Structure of the Revenues & Expenditures of the Employment Fund (Percent) % in Total Year 1992 Ql, 1993 Six m, 93 Nine M.,93 REVENUES Payroll contributions 97.20 96.96 96.37 95.27 Local budgets 0.34 0.06 0.59 0.07 Federal budget 0. 15 0.29 0.30 0.29 Other revenues 1.77 2.68 2.70 4.32 Voluntary contributions 0.55 0.01 0.03 0.04 TOTAL REVENUES 100.00 100.00 100.00 100.00 EXPENDITURES Training/retraining 2.63 2.59 2.70 1.71 Public works 0.28 0.13 0.46 0.38 Unemployment benefits 17.67 18.51 18.70 13.21 Early pensions 0.00 1.55 1.63 1.71 R&D 0.00 0.17 0.21 0.25 Transfers to the FES 0.00 0.00 0.00 12.44 Job creation 18.43 25.13 19.00 26.55 Others 12.44 18.51 22.18 18.39 Operational costs 48.54 33.42 35.13 25.36 TOTAL EXPENDITURES 100.00 100.00 100.00 100.00 18 56. However, even without any growth in unemployment if all those currently out of work were registered and if benefits were upgraded to the subsistence minimum, calculations show that in Chelyabinsk Oblast payment of these benefits would increase expenditure to R 0.72 billion and reduce the surplus in the Employment Fund by 20% on average. At present, unemployment benefits in mining regions are about 41-47% of the average Russian subsistence minimum. Overall, an increase in the unemployment rate of between 3 and 5% would result in the wiping out of the regional Employment Funds. Table 9: Employment Funds of the Main Coal Regions (R.billions) REVENUES Total Payroll contribution Others Payroll contribution Others Surplus (+), def.(-) Russian Fedeation 324.50 309 18 14.02 95.28 4.32 167.50 Komi AR 5.85 5.71 0.13 97.61 2.22 3.11 Rostov oblast 8.67 7.88 0.78 90.89 9.00 2.74 Chelyabinskoblast 9.20 9.16 0.04 99.57 0.43 6.80 Kemerovo oblast 9.70 9.50 0.23 97.94 2.37 8.44 57. As has already been discussed there have been no lay offs in the mines. In Kemerovo, the Employment Services have calculated that the Fund would move into deficit in one month if there is one mine closure although data were not available to support this claim. However,it is possible easily to calculate the rate of unemployment in each area at which the Employment Fund would move into deficit. For example,in Vorkuta the Employment Fund was in surplus as of August 1993. The Mission calculated that 1,100 unemployed miners (equivalent to the closure of the smallest mine) would totally deplete the Fund's monthly revenue. Calculations in Chelyabinsk showed that the Employment Fund would move into deficit if the unemployment rate exceeds 3.84%. Table 10: Expenditure of the Employment Funds of the Main Coal Regions EXPENDITURES TotAl Tr./retrain. Public works Unempl.benef. Early ret. Transf.to fed.budg. Job creat. Oper.costs R. billions Russian Federation 157.00 2.68 0.59 20.7 2.69 19.53 41.9 39.8 Korni AR 2.74 0.06 0.02 0.38 0.01 0.57 0. 0 0.45 Rostov oblsat 5.93 0.07 0.01 0.24 0.04 0.52 3.83 1.19 Chelyabinskoblast 2.40 0.07 0.03 0.52 0.05 0.11 0.35 1.23 Kemerovo oblast 1.26 0.02 0.00 0.29 0.05 0.19 0.01 0.68 EXPENDITURE STRUCTURE Total Tr./retrain. Public works Unempl.benef. Early ret. Transf.to fed.budg. Job creat. Oper.costs Russian Federation 100 1.71 0.38 13.18 1.71 12.44 26.69 25.35 Komi AR 100 2.19 0.88 13.87 0.29 20.84 29.20 16.42 Rostov oblast 100 1.15 0.19 3.96 0.66 8.79 64.59 20 07 Chelyabinskoblast 100 3.08 1.21 21.58 1.92 4.38 14.75 51.25 Kemerovo oblast 100 1.51 0.00 23.17 4.13 14.76 0.71 53.73 19 58. These calculations ignore administrative'3 costs and also assume that all the revenues of the Fund are devoted to the payment of benefits and that no other programs (Training or Public Works) are being financed by the Fund. It is of concern that the financing of Unemployment Benefit will eventually squeeze out pro-active employment policies and programs. 59. Employment Services. In Russia, the payment of unemployment benefits and the delivery of placement services, counselling and other proactive employment programs is the responsibility of the Federal Employment Service which has a core staff of about 150 persons with approximately 21,500 staff in local employment offices throughout the Federation. At the current official rate of about 1% unemployment,"4 this gives a client staff ratio in the Employment Services of 1:3. If however, there were to be any significant increase in unemployment, it is reasonable to assume that the Employment Services would be seriously stretched. Table 11: Ratio of Staff to Unemployed in Employment Services in Selected Countries, 1988 Ratio Austria 1:33 Germany 1:37 Poland 1:225 Portugal 1:120 Sweden 1:9 Russia (Dec. 1992) 1:3 (Dec. 1994) 1:232 United Kingdom 1:98 Nle: slsff c.tatine.s for Russia were blaed on 518,0(X regigtered unemployed and 21.500 field staff, as of December 1992. Dccember 1994 etmates am bas on a projection of 5 milliom unemployed. Source: Fretwell (1992) 60. The office of the Employment Service in Vorkuta may well be overwhelmed by any significant increase in the number of jobless applying for income support. At present low levels of unemployment, the staff-unemployed ratio is approximately 1:40 and would quickly fall to at least 1:200 under future scenarios. Much the same comments can be made about Chelyabinsk Oblast where the staff-unemployed ratio is 1:37 at the moment and where office space is cramped. Chelyabinsk is developing a computer network of its own at the moment which will aid with the registration and payment of benefits. There is some staff discomfort with the complicated system of registration and of computing benefits, which the Employment Service feels does not always best serve the needs of the unemployed. The other concern of the Chelyabinsk Employment Service is that there are many workers in the coal industry who " If administrative expenses are ignored, the unemployment rate which uses up the current revenue of the Fund is equal to tl(t + r), where t is the proportional rate of the payroll tax used to create the fund, and r is the ratio of the average unemployment benefit to the average wage. Thus, if t equals 2 % and r equals 50%, then the fund is in deficit if the unemployment rate exceeds 3.84 %. " There is growing evidence that the official rate of unemployment based on approximately 800,000 registered unemployed (December 1993) is a serious underestimation of the actual situation. In January 1994, around 3 million persons were estimated to be out of work but not registered with the Employment Services, and an additional 4 million persons were estimated to be on mandatory leave without pay. 20 are over pension age, and these workers are likely to be among the early casualties of the expected layoff program. Although those on pension will not qualify for unemployment benefit, the Employment Service anticipates that retired coal workers will come to them looking for employment and requiring counselling, thus eating into meager staff resources and space. 61. In Kemerovo there appears to be adequate staffing for the current situation, but, when unemployment increases or staff become more skilled in providing in-depth services, the current staffing patterns will need to be adjusted. Most of the offices are staffed below the ratio allowed per population (1:200). One office has a ratio of 16 clients per staff per day. All expressed problems in hiring qualified staff given the extremely low salaries. The office staff are predominately women. 62. In addition to the payment of benefits, the Employment Services should be in a position to offer a range of counselling, job search, training and special employment schemes (public works programs) in addition to specially targeted mass lay off programs for the mining communities. In all cases, the Study Missions found inadequate capacity to fund, administer and implement such measures at local level. 63. Public Works. Generally, there is a low take-up of public works programs which are confined to urban clean-ups and to some seasonal agricultural jobs. There are two major reasons for this, one being the very low allowance which is paid to individuals on these programs and the other, the type of work which is repetitive and lacking social esteem. The financing of public works programs in the main coal regions varies from 0 - 1.25% of the total expenditures of the Regional Employment Funds. 64. Training facilities which are available to mine workers through either the Coal Associations or the local authorities are generally obsolete and inadequate for today's skill requirements. The facilities and courses are focused on the manual skills needed in the mines of the 1930s. The training centers are built next to the specific industry. Individual enterprises select and pay for the students to be trained, then hire directly from these training centers. 65. Training Programs. The Study Missions found that a common concern is that people are trained and educated in narrow specialties which do not meet the needs of the developing labor market. Newer, modern technologies and theories are unavailable or are not taught. There are no occupational data to drive training decisions. All training selections for the unemployed are based on either personal wishes or employment staff/personal intuitions of the employment opportunities. (e.g. In Kemerovo only 7% of the current unemployed are selecting to be trained, the rest elect to receive benefits and continue to be unemployed.) 66. Job Creation schemes and Training for Small Business development are mixed together and are either non-existent or in a primitive state of development. There are possibilities for the unemployed to receive support for starting small businesses through the capitalization of the 12 months of unemployment benefits. However, the take-up on these schemes seems very small in the Regions visited and there is a need to link this opportunity with a structured program for Entrepreneurs organized by the private sector. The Job Creation Schemes are in many cases not creating new jobs, but are instead providing another form of enterprise support. 67. To illustrate the issue of the effects of enterprise divestiture on local finances, the Mission analyzed the Municipal Budget in Korkino, a coal mining town of 72,000 inhabitants, situated 21 approximately 30 kilometers from Chelyabinsk. About 70% of the employment in Korkino is mining related. Korkino Municipality is responsible for 18 schools, 28 kindergartens, 3 hospitals, 2 orphanages, as well as public utilities, parks, gardens and some housing. The Municipality has moved into deficit over the last year, due to the twin effects of inflation and recession. Table 12. Municipal Budget ror Korkino 1992 1993 (1 st Half) Revenues Profit Tax 35.7 48.5 Personal Income Tax 32.6 27.0 Natural Resource Charge 18.4 l Land Tax 6.0 Other Revenues 3.1 8.7 Subsidies (balancing item) 4.2 15.8 TOTAL 100% 100% Expenditures Subsidies to Enterprises 37.3 27.2 Education 22.2 26.6 Culture 1.1 1.2 Health Care 26.4 33.4 Social Protection 0.4 0.4 Chernobyl Benefits 0.1 Children's Benefits 5.9 3.6 Other Expenditures 6.6 7.6 TOTAL 100% 100% Total (Millions of Rubles) 692.0 1900.0 Source: Korkino Local Authority. 68. The housing issue in Korkino remains complex: 20% of housing belongs to the Municipality and they barely have the financial capacity to maintain this stock at present. The remaining 80% is Coal Enterprise Housing and the Municipality cannot assume responsibility for the fiscal burden of maintaining it. The average age of housing is 50 years and most of the enterprise housing is around this age, having been built for the workers of the Korkinskii mine. There are faults in many of the blocks because of shifts in the foundations due to mining operations. Consequently, the Municipality has refused to assume responsibility for this housing. 22 IV. Policy Issues: Coal Associations 69. There are many Coal Association policy issues related to restructuring and its implications which are being considered elsewhere. The following items relate solely to social protection aspects. 70. In order to remain commercially viable and observe a hard budget constraint, all mines (whether slated for closure or not) should plan to divest themselves of the provision of social services and should concentrate instead on their core business activities. As part of this process, Rosugol and the individual Coal Associations should now recognize that they are not the appropriate organization(s) to administer the social subsidies . Coal Associations should now proceed to plan for the divestment of all social services which they currently provide. This divestment should be phased in consultation with Oblast and Local Authorities. Ancillary services should also be phased out. It may be necessary to treat isolated one company towns such as Vorkuta differently, in that the provision of social services is so inextricably tied up with the Coal Association and with the entire fabric of the town, that special provision should be made for these cases until such time as resources and possible relocation provisions can be provided by the Russian Government. 71. The plans to retrench the workforce, divest social and welfare facilities and restructure the economic operations of mining and ancillary operations should be tackled comprehensively if there is to be a coherent corporate approach which will enable government to reduce subsidies. In this context it may not be necessary to transfer all of the social services which are currently provided by the Coal Associations to the municipalities; some could be privatized (i.e. recreation facilities and cafeterias) while others could be phased out entirely. However, there are key services without which the social safety net could not be said to function adequately and it is these which should be identified and transferred to municipal provision (health and child care facilities as well as urban services). 72. The development of realistic business plans for each coal association will mean that strategies for recruiting new workers to the industry will also have to be developed. The present policy ofhiring new workers is not consistent with overall demand projections for coal and with the Ministry of Fuel and Energy plans for restructuring the industry. It will be necessary to cease recruitment completely at those mines which are slated for closure and to review hiring practices in all other mines. 73. Management should design suitable labor shedding programs to take into account the future needs of the Coal Enterprises in relation to skill mix and correct profiles for the firm. In particular, management should identify the key underground skills related to production and reduce as many of the surface jobs as possible. 74. Workers who have reached pensionable age, 50 years, should be required to retire if the skill mix needed to run the mine can be retained without them. In addition to the retirement of workers of 50 or older, the industry may wish to introduce an early retirement scheme for specific categories of workers satisfying certain age and length of service qualifications. For example, all workers aged 40 or more with at least 20 years of service in the industry might be eligible for early retirement under the scheme. 23 Early retirement should not be regarded as a right but should only be granted when it is in the interests of the mining industry. 75. From meetings with Management and Unions in all the areas visited,it is clear to the Mission members, that, unless a Union-Management debate begins in an atmosphere of trust and cooperation before difficult decisions have to be taken and their consequences felt, a serious industrial relations problem could arise. Consequently, a very strong recommendation emerges to install a program of Management/Union Training at the earliest possible opportunity which would address topics such as collective bargaining, negotiating etc. Unions in particular require help as they must be made to understand the hard budget constraint and the burden on the govermment budget of coal sector subsidies. The Unions should be developed as partners in the debate about the future of the Coal industry in Russia. 24 V. Policy Issues: Federal and Oblast 76. In the event of a restructuring of the Coal industry,Federal and Local Government will need to design and finance measures and programs to deal quickly with the social and political consequences of labor shedding. The Government should establish a Fund to finance lump sum retirement for displaced coal miners and should finance special labor market adjustment programs to meet the needs of the coal mining areas as soon as possible. 77. If the Government implements the program for coal restructuring and its consequent mine closures, it will be necessary to shed large numbers of workers. It is possible that as many as 400,000 to 600,000 are surplus to the needs of the mines over time. The timing and size of redundancies would depend on the Government's decision regarding the pace of mine closures. A program of rapid mine closures, say 30 to 40 per year, would result in layoffs of 50,000 to 100,000 per year. Since most of the redundancies in the first two or three years are likely to come from mine closures, rather than scaling back production at operating mines, a precondition for such a program will be establishing the necessary capabilities for assisting redundant workers in a large number of communities. 78. Not all of the workers affected by mine closures will become redundant, as many of them are and will be employed in ancillary industries and social services. Others may elect to take early retirement. Usually, early retirement costs would be borne by the Employment Fund, at a normally higher cost than unemployment compensation, and consequently this policy does not save resources. If the cost is the same as the equivalent in regular unemployment compensation, then the only effect is cosmetic - i.e. individuals will not show up as unemployed. However, from the Tariff Agreement between the NPG and the Ministry of Fuel and Energy and Rosugol, it would appear that Union has negotiated a special package which would mean that the Coal Associations would pay early retirement benefits to NPG members for two years before the normal pension benefits kick in." 79. On efficiency and equity grounds, any social safety net measures associated with restructuring should not be confined to miners per se but should extend to all the ancillary workers, inside and outside the association, whose continuing employment depends upon the existence of the mine, as well as to people who become unemployed from the "knock on" effects of cuts in the coal industry. The latter may certainly be as adversely affected by restructuring as the miners, and probably have far more limited means to protect themselves against income shocks because they earn much less than mineworkers. 80. Social Assistance. Institution support could take several forms - including guidelines to assist in the development of targeting mechanisms and the use of the concept of the subsistence minimum, staff training and the recruitment of sufficient staff and appropriate skills to deal with the increased pressures " This issue of early retirement goes against the policy of raising normal retirement ages which one would normally wish to encourage. However it can be defended as recognizing the probable: there are unlikely to be new opportunities in the same occupation, the social return on retraining is likely to be low, since regular retirement is not far off, and active labor market policies can focus on more urgent issues. From the coal industry point of view, the main difficulty is that some of the more experienced and essential workers will leave the workforce on the basis of their age. Meanwhile some of those who stay may be capable of being retrained and/or starting small businesses. The need for careful manpower planning in the individual mines has already been stressed. 25 associated with structural adjustment. In the short term, consideration should be given to developing community family service programs in the mining towns as it is accepted that the family and community costs of mine closures are very high in social terms. 81. Financing Social Assistance Programs. Assistance to the poor has no assured source of financing. Fiscal support from municipal or federal sources will be required to provide a stable source of funding for programs of social assistance. The Bank has proposed that municipalities receive transfers on conditional grant basis (ex ante); cost reimbursement (ex post) or some form of matching grants to create incentives for cost containment at the local level.'6 82. Employment Services. The continued development of a network of flexible staff resources and the strengthening of delivery systems is part of the ongoing work of the Federal and Oblast Employment Services. In addition, these services should now concentrate on the introduction of a range of policies and programs to deal with the specific problems of the mining towns. Examples of appropriate policies and programs are suggested in the following paragraphs. 83. Mass Layoff Programs. A policy will be needed to respond to mass layoffs in mining towns. In consultation with the Unions, a program should be put in place, following the pattern of advance notice and rapid response mechanisms which have been developed in other countries. (i) Advance Notice. Effective advance notice procedures are intended to ensure that the coal association employees to be laid off, the coal association itself, the community affected, and the local authorities receive useful information sufficiently in advance of the actual lay-off to allow for early intervention. The assumption is that job-threatened individuals will be assisted earlier through selected interventions which range from the establishment of an employer-employee committee through an industrial adjustment approach to the set- up of an in-plant employment service linked to the local employment office. Experience in other countries clearly shows that adequate advance notice procedures in the case of mass layoffs provides a useful first step in facilitating the smooth adjustment of affected workers to their changed circumstances. Countries which have had no experience of dealing with a mass layoff situation until very recently (e.g. Hungary) are now developing legislation which stipulates that employer-employee adjustment committees must be formed to deal with the problem of large scale unemployment in a community. (ii) Rapid Response Mechanism. Advance notice alone, as described in the previous paragraph,does not guarantee that adjustment planning will take place. Indeed, advance notice in the absence of a rapid response mechanism may do nothing more than give workers more time to become anxious about their future. A well developed industrial adjustment program is predicated on a rapid response mechanism using a joint consultative approach. Trained advisors are sent on request to firms as soon as notice of layoff is received to facilitate an agreement between the enterprise, the workers and the Employment Service and in crisis areas, the local community. Group registration of workers for benefits, information on measures available, and crisis counselling is 6 For a full discussion of these and related issues, see: Russia, Social Protection During Transition and Beyond. (Feb. 1994) 26 arranged if necessary. Each affected worker's qualifications, special skills, experience, interest in retraining or relocation is obtained. Job development activities, both through the formal and informal job network are vigorously undertaken and linkages are established with local authorities to stimulate economic development activities. Workers not immediately placed are counselled before the application of more costly measures and if appropriate, urged to consider training, retraining or small business initiatives. Thus much of the adjustment planning is be done while workers still have a firm attachment to their work place. 84. Temporary Work Programs. Retraining, wages, experience and rebuilding the infrastructure are potential positive results from a well planned program of public works These programs would begin the phase to a market economy by providing short term security and work to unskilled workers. As currently organized in the Russian Federation, so-called public works programs suffer from very low allowances and from equally low public esteem. One policy requirement therefore will be to increase the allowances payable to individuals on these programs and improve the training content for individuals and the social value of these programs to the community. It is strongly suggested also that the name public works be dropped and replaced by a title which is less negative e.g. " Special Employment Programs." 85. Specific Applications of Special Employment Programs to Mining Areas. It is suggested that these programs try to solve some of the housing and environmental problems which will arise in the mining towns and environs. Hence the recommendation is that people who have been laid off should be deployed on environment clean up programs and on housing and urban renewal programs and that these programs be funded by special subsidies which would be diverted to raion Employment Services. There are Rehabilitation Funds which have been earmarked for Environmental cleanup and which are available to the Association and to the Raion Local Authority which could be used for Special Employment Schemes too.17 86. Training Policy. Vocational Training is a very widely used measure which has several obvious attractions as an immediate option in dealing with the potentially large numbers who might be shed from the Coal Associations. However it is a very expensive option unless programs are properly targeted to those workers who are most likely to benefit. One of the major economic arguments against extensive training in periods of high unemployment, is the risk in training individuals for a market where they will find it difficult or impossible to get a job even with their newly acquired skills. However,in the Russian Federation, it will be necessary to reorient the labor force in the specific skills which are needed in the transition to a market economy. All levels of the labor force will require attitudinal and motivational type training to deal with the requirements of the changing workplace. Unless this becomes a policy for ex coal association employees, the workforce will have difficulties coping with the demands of transition. In fact to neglect well-targeted, selective training in the process of restructuring the Russian Coal Industry would probably be the more costly option in the longer term. " Suggestions from the World Bank Mission that examined the environment impact of coal restructuring are that initial public works type projects would provide meaningful employment for miners displaced during mine closures.Small business opportunities could come from (i) reclamation work on the abandoned operations and (ii) development of separate reclamation companies to contract with the coal concerns to remove and store the topsoil, grade spoil pile slopes, replace topsoil, and revegetate the area. 27 87. There is a need to address the skill mismatch in the labor market through a series of flexible, well designed training and retraining programs. Two groups need to be targeted especially in formulating training policy: women and young people. 88. The position of young people in mining towns may soon become even more acute as the industry which was a traditional source of employment downsizes. In this respect there are some actions which raion and oblast authorities could take which might begin to address this problem. 7he first is to stop (or least drastically reduce) the education and training of people for work in the mines. This will take time, as it is very difficult speedily to adjust educational and training programs. Staff and facilities require time and money in order to cope with change. However, it is important to sensitize local communities to the idea that jobs in mining will not be there in the future and that young people especially must begin to think of other means of employment.The present system of narrow and overspecialized Vocational Education and Training should be restructured to allow young people a broader preparation for entry to a changing labor market. 89. The high proportion of women who are unemployed is already a source of worry to the Federal and Oblast Employment Services. There is a need for a policy and a coherent strategy which would take into account the particular requirements of women who have become unemployed in mining communities 90. Experience in other countries shows that miners often manage to get other jobs but that the skills and attitude of the ancillary overground workers may not be so robust. A policy will be required for retraining older workers who have been displaced from the Coal Associations. These workers may have limited general education complemented by narrow skill training. They will be faced with job changes, changing management practices and increasing technology and ultimately perhaps with structural unemployment. Consideration should therefore be given to retraining policies which can include expenditure on job counselling and assessment as well as remedial general education, management training and traditional vocational training. The focus here also should be on effective screening and job counselling. Initial results in Hungary for instance show that high drop out rates experienced on retraining courses were cut through improved counselling. Improved screening and delivery of training is now resulting in up to 60% placement in communities with unemployment in the range of 15 %. 91. In the very short term, as there are vacancies in the labor market for people with construction trade training, training courses should address the issue not just of the transition to the market economy by providing attitudinal and motivational type training, but should also continue to plug one major gap which exists in the labor market and offer construction trades training. The development of a pool of well-trained construction workers would also enhance labor mobility. 92. Entrepreneurship Development. Small Business Advice and Training for entrepreneurs should be organized and run by Chambers of Commerce or Municipalities. Ex coal association workers should be supported in these activities through the Employment Services (i.e. by allowing would-be entrepreneurs to capitalize their unemployment benefits and avail themselves of free training schemes and financial advice.) In relation to the so -called Job Creation Schemes,it seemed to the Missions that significant amounts of the Employment Fund are being expended on activities which are difficult to define as actually creating new jobs. Further data collection needs to be undertaken to establish exactly how much new job creation is achieved by these programs, together with durations and sustainability. 28 93. Financing these Policies. The question of how Oblast authorities and the other agencies would finance expenditures that would allow the structured handling of the social consequences of mining industry redundancies has to be considered within the context of the fiscal arrangements between the various levels of government in the Russian Federation. 94. In the context of mine area closures, the key issues that need to be addressed are: (i) the proper assignment between Federal, oblast and raion authorities of different categories of expenditure. This is the essential pre-condition for assigning responsibilities on its financing. (ii) the provision of an adequate revenue base that corresponds to the potential expenditure commitments over time of the Oblasts and raions as well as the Employment Fund and the Federal Employment Services. (iii) rules on whether or not deficit financing is permitted and, if so, how it is to be properly controlled. 95. When handling the social consequences of mine closures, the critical issues created by the current fiscal framework in the Russian Federation are therefore: - the potential deficits of raions within oblasts and oblasts within the Federation for coal mining intensive areas arising from the need for extra social protection expenditure and the contraction of tax revenues generated by mine closures; * the potential exhaustion of the Employment Fund at the oblast level; * the financing of proactive policies in general and Federal Employment Services in particular. In addition, there is also the important structural question of the necessary changes in oblast and raion finances if they are to take on an increased responsibility for the provision of housing, kindergartens and other social expenditures that are currently provided by enterprises. Ensuring adequate alternative grant and/or subsidy arrangements is an essential pre-condition for successful divestment of these services by the enterprises. 96. Employment Fund. The capacity and uses of the Employment Fund have already been discussed in Section III. The key policy issues which need to be decided by the Federal Government are (i) the level of benefits payable, and (ii) separating the funding of active employment programs from the Employment Fund. (i) Calculations show that when unemployment rises, the capacity of the Fund to pay Benefits will be quickly exhausted, (paras. 54-57) One option which would delay depleting the Fund would be to put all recipients on flat rate benefits linked to the subsistence minimum, rather than the present complicated process of benefit payment related to previous earnings. This would have the advantage of being easier to administer and would free Employment Service staff for more valuable activities. However, given the present minimum subsistence levels (the national average in August 1993 was R 20,000) miners who are used to much higher salaries would not accept such a drop in their income. (ii) Another option is to top up the Employment Fund with special Federal transfers which would either (a) increase the Benefit level or (b) extend special concessions to individuals 29 in mining areas which have suffered from mine closures. This option raises the question of equity: if other sectors begin to restructure, will other powerful groupings get special transfers too and if so, how much? Or, to put the question the other way: are the miners only to be a special case? (iii) The last possibility of ensuring that the Fund has the capacity to pay benefits at existing levels is to increase the payroll tax. (iv) The other issue is that the Employment Fund life could be extended by financing of proactive policies from central budget funds. The World Bank has been recommending for some time that the Employment Fund should be restricted to the payment of unemployment compensation only. 97. The initial observations of Russian Government Officials to these suggestions are (i) they have tried to introduce fiat rate benefits but have run up against political pressure from powerful interest groups, especially the miners; (ii) introducing a special rate or package through the Employment Fund for areas affected by mine closures is not equitable; and (iii) in a country where official unemployment rates are still around 1 %, there is no possibility of increasing the payroll Employment Fund tax. (In fact, recently there was pressure to reduce this tax). This argument is also used against financing active employment policies from central budget funds as the Employment Fund is perceived to have large surpluses at the moment. 30 VI. An Employment Strategy for Coal Mining Areas 98. For a large number of reasons, in all developed market economies, national governments provide assistance of various kinds to areas suffering major redundancies because market responses on their own are insufficient. This is true even for the USA, where labor market responses are more powerful than in Western Europe. The assistance given can be policies delivered by central governments, but tends to be primarily services provided by specialist labor assistance and training agencies and by regional and local authorities. Where they are provided by the specialist agencies or local government, the costs are usually met in large part or fully by central government out of its general tax revenues. The costs of this assistance are typically not met out of unemployment insurance funds. 99. The degree to which unaided market based responses would eliminate unemployment caused by major redundancies in Russian coal mining areas without incurring unacceptable social costs is very limited. All the available evidence, from the Study Missions and a variety of other sources, makes it clear that labor flexibility in Russia is considerably less than in West European economies. Neither labor markets nor housing markets are well-developed or have strong information networks. Financial markets do not yet provide ready access to medium or long term credits for new businesses or purchasers of housing. 100. That is not to suggest that Russian labor markets are non-existent in the economic sense. There is substantial labor turnover, at least within local labor markets. Previous research indicates that, within Russian industry as a whole around 15 % of employees change their job each year, although very largely within the same local labor market. Very similar turnover rates were found for the mining workforce in Chelyabinsk. There is even evidence of relative wage differentials emerging over the last 1-2 years between different regions of Russia even after taking account of differences in regional price trends. But, the labor market flexibility observed is nowhere near enough to enable even the best placed mining areas to cope with major redundancies without considerable government assistance. 101. There is evidence from the Study Missions that Oblast, raion and union representatives see the need for Government assistance to mining areas in the event of mining employment reductions and colliery closures. They see this as providing an essential social guarantee. The Bank would agree with this view. Indeed, a major concern resulting from our work is the need for these oblast and raion organizations, working together with the Federal Employment Services, to develop strategies for coping with major reductions in mining employment. This will require substantial increases in the financial and human resources devoted to policy design, implementation and delivery of social programs focussed on creating and maintaining an adequate social safety net. 102. The key factor affecting the required scale of assistance in any area is whether or not it is reasonable to expect a relatively strong demand for labor of various types in the local area and in neighboring areas following the redundancies in the coal sector. There is already a substantial demand for assistance to economically hard-pressed areas, mining and non-mining areas, and it will become even larger should they suffer major increases in unemployment. Conversely, there is an acute shortage of 31 resources to meet these demands. Oblasts and rayons have serious financial problems, as shown by the fact that the fiscal deficit in Chelyabinsk for 1993 is running at over twice its projected level. There are similar shortages in managerial and administrative resources. Given an increasing demand and a limited supply of resources, it is vital to use the available supply of resources as effectively as possible. That means minimizing unnecessary expenditure and concentrating resources where they are most needed. 103. The mining areas visited by the Study Missions present diverse social and economic conditions. At one end of the spectrum is Shakhty Municipality in the Rostov coalfield. IEEC found that, in Shakhty, only 21 % of workers are employed in the coal industry. A further 21% are employed in other industries, 26% in market oriented services (e.g. transport, construction and distribution) and 25% in other services (e.g. education, health, insurance etc). There also appears to be a reasonable amount of job mobility in the area. Most interestingly, IEEC report that 6,000 people registered as one-person businesses in Shakhty during the first 6 months of 1993. This represents almost 5% of current employment. 104. At the other end of the spectrum is Vorkuta where 73% of industrial employment is in coal mining, representing 44% of total employment. The results of the Study Mission bring out clearly the very limited range of alternative employment opportunities not just in Vorkuta, but also in neighboring areas. However, the labor market is not stagnant even in Vorkuta. There is some labor turnover and about 30 - 50 small businesses and co-operatives are being registered each month. Nevertheless, it is very clear that mine closures in Vorkuta would result in very few people finding new jobs without assistance following any sizeable employment reduction in the mines. This is in contrast to the position in Shakhty where it seems likely that many people might well be able to do so provided they were given ordinary job-finding assistance. 105. The position in Korkino was found to be between that of Shakhty and Vorkuta. 39% of employment was in the coal industry and there were limited alternative employment opportunities in the town itself. However, the Study Mission found that the Chelyabinsk Oblast was quite diversified in its industrial structure so that many mining communities had alternative employment prospects within reasonable daily travel distance. 106. Considering the scale of appropriate assistance to the different areas studied, Shakhty with a diversified industrial structure as well as an actively functioning labor market seems to be the area where quite a high proportion of people becoming unemployed over a reasonable period could find new employment without considerable and expensive assistance. Conversely, the much more limited alternative employment opportunities in Vorkuta mean that a larger and more comprehensive program of employment assistance and local development would be justified there. Chelyabinsk is in an intermediate position. 107. With the information currently available, it is not possible at this stage to make clear recommendations on the appropriate scale of government assistance even in the areas visited by the Study missions, and it is certainly not possible for other areas. Attention needs to be focussed for each mining area on the key relevant factors: * employment possibilities in local and neighboring areas; 32 * geographical location and transport links; * opportunities for new businesses; * housing markets. The range of anti-unemployment programs that should be considered in any social assistance package to mining areas includes a variety of options. 108. It is possible that for Shakhty, provided mining redundancies are phased in over a reasonable period of time, no more is needed than to provide slightly augmented job finding and counselling assistance at relatively low budgetary cost. It is more likely, even for Shakhty, that more would be needed. The other measures that would be most relevant for Shakhty are training and small enterprise programs, plus perhaps some local development programs. In Shakhty, it would be most appropriate to target these development programs on the early expansion of existing industries in the area and the attraction of new firms. On the basis of the information currently available from the IEEC Study, it is possible that there would not be a need in Shakhty for major public works programs to absorb unemployment, nor for assistance in migrating away from the area, let alone for employment-related subsidies to the mines. 109. Korkino is in a similar but less favorable position than Shakhty. (Other parts of the Rostov coalfield are also in a less favorable position than Shakhty). In Korkino, the Study Mission found that there were probably good employment opportunities in neighboring towns, including the city of Chelyabinsk. But, it was suggested that improvements to transport facilities (for instance, additional bus services) or assistance with travel costs might be necessary to enable unemployed people in Korkino to take up these employment opportunities. This would be an important potential additional element in Korkino besides job counselling, training for new jobs and so on. The evidence from the Chelyabinsk study was that alternative employment prospects were more limited in Korkino than in Shakhty. That would suggest a greater potential need for public works programs, although probably not the need for employment-related subsidies to the mines. 110. The position in Vorkuta is very different. The potential for useful job finding assistance is very limited as is the scope for training for other jobs in the area. It would, of course, be possible to train people "for stock" (i.e. for job opportunities that might emerge at some unknown point in the future) but this is not an attractive policy. To absorb mining redundancies and the associated "knock-on" unemployment in Vorkuta, the most relevant policies are public works policies, assistance with migration to other areas and possibly some subsidies to the mines to maintain employment above the level that could be commercially justified. 111. The Study Mission to Vorkuta found that there were already proposals being discussed to promote migration out of the area, but they contained sufficiently extravagant re-housing promises as to be unaffordable. Conversely, more recent data show net inward migration to Vorkuta. Retirement pensioners were moving to the area in spite of its harsh climate so that they could receive additions to their pensions because of the special cost of living additions. This is a good example of how interactions between social programs can produce unintended and undesirable effects. 112. Methods used to finance small businesses and new enterprises will require close study. The IEEC Study found that, in Shakhty, new enterprises were being supported by tax breaks, subsidized rents and loan guarantees. These are inefficient ways of supporting small enterprises. In addition, they reduce local revenue receipts and the tax base at a time when local authorities have serious financial problems. 33 Loan guarantees in particular hide the real cost of support, which can be high. Both for small business and other programs, policy effectiveness requires that assistance is provided by explicit grants or loans rather than by tax breaks or indirect subsidies and certainly not by loan guarantees. 113. Proper costing of assistance would need to estimate carefully the costs of providing these services in the various different mining areas. Considering just training, it is clear that specific programs have very different costs attached depending on their length, their sophistication, the numbers being trained, the numbers in each training group etc. Programs may be designed on a more generous or less generous basis. Given any overall budget for these programs, the unit cost will determine how many people can be given assistance within an Oblast. 114. Accordingly, with the assistance of USAID, the World Bank is organizing further studies in a limited number of coal mining regions. These studies will, inter alia, clarify some of the complex issues which might arise in reallocating and/or reducing mine subsidies for social services. The studies will also include work on costing a range of proactive employment programs and include an analysis of the likely impact of various scales of intervention both at the regional and at the local level. 34 Annex F ENVIRONMENTAL ISSUES IN THE RUSSIAN COAL SECTOR Annex to the Russia Coal Sector Study Environmental Issues in the Russian Coal Sector Summary and Recommendations 1. This annex is based on the findings of the Coal Sector mission to Russia in September-October 1993 and draws upon work carried out by previous Bank missions and by International Mining Consultants Ltd (IMC) under a contract with the UK Know-How Fund. Members of the mission visited surface and underground mining operations in the Donbass, Kansk-Achinsk, Kuzbass, and Urals mining basins while previous missions and IMC have also visited the Moscow and Vorkuta basins. The annex covers the environmental impact of mining operations but not occupational health and safety issues which are a major area of concern and are dealt with elsewhere in the report. 2. Poor mining practices, bad management and past neglect mean that the coal industry has left a substantial residue of environmental damage in all mining regions. With respect to current mining operations, there is a large variation between the best environmental practices in Kansk-Achinsk, which are not far behind current international practices, and the worse aspects of environmental neglect in some of the older mining basins. 3. Environmental priorities. Spoil heaps, abandoned mine workings and rivers polluted by mine water discharges with high levels of suspended solids are unsightly and highly visible symbols of the impact of coal mining on the environment. However, in terms of human health or other measures of the cost of environmental damage they rank well below other, less obvious, environmentalproblems in Russia. Even in mining areas it is the burning of coal in open fires or boilers without adequate controls on emissions of smoke and dust which give rise to the most urgent concerns. Elsewhere, pollution from heavy industry -- especially iron and steel, non-ferrous metallurgy, chemicals and petroleum refining -- dominate the environmental agenda. 4. There are localized problems in a few mining areas which pose specific threats to human health or to important ecosystems but which could be dealt with at a relatively small cost. The main ones are: * acid mine drainage and related water pollution in Kisel (Urals) and Inta (Vorkuta); * spoil heap fires in Rostov; and * fugitive dust from waste dumps located near to towns. These issues should be given high priority in addressing the industry's environmental performance. A summary of the range of environmental problems identified by the mission is given in Table 1 (at the end of this Summary). 2 5. Incentivesand structural change. Many of the industry's environmental problems are closely linked to the management philosophy which shaped its operations for more than 50 years. Mines are required to extract all 'recoverable' coal with little regard for the economic efficiency or environmental impact of this regulation. As a consequence, environmental measures focus on remedying the damage caused by mining operations -- the equivalent of 'end-of-pipe' controls in industry -- rather than on reorganizing production to avoid or minimize damage in the first place. There are strong links between improved economic efficiency and better environmental performance, so that most of the changes in mining practices recommended elsewhere in this report will contribute to lessening the environmental damage caused by mining operations. 6. The introduction of fees and fines for emissions of the main pollutants in 1991 has been an important step because it forces mines to take account of the costs that they impose on their communities as a result of their operations. There are a number of weaknesses in the implementation of these environmental charges -- notably, the level of fees and fines is much too low while the offsets that are allowed for "environmental expenditures" tend to direct resources to low priority measures. Nonetheless, the system provides the basis for achieving an appropriate balance between economic and environmental concerns in the future. 7. Recent progress. Even within the former system, substantial progress was made over the last decade in addressing the environmental problems associated with current mining activities under pressure from regional and local environmental authorities. The pace of land reclamation has accelerated so that it is becoming standard practice in Kansk-Achinsk and in parts of the Kuzbass for surface mines to restore land on a hectare-for-hectare basis when extending their mining operations. The average level of suspended solids in water discharges from underground mines in the Kuzbass has declined from 60 mg/I in 1985 to 20 mg/l in 1991. Subsidence is generally being managed in a reasonable manner. Thus, the key issues addressed in this annex are (a) how to sustain this recent progress as the industry is privatized and comes under great economic pressure, and (b) how to address the legacy of damage left from past mining operations. 8. Regulation. The institutional framework for environmental regulation of the industry is seriously deficient. For understandable reasons, the Ministry of Environmental Protection and Natural Resources (MEPNR) does not regard mining as a pressing environmental issue and has little capacity to oversee the industry. Oblast and local environmental committees in mining areas devote more attention to the industry. Their approach is media-based -- land use, air, water, and solid waste -- so that they are rarely able to formulate a coherent strategy to deal with the industry's environmental problems as a whole. There is also a serious confusion between the environmental problems associated with ancillary facilities operated by mines -- heating plants, wastewater treatment and solid waste disposal -- on behalf of their communities and those specifically linked to mining itself. 9. To resolve these problems, it will be necessary to create a specialized Inspectorate dealing with mining issues under the supervision of MEPNR. This body would be responsible for formulating and 3 enforcing an appropriate regulatory framework for the mining sector. It could also supervise the activities of the Trust that is proposed to deal with the reclamation of disturbed lands left from past mining operations. 10. Better mining practices. Much of the environmental damage caused by the industry is the outcome of inappropriate incentives reinforced by poor management. These characteristics are not unique to the mining industry, so that, as elsewhere in the industrial sector, the transition to a market economy should be accompanied by significant environmental as well as economic improvements. Operations at many mines, especially older ones which date back to the chaotic days of early industrialization and World War II, appear to be simply a rote continuation of past practices with no concept of strategic planning. Nobody has ever stepped back to question what such mines are producing by way of coal or environmental degradation and at what cost. Problems such as increasing energy inputs and decreasing volumes of saleable coal per ton of waste generated are treated as discrete issues, which leads to familiar calls for more investment, more technology, and other means of tinkering. 11. A different approach is required. The focus should be on better mine managemenlt and pollution prevention in order to make best use of the physical and human resources available. Proper mine planning, "good housekeeping" and other operational improvements can dramatically reduce costs and environmental damage for small or negligible expenditures. Investment should be the last element in upgrading performance, not the first. Some new equipment and improved technology may be necessary, but they should only be introduced after basic management and operational improvements have been made. 12. The legacy of past damage. Mines which continue to operate can be obliged to address the environmental impact of their current mining activities by a combination of regulation and economic incentives. This will, however, leave the problems of past damage in the form of disturbed lands and their side effects such as seepage of contaminated water from old mines or from spoil heaps. The burden of dealing with this legacy will fall on the government and will require a long term program over a period of 15-20 years. The immediate need is to assess the extent and nature of damage in each mining basin in order to establish priorities for rectifying the most urgent problems and to set up a framework for dealing with other problems in a systematic manner. 13. It is proposed that a Trust should be established to take over the ownership of disturbed lands in closed mining operations. The Trust would be responsible for preventing further environmental damage, for restoration, and, eventually, for selling the land for other uses. The main reclamation activities would include: (a) compacting or reconstructing spoil heaps; (b) regrading surface mine workings; (c) provision of adequate drainage to protect rivers and groundwater; and (d) revegetation. Experience in Russia suggests that the costs of such reclamation would be of the order of $1,000-2,000 per hectare although this does depend on the extent of major earthmoving that is required. 4 14. Financing environmental imnprovement. It will not be possible to finance the reclamation of disturbed lands from the regular resources available to the environmental authorities. These consist primarily of the Environment Funds which receive revenues from all fees and fines. However, total revenues are and will probably remain small relative to the scale of the general environmental problems that need to be tackled, while mining-related problems should be ranked below other more urgent environmental concerns. The costs of dealing with disturbed lands must, therefore, be met from funds generated within the coal industry. 15. A levy on coal production is proposed as a mechanism for funding the maintenance and restoration expenditures that will be undertaken by the Trust. The levy should be set at a level that would allow the Trust to complete a program of reclamation over a period of up to 20 years. After that period the levy could be reduced but it is likely that some kind of levy will still be necessary to fund long term care and maintenance for those sites which cannot be safely transferred to other uses. 5 TABLE 1: SUMMARY OF PRINCIPAL ENVIRONMENTAL IMPACTS IDENTIFIED [DONBASS KANSK-ACHINSK KUZBAS | U'RALS VORKUTA WATER POLLUTION Ongoing Mining (Water management and (Discharges not meeting Acid drainage from Kisel Acid drainage from Inta recycling being introduced. standards but impacts small may be reaching Perm goes to tributary of Problems are minor and compared with other water supply. Pechora River. localised.) industry discharges.) Saline discharges at Chelabinsk but surface waters not significantly affected. Closed mines Runoff from spoil heaps (Restoration in progress Flooding of underground Gravity drainage from Runoff from spoil heaps should be controlled. and detailed plans being workings may impact local Kisel could continue after will be a problem. developed.) groundwater supplies. closure. Ancillary activities (Some investment going onto upgrading wastewater treatment for industry and housing.) AIR POLLUTION Mining Operations Dust from roads inside and Dust problems from haul outside the mine is a roads and spoil heaps, problem which is being especially in summer. investigated. Ancillary activities (Minemouth power station Use of low grade coal for High particulate emissions is the biggest local air domestic and industrial use from industrial boilers and pollution source.) creates significant domestic use. particulate problems. Spoil heaps Spontaneous ignition of Dust from spoil is a spoil heaps is causing localised problem. problems. 6 LAND DISTURBANCE Reclamation and restoration Spoil heaps need to be Older mines need further There are large areas of Reclamation is slow and Little reclamation has regraded and controlled. restoration. Current mines land disturbed by coal and there are disputes over been done and a major are restored as mining other mining operations. A acceptance. task remains. progresses. major task exists. Huge Korkinsky pit poses a Problems of storage of particular problem. spoil are increasing. Subsidence (Affected and prone areas being mapped and development controlled.) 7 The Enviromnental Impact of Coal Mining in Russia 16. Water quality. The Urals basin is the focus of the main water quality problems associated with mining operations. In the Chelyabinsk region the issue is one of excess salinity, while further north Kiselugol (in Perm oblast) is discharging large volumes of highly acid (pH < 3) drainage water with high levels of heavy metals and natural petroleum products into a river basin upstream of the main drinking water intakes for Perm. In the case of Chelyabinsk, the damage caused by saline water discharges seems to be minimal, largely because groundwater inflows are low and the surface waters to which the mines discharge are naturally quite saline. Since it is very expensive to treat large volumes of water to reduce salinity, the Chelyabinsk Environment Committee gives much higher priority to addressing problems of water pollution caused by the large concentration of out-dated heavy industrial plants in the region. 17. The mission was unable to establish the extent of the damage caused by acid drainage from Kiselugol's mining activities. The coal is high sulfur (1.5-3%) and the mines produce relatively high volumes of drainage water. However, were mining operations to cease it is likely that natural discharges from the mines, which are located in Urals above the adjacent populated plains, would still result in large flows of acid groundwater into neighbouring rivers. The discharges flow into Kamskoe Lake which lies upstream of Perm on the Kama river (a tributary of the Volga). The dilution factor appears to be high and there are major paper and pulp plants upstream of Kamskoe Lake at Solikamsk and Berezniki, so that the practical impact of mine drainage from Kisel on drinking water supplies for Perm and on water quality in the region is probably quite minor. Nonetheless, this is an issue which would merit more detailed examination under the World Bank funded Environmental Management Project, which includes components dealing with policy and regulation and with water quality in the Urals region. 18. Acid mine drainage is also a problem at Intaugol which produces coal with 2.5 % sulfur content in the form of iron pyrites. The nearby Kozhim river (a tributary of the Pechora river which drains into the Arctic) is heavily polluted, primarily with suspended solids in the effluents discharged by the mine, the coal washery and a power plant. It was not possible to assess the impact of this pollution on fragile Arctic ecosystems -- the Pechora River is an important Atlantic salmon fishery -- but it is unlikely that it has any significant impact on human health beccausethe downstream basin is so thinly populated. 19. In other mining basins where acid drainage is not a significant problem, water quality concerns focus on levels of suspended solids in water discharges, especially those from coal washeries and other ancillary activities. This concern is partly a consequence of unrealistic effluent standards on mine water discharges. In the Kuzbass, the discharge standards vary from 4 to 10 mg/l of suspended solids. By comparison, the European Union directives on the quality of surface waters intended for the abstraction of drinking water and on the quality of fresh waters supporting fish life both specify guide values (which are not mandatory) of 25 mg/l of suspended solids. In many East European countries a level of 50 mg/l is sufficient for surface waters classed as suitable for recreational use and fishing. Actual data on average levels of suspended solids in the main rivers into which mines discharge were not available, but values of 20 mg/l or higher are common throughout the country. 8 20. The average level of suspended solids in discharges from surface and underground mines in the Kuzbass has been gradually declining since the mid-1980s as a result of improved treatment and changes in working practices. About one-half of the discharges meet the current effluent standards without treatment, while the remainder requires (but may not receive) some degree of treatment. The average level of suspended solids was reported to be 46 mg/l for discharges from surface mines (60% of the total) and 20 mg/l for underground mines. Typical treatment facilities rely upon simple filter ponds with the addition of chemicals flocculants in a few cases. Both Borodinsky mine in Kansk-Achinsk and Rostovugol are treating their discharges to reduce suspended solids in their discharges to 15 mg/I. In the former case this is somewhat higher than the level in the receiving river. Nonetheless, the level of suspended solids below the discharge averages only 5.3 mg/I. The Lower Don basin, which receives discharges from Rostovugol's mines, is heavily polluted by agricultural run-off and industrial discharges, so that mining plays a minor role in the water quality problems of the region. 21. Air quality. The main urban centres in all of the mining basins typically have high levels of air pollution. However, this is associated with the use of coal rather than with emissions linked to mining activities. Chelyabinsk, Kemerovo, and Novokuznetsk are among the most polluted cities in Russia because of a combination of emissions from households which burn coal, heating and power plants and various major industrial sources such as metallurgical plants. Rostov oblast is less heavily polluted by large industrial sources, but even there the two mining associations account for less than 5% of total emissions from stationary sources and almost a third of their emissions come from communal facilities (heating and power plants) operated by the mining associations. 22. As part of the general effort to improve air quality in regions that are heavily dependent upon coal, mining associations will need to reduce emissions of particulates from the boilers which provide heat and power to their mines and nearby mining communities. Apart from this, the main form of air pollution generated by mining activities is dust associated with (a) the use of heavy trucks on unmade roads, (b) the handling of coal and of wastes, and (c) the effects of wind on spoil heaps during dry periods of the year. In all cases the key issue is one of management. It is relatively easy to suppress much of the dust by spraying roads and spoil heaps with water, by better construction and maintenance of roads and spoil heaps, and by simple improvements in handling operations. Research is underway in the Mining Institutes on dust management techniques. 23. Air pollution from fires in spoil heaps are a localized problem, especially in the Rostov area where 30 out of 160 spoil heaps associated with Rostovugol's mines were burning at different levels of intensity in September 1993. These fires are a particular hazard to those living close to the spoil heaps because of the danger of collapses or extensive spontaneous outbursts. The problem is strongly associated with the past practice of constructing conical spoil heaps combined with the relatively high proportion (up to 25%) of coal in the material sent to spoil heaps. Putting out the fires is difficult and may cause temporary but serious water pollution because measures were not taken to control run-off or infiltration when the spoil heaps were constructed. The longer term solution will involve much more effort at land reclamation to reconstruct, compact and revegetate the spoil heaps. 9 24. Land disturbance and solid wastes. There are widely differing perceptions of the extent of land disturbance caused by mining operations and the disposal of mining wastes. Russia is a vast country and most of the mining takes place in areas which are or would be very sparsely populated in absence of mining operations -- East Siberia, the Far East, Kansk-Achinsk, Kuzbass, the North East and Pechora. As a result, the mining associations have tended to act as if land has a negligible value in alternative uses, so that they have devoted little effort or resources to land reclamation. However, continued mining operations are seen by local residents as a major threat to their environmental quality as more and more land in and around the towns or villages where they live is taken for surface mining or is used to dispose of mining wastes. 25. There is a considerable range of estimates of the total area of land disturbed by mining but a recent review concludes that 1.5-2.0 million hectares is a reasonable figure for all mining in the former Soviet Union.' About 100,000 hectares were disturbed annually in the late 1980s and about one-third of this can be ascribed to coal mining, primarily at surface pits in Russia and Kazakhstan. Little effort was devoted to land reclamation prior to 1976, but since that time it is claimed that annual reclamation rates have risen from 100,000 ha per year to more than 150,000 ha in 1988 -- this is for lands disturbed by all forms of mining. It appears that much of this reclamation activity has focused on lands disturbed long ago rather than those affected by current mining activities. Many reports, including those received by the mission from oblast environmental officials, indicate that reclamation lags well behind new land disturbance in the Kuzbass and probably in East Siberia. On the other hand, best practice in the large surface mines in Kansk-Achinsk has begun to approach standards achieved in the US, partly because the Environment Committee of Krasnoyarsk Krai has insisted on proper restoration as a condition for granting permission to extend the land covered by mining permits. The same philosophy of 'hectare for hectare' restoration is now being adopted by the Kemorovo Environment Committee. 26. This will leave a large area of land disturbed by past surface mining or by spoil heaps from underground mines. Current rates of reclamation will make little inroad on this backlog, so that a long term program will be needed to address this problem. The costs of restoring land disturbed by surface mining are not high -- typical estimates were 0.6-0.8 million roubles per ha for technical restoration and a further 0.4 million roubles per ha for biological revegetation at mid-1993 prices or a total of US $1,000-1,200 per ha. On this basis, the total cost of restoration might amount to $100-150 million in the Kuzbass, and less than $10 million in each of the other basins with surface mines. The cost per hectare of dealing with spoil heaps from underground mines would be higher, but the total cost would be modest since the amounts of land involved are much smaller. 27. Subsidence is a potential problem in all underground mining areas, but it seems that it is being managed in a manner that is broadly accepted. The theoretical maximum subsidence is 25m directly over the main coal seams, but actual movements are generally much less. In some cases mining associations A. Bond & K. Piepenburg - 'Land reclamation after surface mining in the USSR: economic, political and legal issues', Soviet Geography, May 1990, pp. 332-365. 10 have purchased properties in affected areas. There are no general land use planning regulations which would prevent development in areas liable to subsidence. As a result, buildings have been constructed directly above long-wall mining operations in a number of basins -- cf. the Social Annex paras 35 & 68. However, the municipal authorities are aware of the problem and will not allow any further major construction in such areas. Mapping of actual and predicted ground movements is presently under way. Institutional Issues 28. There is no coherent regulatory system to supervise the environmental performance of the mining industry. In the Soviet era a plethora of technical agencies had overlapping responsibilities for various aspects of coal mining. Many of these agencies continue to function, but they remain narrowly focused and unwilling to cooperate. 29. The Ministry of Environniental Protection and Natural Resources (MEPNR) has overall responsibility for setting national environmental policy. MEPNR is very constrained by its limited resources -- both human and material -- and by a fragmented, media-based structure which is ill-suited to dealing with the problems of industries that require an integrated, cross-media approach. It has no established policy on mining and little institutional capacity to regulate mining activities -- only one staff member works on mining issues. In part, this situation has arisen because MEPNR has no explicit legislative mandate to regulate mining activities and has, therefore, allocated its resources to other issues which fall clearly within its jurisdiction. However, it is responsible for setting fees and fines for discharges of air and water pollutants which are or could be an important influence on the environmental performance of coal mines. 30. Regional/Local Environment Conmiittees are the branches of MEPNR at oblast and district levels which are charged with the detailed implementation and oversight of federal environmental policies. They are responsible for granting permits, monitoring and enforcing regulations, and levying fees and fines. Typically, their inspectors are overstretched -- Kemerovo oblast has 64 inspectors for 1200 enterprises -- and they suffer from a lack of monitoring equipment and technical skills, especially in dealing with accidental emissions and spills. They have little expertise in environmental policymaking and planning. Historically, their efforts have focused on air and water pollution or on soil, forest and wildlife management. They lack the technical skills in geology, hydrology, mine engineering, and land use planning that would be required to develop an integrated approach to improving the environmental performance of the mining industry. 31. The State Manufacturing and Mining Inspectorate (Gostekhnadzor) does hhavsuch expertise and is, by default, the main organization responsible for overseeing the mining industry. It has separate divisions for underground and surface mining -- which used to form the separate State Mining Technical Inspectorate (Gosgortekhnadzor) -- and is organized at federal, regional and local level in a manner similar to MEPNR. Its work focuses on technical issues such as ensuring that mines comply with engineering, construction and operating standards. These include the implementation of regulations 11 designed to maximize the extraction of coal reserves and to minimize the waste of coal in preparation. Such technical regulations discourage the emergence of mine development and operation plans based on economic and environmental criteria. They tend to reinforce attitudes which give priority to the volume of output at the expense of other considerations. In principle, Gostekhnadzor requires that mines have adequate support infrastructure and services, such as wastewater treatment capacity. However, this requirement is often circumvented by the grant of a temporary permit, so that the enterprise may be able to operate for many years without completing the necessary work to obtain a full permit. 32. Gostekhnadzor inspectors confirmed that the current regulations governing the construction and maintenance of underground mines are much stricter than those in force when many existing mines were opened 40-60 years ago. Little, however, has been done to require these mines to upgrade their operations to meet the current standards. Despite the fact that Gostekhnadzor's activities have important implications for the environmental performance of mines, both its representatives and other officials emphasized that the Inspectorate has little or no interest in environmental matters. It has a narrow engineering focus and there is little prospect that it could or would be willing to assume responsibility for the environmental oversight of coal mining operations. 33. The Russian Federation Committee for Geology and Management of Subsurface Resources (Roskomnedra) -- the successor body to the former State Committee on Geology (Geolkom) -- is responsible for setting overall policy on subsurface resource management. Its regional branches carry out basic geological surveys, maintain maps and databases, and manage the process of (re)licensing existing and new mines. The submission of license applications should be accompanied by an approved environmental impact assessment which justifies the proposed land use and provides a technical appraisal of the project. Licenses should then incorporate environmental guidelines, specify fees for the use of mineral resources, and define other conditions to be satisfied by the mine. Before the license comes into force it must be approved by the regional/local environment committees as well as regional/local administrations. 34. From an environmental perspective, the licensing process has a number of important weaknesses. Many mines operate under temporary licenses before the requisite environmental, technical and economic analyses are completed. Those responsible for enforcement of the license conditions appear to have few options short of curtailing or revoking the license for violations of its terms, a step few officials would be likely to take on environmental grounds. The licensing process does not provide for public notification or participation, nor does it provide the possibility of an appeal once a license is granted. Since Geolkom has traditionally been a strongly pro-development organization and its revenues are derived in part from severance payments, it is seen as being biased in favour of natural resource extraction even if this might lead to substantial environmental damage. 35. Regional and local administrations have officials responsible for environmental protection, natural resource management and land use planning. They are the primary agencies in dealing with land use issues, unless mining affects protected zones such as nature reserves or special forests which fall 12 under federal supervision. Their powers encompass decisions about the allocation of land for surface mines, buffer zones for underground mines and ventilation outlets, prospecting, and spoil banks as well as restoration requirements. Thus, they must play a crucial role in addressing concerns about land disturbance and in rectifying the legacy of damage caused by past mining operations. Already some regional and local administrations are using this lever to press mines to increase their expenditure on restoring land which has been used for surface mining. 36. Overall, there are too many bodies with overlapping legal and institutional responsibilities for environmental protection in the mining industry. Within the present system, regional and local environment committees working together with regional and local administrations have been most effective in tackling specific environmental problems -- particularly those associated with water discharges and land disturbance. The procedures for granting operating licenses and discharge permits give the authorities considerable powers to enforce high standards of environmental performance on mines, but in practice the range of sanctions was too limited and the economic pressures too large for these powers to be exercised. As result, the practice of relying upon temporary licenses and permits grew up as a way of circumventing the legal requirements. Paying for Environmental Protection 37. Historically, spending for the environment in the coal sector has taken only a small portion of overall spending. The Rostovugol association allocated only two percent of its outlays in 1992 to environmental protection efforts. Moreover, much of this spending has not been spent on mitigating the environmental impact of coal mining per se, but on providing wastewater treatment for local communities. Some coal companies have attempted to cut back on this low level of spending on the environment. Kuznetskugol, for example, has reduced its environmental staff to just one person in the central office, and plans to reduce its voluntary annual environmental reporting activities. At Rostovugol, the deteriorating performance of pollution control devices on boilers stacks and the poor state of repair of one mine water treatment plant illustrated cutbacks in maintenance. 38. In general, the provision of massive government subsidies to underwrite coal company operations have allowed most firms to continue environmental programs at roughly their earlier levels. For those coal companies that survive the transition to a more market-oriented economy, the pressures to reduce spending on the environment even more will become fierce as coal companies attempt to cut their costs. 39. While various problems have been discussed in this annex, the coal mining industry in Russia over the past quarter century has made significant investments in pollution control efforts. The industry has made significant achievements: many mines have gone to great lengths, including importing sophisticated technology, to treat water discharges from current mining operations and associated facilities to levels significantly cleaner than the receiving waters into which they flow. All efforts should be made to preserve these achievements. 13 40. According to the Soviet system of central planning, large industrial enterprises often provided basic communal services such as drinking water supply, wastewater treatment, steam, and electricity. Coal companies generally perceive these services as a burden (they are a large liability in terms of air and water pollution permit fees and fines), and believe that they should not have to continue providing them. With meagre resources of their own, municipalities often are unable to assume the cost of managing these facilities. During a transition period, a combination of international technical assistance and financial support from the federal budget should be provided to municipalities in order to assist them in putting these operations on a sustainable, self-supporting basis. 41. In the course of discussions, many comments were heard of the need to maintain some means of centralized financing for traditional environmental investments (wastewater treatment, smokestack scrubbers) as well as for innovative and promising concepts (technology to recover coal from spoil banks, fluiclized-bed power generation to burn coal refuse, methane gas recovery). While such projects may be worthy in principle, the coal sector, with few exceptions, does not present the highest environmental priority in coal-mining regions; in the short term, scarce government resources should be allocated to ameliorate more pressing environmental problems generated by other sectors, such as metallurgy and chemicals. 42. Ultimately, the environmental costs of coal production must be internalized and reflected in the overall cost of coal production. Accordingly, the coal producing companies must be held liable for the damage they cause to the environment. This means that they should not rely on external funding to reduce or rectify environmental damage caused by current mining operations. These costs must be treated as part of their regular, self-financed, operating or investment expenditures. That will ensure that mines have a real incentive to improve their operating practices both to reduce their costs and to minimize the amount of environmental damage that they cause. 43. Liability for past damage is a different issue. In one way or another, the costs of remedying such damage will fall on the government, either directly or in the form of a lower stream of income from the mining industry. Thus, issues of fiscal and administrative convenience may playyan important role in determining how to finance and manage the necessary expenditures. 44. Regional/Local Environment Funds. In 1991, the Russian government instituted a federation wide polluter-pays system to support a special non-budgetary fund to be spent primarily at the regional and local levels exclusively for environmental purposes. Contributions to the regional/local Environment Funds come from several sources: permit fees for air and water emissions, waste disposal, and use of natural resources; and fines and court settlements for violation of environmental regulations. Of these revenues, the local Fund retains 60 percent; 30 percent is sent to the regional Fund; and 10 percent is sent to the National Environment Fund. Environment officials may elect to rebate a portion of firm's environmental payment if they are targeted at a specific environmental protection investment. 14 45. After two years of operation, the revenues of environment funds remain small: fees and fines are small and rapidly depreciated by inflation and companies often delay and refuse payment or negotiate smaller remittances. According to government and industry representatives, most expect environmental fees to increase in real terms in the near future which should increase the revenues of the funds. 46. Because local governments in the Soviet Union traditionally were deprived of an independent source of income, many local governments were the first to seize the initiative and turn to local businesses for funds to support local environmental protection programs. In the coal sector, the environmental funds have the potential to fund labour-intensive environmental restoration projects, such as reshaping and revegetation of mined-out lands. This could be of significance in coal mining regions hard hit by unemployment as a result of restructuring and a contraction of the industry. 47. Even so, it is unlikely that the volume of finance coming into the environmental funds will be sufficient to support programs on the scale needed to absorb a significant share of unemployed miners or to effect a significant improvement in environmental conditions. In the case of Rostov oblast, for example, the regional plan for high priority environmental projects in the period 1994-96 envisages that less than 10 percent of all outlays will be financed. For soil conservation measures specifically this figure is less than 5 percent. Improvements in Mining Practices 48. Many of the environmental problems that have been identified are the consequence of poor mining practices. Present mining methods are inefficient and wasteful; improvements would result both in improved productivity and in a reduction of environmental damage. Mine managements tend to highlight a lack of investment as the reason for poor productivity, but it is clear from the relatively good performance of the newer and better operated mines that large gains can be achieved through better management and operating practices. 49. The difficulties of individual mines are compounded by the lack of a framework for disseminating good practice with respect to the planning and operation of mines. Various bodies offer technical advice or set standards, but no effort is made to coordinate and balance the concerns dealt with by separate agencies. Possible reforms to the regulatory framework at federal or regional levels are discussed later, but, irrespective of the details of any new system, there is a clear need for a better and more coherent approach to mine planning. 50. Existing mines. The crucial issue for existing mines is to change their mining operations so as to reduce the amount of waste that is generated. Poor mining practices result in (a) excessively high ash levels that cause problems for coal users and should reduce the value of the coal at the mine if the pricing structure incorporated appropriate quality differentials, (b) expenditures on coal preparation that may be very inefficient or even ineffective, and (c) discarding good quality coal along with other waste because of the lack of incentive to separate it out. Other improvements can reduce the volume of and 15 costs of treating water discharges by reducing water inflows, separating clean water inflows, and implementing simple in-situ treatment systems. More attention to the design and operation of gas removal could reduce surface hazards and allow methane to be used for gas boilers within mines. Finally, coal storage and handling arrangements should be improved to reduce the number of times that coal is handled, and to minimize problems associated with fugitive dust and water run-off. 51. In most cases the costs of reducing environmental damage by adopting such 'good housekeeping' measures are trivial in relation to the overall costs incurred by mines. All that is required is careful planning which takes account of environmental considerations, attention to detail, and proper training of miners and their supervisors. The same comments apply to managing problems caused by subsidence as underground workings are closed. The general approach should be to induce collapse and subsidence at a controlled rate wherever it is important to avoid the possibility of unpredictable future movements -- for example, when certain forms of development are to be permitted in areas that might be subject to subsidence. 52. To deal with longer term environmental problems, each mine (and preparation plant) which remains in operation after a transitional period of up to 5 years should be required to produce and then begin to implement a plan to address any environmental problems and to ensure satisfactory reclamation of land disturbed by mining operations. Such a plan should be negotiated with the regional and local environment committees who would be responsible for monitoring its implementation. The purpose of the plan should be to enable the mine to meet agreed environmental targets which would minimize continuing environmental degradation. In setting the environmental targets, regional and local environmental officials should take account of both costs and environmental conditions in the absence of mining rather than insisting on uniform standards without regard to circumstances. Among the issues that should be addressed by these environmental plans are: topsoil recovery and storage; management of water balance; contemporaneous reclamation; final restoration and closure; and management of overall wastes. 53. New nines. Recent developments in the Kansk-Achinsk basin demonstrate that planning and project institutes serving the industry have the knowledge and capacity to elaborate life-of-mine plans which minimize the environmental impact of mining and ensure the progressive reinstatement of disturbed lands. As these institutes and mining enterprises have gained experience, they have begun to approach the standards achieved by best practice in the West at a comparable relative cost -- 3-4 percent of total mining costs. Admittedly, the geological conditions are much easier in Kansk-Achinsk (horizontal seams with limited overburden) than in many of the surface mines in the Kuzbass, but there are many lessons which should be codified and adopted as requirements for new mines. 54. At a minimum, whenever mines apply to regional and local authorities for the permits for mining operations required under land use regulations, they should be required to produce a plan for environmental rehabilitation which will proceed in parallel with mining operations. These applications should include real environmental impact statements -- not just the general reviews supplied at present - 16 - and should provide the basis for subsequent enforcement action if mines fail to fulfil their obligations. The key document is the life-of-mine plan which should describe the coal resource to be mined, type and extent of operations, schedule of development, equipment to be used, and plan for closure and reclamation of the final workings and all disturbed areas. In return for this increase in the burden of submitting mining applications, the permits should cover sufficient land to allow mining operations to proceed for a period of 5-10 years without further submissions. Mine Closures 55. Procedures for mine closure. This refers to the complete cessation of mining activities with the return of the land to other users and uses. Mine transfers, that is when mining activities are shifted to new faces, will typically involve the maintenance of disused workings by the same enterprise and are subject to standard environmental regulations. Technical and environmental proposals for closure, complying with guidelines approved by the proposed Mining Inspectorate, should be prepared. These should cover measures to ensure safety and the isolation of mine workings -- for example backfilling shafts -- as well as long term monitoring and restoration requirements. 56. Closure will have to be carried out in accordance with the relevant technical and environmental standards. The detailed content of such standards is not addressed here but it should be noted that there are various relevant documents. A draft Manual of Restoration Practice has been prepared (1992) by the Mining Research Institute at Perm and is circulating for comment at present. There are clearly technical problems on the biological and agricultural side of revegetation and ongoing research on this issue will need to be coordinated and collated. The Appendix to this Annex outlines typical closure conditions. 57. A Mine Closure Design Xshoulb be prepared and approved. This will relate to the measures to be taken for the safe closure and isolation of mine workings. It should probably also set out the long term restoration requirements and final land uses, but it is not clear whether this is normally included at present. 58. The basic environmental objectives in mine closure and site reclamation must be to protect the public health and safety, eliminate any continuing environmental degradation, minimize necessity for post- mining maintenance, and return the area to pre-mining or other uses acceptable to local authorities. It appears that closure plans are presently required, although none was available for inspection by the mission. These are prepared by mine staff with assistance from the mining association and local research institutes. They are reviewed by regional/local Environment Committee and other officials. Closure plans include design, stipulations, implementation procedures and serve as basis for allocation from special budget for closure costs. Typically, plans for underground mines provide for continued surface and drainage management by the mining association or another mine (typically closure of one mine is phased with opening of new mine nearby). Kuzbassrazrezurol expects approval soon of plans to close one of their underground operations. 17 59. Responsibility for mine closure and closed mines. Once a mine or group of mines are designated for closure, a Closure Design will have to be prepared and it will be the responsibility of the relevant mining association or other mining enterprise to ensure that the short-term provisions of the Closure Design are implemented. This would cover, for example, matters relating to access, public safety, and so on. The Closure Design should probably also address the structures related to the mine, in terms of conversion to other use or their securing/demolition. 60. At the completion of the initial shut down procedures, there will remain two major issues to be addressed: completion of restoration and handover of restored land; and long term (perhaps indefinite) care and maintenance for the protection of public health and the environment. Legal responsibility for the land before it is handed over, or where it is maintained indefinitely, will presumably lie with the mining association or its legal successors. However, this issue of "ownership" may need clarification in order to define responsibility or culpability for action or lack of it and also to attribute losses (or profits) in relation to changes in the valuation of land when it is transferred to non-mining purposes. 61. One alternative would be to create some form of Trust -- funded out of the production levy discussed below -- which would have the financial and administrative resources to ensure proper restoration and environmental rehabilitation. This Trust would accept the mine land, with its assets and liabilities, upon completion of the short term closure requirements. The Trust would manage the land holdings and would rely on outside funding for its restoration and maintenance activities and on contractors for the necessary works. It would be established as a federal body but would operate through local representatives. If such a Trust were to be established, a number of related mechanisms would be required. One is an audit and oversight function to ensure that funds are being disbursed in a proper and effective manner. The organisational location of this function is not important as long as it is outside the coal industry. 62. It would also be necessary to establish a mechanism for settling disputes over the conditions and standards for handing back restored land. At present, there are special committees at oblast level to determine whether required restoration standards are being These committees include representatives of both the mining associations and the relevant land holders, as well as Environmental Committee and municipal officials. It is not clear whether such a system would be capable of making satisfactory rulings on disputed cases. An independent mechanism is required which can reach judgements based on defined standards and on pragmatic considerations, so as to achieve the overall objectives of returning land to previous owners as efficiently as possible. 63. There is a considerable body of expertise in some of the mining associations relating to restoration, at least on the "technical" (i.e. land forming) side. Indeed, separate specialist Revegetation Companies have been set up within some of these associations. Such Revegetation Companies, or new ones formed using existing expertise, would be very well placed to undertake contract work on behalf of the new Trust. This would also be a way to provide a level of continuing employment, over a period of several years. It would be necessary to split the work into contract packages and to introduce proper 18 tendering procedures so as to develop an understanding of competitive bidding and to encourage the development of independent companies, drawing on local experience and available construction equipment. Regulatory and Policy Reforms 64. Institutional reformn. The primary environmental problems associated with all kinds of mining are sufficiently different from those of industry and other forms of urban pollution to justify the creation of a specialized Inspectorate -- similar to the Office of Surface Mining in the US. Its staff should work in cooperation with media-based specialists in air, water and solid waste management in the Federal Environmental Service, but they must have the resources and expertise required to formulate and enforce an appropriate code of environmental regulation for the mining sector. The Inspectorate should be established as an agency under the supervision of MEPNR. Most of its staff should be based in oblast administrations and should work closely with the officials of regional and local environmental committees. The mission considered and rejected the suggestion that the core of such an Inspectorate might be formed from the Mining Department of Gostekhnadzor. 65. The first responsibility of the new Inspectorate should be to draft and introduce a new set of regulations concerning the environmental obligations of mines, thereby rationalizing a mass of sometimes contradictory and out-dated provisions as well as filling gaps in federal environmental laws. Natural resources are the focus of conflict between the Federal government and oblast/republic governments. It may be difficult to reach agreement on issues concerning the management of natural resources, including coal and other minerals, but this should not inhibit the formulation of provisional regulations covering more technical issues. 66. While the Inspectorate's staff should work closely with regional and local environmental officials, it is important that there should be strong federal oversight to maintain an even playing field for coal producers in different regions. The transition from a highly bureaucratic and centralized system of control to one with significant regional autonomy in a market economy may lead to fierce inter- regional competition, particularly while coal markets decline or stagnate. Officials will come under great pressure to improve their region's competitive advantage by relaxing environmental regulations. This is illustrated by the serious problems which have arisen in trying to regulate the forestry sector. Failure to ensure that federal regulations are enforced could impose substantial environmental costs on communities and would, in any case, probably achieve little in the way of stimulating mining employment or output. 67. Tfhe Russian legal and regulatory system does not provide adequate opportunity for public involvement in land use and natural resource planning and decision making. While the right of public involvement was recently enshrined in the 1992 federal framework law on environmental protection, existing regulations and guidelines often do not provide for public notification, hearings, and consultation with community groups. Observers have noted that companies often have tried to circumvent community 19 involvement, only to have angry citizens mobilize to use the detailed regulations to stymie development. Regional government officials have complained that Moscow (meaning Rosugol) has also tried to force development projects on communities without the required due process and appropriate consultation. Many local governments have tried to block mine expansion by resorting to provisions of the land-use code, for instance by imposing strict demands for reclamation on land returned to community use before the allocation of new tracts to the coal company. Often such conflicts can be avoided with early demonstrations of sensitivity and responsiveness to local interests. 68. Policy reforms. Coal companies are expected to comply with government regulations setting the maximum allowable emissions (abbreviated PDV) for water discharges and smokestack emissions. Given that the established PDVs are strict and many if not most enterprises are unable at present to comply with them, the government has allowed the establishment of Temporary Agreed Emissions (abbreviated VSV) which are negotiated with the local environmental committee and then endorsed by the regional authority. These temporary standards are expected to take into consideration the type of processes and technology involved -- i.e. they may be set more leniently for older equipment. VSVs are granted with the expectation that the enterprise is taking steps to come into compliance with the PDV. According to the system presently in place a firm pays a set fee for emissions up to PDV. If emissions are above PDV but within VSV, fees are multiplied by a factor of five. Should an enterprise fail to meet the VSV the fee coefficient jumps to 25. 69. The intention of using producer fees and fines to facilitate environmental protection efforts is compelling and sound, but there are complications. The first problem is calculating the levels for the emission fees and fines. If they are too low -- as is the case in Russia today -- they will have no impact on polluters, as firms opt to pay the fines instead of taking costly measures to clean up their operations. In the current era of financial difficulty the combination of rising charges for inputs and pollution fees would push many coal companies into bankruptcy. Governments, therefore, will remain under strong pressure to minimize environmental fees and continue producers in order to soften the shocks of structural adjustment. 70. Second, the system's ambitious goals and elaborate structure make it complicated to implement. In Rostov oblast, 258 applications for PDV and VSV permits were considered in 1991; this figure suggests that the amount of time local and regional agency staff (which numbered 307) can devote to adequately assessing and processing applications is severely limited. 71. Third, coal enterprises have run up massive debts as a result of dislocation and uncertainty due to deepening economic troubles. According to the system of payment priorities, however, these debts have to be met before those incurred for environment-related reasons. Firms have many options for avoiding meeting their financial obligations. Many attempt to put off paying their environmental debts as long as possible; some have delayed indefinitely. As a result, environmental agencies received only a fraction of the fees and fines they had charged. In the first half of 1992, the Chelyabinsk regional 20 environmental protection agency assessed local firms 50 million rubles in fines and fees, but it had received only one-tenth that sum. 72. Fourth, the option for fee offsets against environmental investment minimizes the potential market incentive provided by the fee system. If offsets become a common practice, they lose their ability to affect decision making, as enterprises can simply budget them into their regular operations, especially since almost any investment can be classified as environmentally oriented. While rebating keeps resources "closer to home," it favours projects based on their institutional affiliation rather than their environmental merit. 73. Negotiations for reduction or offset of environmental liabilities raise questions about the potential for regulatory capture: the ability of economically and politically important coal producers to dictate terms to small, underfunded and politically weak environmental protection agencies. When questioned on this subject, parties on both sides of the table denied the existence or possibility of capture. Nevertheless, firm guidance from the centre should minimize latitude for bargaining in order to ensure a level playing field. 74. In summary, these market-based approaches can provide an important incentive to reduce environmental damage in future, but their success hinges on the successful transition to stable, market- driven economics -- a process that, at best, will take many years. Dealing with the Legacy of Past Damage 75. A long term strategy to restore disturbed lands affected by past mining operations will be required. The amount of finance allocated to this activity will depend upon social as much as environmental considerations. The first step will be to carry out a survey of all coal mining regions to identify sites and potential problems. The register should, in particular, include details of (a) abandoned mine lands, where the responsible operator either cannot be identified or is no longer in business, and (b) areas within an existing mine but which were worked out before the start of the operator's current permit. Thereafter, priorities should be set by oblast administrations which should be responsible for managing local reclamation programmes. Sites which present specific safety hazards or which are the source of significant polluted water run-off would be the prime candidates for initial projects. 76. Priorities for identification and selection of abandoned lands to be reclaimed should be based on the extent to which conditions at the site may present a risk to public health and safety or may result in significant, continuing environmental degradation. The program for reclaiming the abandoned lands should be implemented over a reasonable time period, perhaps 20 years, with interim goals established. A funding mmnechanis.miust be established to assure the necessary resources and it has been suggested above that an independent Trust be established to manage the program and to account for the funds. The operation of the program must be subject to public input and scrutiny, especially in priorities and selections of sites to be reclaimed. Prioritizing both the problems and the sites for remediation is critical 21 since there will not be enough money to address all of the problem sites; the objectives should be to deal with the most serious problems first, thus obtaining the most health, safety and environmental benefits for the money available. 77. Reclamation activities would include some or all of the following depending on the nature of the problem and the site: * compacting or remaking spoil heaps to prevent spontaneous combustion; * regrading and contouring mine workings and spoil heaps; * provision of adequate water drainage and protection for groundwater; * covering with topsoil, sowing grass and/or planting trees, application of fertilizers and soil bacteria; * special treatments to deal with toxic soils and other problems. Experience suggests that the costs of reclamation may average $1,000-2,000 per hectare depending upon the nature of the initial problems and the degree of restoration sought. 78. Funding reclamation costs. The general principle is that each mine should be responsible for the costs of meeting reasonable environmental standards. Mines which are unable to operate profitably on this basis should be treated in the same way, no matter whether the cause is environmental expenditures or any other component of costs. This leaves the problem of financing remedial actions to deal with the damage caused by past operations which will be the responsibility of the Trust whose role was discussed above. 79. According to standard fiscal principles, there is no reason to tie expenditures to correct past mistakes to current activity in the industry. However, many countries have found it convenient to allocate a proportion of the rents earned within the industry to this purpose. The options for funding expenditures on the reclamation of abandoned mining lands include * a fee on coal production; * a fee on coal use; * discharge fees; * general government revenues. 80. Of these options, that of imposing a fee on coal production is likely to be the most appropriate on both budgetary and environmental grounds. There would be relatively little practical difference between imposing a fee on production and one on consumption, but the former would be easier to collect. In most regions, there are other, higher priority, claims on the revenues generated from discharge fees or on general budgetary resources, so that it is unlikely that sufficient resources would be forthcoming. The federal government might provide initial funding for reclamation projects as part of a program to 22 stimulate economic activity and business development in areas affected by mine closures, but this could only be a temporary measure. 81. In the U.S. there is a $0.15/t fee on underground coal production and $0.35/t on surface coal. For surface coal, this fee amounts to a few percent of the coal value at the mine; for underground coal, it is a fraction of one percent of the coal value at the mine. Overall, the annual U.S. funding for Abandoned Mine Lands (AML) is about $270 million based on 1 billion tons production. This is allocated to cover: (a) administrative costs, (b) grants to coal-producing states based on production, and (c) grants dispensed at the Secretary of Interior's discretion. Funds may be used for non-coal mining problems to address imminent risks to public health or safety, or if a state has addressed all serious AML coal sites. 82. At September 1993 prices, assuming mine mouth values for coal of Rb 4,000 per tonne for surface mines and Rb 8,000 per tonne for underground mines, and production of 250 million tonnes per year, a flat fee of Rb 200 per tonne would amount to about 3.5 percent of coal revenues and would yield Rb 50 billion ($50 million) per year. This should be sufficient to restore up to 30,000 ha per year and should enable the estimated backlog of reclamation to be dealt with in a period of 15-20 years. Obviously, a flat-rate fee would be a larger proportion of the cost for cheaper coals and would favour production of higher quality coal. Regional or local governments might be permitted to increase the fee to meet their particular coal-land reclamation needs. 83. A fee levied on the output of each mine has the advantages that: (a) is derived from coal production and is thus related to problem being addressed; (b) it is easy to calculate; and (c) receipts can be fairly accurately predicted for budgetary purposes. Its disadvantages are that it is assessed on current production which presumably will be in environmental compliance, and it may be difficult to assess and collect from smaller operators. 23 APPENDIX: OUTLINE OF REQUIREMENTS FOR MINE CLOSURE The following notes outline typical requirements for development of detailed closure plans. The references are to US practice ("CFR" section numbers refer to US Federal Regulations) but there are a number of other codes that could be followed. Closure Plans Any closure plans should include the following minimum requirements: 1. Provide maps of final workings to appropriate authorities for permanent record. These are necessary for future land use planning. 2. Fill and seal surface openings - shafts, vents, drill holes, and subsidence cracks. Fill and seal must be stable, not susceptible to erosion or permitting air flow. 3. Elimination or acceptable control of post-closure mine drainage. Any continuing discharges should meet water quality standards and not contribute to environmental degradation. 4. Removal of all equipment, materials, and surface structures. The area should be left free and clear of debris. 5. Stabilize and grade all waste or spoil piles to blend with local topography and reinstate functional drainage pattern; all disturbed areas should be revegetated. 6. Provide for post-closure groundwater monitoring. 7. Any remaining surface impoundments should meet standards for permanent impoundments. 8. For underground mines, provide for continued monitoring of any remaining active subsidence areas and include provisions for repair/maintenance of these areas where necessary to protect public safety and prevent erosion. 9. For underground mines identify any areas requiring special post-mining land use restrictions to ensure public safety. (see 30CFR 817.15, .41, .42, .43, .102, .106, .121, and .132) 10. For surface mines, to the extent possible, final pit(s) should be backfilled, any remaining pit walls reduced, and slopes revegetated. 24 11. If final pit design allows for ponded water, pre-closure studies should be made to ensure that this water will meet appropriate water quality standards. 12. No coal seams should be left exposed. (see CFR30 816.106, .107, and . 111.) Surface Impoundments 1. All large surface impoundments should be designed using current, prudent engineering practices following established criteria and safety factors. Design should provide ample static safety factor, take into account seismic history of the area, and any possible risks failure would present to life and property. 2. Design should provide for stable foundations and abutments, freeboard under all planned operating conditions, and adequate spillway(s) for design precipitation events. 3. Construction should include removal of all vegetative and organic material, proper preparation of foundation base and cutoff trenches where appropriate, and erosion protection for slopes with either riprap or vegetation as appropriate. 4. There should be provision for monitoring and inspections. 5. Emergency procedures should be established with local authorities for any impoundments where failure would present risks to life or property. 6. Permanent impoundments should meet the following additional requirements * size and configuration adequate for intended purposes, * quality of impounded water suitable for intended uses and meet applicable quality standards, * any discharges should meet effluent limitations, * water level stable, * final grading provide adequate safety and access for proposed users, * not diminish water quality or quantity for other users, and * suitable for approved post-mining land use. 25 Coal Mine Wastes (see 30CFR 816.81, .83, and .84.) 1. Coal mine waste (including waste rock from processing plants) shall be either disposed of in the mine workings, excavation or other approved site. 2. Coal waste piles shall be sited and constructed to: * minimize adverse effects of leachate and surface water run-off on surface and groundwater quality and quantity; * ensure mass stability and prevent mass movement during and after construction; * facilitate reclamation and revegetation; * not create a public hazard; * prevent combustion. 3. Disposal facility shall be designed using current, prudent engineering practices following established criteria and safety factors. Design should provide ample static safety factor, take into account seismic history of the area, and any possible risks failure would present to life and property. 4. Design include provisions for any drainage control necessary such as diversions, underdrains, and stormwater control. 5. Construction should include removal of all vegetative and organic material, proper preparation of foundation base and diversion channels where appropriate, and erosion protection for disturbed areas with either riprap or vegetation as appropriate. 6. Emplacement of wastes shall include compaction of each left and sloping sides to both ensure stability and facilitate revegetation. 7. At end of operations, the waste pile shall be covered with a compacted layer of tight silt or clay, a layer of soil or topsoil added and the site revegetated. 8. Emergency procedures should be established with local authorities for any waste piles where failure would present risks to life or property. Annex G COSTS, SUBSIDIES, AND EMPLOYMENT IN COAL MINING Annex Rusln FodradIon Costs, Subsidies and Empibymmt in Coal Mining Contents Page Introduction 1 Operating Costs 2 Coal Prices and Mine Revenues 6 Subsidies 14 Financial State of Mining Associations 26 Wages, Employment and Social Adjustment 32 Social Costs 40 2 August 1994 costfin.ann - 1 - Introduction 1. Like many industries in Russia, the coal industry has been experiencing a radical change in its economic foundations. Prior to 1990 it was one of the core industries of the former Soviet Union with privileged access to investment and other resources. Now it is obliged to operate in a completely new environment where demand for its output is falling and it is no longer protected from competi- tive pressures. The difficulties of making this transition have been exacerbated by high and variable levels of inflation and by the inevitable rigidities of its capital stock and labor force. The political sensitivity of both coal prices and mining employment have also led to the coal industry lagging behind other industries in its response to market incentives. 2. This annex examines the economic and financial performance of the coal industry since 1991 with a particular focus on 1993. It provides the basis for key elements of the Main Report's recommendations concerning measures that should be taken over the next 2-3 years in order to restructure the industry. 3. The crucial issues concern the level and allocation of subsidies to the coal industry. The fiscal burden imposed by coal subsidies is increasingly onerous in a period when government revenue is declining rapidly as a share of (falling) GDP. At the same time it appears that subsidies were much larger in 1993 than would have been necessary to protect the welfare of those working in the industry. The allocation of subsidies has created perverse incentives for loss-making mining associations to hold down their prices. It has also undermined any pressure to improve efficiency and reduce costs. Reductions in the overall level of subsidies are a macroeconomic necessity, while changes in the way in which they are distributed are essential element in restructuring the industry and improving its performance. 4. There are many, often conflicting, sources of data on economic aspects of Russia's coal industry. The analysis in this annex is based upon the best data available. Some inconsistencies or misinterpretations may remain, but the general findings are robust. The annex draws, in particular, on a report on Coal Subsidies prepared by a team working under the direction of Michael Bernstam and Tom MacCurdy for Partners in Economic Reform (PIER) with funding from US-AID. - 2 - Operating Costs 1. See Table 1 A verage real operating costs per tonne of coal equivalent by coal basin (facing page). 2. Mine operating costs cover (a) material inputs such as electricity, fuel, timbbeand explosives, (b) wages paid either by the mine or out of the wage subsidy linked to the Tariff Agreement, (c) social security taxes, and (d) other productive costs. 3. Table 1 shows that average mine operating costs have increased from 6326 Rb per tonne of coal equivalent (tce) in 1 993 Q2 to 7395 Rb per tce in 1 993 Q4, both at 1993 Q2 prices. There was an apparent dip in 1993 Q2 which may simply reflect a problem with the data but could alternatively be linked to the financial squeeze on mining associations in the period before the July 1 993 changes in the arrangements for setting coal prices. 4. The average masks large differences between coal basins. The largest real increases -- 160% and 90% respectively -- were for low cost surface mines in East Siberia and Kansk-Achinsk, whereas the real increases for the Donbass, Kuzbass and North East basins were less than 5%. This narrowing of the relative cost differentials reflects the different impacts of market and financial circumstances on mining associations in the various basins. For example, the North East is a relatively low cost mining area but its situation was unusual in that the largest producer -- Yakutugol -- has a large fixed price contract for the export of coking coal to Japan and has experienced substantial financial pressure due to the appreciation in the real value of the rouble since 1 992. 5. The overall increase of 1 7% in average operating costs per tce is very close to the 18% decline in total output from 1 991 to 1 993, so that the industry's total costs have barely fallen despite the large fall in production. - 3 - Table 1 - Average real operating costs per tonne of coal-equivalent by coal basin Average operating costs in Rb per tce at 1 993 Q2 prices 1991 1992 1993 1993 1993 Q1 Q2 1Q93 Q4 Donbass 9612 8834 11146 7923 10062 9608 East Siberia 1739 2615 2875 2519 4008 4575 Far East 10000 13177 12705 10189 12132 13911 Kansk Achinsk 989 1620 1484 1628 2766 1887 Kuzbass 6994 7858 7173 5984 7534 7327 Moscow/Center 11466 10160 16476 8360 12572 18421 North East 4700 5301 4353 4415 4696 4804 Pechora/North 9024 9607 12501 8100 11278 10702 Urals 10034 9671 10716 9425 9618 12736 All basins 6326 7017 7197 5733 7326 7395 -4- Composition of operating costs 1. See Table 2 Real changes in mine operating costs since 1991 (facing page). This details the median value across mining associations of the real changes in the various components of mine operating costs. Median values have been used because they are not affected by extreme or erratic variations in the values reported by individual mining associations which may be the result of reporting errors or other random factors. 2. Non-energy material costs increased sharply in 1 992 following the general liberalization at the beginning of the year. However, mining associations have clearly cut back upon their inputs of materials, so that the majority of mines had a lower real cost per tonne for materials in the final quarter of 1 993 than in 1 991. On the other hand, energy -- especially electricity -- costs increased substantially in 1 992 and that was maintained through 1 993. In part, this reflects increases in the real prices of electricity and other fuels relative to other industrial goods. The cost increase is larger than can be explained by relative price changes alone, so it seems that many mines have treated electricity costs as fixed, overhead costs independent of the level of output. Overall, material costs were an important element driving up the real cost of mining during 1 992, but that was reversed in 1993. 3. Wage costs -- including the value of wage subsidies linked to the Tariff Agreement -- were primarily responsible for the real increase in operating costs in 1 993. For the industry as a whole the average real wage cost per tonne at 1 993 Q2 price increased from 1760 Rb in 1991 to 2540 Rb in the second half of 1993. However, the wages paid directly by the mining associations themselves fell from 1 760 Rb to 11 00 Rb per tonne, so that it is the Tariff Agreement and the associated wage subsidies which are responsible for this increase in real costs. 4. In the first half of 1993 financial stringency appears to have prompted mining associations to attempt to control their direct operating costs (excluding wage subsidies) since these fell from 4470 Rb per tonne on average in 1992 to 3290 Rb in 1 993 Ql and 2765 Rb in 1993 Q2. However, price liberalization in July 1993 combined with an increase in total subsidies in the second half of the year appears to have undermined this effort, since direct operating costs rose to 3470 Rb per tonne in the second half of 1 993. - 5 - Table 2 - Real changes in mine operating costs since 1991 Cost component Median increase since 1991 in cost per tonne of coal deflated by the consumer price index (%) 1992a 1993 1993 1993 1993 Q1 Q2 Q3 Q4 Materials 34 4 0 11 - 7 Electricity 126 73 74 121 117 All material costs 45 1 5 3 1 3 6 Wages and bonuses -15 (11) 28 6 31 61 (incl wage subsidies paid under the Tariff Agreement) Social security payments -11 -47 -57 -48 -38 Total operating costs 8 (20) 16 - 7 16 28 Depreciation -29 -49 -70 -81 -88 Total costs 7 (15) 12 - 2 12 23 Note: (a) The estimates for 1992 may understate the rise in wage costs and, thus, in total costs because of the treatment of wage subsidies. In 1993 wage payments under the Tariff Agreement financed by wage subsidies are not included in wages recorded as having been paid by mines. However, in 1992 the subsidy received by each mining association was linked to the difference between its average wholesale price and its average 'accounting price' plus a margin for the 'formation of profits' which covered investment, social services and some wages. It has been assumed that, under this previous system of subsidies, reported wage costs per tonne for 1 992 include payments under the Tariff Agreement. The figures in brackets are the estimates based on the assumption that payments under the Tariff Agreement were, in fact, excluded from reported wages in 1992. Coal Prices and Mine Revenues 1. See Table 3 Average coal prices received by mining associations by coal basin and Table 4 Average real coal prices by coal basin (following pages)'. 2. The mechanism for setting coal prices was radically changed in July 1993. This involved a degree of price liberalization combined with the abolition of the distinction between 'wholesale prices' (charged to coal buyers) and 'accounting prices' (paid to mining associations). As a result the average coal price received by mining associations increased from about Rb 5,700 per tce in 1993 Q2 to Rb 11,500 per tce in 1 993 Q3. The real price fell by a little over 10% from 1 993 Ql to Q2. The price reform increased the average real price received by mining associations in the third quarter as a result of the shift from 'accounting prices' to 'market prices', but this gain was eroded in the final quarter of the year. As a result, the average real price received by mining associations fell slightly from the first half of the year to the second half. 3. The July price reform has radically changed the structure of the Russian coal market. The average price for unwashed steam coal2 at the mine paid by coal consumers increased from about Rb 1 540 per tonne in 1 993 Q2 to Rb 8300 per tonne in 1 993 Q4, an increase of 70% in real terms. The equivalent figures for unwashed coking coal were Rb 3190 per tonne in 1993 Q2 and Rb 20220 in 1993 Q4 for a real increase of 100%. Coal prices have been computed from the average revenue from coal sales per tonne of output reported in the financial statements of mining associations, after adjusting for apparent double counting linked to the operation of coal washeries. Prior to July 1993 there was a sharp distinction between the 'wholesale' price of coal (paid by the purchaser free-on-rail at the mine) and the 'accounting' price credited to the mining association. This distinction disappeared with price liberalization since mining associations now establish and receive a 'market' price for their sales. Thus, the tables are based on 'accounting' prices for the first half of the year and on 'market' prices for the second half. Data on association revenues in the final quarter of 1993 were incomplete, so that it was assumed that the market price per tonne increased in line with inflation where data on revenue per tonne could not be obtained. The resulting average price for all basins is broadly consistent with Rosugol's reported average market price for the same period. 2 Steam coal is defined as all hard coal except coking coal. This excludes the brown coals which make up the major part of production in several coal basins -- e.g. East Siberia, Kansk-Achinsk, Tula, and Urals. The data is taken from the energy price database maintained by the International Energy Agency. - 7- 4. Changes in the delivered cost of coal were less dramatic because the large real increases in rail freight rates occurred from mid-i1992 to mid-i1993. The average price of unwashed steam coal delivered to power stations increased from Rb 4250 per tonne in 1 993 Q2 to Rb 1 81 20 per tonne in 1 993 Q4 implying a real increase of 35%. For washed coking coal the prices were Rb 7680 per tonne in 1 993 Q2, Rb 36850 in 1993 Q4, giving a real increase of 50%. There must be some doubt as to whether mining associations will be able to sustain the widening of the margin between steam and coking coal, since demand for coking coal is likely to remain much weaker than that for steam coal. 5. In real terms the gap between average operating costs and the average price paid to mines rose from just under Rb 500 per tce in the first half of the year to over Rb 1 500 in the second half. It seems that price adjustments combined with the continuation of large subsidies relaxed the pressure on mines to hold down their costs, so that the average operating cost per tce increased sharply from Q2 to Q3. This impression is reinforced by examining the basin-by-basin figures which show that the gap between operating costs and revenues per tce widened strongly in all of the high cost basins -- Donbass, Far East, Moscow and Urals. There was also a marked deterioration in the North East but this was probably linked to the sharp appreciation of the rouble relative to the dollar which penalized exports of coking coal from Yakutugol to Japan. 6. Table 4 shows that the price reform has done little to bring the regional pattern of prices into line with the structure that might be expected under a full market system allowing for differences in production and transport costs. In real terms the prices in Kansk-Achinsk and Kuzbass would have to fall, while prices in Donbass, Far East, Moscow, North East, Pechora and Urals would have to rise. These adjustments will involve real increases of 2-3 times for the Donbass and Moscow basins because of their locational advantages. Again, the case of the North East basin is special because of the separation between the local market for steam coal and the export market for coking coal. - 8 - Table 3 - Average coal prices received by mining associations by coal basin Average ex-mine revenues from coal sales (Rb per tce) 1993 1993 1993 1993 1993 1993 Q1 Q2 Q3 Q4 Hi H2 Donbass 3300 4700 9100 13400 4000 11400 East Siberia 1700 2600 7500 12300 2200 10000 Far East 6900 10800 17200 28100 8700 23200 Kansk Achinsk 1000 1300 4100 6700 1100 5700 Kuzbass 3900 6900 13800 22800 5300 18800 Moscow/Center 9200 10000 11600 19100 9600 15300 North East 3400 5900 8100 13400 4600 11000 Pechora/North 5400 5400 17000 23900 5400 20700 Urals 6000 8600 13400 22100 7300 17800 All basins 3700 5700 11500 18500 4600 15300 - 9 - Table 4 - Average real coal prices by coal basin Average ex-mine revenues from coal sales (Rb per tce at 1 993 Q2 prices) 1993 Hi 1993 H2 Market forecast Low freight High freight tariff tariff Donbass 5200 4500 10400 13500 East Siberia 2800 3900 3500 4500 Far East 11400 9100 11100 17500 Kansk Achinsk 1500 2100 1600 1400 Kuzbass 6900 7300 5600 5100 Moscow/Center 13000 6100 14800 20900 North East 5900 4300 11000 13500 Pechora/North 7400 8300 10400 12500 Urals 9500 7100 9400 11800 All basins 6000 5800 - 10- Price adjustments by mining association 1. See Figure 1 Price adjustments after liberalization, 1993 (facing page)3. 2. The basis on which mining associations set their output prices following the price reform seems to have been confused and inconsistent. If they had followed a 'cost-plus' pricing rule, one wouldexpect to find that mining associations with the highest ratio of operating costs to output price would have increased their prices most. It is clear from Figure 1 that this was not the case, since there is no correlation between the ratio of operating costs to output price in the first half of 1 993 to the real increase in output prices between the first and second halves of the year. 3. This suggests strongly that mining associations felt that the allocation of subsidies would protect inefficient, high cost, mines from the financial penalties that they might expect to suffer under a real market system. Instead, the high cost mines were able to hold their prices down in order to maintain the level of demand and, thus, of output. This is supported by the evidence discussed below which shows the very close correlation between the average subsidy per tonne and the difference between average price and operating costs per tonne. 4. The potential benefits of price reform have been largely dissipated by the manner in which subsidies have been allocated because this undermines any incentive for mining associations to increase their relative prices when this is possible or to control their costs. In particular, mining associations in high cost basins which should be protected by their locational advantages -- notably Rostovugol and Tulaugol -- have been encouraged, or at least permitted, to maintain low prices for their coal rather than raising them to reflect the much lower transport costs from the mine to the consumer. 3 As in the previous section, the adjustment of coal prices refers to the prices received by mining associations, not those paid by their customers. - 11 - Figure 1 Price adjustments after liberalization, 1993 Real price Index 193 H2 with 1993 HI =100 200 100 ------------ ... ..... . U . I U~~~~~~ O0. I . I . * . 0 100 200 300 400 Rato of operating costs to output price 1993 HI (%) -12- Price and output changes 1. See Figure 2 Price and output changes by association, 1993 (facing page). 2. Again, in a real market environment one would expect to observe that enterprises that increase their prices by more than the average for their industry would experience a relative decline in demand and in output. Figure 2 shows that this was not the case for the coal industry after price reform. Indeed, there was a mild tendency for associations with larger price increases to have smaller falls in output from the first to the second halves of the year. This reinforces the conclusion that mining associations were primarily concerned with distributing any reduction in output uniformly across associations. On this basis, they set their prices at levels necessary to generate demand for their output rather than by reference to the profitability of production either on average or at the margin. -13- Figure 2 Price and output changes by association, 1993 Output Index for 1993 H2 wlth 1993 HI =100 140 130 120 ----- - -10 - - - - - - - - - - - - - - - - - - - - - . . . . . . . . . . . . . . . . . ..... . . . . . . . ... .... . 50 0 100 200 Real prce Index for 1993 H2 with 1993 H1=100 - 14 - Coal Subsidies 1. See Table 5 Operating subsidies for the coal industry, 1991-94 and Figure 3 Composition of real coal subsidies, 1992-94 (following pages). 2. The price reform of July 1 993 can be seen as the consequence of a major shift in the operation of the system of coal subsidies. Up to then (cross-)subsidies were primarily distributed through the 'accounting' prices for coal that were set individually for each mining association. The data show that this system was clearly beginning to break down during the first half of 1 993 under the pressure of the differential impact of inflation on associations with widely varying cost structures. Nonetheless, the decline in the real value of subsidies in the second quarter of 1 993 appears to have had a significant impact in constraining costs. 3. Under the new system subsidies are notionally allocated to mining associations under specific headings: (a) A price subsidy which is designed to cover the difference between the sales price charged by the association and its 'necessary' operating costs. In practice, this subsidy undermines the incentive of associations to raise their prices, even where this would be appropriate, or to control their costs. (b) A subsidy for the cost of providing 'social services'. This is discussed below. (c) A subsidy for wages which is linked to specific provisions concerning wage indexation and special wage premiums in various collective bargaining agreements covering different workers in the coal industry. These agreements are generally referred to as the 'Tariff Agreement' though they are not identical. Both mining associations and workers regard payments under the Tariff Agreeement as quite separate from the base wages paid by the mines. These payments have been frequently delayed on the grounds that the relevant wage subsidy has not been distributed by the Government. In practice, the separation of base wages and 'Tariff' wages, the latter financed from wage subsidies, has had a very detrimental effect on the control of labor costs by mining associations. (d) A subsidy for investment which covers a bizarre miscellany of costs. A part of this is an accounting transfer to cover the interest on credits used to finance past investments, housing construction and working capital. Funds for training and for agricultural operations attached to mines are also included under this heading. - 15 - However, most of the money appears to be spent on routine maintenance or replacement of equipment, buildings and similar items which ought to be regarded as part of the regular operating costs of each mine. This category should probably be added to the price subsidy in categorizing the ways in which coal subsidies are used, since the real investment subsidy is the provision of budgetary support for 'centralized investment' in larger projects. 4. The level of operating subsidies remained roughly constant Rb 2.0-2.2 trillion in 1993 prices over the period 1991-93. The amount included in the 1994 Budget is 79% of the sum paid in 1 993 (on the assumption that the average price level for 1 994 is 4.45 times that for 1 993). In dollar terms the amount of subsidies has increased from US$ 900 million in 1 992 to US$ 3.9 billion for 1 994 because of the real appreciation of the rouble. Between 1991 and 1993 the share of GDP allocated to coal subsidies increased from 1 % to nearly 1.4%. It should decline to about 1 .3% in 1 994 on current projections of GDP for the full year. 5. Coal subsidies are imposing an increasingly heavy burden on the Government's finances because central government revenue has been falling sharply as a share of GDP. In 1992 these subsidies accounted for 5% of central government revenue, but this has risen to 15% for 1994. Since the pressures which are eroding central government revenues are not likely to ease, the Government has no choice other than to make a reduction of coal subsidies a key element in any program to improve its fiscal position. Macroeconomic considerations mean the real level of coal subsidies must fall sharply in 1995 and following years. Indeed, the fiscal situation for 1 994 is so precarious that the Government may well find itself unable to provide the budgeted level of subsidies during 1 994 if it is to meet its target for a budget deficit of less than 10% of GDP. In this context, Rosugol's request for operating subsidies for the first quarter of 1994, which implied a substantial rise in the real level of coal subsidies, was quite unrealistic. 6. The composition of operating subsidies has changed substantially over the last three years. The proportion allocated to wages has increased from 1 6% in 1 992 to 34% in 1 993 and 54% in the 1 994 Budget. The share of social services has fallen from 1 9% in 1 992 to 7% in 1 994, in part because it is expected that social assets of mining associations and the responsibility for financing them will be transferred to oblast and local authorities gradually in 1 994 and 1 995. - 16 - Table 5 - Operating subsidies for the coal industry, 1991-1994 Period Coal subsidies to Rosugol by category in Rb billion Total coal subsidies Prices Social Wages Invest- Total 1993 Rb US $ as % of services menta billion million GDP Central govt revenue 1991 12.7 2224 0.98 1992 47.6 37.5 32.2 78.8 196.1 1999 900 1.09 5.2 1993 Ql 157.8 24.0 110.0 50.2 342.0 982 597 2.16 13.4 1993 Q2 92.0 34.0 77.0 24.0 227.0 374 245 0.76 5.9 1993 Q3 Alloc 197.7 113.2 217.8 210.4 739.1 643 722 1.67 9.5 Paid 138.0 84.0 195.0 190.5 605.5 527 592 1.37 7.8 1993 Q4 Alloc 135.0 183.0 339.0 163.8 800.8 422 663 1.10 25.2 Paid 99.4 125.7 206.0 142.6 573.7 302 475 0.79 18.1 1994 Request 734.1 284.2 496.6 418.0 2033.1b 726 1289 2.10 25.2 for Ql Budget 1380.1 524.0 4171.4 1183.0 7740.0c 1740 3870 1.29 15.2 for year Notes (a) Excludes resources provided for centrally-funded investment in large scale projects (b) Includes Rb 100 billion requested as a subsidy for mine closures. (c) Includes Rb 305 billion for mine closures, Rb 21 billion for a special subsidy for coal production in Primorsk, and Rb 155 billion of arrears from 1993 paid in 1994. - 17- Figure 3 Composition of real coal subsidies, 1992-94 Real subsidies at annual rat In 1993 Rb trillion 4 3". I E 0 1992 1993 Q1 1993 Q2 1993 Q3 1993 Q4 1994 Budget 2 Prlces/lInvestment M Social services O Wages - 18- Operating subsidies by mining association 1. See Table 6 Allocation of coal operating subsidies by association, 1993 (facing page). 2. As Table 6 shows, there is a huge variation between mining associations in the operating subsidies that they receive per tonne of output. The range is from Rb 11 2 for Borodinsky -- a massive surface mine producing nearly 28 million tonnes of brown coal a year -- to Rb 1 9495 for Kizelugol -- a small association operating mines in the Urals above Perm which are a major source of pollution due to acid mine drainage. The average subsidy amounted to almost Rb 5900 per tonne, of which Rb 2090 was for wages, Rb 1 1 20 for social costs and the remainder for losses under the prices and investment categories. The relative variation of wage subsidies across associations is larger than for the other components of subsidies, which reflects the extent of regional differences in wage levels and in labor productivity. 3. Of 7 mining associations which received less than Rb 1 500 per tonne in total subsidies in 1993, 5 of them (Vostsibugol, Borodinsky, Krasnoyarsk, Mezhdurechje and Yuzhny Kuzbass) rely entirely or over 90% on surface mines for their production. The remaining two -- Raspadskaya, Vorgashorskaya -- are large underground mines each producing over 4 million tonnes of coking coal a year. - 19- Table 6 - Allocation of coal operating subsidies by association, 1993 Associations and Subsidies in 1 993: Rb per tonne independent mines Total Prices Investment Social Wages Gukovugol 11434 3476 1963 1790 4205 Obukhovskoye 6584 510 1405 1340 3330 Rostovugol 16164 6066 2669 2462 4967 Vostsibugol 806 393 91 182 140 Dalnvostugol 2751 927 487 567 771 Primorskugol 9473 4967 1221 1055 2231 Sakhalinugol 13602 4040 1631 2077 5853 Borodinskiy 112 0 34 32 46 Krasnoyarskugol 893 228 247 141 278 Belovougol 6485 1211 1844 817 2613 Kiselevskugol 14931 2969 3421 3681 4859 Kuzbassrazrezugol 4783 11 33 1444 1068 1138 Kuznetskugol 10450 2181 2456 2137 3676 Leninskugol 5816 979 1553 1111 2172 Mezhdurechje 718 210 192 114 202 Prokopyevskugol 9693 2282 1546 1921 3944 Raspadskaya 1400 72 908 94 326 SeveroKuzbassugol 14240 1615 3022 4047 5555 Vakhrusheva 4244 794 1982 229 1239 Tulaugol 9487 2817 1504 1646 3521 Severovostokugol 8440 2252 2045 1489 2654 Yakutugol 6190 1186 1446 1386 2172 Intaugol 7592 903 925 2403 3361 Vorgashorskaya 851 0 383 139 329 Vorkutaugol 12035 1692 943 2867 6532 BashkirUgol 4005 1722 861 336 1086 Cheljabinskugol 6466 2023 1367 849 2226 Kizelugol 19495 5194 2664 3147 8491 Shumikhinskaya 12231 1733 3503 790 6205 Vakhrushevugol 3563 432 885 612 1633 Yuzhniy Kuzbass 1401 0 220 645 536 Total 5881 1529 1142 1121 2089 - 20 - Subsidies, prices and costs 1. See Figure 4 Subsidies and coal prices by association, 1993, Figure 5 Subsidies and production costs by association, 1993, and Figure 6 Subsidies and cost-price differentials by association, 1993 (following pages). 2. The figures examine the relationship between subsidies, coal prices and operating costs across mining associations. Figure 4 shows that there was no relationship across associations between the level of the total subsidy per tce and the wholesale price per tce following the price reform. If prices were determined by purely market factors, one would expect to observe a negative relationship. Instead, the pattern supports the view that subsidies and prices were jointly set so as to protect the high cost, low productivity mines from the impact of real market liberalization on output and employment. 3. Figures 5 and 6 show that, as one would expect, associations with higher production costs and with larger gaps between average production cost and average selling price received large subsidies. The striking point that emerges from Figure 6 is that subsidies more than compensate for operating losses. Associations whose wholesale price exceeds their operating cost still receive a positive subsidy, while increases in the gap between operating cost and wholesale price are compensated on a slightly greater than a one-for-one basis by increases in the subsidy received. Distribution of subsidies in such a manner totally removes any incentive either to control operating costs or to obtain the highest possible price for output that is sold. 4. The implication of these results is that the price reform did not amount to true price liberalization. A move to full market pricing will imply the emergence of large differentials between the ex-mine prices charged by mines which are located close to their main markets and those which are less well located. The way in which subsidies were allocated in 1 993 strongly discouraged this adjustment because the mining associations which should have raised their prices most -- especially those in the Donbass and the Far East -- were also among the largest recipients of subsidies. For the future, it is crucial any continuing subsidies should reward rather than penalize the changes required by full market liberalization. - 21 - Figure 4 Subsidies and coal prices by association, 1993 Real coal price 1993 H2, Rb '000 per tce at 1993 Q2 prices 14 - * sU _ U 6 ----------- -- - - -- - - -- - - -- - - - 0 4 a 12 is 20 24 28 32 Total subsidy, Rb '000 per tce - 22 - Figure 5 Subsidies and production costs by association, 1993 Average subsidy, Rb 000 per tonne 20 86 - -- -- -- -- -- -- -- -- -- ........n.. ..... .. ... . -- - -- - ,* *U - - - - - - - - - - - - . .. . . . . . . . . . . . . . .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Em d o 1 l *l 1 I I I I 0 4 8 12 16 20 24 Average operating cost, Rb V0 per tonne - 23 - Figure 6 Subsidies and cost-price differentials by association, 1993 Totab subsidy. Rb 000 per tonne 20 16-_ J 12 - - - - - - - - - - - - - - - - - - - - - - - .... ...... . .... - - -- -- - -- -- -- - ------------- -- - - - . ........ . . . 4 IL ----------. . ................................................................. . -4 0 4 8 12 Operatilng cost les average prke, Rb 1000 per tonne - 24 - Subsidies and wage payments 1. See Table 7 Subsidies and average wages by association, 1993 (facing page). 2. Throughout the second half of 1993 there were persistent problems of miners' wages not being paid. The impression was given that the reason for the non- payment of wages was either the insufficiency of total government subsidies for the industry or delays in the payment of those subsidies that were provided, especially of the wage subsidies linked to the Tariff Agreement. 3. Table 7 indicates that neither explanation stands up to examination. For all but 6 mining associations -- 6 out of the 7 that were identified above as receiving subsidies of less than Rb 1 500 per tonne -- the amount of subsidies actually paid in 1 993 exceeded the total wage bill including all payments under the Tariff Agreement. Over the industry as a whole, government subsidies amounted to 1.38 times the industry's wage bill. If the payment of wages had been the first priority, there should have been no difficulty in ensuring that all miners were paid - - and on time too. 4. Of course, mining associations had to pay for the other inputs required to continue mining operations -- fuel, explosives, timber, etc. This prompts the observation that it would have been less expensive for the Government to have halted production at most or all mines -- paying all wages but avoiding the expense of using materials and other items which were also financed out of subsidies. In this way the total level of subsidies could have been reduced by over Rb 600 billion for 1 993 as a whole. 5. The 6 associations for which total subsidies were less than their wage bill employed about 56,000 workers (out of an estimated industry total of 740,000) to produce over 81 million tonnes of coal (out of 300 million tonnes for the industry). While some of them faced financial difficulties because of the failure of their customers to pay their bills on time (or at all), they were not central to the overall problem of the non-payment of miner's wages. This was concentrated in mines and association whose subsidies were greater than their wage bills, usually by a large margin. 6. Thus, the question remains: why were large numbers of miners not being paid during the autumn and winter of 1 993-94 ? - 25 - Table 7 - Subsidies and average wages by association, 1993 Associations and Wage rate Subsidy Total subsidy independent mines per month per worker as % of per month total wages Gukovugol 97,689 159,216 163 Obukhovskoye 135,461 148,312 109 Rostovugol 101,326 194,288 192 Vostsibugol 169,553 92,001 54 Dalnvostugol 147,771 203,816 138 Primorskugol 168,217 388,853 231 Sakhalinugol 181,007 230,619 127 Borodinskiy 184,214 40,978 22 Krasnoyarskugol 137,123 145,627 106 Belovougol 146,038 174,377 119 Kiselevskugol 121,300 201,963 166 Kuzbassrazrezugol 164,327 279,336 170 Kuznetskugol 158,398 215,726 136 Leninskugol 147,971 182,060 123 Mezhdurechje 182,102 46,127 25 Prokopyovskugol 129,001 176,885 137 Raspadskaya 187,417 116,034 62 SeveroKuzbassugol 143,284 1 74,116 122 Vakhrusheva 158,212 200,322 127 Tulaugol 81,235 149,705 184 Severovostokugol 293,720 380,846 130 Yakutugol 222,991 590,245 265 Intaugol 201,031 262,253 130 Vorgashorskaya 239,934 61,905 26 Vorkutaugol 218,409 231,548 106 BashkirUgol 88,000 163,153 185 Cheljabinskugol 133,089 196,195 147 Kizelugol 100,446 151,849 151 Shumikhinskaya 100,966 124,348 123 Vakhrushevugol 97,140 124,744 128 Yuzhniy Kuzbass 148,657 93,314 63 Total 144,506 199,203 138 - 26 - Financial State of Mining Associations 1. See Table 8 Financial position of mining associations, 1993 and Table 9 Financial position of mining associations, 1993 03 (following pages). 2. In view of the payment problems experienced from mid-1 993 onwards an analysis of the financial state of the coal industry has been carried out for the whole of 1 993 and for the quarter immediately following the price reform. In the tables: Coal revenues = the value of sales at wholesale prices (not accounting prices for the first half of the year); Value-added = coal revenues less the cost of material and other productive inputs; Profit measure = coal revenues less operating costs; Surplus measure = profit measure plus total subsidies; and Cash flow = surplus plus increase in accounts payable minus increase in accounts receivable plus credits received less loan repayments; The data required to construct the cash flow measure was obtained from Roskomstat data but was only available up to the end of the third quarter of the 4 year 3. Over the whole year four associations had negative value-added. Three of them operate high cost mines -- Rostovugol, Primorskugol, and Tulaugol. The fourth was Yakutugol whose position was affected by the terms of its export contract to supply coking coal to Japan. After the price reform no mining association had negative value-added in the third quarter. 4. Few mining associations were able to operate profitably over the year as a whole. Borodinsky, Kuzbassrazrezugol, Raspadskaya and Vorgashorskaya each made 4 The 1 993 03 figures are based on a different source of data for average wholesale prices from that used for the whole of 1 993 so that there may be some inconsistencies between the two. Where there were doubts, the lower figure is reported so that the profit, surplus and cash flow estimates should be less than or equal to the 'true' figures. - 27 - profits of over Rb 10 billion for the year, but the industry as a whole had a loss in excess of Rb 850 billion with Rostovugol accounting for over Rb 1 50 billion of that on its own. The overall position was much better in the third quarter on its own. The total loss was less than Rb 90 billion with Rostovugol's loss representing a third of that5. Even so, the majority of associations still made losses, though these losses would have been eliminated for all but 8 associations if costs had been kept at their 1 993 Q2 level in real terms. 5. Despite these losses the industry had a large surplus once the payment of subsidies is taken in account. The total surplus amounted to nearly Rb 880 billion for the year. Even chronic loss-makers such as Rostovugol, Primorskugol, Kuznetskugol and Vorkutaugol all had annual surpluses from Rb 40 billion to Rb 104 billion. No association had an overall deficit. Thus, the overall level of subsidies was about double the amount required to safeguard the financial position of the industry. 6. In the third quarter the industry's net surplus amounted to Rb 570 billion. The cash flow estimates adjust this for changes in the cash position of associations due to net changes in receivables and payables as well as in bank and other credits. Loan repayments or an increase in net receivables meant that a few associations experienced a significant outflow on a cash basis, but the industry as a whole had a positive cash amounting to almost Rb 550 billion in the quarter. 7. Nearly Rb 63 billion was also paid to the coal industry to finance centralized investment. There seems to be little justification in providing such resources when there is ample cash flow to finance any investments that make economic sense. Note that Borodinsky, Raspadskaya and Vorgashorskaya all made losses in the third quarter. Their prices for the quarter were well below the average for the year which may indicate that they were initially constrained in adjusting their prices after the reform or that the price data is incorrect. - 28 - Table 8 - Financial position of mining associations, 1993 Associations and Coal Operating Value- Profit Surplus independent mines revenues costs added measure measure (Rb bin) (Rb bin) (Rb bin) (Rb bin) (Rb bin) Gukovugol 34.7 75.9 9.8 (41.2) 32.7 Obukhovskoye 16.1 18.4 11.3 (2.3) 9.6 Rostovugol 38.7 188.9 (25.1) (150.2) 64.4 Vostsibugol 107.0 106.9 60.0 0.1 27.1 Dalnvostugol 22.1 35.0 0.3 (13.0) 3.5 Primorskugol 16.2 100.0 (18.5) (83.8) 43.2 Sakhalinugol 32.2 80.7 2.6 (48.5) 8.1 Borodinskiy 53.1 31.9 32.3 21.2 24.0 Krasnoyarskugol 29.0 27.7 17.7 1.3 15.7 Belovougol 36.8 60.5 10.1 (23.7) 11.4 Kiselevskugol 27.1 58.2 5.7 (31.2) 23.8 Kuzbassrazrezugol 200.6 169.3 112.6 31.3 151.1 Kuznetskugol 164.7 236.0 78.8 (71.3) 104.4 Leninskugol 57.3 103.0 22.2 (45.7) 26.4 Mezhdurechje 23.3 24.6 11.0 (1.3) 1.2 Prokopyevskugol 73.2 125.0 24.3 (51.8) 38.7 Raspadskaya 70.0 39.3 49.4 30.7 38.9 SeveroKuzbassugol 44.1 122.3 6.9 (78.2) 11.9 Vakhrusheva 11.2 8.8 8.0 2.4 8.6 Tulaugol 14.3 64.1 (5.5) (49.8) 23.8 Severovostokugol 13.1 24.7 8.6 (11.6) 13.5 Yakutugol 42.6 90.3 (7.5) (47.7) 29.4 Intaugol 35.7 74.2 12.5 (38.4) 20.3 Vorgashorskaya 39.7 27.3 28.4 12.4 15.7 Vorkutaugol 130.1 201.0 67.6 (70.9) 60.5 BashkirUgol 4.6 13.9 0.3 (9.4) 7.6 Cheljabinskugol 41.4 89.8 7.6 (48.4) 23.5 Kizelugol 12.5 38.8 0.7 (26.3) 10.4 Shumikhinskaya 0.9 2.8 0.1 (1.9) 0.2 Vakhrushevugol 11.7 18.7 5.2 (7.1) 7.2 Yuzhniy Kuzbass 61.1 57.9 27.3 3.2 16.9 Total 1,507.8 2,362.3 583.9 (857.8) 879.6 - 29 - Table 9 - Financial position of mining associations, 1 993 Q3 Associations and Coal Operating VIlti( Profit Surplus Cash Central independent mines revenues costs a(dde(d measure measure flow investm- (Rb bIn) (Rb bin) (RI) in) (Rb lAn) (Rb bIn) (Rb bin) ent (Rb bin) Gukovugol 13.2 21 3 8.3 (8.1) 16.1 16.7 4.4 Obukhovskoye 4.3 3.3 3.1 1.0 6.1 5.5 1.2 Rostovugol 17.4 48.0 7.1 (30.6) 73.3 81.7 10.1 Vostsibugol 30.7 31.2 21.1 (0.5) 11.6 48.0 2.6 Dalnvostugol 9.2 8.0 5.2 1.2 5.6 5.2 0.3 Primorskugol 18.2 22.2 11.9 (4.0) 23.0 20.0 5.6 Sakhalinugol 10.4 19.2 5.5 (8.8) 6.2 6.5 0.0 Borodinskiy 7.7 9.7 4.2 (2.1) 0.8 (14.4) 1.7 KrasnoyarskLJgol 10.5 13.7 5.9 (3.1) 0.9 (7.4) 1.4 Belovougol 14.0 14.2 10.6 (0.2) 18.1 18.4 0.0 Kiselevskugol 9.7 12.3 6.4 (2.6) 18.5 21.3 0.0 Kuzbassrazrezugol 74.6 64 1 45.8 10 4 42.3 44.9 1.8 Kuznetskugol 49.6 56.7 37.3 (7.1) 46.1 55.4 0.0 Leninskugol 31.3 23.8 25J.8 7.5 38.8 39.7 0.4 Mezhdurechje 2.8 6.3 0.6 (3.5) (0.8) (20.5) 0.0 Prokopyevskugol 32.3 30.1 24.1 2.2 45.1 36.8 0.6 Raspadskaya 6.3 10.6 4.4 (4.2) (0.8) (17.4) 7.8 SeveroKuzbassugol 15.9 23.4 11.5 (7.5) 32.6 22.0 0.3 Vakhrusheva 3.5 2.0 3.1 1.5 7.1 9.5 0.0 Tulaugol 7.0 14.5 4.5 17.4) 21.5 22.6 15.7 Severovostokugol 3.4 1.9 3 1 1.6 14.3 15.4 0.0 Yakutugol 19.3 24.5 8.5 (5.2) 18.0 8.8 0.1 Intaugol 14.2 19.5 9.9 (5.3) 15.8 17.5 3.1 Vorgashorskaya 9.3 11.0 6.6 (1.7) 5.8 7.7 0.0 Vorkutaugol 37.3 46.2 26.6 (8.9) 41.5 41.7 3.5 BashkirUgol 4.5 2.8 3.8 1.7 6.2 10.9 0.1 Cheljabinskugol 15.7 19.9 9.2 (4.2) 18.2 13.5 0.0 Kizelugol 3.8 9.2 1.6 (5.4) 8.1 X8.7 0.0 Shumikhinskaya 0.3 0.7 0.2 (0.3) 0.4 0.4 0.0 Vakhrushevugol 4.2 4.8 2.9 (0.7) 5.2 4.2 0.0 Yuzhniy Kuzbass 15.4 9.3 10.3 6.0 14.3 16.0 1.8 Total 505.7 593 9 335.4 (88.2i 570.0 549.3 62.8 - 30 - t%w serious is the build-up of arrears ? 1. See Table 10 Coal industry arrears, 1993 and Table 11 Composition of coal industry arrears, 1993-94 (facing page). 2. The severity of the 'arrears problem' in the coal and other industries is a matter of considerable controversy. Even the basic data is in dispute. For example, Rosugol has published figures which assert that the net receivables of mining associations increased by Rb 132 billion from the end of 1993 Q2 to the end of 1 993 Q3. On the other hand, Roskomstat's figures for the same period show a much smaller detrioration of Rb 34 billion. 3. The large increase in net receivables owing to the industry in the third quarter of 1 993 shown in Table 10 was an inevitable consequence of the large price increases which accompanied the price reform. If bills for coal at the mine had been left outstanding by coal consumers for exactly one month, this would have led to an increase in total receivables of Rb 120-140 billion which is fully consistent with the Roskomstat estimate. 4. The estimates in Table 11 suggest that there was a substantial worsening in the level of receivables over the winter of 1 993-94 since the amount owed by customers increased from 1.5 months' production to 3 month's production. However, mining associations seem to have passed all their liquidity problems on to their suppliers and the government since the gap between total payables and commercial receivables widened from 6 days' production to 18 days. 5. Since arrears of receivables and payables are a normal feature of business finances (especially under high inflation when it is difficult to maintain working capital), changes in the amount of overdue arrears are of primary concern. Table 11 shows that overdue commercial receivables increased from 28 days' production to 46 days', while overdue payables increased from 27 days' production to 56 days'. In net terms, the commercial balance deteriorated slightly -- from 4 to 6 days' production -- while overdue taxes increased sharply from 3 to 1 5 days' production. This suggests that mining associations have been pre-empting the allocation and payment of subsidies by withholding their tax payments. - 31 - Table 10 - Coal industry arrears, 1993 Date Rosugol estimates estimates (Rb billion) (Rb billion) Receivables Payables Receivables Payables 1 April 1993a 165.7 158.8 113.2 138.7 1 July 1993 275.6 320.9 161.7 218.8 1 October 1993 808.5 721.5 386.4 409.1 1 January 1993 1142.3 1047.0 Notes (a) 1 May 1993 for Rosugol data. Table 11 - Composition of coal industry arrears, 1 993-94 Date Arrears as a % of the value Overdue arrears as % of total of monthly production Commercial Payables Commercial Payables receivables receivables Commercial Tax Commercial Tax 1 October 1993 162 152 31 57 52 37 1 January 1994 213 209 54 55 51 52 1 March 1994 301 277 85 51 48 61 32 Wages, Employment and Social Adjustment 1. See Table 12 Real wage costs by coal basin, Figure 7 Wages and labor productivity by association, 1993, and Figure 8 Wages and value-added per worker by association, 1993 (following pages). 2. Table 1 2 suggests that real average wage costs per worker increased sharply from 1991 to 1993 in all coal basins, especially in the second half of 1993. On average, wage subsidies accotirited for 57% of total wage costs in 1 993. The level and allocation of wage subsi(dies linked to the national Tariff Agreements have had a critical impact on1 real wages and employment in the industry. A decentral- ized system of wage bargaining and the phasing out of wage subsidies should be essential elements of a restructUrMng program whose success will require that mining companies should be able to control their own wage costs. 3. In a market setting there would be strong relationships between the average wage paid by a mining company and either labor productivity or value-added per worker. Figure 7 shows that there is the correlation between labor productivity even though average wages in 1993 varied from Rb 81,000 per month for Tulaugol up to Rb 294,000 per month for Severovostokugol. Since the cost of living in the Far East is about twice that in central Russia, real average wages vary by a factor of 2-2.5 times but still in manner that is largely independent of labor productivity. There should be a stronger link between average wages and value-added per worker. Figure 8 shows that this correlation is higher than that between wages and labor productivity, but there are still many outliers. 4. The results suggest that the structure of both average wages and employment by association will have to adjust substantially in the medium and longer term. Mines with high productivity and value-added per worker - especially the large surface mines -- will be able to pay much higher real wages in order to recruit and retain the best workers. On the other hand, mines with low productivity or value-added per worker will have to choose som1e combination of (a) reducing employment in order to concentrate on the most productive faces and operations, and (b) lowering real wages to reflect actual productivity and value-added per worker. The choice between lower wages and lower employment will be a very difficult one both for the labor unions and the workforce. Miners may resist an erosion in their wages relative to other groups but such a decline has been a feature of the coal industries in most European countries. - 33 - Table 1 2 - Real wage costs by coal basin Coal basin Wage costs per worker (Rb 'OOs per year at 1993 Q2 prices) Total wage costs (incl subsidy) Wage subsidy 1991 1992 1993 1993 1993 1993 Hi H2 Hi H2 631 404 621 714 413 476 Donbass 489 522 658 1442 173 715 East Siberia 749 772 1049 1229 625 651 Far East 504 683 652 973 194 255 Kansk Achinsk 864 807 891 973 479 479 Moscow/Center 426 287 487 638 323 471 North East 565 752 1141 1594 619 1125 Pechora/North 1068 1006 1404 1479 889 934 Urals 569 468 664 766 433 485 All basins 745 674 848 983 489 552 Note: Data on average wages by mining association or basin were not available on a consistent basis for 1991-93. Thus, the figures in the table have been estimated from data on mining costs by multiplying wage costs per tonne of output by total output and then dividing by employment. The calculations assumes that sums allocated to wage subsidies were actually used for that purpose. This explains why large changes in wage subsidies between the first and second halves of 1993 are associated with large changes in average wage costs. The estimates must be treated cautious as indicated by the large, and possibly erratic, changes from one period to the next for some coal basins. However, the consistency of the general trend from 1991 to 1993 suggests that the conclusions in the main text are reliable. - 34 - Figure 7 Wages and labor productivity by association, 1993 Average wage, Rb VW per month 350 300 --------- ---- ------------------------- 250 U U 0 400 800 1,200 1,600 2,000 Labor produotvMty. tonnes per worker per year Note: Borocilnak has been excluded as an extreme outiler with a labor producdtlvt of 6186 tonnes per worker per year and an average wage of Rb 184,000 per month. - 35 - Figure 8 Wages and value-added per worker by association, 193 Avrago wage, Rb 000 per month 200 . ... 50. -100 0 100 200 S00 400 Value-added per wowker, Rb 000 per month - 36 - The regional impact of falling employment in mining 1. See Figure 9 Mining as a share of total employment, 1992 (facing page). 2. Mining represents a very small proportion of total employment in all but a few oblasts6. Figure 9 shows that this share is less than 5% for all but Kemerovo, Komi Republic, Rostov and Sakhalin. The figure for Komi Republic is somewhat deceptive because the population of the republic is so dispersed and the share of mining in total is much higher in the mining areas of Inta and Vorkuta. 3. It is clear that special programs to cushion the impact of a contraction in mining employment must concentrate on Kemerovo and Inta/Vorkuta. The magnitude of the employment shock is likely to be greatest in Kemerovo where the potential fall in mining employment shown in Table 4 of the main report (from 296,000 direct mining workers to 82,000 for the Kuzbass) is equivalent to 1 3.5% of total employment in the oblast. The contraction in mining employment is likely to be somewhat less dramatic in the Pechora basin (from 70,000 to 32,000) but this still amounts to 6% of total employment in the Komi Republic and at least double that share in the northern part of the republic. 4. While mine closures and employment reductions may have a significant impact on local labor markets in some basins, no other oblast should lose more than 3% of total employment as a result of the contraction in mining employment. Many other changes during the transition might have a similar impact on employment in particular oblasts, so that there is no reason to implement special measures beyond the two heavily-affected areas. The term 'oblast' is used generically here to refer to all subjects of federation, including republics. oblast, krais and okrugs. - 37 - Figure 9 Mining as a share of total employment, 1992 (% of total employment) Oblast Amur : : : : : : : : Bashkorstan Chelyabinsk Irkutsk= Kemerovo K o m i R e p ------------- ..... --------------- Krasnoyarsk Magadan Perm 1l Primorsky EHBi _ H _ i . .......... Rostov Sakhalln Sverdlovsk Tula YakLutla , j j j,i.i. ,i. 0 2 4 6 8 10 12 14 16 18 20 All mining workers as a % of total employment - 38 - Composition of mining employment 1. See Table 13 Age composition of mine workers (facing page). 2. Almost one quarter of all mine workers have passed the age of 50 at which they begin to receive a pension, so that they are receiving income from two sources linked to the coal industry. Both of these represent a drain on state finances -- their pension (paid out of the State Pension Fund) and their wages (subsidised under the Tariff Agreement). 3. One immediate measure would be to require that such workers either leave their jobs or that they forego their pension while they continue to receive a wage from the coal industry. A more radical step, but a necessary one if targets for employment reduction are to be met, would be to require that all workers who have passed the age of 50 should retire from the industry by a specific date. Provisions to retain workers with special skills would be needed to cover exceptional cases. Since those forced to retire involuntarily would suffer an unanticipated decline in their income, it may appropriate to make special payments to them to compensate partially for their loss of earnings. 4. Further employment reductions could be achieved by targeting voluntary severance packages at workers aged 45 or over and by the recruitment of new workers in order to take advantage of natural wastage. Such a combination of measures could reduce total employment by as much as 35% over a period of 2-3 years. This would go a long way to meet the need to reduce employment by 50% over the next 4-5 years. Of course, special provisions would be required to ensure that the industry does not lose workers with crucial skills and experience. - 39 - Table 13 - Age composition of mine workers Age group % of mine workers in age group' 20 or less 2.8 21 - 25 11.7 26- 30 14.0 31 - 40 29.8 41 - 50 19.3 above 50 22.5 Note (a) The age structure was calculated for a sample of 14 mines in the Urals, Kuzbass and Rostov basins. - 40 - Social Costs 1. See Table 14 Mine social costs by association, 1993, Figure 1 0 Mine social costs as a % of total oblast revenues, 1992, and Figure 11 Social and culture costs as % of oblast expenditures on social and culture, 1992 (following pages). 2. One half of all social costs go to finance housing maintenance and another 10% for wages in kind such as cheap coal and vacations. True social expenditures on health, children and cultural account for less than one quarter of social costs. The category of other social costs includes a wide variety of items including fuel subsidies for power and heat produced in plants operated by mining associations. 3. Responsibility for providing social services ought to be transferred as rapidly as possible from mining associations to oblast or local authorities. This would certainly cover health clinics, kindergartens and cultural activities. The disposition of housing is a more complex issue. The best solution would be to transfer ownership to the current occupants -- either directly or via condominium associations -- who would henceforth be responsible for maintenance. The alternative would be to transfer the housing to local governments. 4. Wages in kind and most other social costs are an element of worker compensation that mines might choose to continue (without government subsidies) or simply consolidate into money wage payments. Note that consolidation -- even including sum in place of the value of housing maintenance services -- should not increase wages by more than 20%. This adjustment might be part of the more general realignment of wage structures discussed earlier. 5. The implications of transferring some components of mine social costs to local authorities are illustrated in Figures 10 and 1 1. Social and cultural costs accounted for less than 4% of total oblast revenues in 1 992 for all oblasts other than the Komi Republic. Even in Komi the addition spending would only represent 1 2% of previous expenditure on social and cultural items. 6. If responsibility for housing maintenance were transferred to local authorities, it would have to be accompanied by additional fiscal transfers to Kemerovo and Komi Republic. - 41 - Table 14 - Mine social costs by association, 1993 Associations and Wage Social costs (Rb billion)a independent mines bill (Rb bin) Wages Housing Health, Other Total in children, kind culture Gukovugol 45.4 0.1 5.7 2.5 1.4 9.8 Obukhovskoye 11.7 0.1 1.0 0.5 0.8 2.4 Rostovugol 111.9 3.0 9.4 9.6 11.0 32.9 Vostsibugol 49.7 0.9 0.8 1.2 2.9 5.8 Dalnvostugol 12.0 0.6 1.4 0.6 1.2 3.8 Primorskugol 55.6 1.1 3.9 2.5 6.1 13.5 Sakhalinugol 44.4 0.2 5.1 1.7 0.7 7.7 Borodinskiy 9.0 0.2 0.4 0.4 0.6 1.5 Krasnoyarskugol 13.6 0.3 0.6 0.9 0.5 2.4 Belovougol 29.4 1.2 1.7 0.4 1.3 4.6 Kiselevskugol 33.0 0.7 12.3 0.6 0.6 14.1 Kuzbassrazrezugol 70.5 2.2 12.4 4.8 6.0 25.3 Kuznetskugol 129.0 5.8 17.1 9.1 3.3 35.3 Leninskugol 58.6 2.9 5.7 2.9 3.1 14.7 Mezhdurechje 10.0 0.0 0.1 0.1 0.2 0.5 Prokopyevskugol 66.0 4.6 12.2 3.2 1.0 21.0 Raspadskaya 14.3 0.3 0.3 0.4 0.2 1.2 SeveroKuzbassugol 74.2 2.0 18.3 2.1 3.8 26.1 Vakhrusheva 4.9 0.2 0.0 0.1 0.0 0.3 Tulaugol 40.0 0.9 6.0 2.3 3.5 12.6 Severovostokugol 19.4 0.2 1.8 0.9 0.8 3.8 Yakutugol 38.0 1.9 9.5 3.4 1.6 16.4 Intaugol 45.0 1.5 9.0 3.1 5.6 19.1 Vorgashorskaya 12.7 0.4 0.0 0.3 0.0 0.8 Vorkutaugol 123.9 0.7 23.5 4.8 2.9 31.9 BashkirUgol 9.2 0.0 0.4 0.3 1.0 1.8 Cheljabinskugol 48.8 0.4 6.1 0.5 1.1 8.1 Kizelugol 24.2 0.3 3.5 0.7 1.7 6.2 Shumikhinskaya 1.7 0.0 0.1 0.0 0.0 0.1 Vakhrushevugol 11.1 0.1 1.5 0.6 0.4 2.5 Yuzhniy Kuzbass 21.8 0.7 6.3 0.5 0.1 7.6 Total 1272.5 34.6 177.7 61.4 64.2 337.9 Note: (a) Expenditures for 1993 G4 converted to an annual basis at 1993 prices. - 42 - Figure 10 Mine social costs as a % of total oblast revenue, 1992 Oblast Amur:::: Bashkorstan:::::: Chelyabinsk Irkutsk K e m e ro vo m............. .... ;. .;............................................ Kom l Rep ........ ............... Krasnoyarsk , . Mag da Perm Prlmorsky oostov t : revnu Sakhalln m Sverdlovsk Yiakutia i . i . i . i . i . i 0 2 4 810 12 14 % of toaSl oblast revenue Housing maintenance E} Social & Culture - 43 - Figure 1 1 Social and culture costs as % of oblast expenditures on social and culture, 1992 Oblast Amur::::: Bashkorstan Chelyabinsk Irkutsk =:: K e m e ro v o Hi. ------------------ -----------------.---.-.- Komi Rep Krasnoyarsk Magadan Perm Primorskv Rostov . : : Sakhalin Sverdlovsk Tula:::: T l .. . .............. Yakutla 0 2 4 6 8 10 12 14 % of oblast soclal and culture expenditures Annex H COMMENTS AND OBSERVATIONS OF MINISTRIES, AGENCIES, AND OTHER INTERESTED RUSSIAN ORGANIZATIONS ON THE IBRD REPORT "RESTRUCTURING THE COAL INDUSTRY OF THE RUSSIAN FEDERATION IT LIST OF ORGANIZATIONS WHICH SUBMITTED THEIR COMMENTS TO IBRD REPORT (August 8, 1994 edition) No. Name of organization Number of pages 1. 'RosUgol" state-owned enterprise 13 2. Analysis of "RosUgol" comments to IBRD report 10 3. Federal Bankruptcy Committee 2 4. "Kuzbassinvestugol" 10 5. Ministry of Finance of the Russian Federation 2 6. Administration of Rostov oblast 4 7. Ministry of Social Protection of Russia 5 8. Department of Coal Industry 6 9. Main Department of Fuel Industry of the Ministry of 4 Economy 10. NPG Rossii (Mr. Sergeev) 2 11. Russian Committee of Independent Coal Industry 2 Trade Union 12. GKI of the Russian Federation 2 13. nRostovUgoln joint stock company 4 14. "GukovUgol" joint stock company 1 15. Administration of Tulskaya oblast 3 16. Administration of the Komi Republic 1 17. Ministry of Labor of the Russian Federation 3 18. Research institute TSNIEIUgol 2 19. Ministry of Industry, Transportation and 5 Communications of the Komi Republic 20. Federal Employment Service 5 21. The Russian Federation Metallurgy Committee 2 22. "Severokuzbassugol' joint stock company 1 23. "Kuzbassrazrezugol" concern 2 24. "Rossugleprofsoyuz" Trade Union 7 25. "Kuzbass Coal" Round Table 4 14 September 1994 No. 2-7-34/801 A.N.Shokhin Chairman Inter-Agency Commission on Socio-Economic Issues in Coal Producing Regions On the Report of the International Bank for Reconstruction and Development (IBRD) "Restructuring the Coal Industry in the Russian Federation" Below please find comments on the IBRD Report. The International Bank for Reconstruction and Development has made a great effort to study the situation in the Russian coal industry and prospects for the sectoral development, especially issues related to the domestic coal market; coal transportation and production; systems of pricing and subsidies; employment and social protection; issues of safety techniques and labor protection, environment protection. An attempt has been made to reveal regional peculiarities in the coal sector. The Report determines the objectives of restructuring correctly: adjustment to new market conditions and establishment of competitive enterprises. These objectives raise no doubts. However, projected assessments, individual statements have not been substantiated in a number of cases. The proposed pace and individual approaches to implement restructuring in the sector that do not take account of the present economic situation in Russia give way to significant doubts. First, the IBRD-proposed pace to restructure such a huge, heterogeneous and geographically scattered sector as the coal industry of Russia is, has no precedents in the world practice. Moreover, the world experience related to coal industry enterprises of the European countries that are most close to us in terms of their mining and geological conditions (Germany, Great Britain, France, etc.) witnesses for the fact that the restructuring processes last dozens of years rather than years, with the massive state support. Thus, calculated per 1 ton of black coal, subsidies in 1992-1 993 equaled: in England - $ 1 2.7, Germany - $ 70, France - $ 98, Spain - $ 20 (in Russia in 1993, they were about $ 5.00 and are expected to be about $ 9.00 in 1994). The process of restructuring does not radically cut on subsidies but rather provides for a gradual change in their structure and orientation. For instance, in England the state subsidies to the coal industry under compensatory contracts with power plants dropped from 1 billion pounds in 1990 down to 0.5 billion in 1993 over the last three years, which, to a certain - page 1 - extent, reflects the slump in coal production and closure of most heavy loss-making mines. At the same time, in 1992-1 993, 640 million pounds were annually allocated for social needs. The restructuring processes are still going on in these countries. In December, 1 993, the European Union (EU) approved national programs for subsidizing the coal industry for the existing period of the budget of the European Coal and Steel Committee (ECSC) by extending them to 2002. In addition, one can't but take into consideration the fact that restructuring of the coal industry in these countries was and is being implemented in conditions of relatively stable market economies (with inflation rate of 2-4 % per annum; the level of actual unemployment of 5-7 %, and GDP growth at least 1.5-4 % a year), not in the economy under crisis, now embracing all economic sectors of Russia (the 1 994 rate of inflation is expected to be about 140 % per annum, the level of actual unemployment - 11 % and to be monthly increased, less hidden unemployment; GDP decreased by 17 % during 7 months of 1994). Thus, it is with a high degree of truth that one may state that the pace of restructuring suggested is neither substantiated, nor realistic and the attempt to implement it may lead to unpredictable socio-economic consequences. The Company "RosUgol" is of the opinion that the process of restructuring has not only started already but is gaining the momentum. The period of 1993-1994 proved to be a turning point in operating conditions of the coal sector and in its transition to market relations. A new economic mechanism started to be formed up in the sector based on free prices for coal, on a selective approach to measures of state support to underground and surface mines and changes in ownership, and establishment of new organizational and economic structures. The selective approach to allocation of state support funds entailed positive changes in the structure of subsidies. A share of funds allocated for technological re-tooling and development of promising enterprises and also for closure of heavy loss making mines augmented from 20 % in 1 992 to 30 % (the first half of 1 994); a percentage of budget funds designed to be credited to compensate losses of the industry has decreased from 48 % to 1 9 %, for the same period. The establishment and approval of "Basic Principles for Clearing-Up Books and Closure of Heavy Loss Making Underground and Surface Mines", allocation of funds for clearing up books and closure of mines in the first half of 1 994 have allowed to get down to practical restructuring of mines. All coal producing enterprises have been reviewed and 37 underground mines and 1 surface mine have been proved to have no prospects; they make heavy losses and thus, have to be closed as a matter of first priority. The work is being carried out to close the mine "Khalmer-Yu" in Vorkuta, the Krupskaya mine in JSC "Kizelugol", the mine "Anzherskaya" in JSC "Severokuzbassugol"; preparatory and design works are nearing the completion to close another 4 mines including the mines "Zapadnaya" and "Tayozhnaya" in JSC "Kizelugol", the mine "Khassan" in JSC "Primorskugol" and the mine "Podozernaya" in - page 2 - JSC "Chelyabinskugol'. A specific work has been initiated to concentrate the production, ensure the growth of workload per mine, per coal-face. In the first half of 1994, the number of low productivity coal-faces (with load under 200 t/day) decreased by 21 % (50 coal-faces), and the number of high productivity faces (500 thousand and more tons of coal per annum) has gone up by 1 6, of which 4 coal-faces are producing about 1 min. tons annually. From 1990, we had no coal-faces of this nature. Their share with daily production of 500-1000 t increased from 1 9 % to 22 %, only from the beginning of the current year. For the first time over the last 4 years, quality performance indicators of underground and surface mines showed tendency towards improvement. On average, during 8 months of 1 994, the load per coal face increased by 3.9 %, ash content of the coal produced decreased by 0.2 %, a share of the most economical method of open cast coal mining is growing up (+0.5%). A planned discharge of labor in the sector is being implemented. For the last one and half years (1993 and the first half of 1994), an average employment was reduced by 72.3 thousand workers including 46.8 thousand employees belonging to the production staff. The employment structure is being changed. During the same period, a share of workers involved in coal mining has gone up from 41 % to 46.5 % of the total employment. With a view to arranging jobs for those discharged as a result of closures of heavy loss making mines, a comprehensive work aimed to provide new jobs on lead time basis is being undertaken. 29 facilities for manufacturing consumer goods and provision of services were constructed and commissioned in 1993, including enterprises for building materials, electric home appliances, furniture, plastic items, agricultural commodity processing. This ensured 2.5 thousand jobs in 1993. Another almost 5 thousand jobs are planned to be created in 1994. The housing construction was expanded to re-settle veteran miners from Northern regions. In 1994, authorizations have been given to move to more than one thousand apartments in Kovrov, Bryansk, Kaluga, Stariy Oskol and other cities of the Central Russia. Social facilities started to pass into municipal ownership. In 1 993 and the first half of 1994, 2.5 million m2 of housing (6.1 % of the total number available in the sector) and 237 social facilities (12 %) have been divested to local authorities. Improvements in sectoral management structure are being made aiming to strengthen regional joint stock companies, create and develop market infrastructures. According to "RosUgol", the restructuring process in the sector started by the Company must advance as quick as possible with due regard for socio-economic situation which is actually being created in Russia. Secondly, approaches to restructuring proposed by IBRD are based on conclusions which are quite loose in interpreting economic, financial and institutional systems established in the Russian coal industry. Remarks regarding individual conclusions in the Report are given in the Attachment. - page 3 - Remarks of principal nature are as follows: IBRD recommends to discontinue, beginning from 1995, to subsidize losses caused by industrial operations and investments paying no heed to conditions the mine stock is in (over 2/3 of mines have been operating for a long period of time without reconstruction), significant differences in mining and geological conditions and specific features of coal basins, which determine sharp fluctuations in production costs for the same types of coals. To discontinue subsidies for losses, already from 1995, would require at least 3-fold price increases at the time when the average level of prices for coal products (Rb24,000 in July 1 994 and Rb29,000 in Quarter IV, 1994) including a transportation component (with the average transportation distance of 1270 km - Rb23,700 and from October 1 - Rb3l,400) is already reaching the world level. Any further increase is impossible since, given the ongoing steady level of arrears in Quarters II and III (30 % of the monthly volume of sales), operations of the coal enterprises would be paralyzed due to non-availability of working funds; the enterprises would be forced to stop their operations that would result in the loss of 70 min. tons of coal already in Quarters l-ll, 1995 (i.e. in winter time). To discontinue investments, already from 1 995, implies self-financing by enterprises in this period in order to renew their fixed assets which, due to impossibility for further growth of prices for coal products and non-payments on the part of customers, would make it impossible for promising enterprises to undertake any technological re-tooling and reconstruction. And in 1 995 itself, this would lead to the reduction of sectoral capacity by 23 mln. tons and loss of at least 1 8 mln. tons of production at highly efficient enterprises. IBRD is also proposing to discontinue state subsidies for payments under the Tariff Agreement disregarding the fact that payments under this Agreement are of compensatory nature determined by the rate of inflation. Should the latter be decreased, it is but obvious that the provision of the above funds would be also reduced. The payments under the Tariff agreement may be shown as enterprise expenditures; however, this would lead to a single, at least 1 .5 time increase in prices for coal and, given the arrears, the enterprises would be in no position to pay wages that may result in social tension and labor disputes. Thus, in the course of the next few years, it will be necessary to change the structure of state subsidies gradually aiming towards reduction of subsidies which offset enterprise losses; rise in funds designed for mine closures and for investments in highly efficient enterprises. The actual implementation of restructuring measures developed by RosUgol would allow to annually reduce the total budget allocations for the coal sector by approximately 1 5 % of the basic period amounts in existing prices and establish appropriate ceilings. To link reduction in subsidies with GDP as proposed by the Bank would disregard a declining tendency of GDP and this may lead to increasingly declining subsidies. IBRD proposals for the Ministry of Finance of Russia to pay subsidies directly to coal companies and local authorities are being already implemented through the Treasury Department of the Ministry of Finance of Russia. - page 4 - The sharp cut on coal consumption in Russia during 1995-1 997, as projected by IBRD, should be questioned. The Section "Demand for Coal" (p.23) suggests that the coal consumption would drop faster than the general consumption of energy resources due to the expansion of gas, power and heat energy niches in the market. It is projected that the coal consumption in 1 995 would be about 60 % of the 1990 level or 218-220 mln. tons (in 1 990 the consumption of coal produced by RosUgol enterprises comprised 364 mln. tons) and in 1997 - 217 mIn.tons. However, for the last three years, consumption of coal products decreased by 24 % or 8 % per annum on average; in 1 994, deliveries are expected to be at the level of 250-255 mln. tons, i.e. lower than in 1993 (deliveries - 267 mln. tons) also by 8-9%. It should be noted that due to such deliveries and shortage of coal resources in the Far Eastern and some other regions, restrictions on consumption of heat and power have been introduced. Therefore, volumes of sales in 1995-1 997 indicated in the IBRD Report do not agree with the real demand for coal which, according to calculations, is expected to be at the level of 257-258 mln. tons in 1 995 which corresponds to the production of 274 mln. tons. In estimating the demand, no full account is taken of the geography of coal basins (55 administrative entities have no coal deposits and consume 1 00 % of the coal transported to their regions), opportunities to replace coal with other types of fuel and the fact that over 50 % of coal resources are consumed for heating purposes since the heating season in Russia lasts 7 months a year, on average. In view of this, the coal transportation for distances 1000 km - 3000 km to eliminate the shortage of fuel is inevitable in the nearest future (till 2000). Now, transportation for distances in excess of 1000 km account for about 30 % of the total coal deliveries, and in excess of 2000 km - for 1 2 % - 13 %. To discontinue these deliveries only because of high transportation costs may result in the coal shortage in some regions of Russia. Therefore, to create normal conditions for provision of short-supplied regions with long- distance coals would require introduction of different tariffs for coal transportation, with its share in the coal price not to exceed 35-50 % at the place of consumption. One cannot agree with IBRD assessments of demand and production of coal by individual basins, Kuzbass and Pechora basins, in the first place. In the most promising Kuznetsk basin which features high quality coal deposits favorable for the development, IBRD forecasts the production (p. 43) of 56.5 mln. tons under "low" scenario and 53 mln. tons under "high" tariff scenario in 1997 against the actual production of 101.8 mln. tons in 1993. At present, of 95 mln. tons of Kuznetsk resources, 28 min. tons account for coking coals. Of these, 30 mln. tons are regularly used in the Kemerovo oblast including only 8 mln.tons of coking coals. Up to 65 mln. tons of coal including 1 6 mln. tons of coking coals are transported to other regions as far as the Kaliningrad oblast, the Republic of Kareliya and abroad. The slump in Kuznetsk coal production by 40-45 mln. tons would inevitably lead to the - page 5 - irreplaceable loss of especially valuable caking types of the coking coal for the domestic coking chemistry, decrease in hard currency receipts, and also narrowing opportunities for possible manoeuvre in compensating the depletion of coal resources with other deposits which is especially impermissible at the time of reviving the Russian industrial production. In view of the fact that the coal production has reduced in all the basins including the European part of Russia and the Urals and given the prospects for improving economic relations with the Ukraine, Belarus and Transcaucasian republics where Russian coal deliveries would be increased and also in the absence of gas resources till 2000, volumes of production proposed by IBRD, 56.5-63 mln. tons, will not meet the fuel demand in the European part of Russia. According to RosUgol, demand for Kuzbass coals in 1997 will be 98-100 min. tons. IBRD projects also the decrease in coal production in the Pechora basin (p.26) from 24.5 in 1993 to 12.1 mln. tons under the "low" tariff scenario and 15.2 mln. tons under "high" tariff scenario in 1997. In addition, it stipulated that the production of power station coals would be discontinued in the basin. The Pechora basin is the major supplier of coking and power station coals to the Northern region, North-Western and Central regions. The consumption of power station coals in the Northern region is 11 -1 2 mln. tons, with over 1 mln. tons of these coals brought from other regions including about 0.4 min. tons of Arctic coal. Any termination of power station coal production in the basin would result in curtailing the production of lntinsk and Vorgashorskaya coals and concurrent delivery of 10 min. tons of coal to the Northern region from Kuzbass. It is more so, since any incremental gas consumption in the Northern region may happen only after 2000. Therefore, to meet the requirements in fuel in 1997, the Pechora basin would have to produce 22-23 min. tons. The IBRD Report lacks actual proposals for improvement of the system of management in the coal industry. Yet, this problem is closely associated with the recommended restructuring methods and the choice of the latter would determine areas for management system improvements. In our opinion, in the transition period it is necessary, first of all, to strengthen the middle rank management - regional joint stock companies. A basic subject of business activities should be joint stock coal companies (societies) created by transforming producing associations and consolidating blocks of shares of the enterprises which were part of voluntary associations in the past. The coal companies should embrace production, preparation and sales of coal. In conjunction with the enterprises of market infrastructure (investment, insurance companies; commercial banks, etc.), they should accumulate financial resources, staff, technical and material support required for investment and operate on the basis of long-term contracts with customers. Operations of the joint stock companies which are part of these entities (underground and surface mines, etc.) should be primarily focussed on issues of production and operation. The coal companies set up by consolidating the blocks of shares of independent stock companies should be transformed so that they have a controlling interest in the enterprises which become their part. - page 6 - Operating under the Ministry of Fuel and Energy, the Company "RosUgol" ensures resolution of practical tasks related to sectoral restructuring; clearing up enterprise books and closure of inefficient facilities; maintaining the required level of industrial safety measures and social conditions for miners by strictly combining functions of running these processes and allocating funds aimed at restructuring. That this approach is correct has been proved by the experience across the world: Great Britain ("British Coal"), Germany (Ruhr Kohle), France (Charbonnage de France) and others. In the transition period, market structures in the center and regions should be established according to a functional principle (investment and insurance companies, pension funds, consulting and engineering firms, transportation, trading and service companies); they should be also developed and strengthened by gradual acquiring certain responsibilities and specialists from RosUgol and the staff of regional joint stock companies. In the time of their strengthening, the activities of these companies would be coordinated by RosUgol under the general sectoral development strategy. The IBRD Report stipulates sharp reduction in the number of enterprises and employment in the coal industry: during 1992-1997 - by 155 coal enterprises and 475.6 thousand employees (Option I) and under Option II, the reduction of enterprises by 135 (2- fold) and employment by 424.6 thousand workers (2.3 times). The world practice does not know any of this type of reductions in the coal sector, both in terms of scope, and time of implementation. In particular, the Kuzbass basin is expected to reduce the number of enterprises from 91 to 33-40, i.e. 2.3-2.8 times and employment in the basin from 296.3 thousand people down to 72-83 thousand or 3.6-4.1 times. In the Pechora basin, it is expected that the number of coal producing enterprises would be reduced from 18 to 5-7 or 2.6-3.6 times and the employment from 70.4 thousand people down to 21-32 thousand, i,e, 2.2-3.4 times (p.34). The Report does not take account of economic consequences that may happen not only from the closure of mines and subsequent necessity to find jobs for this mass of people which neither the U.S.A., nor Europe had ever faced and where the labor force are relatively mobile, but even from the complete termination of state budget subsidies, bankruptcies occurring everywhere and natural inflation of prices for coal products and in the national economy, as a whole. The massive social payments (allowances, etc.) to released sectoral workers proposed by IBRD disregard the mentality of the Russian miner created over dozens of years; on the one hand, he is proud of his work, on the other - he does not want to change his way of living this sharply. One can't agree that "the primary focus in the program for employment reduction should be the decrease in general volumes of employment with no significant geographical discrimination (p. 14), where only after the discharge of 25-30 % of staff in this or that basin, specific features of a region should be considered. Our basins are of local nature and to move to another basin, in conditions of the acute shortage of housing or employment problems in other sectors at the time when people are being sacked all around, is just a pure theory - page 7 - playing incompatible with the reality of our life. The IBRD Report suggests that all employees of pension age should be discharged from the coal industry (p. 14). RosUgol believes that any massive outflow of workers aged 45-50 from the production sphere would lead to irreplaceable distortion in the personnel structure of enterprises, "promising" enterprises in the first place, which is impermissible. Workers should be released depending on prospects of an enterprise. According to RosUgol, if one takes into consideration the coal demand, reconstruction and modernization of promising underground and surface mines and resolution of social issues, it is possible to close up to 100 coal enterprises by 2000 and reduce the total employment down to 254 thousand people. The counter data shown in the IBRD Report (p. 19) may, after their range and meanings have been adjusted, serve as reference points in drawing up a long-term agreement between the Government of Russia and the Company "RosUgol" where financial and legal obligations of the Government with respect to resolution of basic tasks faced by the coal industry on the one part, and RosUgol obligations to provide the national economy with coal products and rationalize the consumption of state support funds set out in the agreement, on the other part, would be reflected. In our opinion, this agreement will become the basis for restructuring the coal industry in Russia. Encl.: on 6 pages. V.Ye. Zaidenvarg First Deputy General Director Company "RosUgol" - page 8 - Attachment Comments by Sections of the Report of the International Bank for Reconstruction and Development (IBRD) "On Restructuring the Coal Industry in the Russian Federation" 1. Price Liberalization, Subsidies and Wages 1.1. The Report does not take account of peculiarities of the coal basins, of the stock of mines that determine sharp fluctuations in production costs of coals belonging to the same type; therefore, a number of basic conclusions and proposals on pricing policies and subsidies are wrong. Thus, on p. 9, para 4, an unsubstantiated conclusion is made that as if arbitrary, half of the subsidies in 1993 were used to support price levels and investments and such allocation leads to unjustified physical costs and operating expenses to produce the unmarketable coal. A conclusion on p. 1 2, para 1 is rather questionable: if prices for products could correspond to competing market elements, about 2/3 of the total sectoral capacity would become profitable already in medium term. The practice shows that with introduction of free prices, 4 out of 9 profitable enterprises had excise duties imposed. At present, profits of these enterprises are sufficient only to cover their own needs and these profits keep on declining due to inflationary processes. The statement in the Report that subsidy amounts allocated to the sector could be decreased by 50 % and more (p.20, para 2) has no connection with the rise in coal price, sharp increase in the rate of inflation, slump in coal production and adverse consequences for the national economy as a whole. The same page, last para, gives an ungrounded conclusion that such measures (it is unclear which measures) would release funds allocated for an unprofitable portion of the coal producing industry and allow for the most active group of coal producing companies to survive. And this is when all the funds have been already reduced by 50% or what ? Absolutely wrong is the conclusion that the enterprises lack incentives to increase prices for products according to their situation in the market (Section "Subsidies", para 4) because they would be provided with corresponding subsidies. It should be noted that in Quarter III, 1994, subsidies to cover losses decreased almost three times as compared with Quarter 1, 1 994, and the coal enterprises were forced to raise prices; however, the level of raising proved to be insufficient and the enterprises were short of receiving over Rb. 450 billion from their customers. Also wrong is the argument linking subsidies with the timely payment of wages, since subsidies are strictly earmarked (a portion of wage funds is to be received from the customer, the remainder - through the state support to offset the increase in consumer prices). It is stated on pages 74, 76, that the coal prices are set by RosUgol. It should be - page 9 - pointed out that RosUgol sets only the size of subsidies while the level of selling prices is set by the associations independently, with subsidies set not to protect the most feeble, but to offset uncovered production costs emerging due to worse mining and geological conditions, high depreciation of fixed assets, while selling prices for the same types of coal in all groups of coal producing enterprises remain equal. The proposal for complete elimination of subsidies (p. 88) after 1994 aimed to offset operating losses and investment would lead, without restructuring of the sector, to the sharp inflation of prices for coal, growth of arrears and forced shut-down of underground and surface mines as well as to the loss of 1 50 mln. tons of coal. The wage subsidies are allocated only to set off consumer price increases and may not depend on the share of employment in the total labor strength as envisaged in the Report. 1.2. Recommendations to concentrate powers to manage the subsidy fund within the Inter- Agency Coal Commission in one case and within the Ministry of Finance in another is the example of superficial knowledge of specifics in the coal industry of Russia, an attempt to destroy the vertical structure of management in the sector including RosUgol. However, for this purpose, any body would require a sufficiently large group of highly qualified coal specialists, if the definition of required subsidy amounts is to be approached from the State perspective, of course. 1.3. The Report ignores the world experience in respect of the fact that many countries subsidize their coal industries on continuous basis. Yet, we are offered to discontinue the state support to the sector within two years. This idea can be traced in many sections of the Report. They would persistently talk about the foreign experience in radical cutting on the coal production and keep continued silence about the experience in state support. Should we implement these recommendations, we will have the following as the outcome: - mass unemployment with all the ensuing consequences; - a loss of production and staff capacities which would be difficult to restore and which would obviously be required at the time of reviving the national economy; - economic dependency on foreign countries, planned by ourselves, in the area of coal products due to the necessity to export them; - continued irregular deliveries of coal products to the population. 1 .4. The proposed decentralized conclusion of tariff agreements would slow the competition between individual companies rather than enhance it. For instance, having lower production costs, JSC 'Kuzbassrazrezugol" would raise its level of wages without changing the price (since the latter is dictated by mines) and this would be detrimental for the development and maintenance of its facilities. Besides, the establishment of different remuneration bases would entail still higher social tension among the staff, especially if they belong to coal enterprises located close to each other. - page 10 - 1.5. Budget subsidies to implement the sectoral tariff agreement of miners are not wages but only sources to cover expenditures of the enterprises. Under conditions of arrears which emerge everywhere after the production has been shipped, the subsidies under the tariff agreement serve only as the guarantee to receive a partial wage since these funds are to be disbursed on earmarked basis. Actually, this type of subsidy may be replaced with guarantees to reserve a portion of received funds for the products sold, up to 40%-50%, to pay wages. A size of subsidies for these purposes is allocated in proportion to the coal production, i.e. it is strictly tied up to the enterprise performance. 1.6. The World Bank states (p. 9) that subsidies under the tariff agreement do not reach their objectives which are to protect people from hardships of the transition period and that they are used to protect production. And this is supported by the example that subsidies per person are Rb. 227 thousand while the wage is Rb. 145 thousand and wage arrears comprise 3-6 months. This example evidences to which extent the financial subsidies of the Russian Government are target oriented. 1.7. The Tariff Agreement exists not only in the coal industry of Russia but also in other coal producing countries. In Germany, for instance, it is more capacious and comprehensive; France features the status of a miner, etc. One should not state that the increase in miners' wages is basically linked to the Tariff Agreement since it primarily contains indexation of wages caused by the rise in consumer prices (p. 8, p.56). The Tariff Agreement is not a system of subsidies ("for workers' wages", p.83) but only the source to cover expenditures incurred to implement the Tariff Agreement. Wages are paid from funds received from the sales of products and a portion of wages is paid under the Tariff Agreement, with the size of these funds tied up in direct proportion to the coal output. 1.8. Actually, page 7 contains ungrounded statement that "tariff agreements are quite efficient in opposing the attempts of local coal producing companies to implement... key management functions". The establishment of own selling prices, wage levels to own workers, the system of additional benefits; the right to transform individual enterprises into independent operating units or close mines are implied here. Apart from obvious juggling with substance of the matter, an attempt can be traced to remove the trade unions from the "game". 2. Transport Tariffs and Coal Market 2.2. In reviewing individual basins, one cannot agree with the conclusions made in the World Bank Report with respect to production and, consequently, demand for coal. The Pechora Basin. (p.36. Section "Parameters of Coal Basins"). - page 11 - The Report concludes that under the "low" tariff scenario, the coal production in the basin would decrease from 24.5 min. tons in 1993 to 12.1 mln. tons in 1 997 and under the "high" tariff scenario the production would go down to 15.2 mln. tons. It is also projected that the basin would terminate production of power station coals. One cannot agree with this approach. Being a major supplier of coking and power station coals for the Northern regions, the Pechora basin supplies about 2 min. tons of coking coals and 5 mln. tons of power station coals to the North-Western, Central regions and abroad. The consumption of power station coals in the Northern region totals 11 -1 2 min. tons with over 1 mln. tons of these coals brought from other regions including about 0.4 mln. tons from the Arctic. Therefore, one cannot agree with the conclusions that the production of power station coals in the basin would be discontinued; this would require to terminate the production of lntinsk coal and cut on the production in the Vorgashorskaya mine, bringing concurrently to the Northern region up to 10 min. tons of coal from Kuzbass. This is even more so since the gas consumption can be increased in the Northern region only after 2000. Therefore, most realistic is the production of 22-23 mln. tons in the Pechora basin in 1997. The Moscow Basin (p.38, the same Section). The Bank's calculations stipulate to maintain production in the amount of 5.3 min. tons in the basin under the "low" tariff scenario and raise the production up to 8.9 mln. tons under the "high" scenario against the actual production in 1993 comprising 7.5 mln. tons. Moscow basin coal is consumed only in the Central region where about 9-10 mln. tons of coal from other regions are delivered. The production of this coal is associated with high costs; the coal is "dirty" in environmental terms. Given this, it is possible that the Moscow basin coal production would be lowered to 4.5 mln. tons in 1997 with its resources to be replaced with gas or, in the extreme case, with other coals. The Donetsk Basin (p. 40. Same Section). The Bank's Report stipulates production of 19 min. tons of coal under the "low" scenario and 20.8 mln. tons under the "high" tariff scenario in 1997 while in 1993, the production was 24.4 min. tons. One could agree with these levels of production since the Donetsk coal features stable sales which could be increased if economic relations with the Ukraine and former Transcaucasian republics have been restored; however, due to high costs, in all likelihood the production in 1997 would be 16-18 mln. tons. The Ural coals (p.42) The Bank's paper forecasts that the 1997 production would be in the order of 10.9 min. tons under the "low" scenario and 15.7 mln. tons under the "high" scenario, with the production of 20 min. tons in 1993. - page 1 2 - In our opinion, it is impossible to reduce the production of the Ural coals below 1 7 min. tons since the Urals are expected to reduce the consumption of Ekibastuz coals. The Kuznetsk Basin (p. 43) The most promising basin of high quality coals. The World Bank forecasts the production of 56.5 mln. tons of Kuznetsk coals in 1 997 under the "low" tariff scenario and 63 mln. tons under the "high' tariff scenario against the actual production of 101 .8 mln. tons in 1993. Presently, of 95 mln. tons of Kuznetsk coal resources, 30 mln. tons are steadily consumed in the Kemerovo oblast and over 30 mln. tons are consumed in other regions of the West-Siberian region, about 35 mln. tons are delivered to other regions as far as the Kaliningrad oblast and the Republic of Kareliya and abroad. In view of the reduction in coal production in all the basins of the European part of Russia and in the Urals and prospects for improving economic relations with the Ukraine, Belarus and the Transcaucasian republics where deliveries of the Russian coal would be raised, the levels of production proposed by the World Bank, 56-5-63 mln. tons, would not be sufficient for the deliveries to the European part of Russia and beyond. The most optimum production of coal in the Kuzbass in 1997 is 98-100 min. tons. The Kansk-Achinsk Basin (p. 46). The World Bank experts included Khakassiya, Tuva coals and the mine "Kotuj" in the Kansk-Achinsk basin, in addition to Kansk-Achinsk coals. According to Bank's calculations, it is planned to decrease the production of these coals down to 39.6-50 mln. tons in 1997 as opposed to 57.8 min. tons in 1993. The significance of these coals would grow up after the new unit at the Kharanorsk Power Plant is commissioned in Quarter I of 1995 to consume about 0.5 mln. tons of Kharanorsk coal. The deliveries of this coal to the Far East would be lowered by the same amount which may be partially offset by coals from the Krasnoyarsk krai. In addition, if the economic relations with former Central Asia republics of FSU which annually received from 2 to 4 mln. tons of the Kansk-Achinsk coals are revived some of these coals would be supplied outside Russia. The Kansk-Achinsk coals may be also used in the future to partially replace the Ekibastuz coals. Given the above factors, the production of Kansk-Achinsk, Khakassiya and Tuva coals should be at the level of at least 50 min. tons in 1 997. The East Siberian Basin (p. 48). This basin needs clarifications as regards the structure of producing enterprises and the level of production. The East-Siberian deposits include Tugnuisskoye and Gussinoozerskoye deposits in the Chita oblast (composed of 1 underground mine and 2 - page 1 3 - surface mines); Cheremkhovskoje, Azejsskoje and Mougounskoje deposits in the Irkutsk oblast (composed of 5 surface mines); Chitinskoye deposit composed of 4 enterprises (1 underground mine and 4 surface mines), i.e. totally - 2 underground mines and 11 surface mines with the annual production of 32.5 mln. tons in 1993. The World Bank materials include 18 mines in this basin, with their annual production of 24.4 mln. tons in 1993. Clarifications are required both in terms of production and composition of enterprises. The Far East Basin (p. 50) The Far East basin includes deposits which are parts of the JSC "Primorskugol", "Dalvostugol" and "Sakhalinugol' whose enterprises produced totally 23.1 mln. tons of coal in 1993. The World Bank calculations predict that in 1997 the Far East Basin would produce 13.2 mln. tons under the "low' tariff scenario and 19 min. tons under the "high" tariff scenario. The Far East region which includes the Primorsk and Khabarovsk krais, the Amursk and Sakhalin oblasts where the deposits of the Far East basin are located, is the most short- supplied region of Russia, in terms of coal. To lower the fuel shortage in 1997, the deposits of the Far East basin should be developed and ensure production of at least 26-27 mln. tons. The North-Eastern Basin (p.52) This basin, according to the materials of the World Bank, includes enterprises, of "Arktikugol", "Severovostokugol" and "Yakutskugol" which produced totally 15.9 mln. tons of coal in 1 993. The World Bank calculations suggest that the North-Eastern coals would be reduced in production down to 14-14.6 mln. tons in 1997. The coal from Arktikugol enterprises (production was 0.5 mln. tons in 1993) is transported from the ports of Murmansk and Arkhangelsk (up to 0.4 min. tons) for the distance which does not exceed 200 km, i.e. only for customers of the Northern regions of the European Russia. Therefore, it would be more appropriate, from the viewpoint of coal market',, to review this deposit in conjunction with the Pechora basin. Of the Yakutsk coals (production of 12.5 mln. tons in 1993), only the Nerungri coal in the amount of 4.2. mln. tons is transported by railway to supply oblasts and krais of the Far East region and 3.2-3.4 min. tons are exported via ports of the Primorsk krai. Coals from "Severovostokugol" (in 1993 - 3 min. tons) are transported only by water to supply Northern regions of the Far East. Hence, of 15.9 min. tons produced in this basin in 1993, only 7.5 mln. tons are - page 14 - transported by railway (50%) and the remainder is either transported by water or consumed locally. Due to economic considerations, the production of these coals should be maintained at least at the level of 15 min. tons in 1997, since should it be lower, this would require additional and costly transportation of coal to the North of the Far East region from Siberia. 3. Employment 3.1. It is expected that in 1992-1997 the number of enterprises in Kuzbass would be reduced from 91 to 33-40, i.e. 2.3-2.8 times and their labor force from 296.3 thousand to 72-83 thousand employees, or 3.6-4.1 times. In the Pechora basin, the number of coal producing enterprises is expected to be reduced from 18 to 5-7 mines or 2.6-3.6 times and their employment from 70.4 thousand to 21-32 thousand workers, i.e. 2.2-3.4 times(p. 34). It is unrealistic to reduce so many enterprises and employees for the remaining period of time. Only in Kuzbass, it would be necessary to discharge 22 thousand workers for the remaining 3 years. The world practice never faced this. It is stipulated to reduce the coal industry by 155 coal producing enterprises during 1992-1 997, i.e. 2.3 times, and the employment by 475.6 thousand people or 2.7 times (Option I); under Option II, 135 enterprises are to be reduced (2 times) and 424.6 thousand workers laid-off (2.3 times). This challenge cannot be met in Russia due to a number of reasons (meeting the demand for coal, job placement and non-availability of required funds). The world practice does not know any of such reductions in the coal industry, both in terms of scope and the time required for their implementation. 3.2. The massive outflow of workers aged over 50 and, moreover, at 45-50 years of age from the production operations would lead to the distortion of the structure of enterprises, of "promising" enterprises, in the first place. The discharge should be specifically regulated within each group: "promising" enterprises, "stable' enterprises, "enterprises with no prospects". 4. Environment The Report gives a controversial conclusion that profitable enterprises are gradually improving the situation related to environment protection (p.75, para 9). Previously, the Report noted the profitable operations of the surface mine "Borodinskij", JSC "Kuzbassrazrezugol" and JSC of the mine 'Raspadskaya". The analysis of indicators which characterize their environmental actions shows, with due regard for projections and actions developed by enterprises, that there is no orientation towards environment improvements. - page 15 - Analysis of "RosUgol" comments to the World Bank Report, submitted as the Annex to "RosUgol" letter of September 14, 1 994 No. 2-7-34/801 "RosUgol" comments Comments of the Working Group Page 9, para 4 of the Report The case, described by IBRD, is true for contains a groundless conclusion to 1994, for example for the relations between the effect that in 1 993 half of the "Zapsibcombinat" joint stock company and subsidies was unintentionally coal-mining enterprises of Kuzbass region, channelled for the purpose of where loss-making mines in Prokopjevsk support of price levels and compete with open pits of Mezhdurechensk, investments, as well as that such although the latter have reserve capacities. allocation of funds leads to unreasonable spending on materials and maintenance expenses for the extraction of coal, for which there is no demand. Neither the IBRD conclusion, nor the 2. Quite disputable is the conclusion "RosUgol" comments are confirmed by on page 1 2, para 1, that if the prices calculations. of products are competitive, approximately two thirds of total industry's capacities will become profitable even in mid-term. Experience shows that after prices are liberalized, excise taxes are imposed on 4 out of 9 enterprises, generating profits. Currently these enterprises generate profits, sufficient only to cover their own needs, while inflation tends to further erode their profits. - page 1 6 - The IBRD estimations of budget funds 3. The statement of the report to the savings are 50 per cent of 1994 level, but effect that subsidies to the industry these conclusions are not confirmed by can be reduced by 50 or more per calculations. "RosUgol' company's cent (page 20, para 2) does not take estimations are at the zero level. These are into account the price rise of coal as two extremities, which are not based on the result of inflation, drop of calculations (these calculations might have production volumes and negative been made, but they are neither shown, nor trends in overall economic discussed). development in the country. The comments refer to the above-mentioned 4. Same page, last para, contains a measures. If "RosUgol" does not understand groundless conclusion that such the essence of these measures, than measures (it is not clear, what arguments against calculated figures are measures the authors are referring worthless. to) will free funds from an unprofitable part of coal industry, which would make the most active coal companies viable. Do authors take into account the fact that total funds have already been cut by 50 per cent? 5. The conclusion that enterprises IBRD is correct, while "RosUgol" refers to are not encouraged to raise coal IBRD conclusions, which can not be found in prices taking into account market the report. IBRD claims that Sales price is conditions (Section "Subsidies", para lower than Cost of production, for Sales 4) as the result of getting subsidies price equals Cost of production minus as absolutely wrong. Subsidies. Cutting subsidies will make loss-making enterprises to raise their sales price, not to reduce the cost. And that is the major defect of the subsidies scheme. - page 17 - 6. It is important to mention that in 'RosUgol" makes a big mistake for a the third quarter of 1 994 the proponent of market mechanisms, saying subsidies to cover losses have been that if a loss-making enterprise is forced to reduced by the factor of 3 as sell its coal at market price, but not at the compared to the first quarter of cost of production, the customers "underpay 1 994, an enterprises in coal industry the supplier" (Sales price lower than Cost of had to raise their prices, however production). the level of price rises was not If the amount of Rb450 billion has nothing to sufficient, leading to the fact that do with arrears crisis, than this figure is the shortfall of funds from customers to cost of excess production (450/Cost of enterprises was in excess of Rb450 production), for which there is no market billion. The assumptions about demand, as it is properly stated by IBRD. interlinkage between subsidies and timely payments of wages and salaries are not correct either, as the subsidies are earmarked to certain purposes (funds to pay wages and salaries are earned by selling production to customers, the remaining part comes in form of government support for the purposes of compensations for consumer prices growth). - page 18 - 7. Pages 74, 76 contain the It is evident than by allocating subsidies to assumptions that coal prices are set cover losses on price differences, "RosUgol" by "RosUgol" company. It is has levers to influence the market price of important to emphasize that coal. Currently the government does not "RosUgol" sets the subsidies only, regulate the policy of allocation of subsidies while the level of prices is set by for coal production, such allocation is total enterprises themselves; at the same authority of "RosUgol". In its turn, time, subsidies are set not to protect "RosUgol" does not make this policy the weakest enterprises, but to transparent. There are some examples, compensate for excessive costs of evidencing that "RosUgol" tends to support production, caused by adverse "strong" mines in Kuzbass region, adversely geological conditions, high extent of affecting the status of "weak" mines in depreciation of fixed assets, if the Vorkuta region, but there are some examples prices of similar types of coal of all evidencing opposite practices, i.e. coking the groups of coal-mining enterprises coals of "Zapsibmetkombinat" joint stock are the same. company. "RosUgol" is not sincere in its statements that the company could separate the geological and administrative factors, affecting costs. Such a differentiation is possible only if it is qualitative, but not quantitative. The Ministry of Coal Industry used to apply the model of planning the number of employees on the basis of factors as well as total wages and salaries, with the breakdown by elements. Today the information, required to apply such models (financial reporting) is non-existent. - page 19 - 8. The proposal to totally eliminate This argument of "RosUgol" is a graphic all the subsidies (page 88) to example of non-market oriented approach, compensate for operational losses as based on a number of logical mistakes. First, well as for investment purposes by only the elimination of subsidies could the end of 1 994 without encourage structural adjustments in the restructuring of the whole industry, industry. If subsidies are not eliminated, if implemented, will bring about structural adjustments will be existent in sharp price rises, higher extent of public pronouncements of the heads of the insolvency of enterprises as well as industry only. Another evidence is the forced close down of mines, as well experience gained in the times of planned as shortfall in production in the economy. volume of 1 50 mn tones of coal. Second, the term "sharp" price rise of coal can not be considered to be an element of a professional statement. The question is by how many per cent the prices will rise, but 'RosUgol" does not have a professional answer to this question. Although the danger of price rises, which could not be considered as a beneficial factor, does exist. Third, arrears are the case even today, when subsidies do exist. A reverse situation is also possible, when the budget, relieved of the burden of "coal subsidies" will pay its debts to budget-financed customers of coal enterprises. The shutdown of unprofitable mines and open pits because of insufficient demand is quite a normal thing for a market economy, while closing down profitable mines for the same reason is a negative factor. Currently customers, issuing their orders in "contact" with coal-miners, tend to overestimate the demand in the hope, that if subsidies to coal industry are increased, consumers will be in a position to purchase coal at lower prices. Fourth, shortfall of 1 50 mn tones is to be considered in the context of budgetary gains from the elimination of subsidies for the production of the above-mentioned 1 50 mn tones. - page 20 - 9. Subsidies for wages and salaries Its is not clear why subsidies for wages and are paid to compensate the salaries payments can not be dependent on consumer price growth only and the number of working hours per employee they can not be dependent on the and on the number of employees. (There is employment level, as it is proposed no reference to the para or section of the in the report. IBRD Report, containing such recommendations). 10. (1.2) Recommendations to The whole statement is based on the concentrate the authority to manage assumptions, which have their roots deep in the subsidies fund either in the the past: Interagency Coal Committee or in - it is correct, that when calculating the Ministry of Finance show the subsidies for the coal production lack of depth in the analysis of using existing methods it is necessary specific features inherent in the to consult high qualified experts, Russian coal industry, the drive to specialized in coal industry; at the destroy the vertical structure of same time, the IBRD proposal is to administration in the industry, eliminate such subsidies, thus including "RosUgol". At the same eliminating the need in such time it is important to remember that specialists; any agency will have to hire highly - the calculation of subsidies for the qualified specialists in coal industry, social infrastructure of coal-mining if we are to take a serious and does not presuppose the need for governmental approach to the specialization in coal mining; process of setting subsidies for the - the fact that "RosUgol" has the right industry. to identify its own approach with the governmental approach is highly disputable. 11. (1.3). The report ignores the This question is to be addressed to the IBRD world practice, showing that many during the session of the Commission. countries are constantly subsidizing Although the report itself contains the their coal industry. While the authors answer to this question, i.e. that coal of the report propose totally industry in Russia in its current shape (as eliminate government support to the well as military-industrial and agro-industrial industry within the nest two years. complexes) is a bottleneck for market Such a proposal is contained in reforms in the economy. many sections of the report. The authors emphasize western practices of downsizing their coal production, while totally ignoring the fact that this industry receives government support in many countries. - page 21 - 1 2. If the recommendations are The comments makes us think that is case implemented, the ultimate results the IBRD concept is adopted, "RosUgol" will will be as follows: make every effort to prove the inapplicability - mass unemployment, with of this concept. It is quite natural that all the relevant current management of "RosUgol" will do its consequences; best to implement its own ideas about the - loss of industrial and labor policy of restructuring, thus resisting potential, which is difficult to different views and opinions (those of IBRD, restore, while in case of Ministry of Economy, etc.). economic revival the demand Counterarguments are as follows: for these capacities will be - mass unemployment can be avoided restored as well; if IBRD funds are used for these - self-planned economic purposes; dependence on western - in new market environment the markets, needed for exports revival of old energy intensive of coal; economy is out of the question, while - constant breakdowns in for the new, energy-efficient economy supplies of coal to the maintenance of the existing levels households as well as of production is not necessary; industrial consumers of coal. - industrial and labor capacities of inefficient enterprises is hardly valuable for new market conditions; - modern world presupposes some extent of interdependence of different countries; e.g. currently the United States are "dependent" on imports of consumer goods from China, because they are cheaper than domestic goods; - imports of coal for Far Eastern regions might be much more cost- effective, than subsidizing the transportation of coal, produced in the Kuzbass region; - Russia was dependent on the imports of Canadian wheat was the result of planned economy and subsidized agro-industrial complex. The coal component of economic security of Siberia in the foreseeable future will not be endangered; the only concern is connected with low efficiency of coal-mining enterprises in Russia. - constant breakdowns in the supplies of coal to households and industrial consumers took place under the - page 22 - 13. (1.4). The proposed If it is true that "Kuzbassugol" is currently decentralization of the process of increasing wages and salaries at the expense concluding tariff agreements will not of the development and maintenance of bring about tougher competition production capacities, than its growing between companies, on the operational costs, in the context of tough contrary, it will impede such competition, will make it much insolvent competition. For example, earlier, than the orders, issued by "RosUgol". "Kuzbassrazrezugol" joint stock company, the cost of production of which are relatively low, raises wages and salaries without changing prices (because market prices are dictated by coal miners), which adversely affects the development and maintenance of its capacities. 14. Moreover, differentiation of the The fact, that workers leave weak base for setting wages and salaries enterprises and are hired by efficient will result in higher extent of social enterprises can be viewed as a natural flow tensions, particularly between cola of labor in the market. mining associations, located close to each other. 15. (1.5). Budget subsidies to This allegedly "tough" approach to the implement the industry's tariff utilization of funds only for certain purposes agreement of coal-miners should not can be argued by the fact that, for instance, be considered as method of the Vorkuta region claims amounts in the payments to cover labor costs, they repayment of arrears in wages and salaries serve as the source of covering of from the budget, while these funds have enterprises' expenses. Against the already been received by "Vorkutaugol" background of the arrears crises the enterprise. subsidies under the tariff agreement serve as the only guarantee that at least portion of earned wages and salaries will be received, for these subsidies are earmarked for the above purposes. 1 6. Such subsidies could be replaced The essence of the proposed measures is far by guarantees to retain 40 to 50 per from clear. cent of the inflow of funds in the payment for goods sold for the purposes of wages and salaries payments. - page 23 - 17. The amount of subsidies If that is the case, than why do employees allocated for these purposes is of other enterprises and organizations, not determined on a pro rata basis, involved in coal production, under the tariff depending on the volume of coal agreement received in the second quarter of production, i.e. it is closely linked to 1994 Rubles 14,335 mn. the enterprise's performance. 18. (1.6). The World Bank insists It is not clear, what is actually evidenced by (page 9), that subsidies under the such a 'graphic example". tariff agreement do not bring about the expected results, being social protection of population in the transformation period, and that these subsidies are utilized for the maintenance of existing production levels. This assumption is based on the fact that per capita subsidy is Rubles 227,000, while average wage is Rubles 145,000, with wages and salaries being 3 to 6 months in arrears. This graphic example is just another evidence of the fact that government subsidies are earmarked for certain purposes only. 1 9. Wages and salaries are paid out If that is the case, than what is the of funds, received for goods sold, production, for which employees of while a certain portion of wages and TSNIEIUGOL research institute get their salaries is paid under the Tariff salaries under the tariff agreement. agreement, while the above amounts are closely interlinked with the production volumes. - page 24 - 20. (1.8). Page 7 contains an absolutely groundless assumption that "Tariff agreements are quite effective in putting hurdles on local coal mining enterprises in ... their attempts to carry out key administrative functions". By this the authors mean the measures to set their own sales prices, level of wages and salaries to employees, systems of social benefits, the right to operate as an independent entity, or to close down some of the mines. These conclusions are far from accurate, moreover, the authors make an attempt to exclude trade unions from "setting the rules of the game-. V.A. Brodsky - page 25 - FEDERAL DEPARTMENT FOR INSOLVENCY (BANKRUPTCY) State Committee of the Russian Federation for Management of State Property To the Chairman of the Interagency Commission FIRST DEPUTY for Social and Economic DIRECTOR GENERAL Problems in Coal Mining Regions A.N.Shokhin 129857, Moscow, ul. Shchopkdna 42 phone: 971 91 39 fax: 975 45 61 21.09.94 No. IT-06/1904 Re: Report by the International Bank for Reconstruction and Development (IBRD): "Restructuring the coal industry of Russia." Dear Alexandr Nikolaevich, The Federal Department for Insolvency (Bankruptcy) of the State Committee of the Russian Federation has considered the report on the restructuring of coal mining industry in Russia submitted by the IBRD and generally agrees with the findings and proposals of the report in matters of advancing subsidies and implementing industry restructuring. Thus, limitation of the time period of the restructuring to 3 to 5 years suggested in the report is economically advisable, but, given the current political and economic situation of Russia, this deadline is unlikely. The formulation of restructuring program for coal industry of the Russian Federation for the initial 1 to 2 years and experience gathered in its implementation make it possible to more precisely determine the industry restructuring pace and coal requirements up to the year 2000. The experience gathered in implementation of that program would make it possible to determine the pace of discontinuing subsidies, their pattern, and orientation either, as well as viability of advancing subsidies directly to enterprises (coal mining companies) and to local authorities. Besides, among other basic measures for restructuring coal mining industry of Russia suggested in the draft report, the Federal Department observes the following ones: - To augment impact of the coal mining companies on coal pricing with due consideration of coal grades and transportation tariffs. - The methodology of subsidy distribution does not result in reduction of general recurrent costs with considerable coal output drop which enables some coal mining companies - page 26 - to artificially keep their coal prices lower than its cost value thus negatively influencing the financial situation of the enterprises with low product cost value. - Railroad tariffs for coal transportation surpassed economic costs (long-term ceiling costs) of transportation of this type of product. Establishment of an adjustment mechanism for determination of railroad tariff for coal transportation. - Reduction of the subsidies for coal industry (in % of GDP). - Full-fledged responsibility of the coal mining companies for meeting their commitments as to paying wages/salaries with no resort to public subsidies. Substitution of direct negotiations with the employees and making contracts at the enterprise level for the nation-wide Tariff agreement. - Establishment of fully funded federal and regional systems of social protection for coal miners and generation of new jobs for them as determined by employment drop and shutting-down unpromising and highly unprofitable enterprises of the industry. A. Tal - page 27 - KUZBASSINVESTUGOL Judgement on the Report of the World Bank and the Russian Government on the Restructuring of the Coal Industry in the Russian Federation The principal report contains an assessment of the coal reserves in the territory of Russia, status of the coal production, prospects of the coal markets by regions and fields. An international experience in the structural adjustment of the coal industry is considered. An analysis of the component costs of the transportation of coal and transport tariffs are shown. Matters connected with social protection, structure of subsidies and subsidy financing in the coal industry and the situation with environment protection are considered. On the basis of the analysis of the status and prospects of the coal market development recommendations for the restructuring of the coal industry are made. The report notes that Russia possesses enormous reserves of coal which may be actually used in the amount of 300 - 400 billion tons, i.e. for more than 1000 years of production with its current rates. The highest level of the coal production was registered in Russia in late 1 980-s and then it started to decrease. According to the estimates of the World Bank which took 1992 as a "base" year, the total volume of the coal sales in the country will decrease approximately by a third and then in the period of 1 995 - 2000 will remain at the same level for some time. Individual coal fields will have to compete with each other to maintain or enlarge their part of the narrow market - a field that will be able to supply coal of required quality at the lowest price that will include the costs of delivery will secure contracts for the sale of coal. In the past investment in the coal industry resembled gratis financing but in the future the prices for coal should cover costs for servicing principal amounts of loans and their interests, profits ( dividends and undistributed profit) and operating costs. The reduced demand for coal in Russia is caused by the general reduction of the GNP volume, shift of focus under the conditions of inflation and economic instability to the expenditures connected with consumption instead of expenditures for investment, decline of production in the heavy industry and an increased portion of natural gas in the electric and heat supply systems. The control year for the forecast of the coal demand in the report of the World Bank was 1997 as a "typical" year in the period of 1995 - 2000. According to the estimates of the World Bank, the demand for coal in 1997 will be 144.9 million tons of coal equivalent, including coke - 28.8 million tons of coal equivalent, and will decrease by 34 - 35 per cent as compared with the "base" 1992 year. With the declined demand for coal the level of employment in the industry remained the same and the subsidies allocated for the coal industry amount to about 1.2 per cent of the gross domestic product (GDP) that is the second largest figure after the agriculture and represents a heavy burden for the State budget. The amount of subsidies granted to the coal industry exceeds the total wages fund. In the opinion of the World Bank, subsidies protect a production process rather than directly its participants and the methods of subsidy use impede the process of restructuring in the sector rather than promote it. For example, in 1 993 in the coal industry 35 per cent of subsidies were allocated for the payment of salaries, 1 6 per cent for the provision of social services and 49 per cent for - page 28 - the covering of production costs and capital investment. The necessity of restructuring in the coal industry of Russia is prompted, in the view of the World Bank, by the following conditions: - low demand for coal; - high tariffs for the transportation of coal; - increased requirements to the coal quality undeL r the njiket conditions. The object of the restructuring process in the coal industry is adaptation to new market relations and creation of a dynamic coal industry which could Iunrwtion with profit, without subsidies in the market economy of Russia. According to the estimates of the World Bank, the struCtural adjustment of the coal industry in Kuzbass will be accompanied by the reduction of the coal production from 96.2 million tons of coal equivalent in 1992 to 47.4 - 52.8 million to!iy of coal equivalent in 1 997, the number of mines will decrease from 91 to 33 - 40 and the enml loyment will decline from 296.3 thousand persons to 71.8 - 82.6 thousand persons. To prevent serious social upheavals and greater sociai tension the drastic reduction of employment in Kuzbass requires development, in the opinion of the World Bank, of special employment programs and establishment of an adequate and entirely financed system of social protection for miners and their family members. This system of social protection should include, besides the maintaining of the present system of social paymnenits and unemployment benefits, the development of a new, temporary system of special nono-recurrent payments to encourage early retirement of workers in the coal industry. The report of the World Bank contains the followig(- recommendations for the restructuring: In the market economy the prices for coal are set in the coUrse of negotiations among independent coal mining companies and their customers. New coal mining companies should be entirely responsible for the fulfillment of their obligations connected with the payment of salaries rather than rely on the public subsidies for salaries. At the coal mining enterprises with low costs the coal mining companies should reinvest their profits to increase the efficiency of labor, quality of the coal produced and improvernent of the environment protection measures. At the coal mining enterprises with high costs the production capacities should be reduced to the level of efficiency or, as necessary, the produIction process should be stopped while ensuring an adequate financing of the environment restoration arrangements. The government should reduce subsidies for the coal industry at the expense of the cancellation of subsidies for the losses caused by the principal activities, make payment of subsidies by the Ministry of Finance directly to the coal mininig companies and local authorities, channel the remaining part of subsidies for the financing of special payments, system of social protection and for the closing of mines. - page 29 - The World Bank considers the Tariff Agreements as a serious barrier to the adaptation of commercial coal companies to the conditions of free market and recommends the Government to redirect these funds from the financing of salaries to the purpose-oriented payments for workers who have agreed to leave the coal industry. In the opinion of the World Bank, the fundamental problem for each coal mining company will be an assumption of the entire responsibility for the regulation of wages in the company which means conducting direct negotiations with its workers on the levels of employment and salaries. In the documents prepared for the report of the World Bank the experience of structural adjustment in the coal industry of the leading countries in the coal production (Great Britain, Germany, France, Poland and the United States of America) is discussed. The report notes that in all countries under consideration restructuring of the coal industry has taken or is taking place, but circumstances were different and different strategies were used. In those countries of Western Europe were hard coal is produced (Great Britain, Germany and France) the structural adjustment in the coal industry represented a response to the changing situation on international markets of energy products that was connected with the development of atomic energy, production of natural gas and emergence of inexpensive imported coal on the market. The structural adjustment resulted in the significant reduction of unprofitable coal production, substantial reduction of the number of persons employed in the coal industry, as well as the diversification and development of other sectors of the economy in regions. In all cases the development of the coal industry was inevitably carried out in the direction of reduction of production scales, increase in labor productivity and concentration of production at the enterprises with the best performance figures. As the materials of the World Bank show, Germany will maintain its production at some minimum level proceeding from the considerations of the fuel supply security no matter whether this is economically justified. France follows the course for the constant elimination of the coal production taking all necessary political and social measures. Starting from early 1 960-s and up to the present the volume of production has decreased from 50 million tons to less than 10 million tons. During the whole period personnel reductions gradually took place (from 320,000 to 6,000 persons) at relatively stable rates amounting approximately to 10 per cent a year on the average. In the last years expenses for the coal production amount to approximately 1 60 dollars per ton that is twice as much the cost of imported coal. The most important forms of the assistance provided by the State are the State support of the sale of coal of a producers that ensures a guaranteed volume of supply, direct subsidies for covering operating losses, as well as for retraining and employment of coal miners, creation of new jobs, with expenses per person being equal to the remuneration for two years. In Great Britain the state subsidies for the coal industry amounted to 32 billion dollars since 1992. In 1991 the coal consumption was 92 million tons of coal equivalent. Coal still represents a leading element in the energy balance of Great Britain. The portion of electric - page 30 - and heat supply enterprises in the total volume of sales is 75 percent. At the present time almost 65 percent of electric power is produced at power stations using coal. Power stations using gas produced only 1 percent of the total volume of electric power in the country. Since the early 1960s, coal production has declined from 200 million tons per year to 81 million tons a year in 1993. During the same period the number of persons employed in the coal industry dropped from 490,000 to 30,000 as of the end of 1 993, with the number of workers being reduced by 5 percent a year on the average. The Government has taken a decision to restructure the process of management in the coal industry in accordance with commercial principles, and in December 1993 a draft law was adopted concerning the privatization of the British Coal companies, but the privatization mechanism has not been definitely determined yet. The most significant forms of assistance on the part of the State were guaranteed sales of coal and direct subsidies for the British Coal Company to cover losses. In the period from 1980/1981 to 1991/1992 23.5 billion U.S. dollars have been allocated for these purposes. Moreover, substantial subsidies have been allocated for the solution of labor problems, mainly for the payment of separation allowances to dismissed miners. In the period from 1 980/1 981 to 1 991/1992 the total amount of subsidies was 3.7 billion U.S. dollars, or 20000 U.S. dollars per one dismissed person. In the period from 1985 to 1992 5.3 billion U.S. dollars have been allocated for the structural adjustment. The allowances were offered to miners that on the average were equal to the yearly remuneration. In Germany, in spite of a high level of protectionism for the benefit of the producers of both power station and coking coal, the coal production is constantly decreasing. In 1973 coal accounted for 41 per cent of the energy balance of Germany, but in 1 991 oil became a main source of energy (38 per cent), coal (33 per cent), natural gas (7 per cent). Electric energy and heat supply represent the main area of the coal consumption in Germany, which absorb 75 per cent of coal produced in the country. Electric power station using coal are the principal producers of electric energy (60 per cent). Since early 1 960s up to 1993 the output dropped from 140 million tons to 65 million tons a year. During the same period the number of persons employed in the industry decreased approximately from 400,000 to 90,000. The reduction of the number of workers was gradual and stable and amounted to approximately 4 per cent a year. The number of operating enterprises dropped from 1 39 to 1 7. Nevertheless, the production costs remained the same and amount to 1 50 dollars per ton that is three times larger than the value of imported coal. The coal industry of Germany consists of two private joint stock companies. The coal producers enjoy the protection of legislation which guarantees certain positions on the market and subsidies if a competitive level of prices cannot be ensured. With the support of the Government two long-term agreements have been concluded. The first agreement provides for annual supply of 45 million tons of local coal for electric power stations at prices ensuring the reimbursement of expenses. Under the second agreement, all steel plants undertake to purchase coking coal only from local sources and the Government should cover the difference between the price of the local market and the price of the international market through direct payments. - page 31 - Under these two agreemnents the State grants subsidies for the restructuring of production at enterprises to increase their profitability (90 per cent). The rest of the State assistance is connected primarily with labor problems (funds are allocated for the payment of long-term pensions and bonuses to minersl. Coal mining companies in Germany carry out on a permanent basis major investrment programs aimed at production improvement (as a rule, investment represents a hialt of amounts received as a part of assistance in general). In the coal industry of Germania. personnel reductions are made for the most part through the retirement of workers, including early retirement. The RAG association which is a principal coal producer increasingly diversifies its activities in such areas as electric energy, chemistry, development of technolo(ies, environrnenit protection. Today the activities that are not directly related to the coal piodmiction account for 40 per cent of the total income and ensure jobs for 20 per cent of the lotal number of workers. The reform process is quite successful in the coal production regions, particularly in the Ruhr region where nowadays advanced arnd multisectoral econorny is built. In the United States the coal productioni increased from 370 million tons in 1 960 to 838 million tons in 1 993. Durinig the same period the production of electric energy in the country has doubled. Electric energy supply enterprises are the main consumers of coal in the United States. They accounit for 85 per cent of the total volume of consumption. In 1991 55 per cent of the total volurnie of electric energy were produced at power stations using coal. After the fluctuations of prices that were registered on the world market in 1970s the consumption of oil in the jeCtruc power supply system drastically dropped and today is only 4 per cent of the total volume of electric energy produced ( as compared with 1 7 per cent in 1973 ). In the period from 1 973 to 1 991 the portion of coal in the total energy consumption in the United States increased from 1 8 to 23 per cent. Although in the United States the coal market was steadily growin-g the coal industry underwent constant structural reforms. In the last twenty years the coal productiUon increased mainly at the expense of large open cast collieries located in the westerni parl .of the United States. In the East enterprises with high costs were closed and small-size enterprises merged. A number of small-size enterprises reduced from 6550 in 1 996 to 2750 in 1 992. In the last twenty years productivity of labor has doubled. Proposals and recommendations of the World Bank for the restructuring of the coal industry in Russia are of specific nature and are justified by the analysis of historic development of the coal inarket and production by regions of Russia, and they have been prepared on the basis of th,rty years of experience in restructuring the coal industry in western countries with developed mariket economnies which lead in the coal production. However, in spite of all depth of the study of the coal industry development problems and integrated character of the prepared proposals, irn our opinion, it should be noted that some proposals are superficial and do not take irito account a present-dav status of the production relations in regions and an initial sTage of economic reforms carried out in the country, and in some cases they are contrary to the experience and strategy of restructuring in the coal industry of countries with developed ITlarket ecoriornies. The analysis of proposals of the World Bank shows that the model of the coal industry of the United States has hpen used as a basis for the restructuring of the coal industry in Russia. - page 32 - All coal mining enterprises in the United States are privately owned, and the supply of energy is regulated by the market. In contrast to the countries of Western Europe, the United States of America have never faced the problem of noncompetitiveness of the coal industry. The reserves of oil in the country are not large and exploration and development of natural gas fields have been restrained by the price regulation. After the "oil crisis" in early 1 970s the strategy of the State in the energy development was oriented to the reduction of the portion of oil (to 4 per cent) in the electric energy production at heat power stations at the expense of increase of the portion of coal (up to 55 per cent). In the countries of Western Europe (Great Britain, Germany, France) restructuring in the coal industry is connected with the emergence on the market of inexpensive imported raw materials in early 1 960s, consequences of the development of atomic energy and natural gas production. The structural adjustment was carried out during 20 - 30 years with the high level of protectionism for the benefit of coal producers and the State support. Subsidies and grants allocated by the State are directed to the reconstruction of enterprises and absorbing of production costs (up to 40 -55 per cent) and social support of miners (10 - 15 per cent). It should be noted that the reduction of the total number of workers at coal mining enterprises did not exceed 4 - 5 per cent a year. Dismissed miners received separation grants (equal to the remuneration for two years). Programs of social assistance for miners and creation of new jobs have been developed with the State ensuring financial guarantees. Proposals for the restructuring of the coal industry in Russia and reduction of employment are of an accelerated nature and do not take into account social consequences. For example, "the Government should follow the principle in accordance with which no one receiving a pension from coal mining enterprises may not continue his/her work in the sector. However, they may look for jobs in other sectors." 'During a limited period of time, maybe 1 - 3 years, the Government should propose to include mines that cannot become profitable in the program of closing of mines which is carried out by the Government." after 1994: cancellation of subsidies for covering losses incurred in the course of principal activities and investment." ,...commercialization and privatization of new coal mining companies may not proceed until: - local coal mining companies remain under control of the national coal monopoly (Rosugol)... in which a national company (Rosugol) possesses controlling block of shares." This is a questionable recommendation, for these days it is difficult to restore the management in the coal industry. The discovery in early 1 960s of large reserves of oil and natural gas, as well as the development of nuclear energy have led to the reduction of the portion of coal in the energy balance of Russia to 20 per cent by 1 980s and further drop of its portion to 1 4 per cent in - page 33 - 1 990s. National interests of Russia necessitate to maintain in the national economy the coal industry which is able to ensure increased output of coal when a threat of energy crisis emerges after the exhaustion of resources of hydrocarbons. The coal industry of Russia is based on national scientific, technical and industrial potential that is critical for ensuring energy security of the country. Maintaining of a minimum necessary portion of coal in the energy balance of the country requires substantial public funds, consequently appropriate legislative decisions should be taken which would ensure guaranteed sale of a certain part of produced coal and subsidies from the State budget to maintain a required level of production capacities. To prevent a drastic drop in the coal production in Kuzbass and a forced reduction of miners' employment resulting from serious shrinking of the Kuzbass coal market due to the increased transport tariffs, in our opinion, it is necessary to consider advisability of creation of a regional fuel and energy complex on the basis of promising fields in Erunakovsky region. Construction of heat power stations which would use advanced technologies of coal burning and would be environmentally safe, in the immediate vicinity of mine fields and open cast collieries would allow to cut significantly transport costs and to deliver coal by colliery transport vehicles, bypassing the Ministry of Railroads system, and in the future possibly by conveyer and pipeline transport. Creation of a strong energy base in Kuzbass would permit to increase power availability in agriculture, to develop a modern processing industry producing high-quality foodstuffs, to enlarge the use of electric power for household purposes and to carry out fully environment protection measures. The levels of the coal production and sale indicated in the report are insufficient even in the nearest future, and the adoption of this recommendation would mean a destruction of the base industry of the country, and particularly Kuzbass. It would be more appropriate, while cutting consumption of oil and gas for the production of electric energy, to increase their export and to increase accordingly a portion of coal in the electric energy production. The coal industry of Russia should remain one of the largest in the world. (Signed) E.L.Langolf, Director Diversification and restructuring Kuzbassinvestugol - page 34 - MINISTRY of FINANCE of the RUSSIAN FEDERATION From: A.L. Samusev Deputy Minister of Finance the Russian Federation To: Y.M. Urinson First Deputy Minister of Economy the Russian Federation Pursuant to the instruction of the Russian Federation Government (N AW-nl4-26707 of August 25, 1994), the Ministry of Finance of the Russian Federation reviewed the IBRD report "On the Status and Restructuring of the Coal Industry in the Russian Federation." 1) The main targets (objectives) of the coal industry restructuring proposed in the report are consistent with the concept of expanding economic reform in Russia. However, the underlying principles relating to the resolution of the issue and sgecific im0lementation activities need to be modified in a number of respects, including the need for adjusting them in accordance with Russia's geographic conditions. 2) First of all, the IBRD's strategy assumes a trend towards a further decline in production in the Russian Federation, which runs counter to the Russian Government policy to stabilize production over the next years and then to increase it. In this context, the IBRD report should be revised as follows: 3) firstly, with respect to estimated demand, coal production requirements and production capacity with account taken of ensuring economic security of Russia; 4) secondly, as regards the timing (pace) of the industry's restructuring based on the availability of government finances for the purpose. 5) Given the economic instability in Russia, the Russian Federation Finance Ministry believes it would be useful to work out a detailed coal industry restructurina vrogram for the next foreseeable and economically calculable geriod (for examrle 3-5 years) and make a general projection for a longer-term period. 6) French and German experiences show that restructuring of the coal industries there took a long time and was carried out with active government support. Since Russia has a lot of similarities in respect of coal operations and has a wide geographic dispersion of coal mines across its territory, restructuring the Russian coal sector will also be likely to take a lot of time and government supoort. 7) The Russian Finance Ministry is of the view that it would not be feasible to stop providing subsidies to the coal sector in the near term. Certainly, the formats of such support should be designed on a case-by-case basis in line with specific tasks handled - page 35 - at each particular phase of restructuring. 8) Currently, the Finance Ministry is providing subsidies to many coal enterprises directly through regional treasury offices. The structure of subsidies is changing with regard to various groups of enterprises, especially as companies move to market-priced sales of coal. 9) The current policy is towards expanding subsidies for mine closures and relative reductions of subsidies allocated for other purposes. This trend is likely to continue in the future. The Russian Finance Ministry believes that focusing efforts on Driority issues involving the closure of 42 non-viable mines in the cominq years creates a solid basis for further restructuring of the coal sector. 10) According to the Russian Finance Ministry, an active involvement by the IBRD in the efforts to close 42 uneconomic mines and. esDeciallv. with reaard to covering costs related to the divestiture of mine-owned social assets to the municiDal authorities would create a good basis for the Bank's participation in the provision of financial resources to assist the process. Financial resources should be made available to address the entire range of issues related to the retrenchment of coal industry workers across the various regions. 1 1) The Ministry of Finance notes that the IBRD report does not provide sufficient coverage of the potential impact that the proposed measure to withdraw budget- financed subsidies to the coal sector in three years would make on the overall price levels of domestically manufactured products (listed by type of industry), price ratios by commodity groups (non-food and food products) and an increase in the total amounts of budgeted subsidies primarily through more subsidies to be paid to the social sector and defense industries. Additionally, it should be realized that the coal sector restructuring program is taking place at a time when other industries are also being reformed resulting in closures and reorganization of companies, which certainly requires some nation-wide coordination in addressing social concerns. A.L. Samusev - page 36 - DEPUTY HEAD OF ADMINISTRATION OF THE ROSTOV OBLAST Ministry of Economy of the Russian Federation TO: Chief of the Division for Social and Economic Problems of Coal Mining Regions, Mr. I. Kozhukhovsky 103025, Moscow, 19, Novy Arbat The Rostov Oblast Administration has reviewed the report of the World Bank 'Restructuring the Coal Industry in Russia. Sector Report" and prepared its comments and proposals jointly with specialists from the "RostovUgol" joint-stock company, "GukovUgol" and the Rostovgyproshakht Institute, which we would request you to take into consideration when considering the World Bank report at the Inter-Ministerial Commission on Social and Economic Problems of Coal Mining Regions. Enclos. A copy of the above mentioned doc./3 pages/ signed A. A. Khomyakov - page 37 - Attachment to Doc. No. 731/372 of September 20, 1994 September 20, 1994 COMMENTS AND PROPOSALS OF THE ROSTOV OBLAST ADMINISTRATION ON THE WORLD BANK REPORT nRESTRUCTURING THE RUSSIAN COAL INDUSTRY" 1. The report presented by the World Bank experts contains an analysis of the Russian coal industry operation in the period of implementation of market reforms. 'Scenarios" of the coal mining development are determined with due account of competitiveness of the coal mining companies and the possible demand for fuel. At the same time, the report does not reflect either the state of production assets of the sector, or the perspectives for the production capacity of coal mining companies in view of the demand for coal in regions. The costs related to closure of loss-making mines, to employment for laid off workers and solution of ecological problems are not determined. In evaluating the competitiveness of coal mining companies only the current prices for coal and transport tariffs are taken into consideration, the effect of other fuels on the coal market as well as possibilities of changes in the structure of the fuel balance in different regions of Russia in the medium-term perspective are not taken into account. It is also necessary to consider the possibilities of competition from foreign coal suppliers under conditions of a considerable rise of the world prices if the state subsidies to the coal sector are reduced or discontinued. 2. In our view, the evaluation of the demand for coal in the Russian Federation is not correct, including use of gas and oil to substitute for coal and this approach may lead in the perspective to a complete cessation of gas and oil export and, as a result, to a significant reduction of currency inflow. 3. Taking into account the considerable influence of coal miners on the level of social and economic tension in the region, the pace of restructuring the coal industry in the Rostov oblast must be conditioned by the following factors: 3.1 closure of especially heavy-loss-making mines and construction of highly efficient coal companies which would produce market coal competitive on world market. 3.2 evaluation and calculations by the World Bank of the possibility for operating coal mining enterprises, taking into account only the profit gained in the Rostov oblast, are not quite correct. In a number of developed western countries production of high quality coal is subsidized by the state. - page 38 - 4. Experts of the Bank believe that an immediate abolition of state subsidies to the coal industry and liberalization of coal prices would allow most coal companies to become profitable, but they do not take into account the growth of production costs at coal companies as a result of the increase in prices for materials and services in other industries due to increase in coal prices. Taking into account the complexities of prices on coal, the inability of consumers to pay is now beginning to manifest itself, and with the cessation of all state subsidies, even in conjunction with a limited reduction in wages - coal prices will increase sharply, the inability to pay will increase, and this will lead, practically, to a halt of the majority of mines and of the branch in general. 5. If the number of employed in coal industry - including working pensioners and people approaching the retirement age - is reduced, it would be almost impossible to find jobs for them in other industries, since their economic situation is as difficult as that of the coal industry and they are forced to reduce the labor force and to close down factories. Since coal basins are in different economic conditions we think it necessary to consider the possibility of constructing mines in favorable, promising Russian coal regions and transfer (moving) of coal workers to these regions. Example: development/construction of new highly productive mines in highly developed North-Caucasian economic region. In this case adequate subsidies should be foreseen for development and reconstruction of operating promising mines and enrichment plants. 6. The report proposes two options with respect to periods of restructuring - three years and five years. In the present political and socio-economic situation , when we have no practical experience in implementing such large-scale measures in Russia, we believe that the five year term for restructuring is preferable. This period may be subdivided into two stages: at the first stage practical experience of cleaning up and closing non-perspective mines and finding solutions to social problems will be accumulated and analyzed, as envisaged in" Guidelines for rehabilitation and closure of heavy loss-making and non-perspective mines in Russian coal industry" approved by the Inter-Ministerial Commission on Social and Economic Problems of Coal Mining Regions (Protocol No. 2, May 4, 1994) In view of the present uncertainty with respect to coal consumption in the Russian Federation and bearing in mind that the problem of railway tariffs is not solved, we think it expedient to preserve the level of coal production reached in the Rostov oblast - 22.0 million tons, providing adequate financing for maintaining the capacities and rehabilitation of perspective mines and enrichment plants as well as for construction of new mines together with social infrastructure. At the same time it is necessary to proceed with the implementation of planned activities on cleaning up of heavy loss-making non-perspective mines and provide for that purpose adequate budget financing. On the basis of the above the conclusions and proposals for restructuring the Russian - page 39 - coal industry contained in the report, in our view, cannot be recommended for implementation until they are appropriately corrected and additional research is carried out. The proposals mentioned above will make it possible to carry out restructuring of the coal industry within the terms planned without sharply aggravating the social and economic tension in coal mining regions and without sharp fluctuations in providing coal to consumers. - page 40 - MINISTRY OF SOCIAL PROTECTION RUSSIAN FEDERATION FIRST DEPUTY MINISTER The office of the Inter-Departmental Commission for Social and Economic Issues of the Coal Mining Regions Having considered the IBRD draft report "On the Status and Restructuring of the Coal Industry in the Russian Federation' and the attachment thereto, the Russian Federation Ministry of Social Protection hereby advises as follows. The report contains the findings of a comprehensive. large-scale and phased study of complicated technical and socio-economic issues. Of special significance are social protection matters in the coal mining areas which are covered in the report by a special section compiled based on analyzing statistical and sociological data. The section contains information on employment, pension provisions, housing and everyday life conditions in the coal mining regions as well as conclusions and practical recommendations on resolving social issues during the coal sector restructuring. Analysis of the social sections of the draft report suggests a number of conceptual comments, including: 1. Great caution should be exercised towards the World Bank experts' view that there is a need for accelerated coal industry restructuring in Russia, including mine closures and disengagement of employees. Comparative studies show that countries with similar numbers of coal industry employment took much longer to reduce their work forces than envisaged in the Russian Federation coal restructuring program. For example, in Germany, where the coal sector employed 607 thousand people in 1957 (Russia in 1992 had 763,000 coal employees), the average annual labor redundancy rate in the period from 1957 to 1993 (36 years) amounted to only 2.3 percent. In France, employment fell from 360 thousand to 40 thousand in 1950-1990, that is, at an average rate of 2 percent per annum. However, the World Bank estimates that the relevant annual figure for Russia in 1992-1997 would be 8-9 percent, i.e., 4-5 times higher. Even disregarding the differences between the initial social and economic situations in those countries and Russia, such a rapid pace of restructuring will require much more substantial financial and material expenditures and institutional efforts within limited time frames than under an evolutionary industry reform scenario. 2. Criticism is warranted with respect to the World Bank's recommendation to withdraw government subsidies to the coal sector as quickly as possible. According to foreign experiences, liquidation of loss-making mines does not automatically ensure the removal of government subsidies to the coal industry. A case in point is Germany, where financial support from the government to the coal sector increased from DM5.2 billion in 1980 to 9.9 billion DM in 1993 as employment in the industry fell, and, if calculated per ton of coal produced, subsidies rose from 24 DM per ton to 70 DM per ton. In the UK, coal subsidies went up from 500,000 dollars in 1979-80 to one billion dollars in 1 992-93. The purpose of - page 41 - such subsidies is to promote the technological and economic development of enterprises/companies and industrialization of coal mining regions (the latter occurred in France) and to address social concerns related to industry reforms. Withdrawal of government subsidies makes it impossible to accomplish technological upgrading of the coal producing assets and to overcome the negative social impacts of loss-making mine closures. 3. International experience offers a wide range of activities to provide social protection to people whose jobs are cut as mines are liquidated or closed. There is a variety of arrangements and methods of protection, and the size of related investments also varies significantly. As a generalization, these types of assistance/protection include the following: - compensatory payments to disengaged workers (severance benefits) the size of which depends on the annual wage and length of service, form of dismissal (UK and other countries) or unemployment benefits (USA); - early retirement opportunities (based on length of service in the industry), establishment of specialized pension funds; - management of production sites being vacated in order to maintain economic activity in coal production regions (favorable leasing terms, administrative services, etc.); - pro-active employment policies directed at retrenched workers, including moves to encourage creation of new jobs (both in the coal mining areas and outside them) through special investment projects, soft loans to be made to companies being set up, including small businesses; assistance in retraining and job placement, including in other regions of the country (relocation), away from the former place of residence (development of computer data bases, vocational counselling services). Despite the differences of these social protection methods, there is one thing that brings them all together: the need for a national legislative and regulatory framework - exactly what was done in foreign countries that conducted coal restructuring reforms. It would be appropriate to take fully into consideration and reflect in the report the whole range of such social protection measures to be used while planning Russian coal restructuring, rather than be limited to individual elements. 4. The draft report fails to cover at least three groups of issues that are of major social and economic significance: 1) The issue of legislative support for coal restructuring. In accordance with the Russian Constitution, key social issues (social protection of the population, health care, education, culture) are within the joint jurisdiction of the federal executive authorities and executive authorities of the Federation subjects. In keeping with the treatment of employment and migration matters given in the program where they feature prominently, these matters are under exclusive jurisdiction of the executive government authorities of the Russian Federation subjects. Failure to address these circumstances in the program, which is now a predominantly sectoral program, may make its implementation difficult. Regional legislatures and executive government agencies will undoubtedly use their legitimate rights to obstruct program activities, should these measures lead to a drop in the living standards, increased social tensions in the regions where social peace is already fragile. In order to prevent this happening, it is necessary, first, to make this program a federal- - page 42 - regional one, that is, to identify both national and region-specific activities that would take into account the special circumstances of a specific region like Kuzbass, the Far East or the Moscow region. Secondly, this program should be submitted for consideration and approval to the State Duma and the Federation Council, and after that is may acquire the status of law rather than an administrative directive, and would be binding on all levels of government. 2. The issue of maintaining living standards in the coal mining regions during the restructuring reforms. There are a number of aspects to this issue: there is a need to at least stabilize the number of needy individuals in coal mining areas (miners and employees of support industries, including social infrastructure financed by coal producing enterprises); to keep the level and structure of the consumer basket intact (food, non-food items and services); and, finally, the need to prevent a collapse of the social infrastructure in coal mining regions. Even today, when unemployment is minimum, one in every three persons is below the poverty line. In the Rostov region, for example, the average per capita income is at the subsistence minimum level. In the Chelyabinsk region, this indicator exceeds the subsistence level by only 50 percent. It is easy to imagine how these figures will change as a result of closures and what sort of popular response this would generate. To find effective solutions to social problems in the coal mining regions during the period of restructuring, the program should address the question of amounts and sources of financing at least three types of expenditures: to provide employment to those made redundant, to pay poverty benefits and other social benefits (let alone unemployment benefits); to maintain the existing social assets in coal mining areas that are also in need of modernization; to finance social protection institutions and implement programs directly related to providing social protection to the population in coal mining areas (operation of the industry's standard institutions, social service centers, etc.). 3. The issue of establishing the coal mining area social protection system proper. This subject is treated rather superficially in the report. However, the industry reform will likely require an increase in social assistance in a variety of forms, which in turn will call for involving skilled personnel and strengthening the financial, logistical and information bases of the social protection network. The thrust of practical moves to address these concerns is to increase the scale of social benefit payments and provision of social services to the population. Each of these issues should be defined and included in the program. A.N. Khromushin - page 43 - MINISTRY OF FUEL AND POWER of the RUSSIAN FEDERATION CHIEF of the COAL INDUSTRY DEPARTMENT TO: Shamrayev N.G. Deputy Minister of Economics Government of the Russian Federation Dear Nikolai Grigoryevich, Please find attached comments and suggestions of the Coal Industry Department regarding the World Bank report "Restructuring Coal Industry". Attached: 5 sheets G.A.Kassikhin - page 44 - COMMENTS AND SUGGESTIONS REGARDING THE WORLD BANK REPORT "RESTRUCTURING COAL INDUSTRY" The report contains detailed information on the situation of the Russian coal industry provided by Rosugol. Some recommendations support the restructuring effort in process: establishment of joint-stock coal-mining companies which enjoy complete autonomy in their operation, including coal pricing; transfer of social assets to the local authorities; - reduction of government subsidies and more effective use of subsidies; development of a regulatory framework for closure of unprofitable mines, preparation of information on such mines; preparation of regulatory acts in support of restructuring. At the same time the report largely ignores the role of the coal industry in the Russian economy, possible scenarios of development of the fuel and power sector, and implications of restructuring for other sectors and the Russian economy as a whole. The following comments and suggestions concern demand for coal, volumes of production, assessment of mine closures and reduction of employment, composition and scale of subsidies. 1. Recommended volumes of production - 210-250 million tons in 2000 and 260-280 million tons by 2010 - are insufficient for fuel security and further economic development of the country. These recommendations are built on the assumption that by the year 2000 GDP will not exceed 75% of the 1990 level. It is presumed that gross output will increase by 5-7% a year starting from 1 995 while demand for primary fuel, including coal, will decrease by 5- 7% a year in 1995-1996. In other words, it is assumed a priori that Russia has the technologies, and means of their multiplication, permitting immediate reduction of fuel consumption by 10-14% a year. The report forecasts that in 1997-2002 demand for coal will remain unchanged while GDP will increase by 5.0-5.5% a year, presuming annual decrease of fuel consumption per unit of output at the level of 4.7-5.2%. This frame of reference differs from the expectations of the Russian government concerning GDP (90% by 2000), outlook for application of advanced technologies, reduction of power consumption and power-saving per unit of gross output. To date, the last value has never exceeded 2% a year in industrialized countries. In the former Soviet Union annual reduction of power consumption per unit of output did not exceed 1 %. Demand for primary fuel is also underestimated. 2. Estimates of coal demand in the report presume a mature fuel market. In forecasts for periods until 1997, maybe even until the year 2000, focus must be on the need for coal because other approaches, including one built on purchasing power, may result in miscalculation of required output and a considerable shortfall in energy consumption. Several estimates have been made of demand for coal at the federal and regional levels, as highlighted in Table 1. - page 45 - Table 1 m tons Estimate Year 2000 Year 2010 Russian Energy Strategy. Draft. Outline. 250-270 300-325 Ministry of Fuel and Energy. July 1 994 Restructuring Coal Industry. Outline. 285 330-350* Rosugol. April 1994 Development and Siting of Coal-Mining 360-365 440-450 Enterprises Until the Year 2010 (with detailed plan till the year 2000). Coal Research Institute. December 1 993 Interministerial Co-ordinating 310-320 325-345 Commission for Russian Energy Strategy. 1 994 Government Fuel and Energy Program. 329.4 1993 Joint Protocol of the Department of 345-370 400-440 Energy and the Department of Coal Industry (the Ministry of Fuel and Energy), and Coke Company. November 1993 World Bank. November 1993 200-260 285-325 August 1994 210-250 260-280* Estimates of regional administrations. 361 May-June 1994 l Electricity and Energy Program of Russia - 490-500 Demand for coal None of the estimates performed in Russian corroborates the World Bank forecast of demand for coal, let alone the estimate of needs for the period till the year 2000 and till the year 2010. It must also be noted that the discrepancy derives primarily from forecasts of power generation in the Kansk-Achinsk coal basin. 3. The report contains no substantiation of regional coal market scenarios. The conclusions that production in the Donetsk (Rostov region) and Kuznetsk basins will decrease disagrees with estimates of comparative competitiveness of coal produced in those two basins. The Donetsk coal is competitive throughout the European part of Russia. The Kuznetsk coal is competitive in some European regions of Russia , in the Urals and in West Siberia. No consideration is given to the effect on the markets for Donetsk and Kuznetsk coal of power stations in the Urals and West Siberia abandoning Ekibastuz coal with high ash content. Concerning the Far East, the report forecasts a decrease in demand for coal to 10.2 million tons of equivalent fuel by 1 997 as against 26.3 million tons of equivalent fuel in 1 990 (2.6 times). This is totally ungrounded with respect to a region where coal is the key fuel. - page 46 - 4. While the report recognizes that the process of restructuring the coal industry in several countries in the past 20-30 years has been lengthy and painful, it proposes to restructure Russia's coal industry within 3-5 years and shut down all loss-making mines within 2 years. According to the proposed scenarios, 135-155 mines will be closed by 1998, and the number of employees will be reduced by 424,600-476,600. The report contains neither cost estimates nor analysis of the potential effect of massive mine closure on other sectors of the regional economy and the Russian economy as a whole. Closure of one mine requiring 100-1 20 billion rubles (1994 prices for the Kuzbass basin), it is not feasible to implement the proposed program, and cope within its social ramifications, within 2-3 years. 5. It is crucial that coal-mining companies prepare their own restructuring programs. The government, however, must assume responsibility for preparation of not only regional programs (to define allocation of scarce government resources and co-financing arrangements in the process of mine shutdown), but also federal programs outlining development of the coal industry with a view to creating a competitive coal market. 6. Withdrawal of subsidies to the coal industry is totally ungrounded and unacceptable. This would lead to immediate conservation of reserve capacity (69.4 million tons) and discontinuation of construction intended to maintain current capacity of operating mines (stripping, preparation of new galleries, re-tooling , etc.). That would result in a steep drop in production. Mines which pay their way as of the moment of withdrawal of subsidies (referred to as "the core of the coal industry' in the report) will become loss-making 2-5 years later and will have to be closed. According to estimates, conservation of mines under construction, social protection of construction workers made redundant in the process, and changing the business of construction companies will cost 1 5-17 trillion troubles in current prices. 7. The report contains no estimate of restructuring and modernization costs. The proposed government subsidies will be insufficient to ensure even social protection of workers. 8. Coal export and import estimates are totally unjustified. This section must be prepared by the Russian counterpart. PROPOSALS 1. To make note of the World Bank report. 2. To negotiate World Bank loans to finance re-tooling and social protection (particularly job creation) in the coal industry. 3. To estimate regional and inter-sectoral demand for coal in the next 2-3 years consistently with free-market trends, in order to substantiate decisions on mine closure, re- tooling and modernization. - page 47 - Mr. I.S. Kozhukhovsky Department for Socio-Economic Development in Coal Producing Regions On Draft Report of the World Bank "Restructuring the Coal Sector in Russia. Status of the Sector" Instruction given by A.G.Shapovaliants of August 26, 1994 NAW-nl4-26707 In pursuance of the Instruction of First Deputy Minister of Economy of the Russian Federation A.G. Shapovaliants of August 26, the Main Administration for the Fuel Industry has reviewed the Draft Report of the World Bank "Restructuring the Coal Sector in the Russian Federation. Status of the Sector", and its comments and proposals are as follows. Basic objectives of restructuring the coal industry, along with the establishment of competitive, highly efficient enterprises, is the assurance of solvent demand for coal products. The Draft Report of the World Bank "Restructuring the Coal Sector in the Russian Federation" of August 8, 1994 (N13187-RU) forecasts the coal demand for 1997 which is, according to them, typical of the whole period of 1 995-2000 (p.25-27), in the amount of 150 million tce or 217 million tons in real terms; it follows from Table 1 (p. 25) that it would be 59 percent in relation to the 1990 demand. Fig. 1 (p. 23) forecasts the coal demand at the level of 50 % in 1997-2002 of the 1 990 demand (256 million tce or 369 million tons, Table 1 on p. 25). If one relates demand indices to 1990 from Fig. 1, then the annual coal demand, as projected by the World Bank, would be 1 28 million tce or 184.5 million tons in 1997-2000, 140.8 million tce or 203 million tons in 2005 (55 % to 1990) and 184.3 million tce or 266 million tons in 2010 (72 % to 1990). "Proposals to the Integrated Forecast of Socio-Economic Development of the Russian Federation for the Period of up to 2000-2005 (FEC area)" submitted by the Ministry of Fuels and Energy of Russia to the Ministry of Economy of Russia adopt such volumes of production of the fuel and energy resources as set out in "Basic Provisions for Energy Strategy of Russia" approved at the meeting of the expanded Board of the Ministry of Fuels and Energy of Russia on July 27, 1994. Under scenario for production of primary energy resources, the coal production should be 260-270 million tons in 1995, 250-270 million tons in 2000 and 275-300 million tons in 2005. The draft "Basic Areas for Coal Industry Restructuring" prepared by RosUgol prepared with due regard for comments of the Inter-Agency Commission for Socio- Economic Issues in Mining Regions which has reviewed this Draft version on May 4, 1 994 and approved it in principle stipulates that implementation of "The Basic Areas for Coal Industry Restructuring" would allow to meet requirements of the national economy for coal in 1 994-2000 at the level of 292-285 million tons/yr and maintain, accordingly, production capacities at the level of 350-360 million tons/yr in order to assure necessary reserves (24-25 %). - page 48 - Being guided by the methodological documents on making an integrated forecast for socio-economic development of the Russian Federation for the period of up to 2000-2005, it is envisaged that prior to 1997, it would be necessary to achieve stability in the total volume of production and recover the economic growth; in 1988-2000, to assure the average annual incremental rate of GDP at the level of 5.5 %; while in 2001-2005 - at the level of 3-4 % aiming at the projected decrease in power content of GDP and rise of the gas share in the energy balance. The Main Administration of Fuel Industry is of the opinion that the forecast for coal production suggested by the Ministry of Fuels and Energy of Russia is the most realistic one. It follows from the above that volumes of coal production (consumption, demand) for the period of up to 2005 projected by the World Bank were significantly underestimated. Predicted volumes of coal production (with allowances made for developments in labor productivity) would influence the number of operating coal enterprises and employed labor as well as other critical indicators of coal industry restructuring. It means that the indicators suggested by the World Bank may not be adopted as the basis. For instance, according to assessments of the World Bank (Report, p. 35, Table 5): - the number of existing coal enterprises should be reduced from 273 in 1992 to 118-138 in 1997 or 2.3-2 times; in other words, it would be necessary to close 155-135 enterprises during this period. According to the Ministry of Fuels and Energy of Russia and RosUgol, less than 50 unpromising or heavy loss making underground or open mines should be closed prior to 2000; - employed labor at the coal enterprises are suggested to be reduced from 762.6 thousand workers in 1992 to 287-338 thousand in 1997 or 2.7-2.3 times, i.e. to lay-off 475.6-424.6 thousand employees which appears to be unrealistic. According to assessments made by RosUgol ("Basic Areas for Coal Industry Restructuring of Russia", p. 11), the labor strength in the sector should be reduced by 300-310 thousand persons by 2000. On p.3, para 5 of the Draft Report of the World Bank, states that this Report is not intended to provide 'quantitative evaluations of costs associated with closures of mining enterprises and employment reductions" and this predetermines the inappropriate nature of a number of World Bank proposals pertaining to changes in subsidies for the coal industry from the federal budget and a possible pace of restructuring process. With a view to reducing the labor strength in the coal sector, the World Bank suggests, for instance (vol. 1, p. 14, paras. 3 and 4), that in order to encourage retirement of miners of pension age the "decision on providing them with small lump-sum allowances that could offset an unexpected loss of their rights" should be taken at the governmental level. This position takes absolutely no account of the realities in the contemporary social and economic situation of Russia. Estimates made by the Ministry of Economy of Russia in cooperation with the Ministry of Finance of Russia and the Council of Ministers of the Republic of Komi at the time of preparing Government decisions on the Pechora coal basin - page 49 - in 1993 and 1994 (Resolutions of the Government of the Russian Federation of December 25, 1993, No. 1351 and of June 20, 1994, No. 761) showed that to meet the financial demands of miners and pensioners and make them agree to abandon Vorkuta and Inta would require allocation of Rb. 2.4 billion from the federal budget. If such compensatory payments were applied to the coal industry as a whole, it would have entailed annual budget expenditures exceeding the size of subsidies to the coal sector for 1 994. The Main Administration for the Fuel Industry deems it necessary to take account of the above considerations in reviewing the draft Report of the World Bank at the meeting of the Inter-Agency Commission for Socio-Economic Issues in Mining Regions. V.I. lvanov Deputy Head of the Main Administration for the Fuel Industry Ministry of Economy - page 50 - Interministerial Commission for Social and Economic Problems of Coal-Mining Regions RE: World Bank Report "On Restructuring Coal Industry in the Russian Federation" The Independent Union of Russian Coal-Miners has reviewed the World Bank report on restructuring the coal industry and hereby presents its conceptual comments and suggestions. The proposed timeframe for restructuring the sector and the plan to find new jobs for over 200,000 redundant miners within 3-5 years do not seem quite feasible. In our opinion, maintaining living standards of coal miners and coal-mining regions during restructuring must be a key consideration in deciding the pace of reform. It must ensure that the government is at least able to keep the current living standards in coal-mining regions from dropping. The approach to restructuring proposed by the World Bank ignores some social and economic realities of the country. For example, the Bank suggests lifting government subsidies relating to tariff agreements, arguing that subsidizing wages through tariff agreements may impede "the success of the job reduction program". Also, the Bank considers tariff agreements to be a serious obstacle in the process of adaptation of newly-established commercial companies to the free-market environment. At present, tariff agreements fix minimum guaranteed tariffs and salaries. Companies (enterprises, production associations) enjoy autonomy in their wages policies but may not go below the rates fixed in the tariff agreements. We have certain doubts about another proposal of the Bank which concerns decentralization of the process of concluding tariff agreements and its devolution to the company level. We believe that this will may give rise to disputes between the companies and their employees, breed public discontent of the labor force in the industry as a whole and ultimately threaten the process of reform and democratic change in Russia. Regulation of labor relations, particularly tariff agreements offering minimum federal guarantees, will safeguard employees against attempts by individual companies to resolve the problems of transition to the free market at the expense of their workforce. Negotiations on tariff agreements at the federal level could involve delegates of companies and their associations. We believe that the employer in the negotiating process should be represented not only by the Ministry of Fuel and Energy but also by Rosugol. The coal industry does not seem to be prepared to accept the pace and scale of job reduction proposed by the World Bank. Tariff agreements and protocols signed by Vladimir Shumeiko and Yegor Gaidar instructed the Federal Employment Agency of the Russian Federation, in conjunction with the employers and the local authorities, to prepare an employment program for coal-miners made redundant. This program has yet to be elaborated (the adjustment program cannot be considered as one). - page 51 - No closures or redundancies should take place until social adaptation (employment) programs have been prepared for all regions concerned. Proposed compensatory payment are insufficient to resolve all problems facing the unemployed workers. Ways must be found to find jobs for redundant miners. A.A. Sergeyev Chairman Independent Union of Coal-Miners of the Russian Federation - page 52 - RUSSIAN COMMITTEE of the INDEPENDENT UNION of COAL INDUSTRY WORKERS TO THE CHAIRMAN of the Interagency Commission for Social and Economic Issues in Coal Mining Regions A.N. Shokhin Re: Report of the International Bank for Reconstruction and Development (IBRD) on Restructuring the Russian Coal Industry. Having studied the draft report of the International Bank for reconstruction and development on Restructuring the coal industry, the Russian Independent Trade Union of Coal Industry Workers notes: 1. There is no doubt that the coal industry of Russia needs restructuring, the ultimate aim of which is to raise the competitiveness of coal, so that coal could enjoy a firm position among other fuels and energy resources. This is dictated by the requirement to ensure security of Russia in the field of energy. Global experience and projections of our leading research institutes show that it is impossible to ensure security of a country like Russia without coal. 2. Restructuring is possible only through adapting the coal industry to the market conditions. 3. The present system of subsidies for the coal industry is not optimal. Alongside with positive elements is has some negative ones, the main of which is its anti-stimulating effect on the process of the production efficiency. Therefore the system of subsidies needs to be improved and tied up with objectives of restructuring the sector. However, under present conditions it is impossible to completely do away with subsidies in the coal industry, due to the condition of mines as well as to the necessity to take into account social factors. 4. Restructuring of the coal industry should proceed at optimal speed. Under the present conditions it means at maximum possible - we stress gossible. And the speed for restructuring suggested by the IBRD does not take into account the social factors and therefore the way proposed by the IBRD is extremely dangerous in our conditions: it may cause a social explosion of unprecedented force among miners, who will be supported by workers in other sectors. If that is what the IBRD is after, then it has fulfilled its task well, by suggesting such speed of restructuring. 5. Hopes of the IBRD that it will be possible to transfer subsidies for production to the social sector to support miners in present conditions are senseless. Perhaps, that could be done in the USA, but not here. - page 53 - Conclusion: The analytical work that is being carried out is useful, there are no doubts as to the main objectives of the restructuring. However, any underestimation of social factors in actual conditions of today's Russia will not permit the authors of the report to get the claimed result. Therefore, the IBRD's suggestions as to the speed of restructuring and the mechanism of its implementation are erroneous. Deputy Chairman, Russian Committee 1.1. Mokhnachuk Independent Trade Union of Coal Industry Workers - page 54 - State Committee of Russian Federation for the Management of State Property (GKI) To Mr. J.M. Urinson First Deputy, Minister of Economy of the Russian Federation -- Deputy Chairman of the Joint Committee for Social and Economic Problems of Coal Mining Regions According to Instruction of the Government of Russian Federation of 25.09.94 N" Al-nl4-26707, The State Committee for the Management of State Property (GKI) has considered the draft report for the July 1994 on the restructuring of coal industry in Russian Federation, prepared by the World Bank experts, and forwards its proposals to the Joint Committee for Social and Economic Problems of Coal Mining Regions for the discussion. The main provisions of the World Bank draft report on the policy development in the sphere of coal industry restructuring, generally reflect the current situation with the distribution of subsidies, mainly forwarded to cover the expenses of production and investment expenditures. This leads to the increase of manufacturing expenses at the overall output reduction and allows some enterprises to keep product sales prices at the level, which is below its wholesale price, thus producing a negative impact on the profitability of other enterprises, having low wholesale prices on their products. The increasing pressure of transport component on the changes of the existing coal market and its output by the regions has been noted. The railway tariffs for coal transportation exceed the railway economic expenditures. Out of the proposed in the Report coal industry restructuring measures, aimed to its effective implementation, the following might be noted: - to limit the period of the sector restructuring to 3-5 years and to implement it in a decentralized manner. To channel subsidies directly from MOF to the enterprises (coal mining companies) and local authorities. To reduce subsidies to the sector (in % of GDP) according to the special schedule; - to replace the national Tariff agreement by direct agreements at the enterprise level; - to establish a system of special allowances for coal miners and an ad hoc program of their employment in view of forthcoming redundancies in the coal industry; - to establish a regulatory mechanism to restrain railway tariffs on coal transportation. - page 55 - On the consideration and preparation of the proposals to the World Bank draft report, GKI thinks it necessary to carry out a supplementary coal needs analysis for the period up to 2000 in Russia, as the draft report has been worked out on the basis of the assumption, that by 1 997 the demand for the coal is about 200-250 million tons per year; besides, the report does not consider the problems of gas, mazut and electric power substitution for coal, the possibility of placing new coal consumers in the regions of mining operations in order to diminish the transport component. GKI supports the proposals, contained in the World Bank draft report, on the transition to the decentralized policy of coal industry restructuring through the establishment of regional coal mining companies, provided that no amalgamation by such companies of all enterprises within a single coal mining basin is admitted. To realize this program it is necessary to strengthen regional coal companies, created for the consolidation of coal mining enterprises stock through allocation to them the additional part of federal shares of coal enterprises followed with the increase of their charter capital funds. To do this it is necessary to introduce necessary changes in the Decree of the President of Russian Federation of 30 December 1 992 N 1702 by way of the new Decree preparation. P.P. Mostovoy - page 56 - Joint Stock Company TO: A.A. Khomyakov for Coal Extraction and Processing Deputy Head of Administration nROSTOVUGOL" Rostov Oblast COMMENTS TO THE REPORT OF THE WORLD BANK "RESTRUCTURING THE RUSSIAN COAL INDUSTRY" 1. The report presented by the World Bank experts contains an analysis of the Russian coal industry operation in the period of implementation of market reforms. This analysis reviews problems associated with the formation of a coal market, "scenarios" of the coal mining development are designated with due account of competitiveness of the coal mining companies and the possible demand for fuel. In preparing the report, a wide range of informational and statistical material was used, including material from several associated branches which have an influence on the development of a coal market (railway transport, power, etc.). Particular attention is accorded the problems of social protection and employment of workers and their family members in the context of liquidating loss-making production. At the same time, the report does not reflect either the state of production assets of the sector, or the perspectives for the production capacity of coal mining companies in view of the demand for coal in regions. The costs related to closure of loss-making mines, to employment for laid off workers and solution of ecological problems are not determined. In evaluating the competitiveness of coal mining companies only the current prices for coal and transport tariffs are taken into consideration, the effect of other fuels on the coal market as well as possibilities of changes in the structure of the fuel balance in different regions of Russia in the medium-term and longer-term perspective are not taken into account. It is also necessary to consider the possibilities of competition from foreign coal suppliers under conditions of a considerable rise of the world prices if the state subsidies to the coal sector are reduced or discontinued. A rapid cessation of state subsidies to the coal industry and liberation of prices on coal, in the opinion of Bank experts, will allow a large part of coal enterprises to become profitable, but in this connection the growth of production expenditures of coal enterprises connected with the corresponding increase in the value of materials and services in other branches of the economy, as a reaction to an increase of coal prices, is not considered. Nor is there any consideration accorded the significant growth in taxes in connection with the increase of prices on coal. On the basis of the above the conclusions and proposals for restructuring the Russian coal industry contained in the report, in our view, cannot be recommended for implementation until they are appropriately corrected and additional research is carried out. Concrete comments to the report are presented in an attachment. Technical Director, AO "RostovUgol" N.A. Piseyev - page 57 - Attachment 1. Quantitative losses connected with the closure of mines and the provision of employment of workers was not specified by the World Bank (p. 3, point 5). 2. The conclusions of World Bank experts (p. 6, para. 3) about the need to direct subsidies toward wages and social protection of workers, and not to the defense of productive processes, call to mind the principle of a "great leap" (p. 78, point 2) rejected by the experts, since it will lead to a halt in production and to massive redundancies of workers in conditions where a system of social protection is absent. At present, the provision of production with necessary materials is lower than sustainable levels since, due to an insufficiency of resources, their delivery has fallen on the average between 3 - 5 times. 3. According to the forecasts of the experts, in connection with the creation of conditions for normal operations (to include a full liberalization of coal prices), 2/3 of coal enterprises will become profitable (p. 1 2, point 1). Kuzbass enterprises are used as an example, where a reduction of extraction and employment of 50% and 70%, respectively, is expected, mainly at the expense of underground mining operations. In the Donbass, an increase in the real prices on coal of 2 - 3 times will allow for competition with fuel from the Kuzbass in the European part of the country (p. 58, point 5), but will not cover production losses, which will rapidly increase to 75-85% of the growth in coal prices at the expense of an increase in value of materials, expenses, and services, called forth by the increase in value of coal. 4. In the report, prospects for the development of gas and oil industries over the medium and long terms (with all certainty, the Bank has additional information), and the influence of these energy products on the formation of regional fuel markets, have not been specified. Apart from this, there is no forecast pertaining to the possible competitiveness of coal shipments from abroad in conditions where world price levels on coal are eclipsed. At present, the price on coal shipped from the Kuzbass, inclusive of the cost of transport, for several economic regions of the European part of Russia is on the order of Rb80,000 - 90,000 per ton, which is at the level of world prices on coal. 5. Proposals for the complete cessation of subsidies in 1 995-1996, with the exception of subsidies to the social sphere (p. 1 9, point 3) will lead to the closure of the majority of mines in the Donbass in connection with their loss-generation, which will contradict the prospects for provision of the Russian market with steam coals from the Donbass at a volume of 15-1 6.3 million tons of standard fuel (p. 40, point 3). (The expected level of production in 1 994 is 1 6.0 million tons.) 6. In the opinion of the experts (p. 1 7, point 3), one of the factors contributing to the increase in efficiency of production and labor safety is "an appropriate amount of mining- technical planning," which places in doubt the competence of engineering-technical - page 58 - workers of the Russian coal industry. If in fact this is a discussion of the necessity of long-term planning, it is necessary in the first instance to conduct a discussion about capital investments. 7. (p. 1 8, point 9) For enterprises with high production costs, it is imperative to reduce the level of capacity of the enterprise to an efficient level. In conditions of reducing the volume of production, the efficiency of coal enterprises will unavoidably be reduced, with the exception of enterprises having in their ranks units with separate infrastructure. - page 59 - GUKOVUGOL PROPOSALS relating to the report of the World Bank "RESTRUCTURING THE RUSSIAN COAL INDUSTRY" The Sector Report on the Russian coal industry and on restructuring the coal industry is a voluminous, substantial, and sufficiently complete document and objectively presents the problems and condition of the Russian coal industry together with a series of conclusions which are incontestable and merit a rapid implementation. However, prior to the adoption of the report, AO GukovUgol has some serious comments demanding investigation and a discussion of the document concerning a series of aspects reviewed in the document. 1. If the number of employed in coal industry - including working pensioners and people approaching the retirement age - is reduced, it would be almost impossible to find jobs for them in other industries, since their economic situation is as difficult as that of the coal industry and they are forced to reduce the labor force and to close down factories. Since coal basins are in different economic conditions we think it necessary to consider the possibility of constructing mines in favorable, promising Russian coal regions and transfer (moving) of coal workers to these regions. Example: development/construction of new highly productive mines in highly developed North- Caucasian economic region. In this case adequate subsidies should be foreseen for development and reconstruction of operating promising mines and enrichment plants. 2. The report proposes to end subsidies, investments, including even the Tariff Agreement, for mines not slated for closure, that is, these mines must cover all their expenses, including those for development, with their coal sales receipts. Taking into account the complexities of prices on coal, the inability of consumers to pay is already now beginning to manifest itself, and with the cessation of all state subsidies, even in conjunction with a limited reduction in wages - coal prices will increase sharply, the inability to pay will increase, and this will lead, practically, to a halt of the majority of mines and of the branch in general. Technical Director, Kandidat Tekhnicheskikh Nauk A.O. "GukovUgol" K.l. Rutkov Prepared by: V.V. Antipov Tel. 3-37-63 - page 60 - THE ADMINISTRATION OF TULSKAYA OBLAST To Mr. A.N.Shokhin Chairman, Joint Committee for Social and Economic Problems of Coal Mining Regions Your ref. N RY-499/260-160 of 02.09.94 Subject: The World Bank report "Restructuring Coal Industry in Russian Federation". The Instruction of the Government of Russian Federation of 25.08.94 N AW--n14-26707. The Administration of Tulskaya oblast has considered the World bank report "Restructuring Coal Industry in Russian Federation" (further referred as the "Report"). It should be noted, that the Government of Russian Federation, together with the interested bodies and institutions (primarily, State enterprise "Rosugol", Department of Coal Industry of Mintopenergo of RF), as well as local authorities, undertook some practical steps regarding the proposals set forth in the Report ( transfer of social sphere to the municipal ownership, mine closure program based on the main principles of sanitation and closure of unpromising and most unprofitable pits and surface mines of Russian coal industry, the new working places creation program, gradual reduction of subsidies, etc.). This suggests, that many provisions of the Sector reform, reflected in the Report, have practical and realistic meaning. However, we consider it necessary to put forward the following general proposals and comments to the Report: 1. The literal acceptance of the proposed policy, which aims to turn two thirds of coal industry enterprises into a profitable entities without any subsidization, can't be considered in isolation from the overall process of Russian national economy reformation. The proposed pace and terms (the coal sales fall off to 200-250 million tons and the reduction of coal industry employment volume by more than one half by 1997) may ruin our coal industry. The simultaneous curtailment of governmental subsidies to the coal industry, as it is proposed in the Report, may in a very short time result in a critical level of coal output, not ensuring the economic security of the country. The lessons, gained from the initial stage of coal industry reform experience, (taking Tulskaya oblast as an example) show, that for a successful coal sector reorganization it is necessary to develop a sector restructuring transition program with a reliable financing and in conjunction with the other sectors of national economy. - page 61 - The program should include: - the complete transfer of housing and community services with engineering infrastructure (in this regard the Decree of the RF President N 1 702 has not been executed); - the solution of the problem of coal-miners' ramshackle and not valuable housing resources transfer and the implementation of the program of their pulling down and construction of the new houses instead of the old ones; - the solution of the non-payment and mutual settlements problem, now typical for all sectors of national economy and, in the first place, for the fuel and power complex. 2. We consider it advisable to maintain, for the transition period, the present management structure of Russian coal industry as well as its financing mechanisms. It is necessary to determine the optimum volumes of coal production for each region, ensuring the economic security of the country. To consider the possibility of placing of the Governmental Order for these volumes. The financing of the transferred housing and community services with engineering infrastructure, pulling off ramshackle and not valuable houses and construction of the new ones, should be channeled directly from MOF RF through local governments (oblast administrations). Mine closure programs, the creation of new working places, social protection of the population should be financed through newly established local joint units, including both local authorities and coal mining companies. One of the essential problems is the revision of the Tariff Agreements. As one of the possible ways to solve this problem we suggest the conclusion of the Agreement between the Government of RF and the trade-unions, aimed to the regulation of wage levels in various sectors of national economy. 3. The restructuring of coal industry will lead to extraordinary high level of unemployment. Taking into account, that about 70% of Tulskaya oblast production volume is taken up by the chemical and metallurgical industry, where manpower reduction processes are also proceeding, the closure of mines in Podmoskovny basin will further aggravate the situation with the employment. Positive solution of this problem requires the implementation of a special Federal transition program on the creation of new working places both in Tulskaya oblast and other regions. 4. The Oblast administration supports the need of testing a pilot mine closure program and agrees that Tula region become an experimental site, in view of the planned - page 62 - closure of 10 coal mines in Tula basin during 1994-1995, according to the mine closure program. First Deputy, Head of Administration N.K.Popov - page 63 - KOMI REPUBLIC ADMINISTRATION (translation of this covering letter is included with the complete Komi Republic submission on p. 69 of this Annex) - page 64 - Ministry of Labor Government of the Russian Federation of the Russian Federation Deputy Minister In pursuance of Instruction NQ AW-nl 4-26707 of the Government of the Russian Federation, dated August 25, 1994, the Ministry of Labor of the Russian Federation has reviewed the World Bank report "On Restructuring Coal Industry in the Russian Federation" and hereby submits to you its comments. Appended: 2 sheets. E.D. Katulsky Deputy Minister - page 65 - Comments on the World Bank report "On Restructuring Coal Industry in the Russian Federation" The Ministry of Labor of the Russian Federation notes the relevance of the coal-mining restructuring program and supports the key argument of the report that special attention should be given to social protection of the workforce. Given the fact that reorganization and restructuring of the sector will result in closure of loss-making mines, further effort should be taken to define mechanisms of protecting labor rights of the citizens and more emphasis should be placed on the needs of cities and regions, and to creation of new jobs. Many mines earmarked for closure are focal points of their respective towns. Cities and towns in the regions rely for their livelihood on coal-mining. If mines are shut down and miners are relocated, hospitals, schools, entertainment and recreational facilities, retail outlets, services, railroads, construction companies, utilities, etc., will decline. For that reason, relocation of the population of mining cities and towns requires additional measures to help redundant workers. This holds especially true for the most vulnerable groups (retirees, disabled people, single parents, families with many children). People should be helped to move, find jobs for which they have qualifications or receive training. It is also necessary to help them to receive housing, including allocation of land, purchase of construction materials and availability of low-interest credit facilities. We believe that there are several ways to address the employment problems resulting from closures of mines and layoffs of miners. Job creation must be included as a component in restructuring projects, and, if feasible, programs should be put together to promote small business and self-employment by means of operation of assets of closed mines and other assets sold to employees or purchased at public auctions and by investment tender in the process of privatization. It would seem that the Interministerial Commission should review the aforementioned social and labor issues which arise in the process of restructuring the coal-mining industry. As regards wages in the sector, the Ministry of Labor does not believe in subsidies and subscribes to the opinion of experts who press for self-sufficiency of coal-mining companies in terms of labor costs. On the other hand, in order to achieve consistent reduction of employment in the coal- mining industry, employees should be encouraged to leave voluntarily in which case they should be entitled to severance pay depending on the length of service. - page 66 - To Mr. N.G. Shamraev Deputy Minister, Ministry of Economy of RF The Institute considered the World Bank report "Restructuring the coal industry - Sector report" and informs about the following. The report contains the detailed information on the state of the coal industry in Russia, provided by "RosUgol". The variation approach to the solution of coal industry development and a number of very constructive proposals make the report essential for practical work aimed to the quest for the ways of the sector development. At the same time, the Institute has some comments to the report, which are summarized below: 1. The forecasted by the authors of the report an unambiguous decrease by 2000 of the gross domestic product (GDP) down to 75% of the level of 1990, should be well-grounded. We believe, that the variant, recommended by the Government of Russia, namely, the achievement by 2000 of GDP equal to 90% of the level of 1990, could be considered in the report as well. 2. We can't agree with the authors' consumption forecast for 1 997 estimated as 146 million tons of coal ( this level is assumed to be preserved up to 2000). The results of the studies, carried out by scientific-research institutes and other entities (VNIIKTEP of RF Ministry of Economy, Energoset project, firm "KOKS" etc.), confirmed by the experts from the coal, gas and power sectors of TEK (fuel and power complex) (minutes of the meeting in Mintopenergo RF of 02.11.93) and the data on the demand for the coal in Russia up to 2000, presented to the coal industry department of Mintopenergo RF by the heads of administrations, estimate this demand to be at the level of 230-235 million tons. The estimates, carried out by the institute "TsNIEUgol" together with the design and scientific-research institutes of the sector in the frames of "Main principles of coal industry development strategy in Russia" and n The outlines of the development and placement of coal industry in Russia up to 2010", approved by Mintopenergo RF on 11.08.94, also point out to the necessity of further increase of mining operations. 3. The levels of coal export and import should also be motivated. We suppose, that the export of coal from Russia as a source of currency receipts should be maintained at least at the level of 1 993. As for the coal import, the authors of the report keep it up at the level of 1 4 million tons, retaining the delivery in Russia of high-ash Ekibastuz coal, which can't be admitted, as Kuznetsk coal can be quite efficiently substituted for it, this thesis being confirmed by the results of joint studies of coal and power engineering experts, carried out in the frames of " The outlines..." in 1 994. 4. While acknowledging the need to close some unpromising and unprofitable coal mining enterprises, we consider the closure of 1 55 and 1 35 pits and surface mines (in accordance with the first and the second scenarios of coal industry development) by 1 997 to be quite unrealistic, as it is equivalent to the liquidation of almost 50 enterprises per year with the release of about 1 50 thousand people, working in - page 67 - the industry-productive sphere. One can't also agree with the proposal to close all mines of lntinsky deposit, over 50 mines in Kuzbass, all mines in the Sakha-Yakut Republic and in Magadanskaya oblast. We believe, that the realization of unpromising enterprises closure program, aimed to the prevention of social conflicts, creation of conditions for learning the new jobs, migration and provision of working places for the released labor power, will need much more time (no less than 10-15 years). The estimates show, that the total expenditures, connected with the closing of Donetsk mines (Rostovskaya oblast) and mines of Podmoskovny basin, on the Urals and in Kuzbass, may be of the order of 14,5 and 1 5,3 billion rubles in 1 994 prices, according to the first and second scenarios of coal industry development, proposed in the report. 5. The report does not motivate the formation of regional coal markets. The conclusions on the reduction of coal output in Donetsk (Rostovskaya oblast) and Kuznetsk basin contradict the estimation of competitiveness of coal in all above mentioned basins. The coal of Donetsk basin is competitive in almost all regions of the European part of Russia, and as far as Kuzbass is concerned, its coal (especially from the surface mines) is competitive in some regions of the European part of Russia, on the Urals and in the West Siberia region. The estimates show, that the demand for Kuznetsk coal may give a supplementary increase of 30-50 million tons per year with regard to the development of Erynakovsky region. 6. The suspension of the sector subsidization from the Federal budget will result in the long process of coal output decline, with the impact on economic security of Russia. That is why we believe, that this could be possible only after the implementation of restructuring the overall fuel and power complex of Russia. While appreciating the report as a whole, we consider it essential to point out, that the proposed scenarios of coal industry development could be considered as alternative variants of the temporary reduction of mining operations volume, based on the assumption of GDP being not higher than 75% of the 1990 level by the year of 2000. Director of "TsNIEUgol" VA. lIljin V.K. Branchugov 928-0 1 -07 - page 68 - FIRST DEPUTY HEAD TO: Mr. A.N. SHOKHIN OF THE KOMI REPUBLIC Chairman Interdepartmental Commission 167010, Syktyvkar, on Social and Economic Problems Kommunisticheskaya 9 of the Coal-Mining Regions 08.09.94 No.03-21/3518 Re: your No. AW-T14-26707 of 25.08.94 Dear Alexander Nikolayevich, I am transmitting to you herewith the comments of the Ministry of Industry, Transport and Communications of the Komi Republic on the draft report concerning the reconstruction of the coal mining industry in the Russian Federation, prepared by a division of the World Bank. I believe that the fundamental documents for the reconstruction of the coal-mining sector in our Republic are Decree 71 6 of the Government of the Russian Federation of 19.06.1994 "Concerning Measures to Stabilize the Social and Economic Situation in the Pechora Coal Basin Region" and a number of follow-up documents, inter alia, the Program of Restructuring Coal-Mining Enterprises of the Pechora Coal Basin, to be prepared by December 1, 1 994 and submitted for consideration. First Deputy Head Komi Republic (signed) A.A. Karakchiev - page 69 - MINISTRY OF INDUSTRY, TRANSPORT AND COMMUNICATIONS OF THE KOMI REPUBLIC 167610, Syktyvkar Internatsionalnaya 157 tel: 2-40-37, 2-14-42 fax 2-3744 06.09.94 No. 04-1029 Proposals in connection with the results of consideration of the the World Bank report entitled "The Situation in the Industry and Reconstruction of the Coal Industry of the Russian Federation' In general, the report provides a fairly objective assessment of the situation in the coal industry and, no doubt, can be used as a basic document in development of the coal industry reconstruction regional programs. However, we consider it necessary to make a number of comments relating primarily to the situation in the Pechora coal basin. 1. It is noted in the report (page 6, para 1 and 2) that the period of reconstruction of the coal industry in many countries lasted from 20 to 30 years. At the same time it is stated that the reconstruction period now should not exceed 3 to 5 years. In our opinion it would not be possible to complete reconstruction of the coal industry within the stipulated period as this would require subsidies the amounts of which would exceed by many times those provided at present. 2. It would probably seem premature to set the goal to phase out completely subsidies to the coal industry in the near future would probably seem premature. Most probably, a more rapid reconstruction of the industry would require significant funds to cover the costs of reduction of the staff and of mine closures. Moreover, provision of subsidies to the coal industry in some forms does not contradict the world practice. 3. One cannot but agree with the provision in the report concerning provision of subsidies directly to coal companies. At the same time the report notes the facts of a wrong use of subsidies; these funds are used not for the protection of people from difficult problems of the transition period but for protection of production to cover the costs and to artificially maintain the selling prices for the products at levels below their production costs (vol. 1, page 9, para 1 -4). Probably, in this case the central management structures should be entrusted with control functions both over the process of reconstruction and the appropriate use of subsidies. 4. Restructuring of the coal industry in the Pechora coal basin can be carried out only under its own regional program with due regard for specific features of this basin: 4.1. The main part of the region is located beyond the polar circle, which makes it - page 70 - extremely difficult to create alternative new production units and new jobs for labor released as a result of staff reductions and coal mine closures; 4.2. During the forthcoming decade the Komi Republic will remain an area supplying mainly raw materials to the market. A drastic reduction of coal and other fuel and energy resources production which account for about 70 per cent of the Republican budget could have catastrophic and irreversible consequences for the economy of the region. On the basis of the above and account taken of specific features of the Pechora coal basin decisions concerning this region upon recommendations of the World Bank should be taken very carefully after a detailed and in-depth study of the draft Program of Reconstruction of the Coal Industry specially adapted to the conditions of this basin. Minister (signed) E.B. Grunis - page 71 - Dear Members of the Commission, The report entitled "Reconstruction of the Coal-Mining Industry", prepared by the World Bank is of certain interest; views and assessments from outside are always useful and advice and recommendations of an experienced and independent expert are simply necessary. And no doubt, the report submitted for considerations contains these points. However, I would like to discuss this question later. First of all I would like to touch upon the points to which we can not give our consent. 1. It was stated in the report that in many countries of the world the coal-mining industry had undergone a protracted and painful process of reconstruction, which lasted from 20 to 30 years. And this concerns, inter alia, developed countries where the situation in the coal-mining industry could hardly be called catastrophic. However, in the next paragraph of the same document it is recommended to carry out reconstruction of the Russian coal-mining industry within 3 to 5 years and in doing this to close down 10 mines by the end of 1995 and after that from 15 to 20 mines annually during the period up to 2000. Even simple calculations suggest that the amount of government financing of mines closure (according to the experience of the "Khalmer-Yu" mine of the Pechora basin) go far beyond the budget capacity. And it is practically impossible to finance these processes from the funds of local coal producing firms. The mine closure rates do not conform to the forecasts made by the Ministry of Fuel and Energy of the Russian Federation, the difference being more than 100 per cent. Thus, one of the principal theses of the report concerning restructuring rates can not be considered well-founded and realistic. 2. The report contains the following forecast concerning the volume of coal production: by 2000 the coal production volume should be at the level of about 1 85 million tons per year. According to the "Main Lines of the Strategy of Russia in the Field of Energy" the volume of coal production in 2000 should be 250-270 million tons while the coal production capacity should be maintained at the level of 350-360 million tons per year. Such a difference (by almost 100 per cent) gives rise to doubts for "The Strategy of Russia in the Field of Energy" was prepared by the Ministry of Fuel and Energy of the Russian Federation while a Deputy Minister of the RF Ministry of Fuel and Energy and the Director-General of the "RosUgol" company are mentioned as the main coordinators of the World Bank report. Therefore, in our view, the second principal provision (concerning production volumes) cannot serve as a basis for the program of reconstruction of the Russian coal industry. - page 72 - 3. We can not agree either with the projections according to which the volume of coal production in the Pechora basin would be reduced to 1 2- 15 million tons. This basin in the principal supplier of caking and fuel coals for the North region and about 2 million tons of caking coal and 5 million tons of fuel coal are exported to the North-West and the Central regions as well as abroad. Moreover, we have even witnessed a slight increase in the production of fuel coal by the joint stock company "Intaugol". Taking into account that this balance between demand and consumption can be considered well-established and that any increase of natural gas consumption in the North is not expected by 2000, the most realistic figure of the production volume would be no less than 20 million tons. Furthermore there are two other special factors relating to the reconstruction of coal industry in the Komi Republic, which have been completely ignored by the authors of the report. The Pechora coal basin is, geographically, a part of the Extreme North Region and it would not be realistic to consider creation of new jobs in this region in response to a decrease of employment due to the closure of mines. Furthermore, at present and, evidently, in the foreseeable future the Komi Republic would be primarily a supplier of fuel and energy raw materials which account for about 70 per cent in the economy of the Republic. A drastic reduction of the coal production volume in the Pechora basin would undoubtedly lead to aggravation of the critical situation in the economy of the Republic. In my opinion, it would be unwise and risky to project the production volumes with no regard for the general economic situation in the region in whole. 4. In our opinion, the view of the authors of the report concerning the need to abandon the subsidies system is erroneous. This could be possible only in case of a rapid growth of Coal prices, which, if occurs, would have a paralyzing effect on the coal and related industries. Provision of subsidies in some forms does not contradict the world practice. 5. The authors of the report rightly note the need to decentralize management and to provide subsidies directly to coal producing companies. However, the report notes the cases of a wrong use of subsidies to cover production costs and not for the purposes of social protection of workers. Consequently, a mechanism of control over the use of subsidies - page 73 - should be established. CONCLUSIONS: the main figures characterizing the reconstruction process in the coal industry - the rates and volumes of reduction - appear unjustifiably overestimated and unrealistic, while following the recommendations based on them could lead to a collapse of the coal industry with unpredictable social and economic consequences. Deputy Head of the Fuel & Power Complex Department of the Ministry of Industry, Transport, and Communications of the Komi Republic, Chief of the Coal Industry Division A. Bernstein - page 74 - FEDERAL EMPLOYMENT Interdepartmental Commission on SERVICE OF RUSSIA Social and Economic Problems of Coal Mining Regions Regarding the report of the World Bank "Survey of the Branch and Restructuring of the Coal Industry of the Russian Federation" At the request of the Government of the Russian Federation dated August 25, 1994, N" 26707 The Federal Employment Service of Russia has considered the report on the restructuring of the coal industry presented by the World Bank and, on the whole, supports the conclusions and proposals regarding the reemployment of the laid off workers in this industry. At the same time, the Federal Employment Service of Russia maintains that the part of the report dealing with the revenues and expenditures of the State Employment Fund quotes outdated figures for 9 months of 1993 which do not reflect accurately the real state of things in financing employment programs. The FES of Russia has analyzed the social and economic situation in the labor markets of all coal mining regions of Russia. The analysis shows that the lay-offs in the coal enterprises to be closed down in 1994 may considerably influence the unemployment level in the regions. Pursuant to order No 37 of "Rosugol" dated June 27, 1994 34 mines with a staff of about 28 thousand employees will be closed down in the second half of this year. The closures will mainly affect Tula region (10 mines), Kemerovo region (9 mines), Rostov region (6 mines) and Chelyabinsk region (6 mines). In connection with the above the regional agencies of the FES of Russia are devising employment programs for the miners of Tula and Rostov regions, specifying concrete measures, sources and amount of financing. Proposals for similar programs have been prepared for Kemerovo and Chelyabinsk regions to be submitted to the FES of Russia in October-November 1 994 for approval. A working commission composed of ministries and branch departments executives is leaving for the republic of Komi in the second half of September to study the situation in the labor market, the results of the commission's work to be discussed at a meeting of the State Commission on the prevention of emergency situations in the labor markets. The settling of coal industry problems relating to the restructuring of this industry in Russia will be of clear-cut regional character - it will take into account the state of the labor market in a particular region. For instance, in Smolensk region and in the republic of Sakha (Yakutiya) the number of vacancies exceeded the number of officially registered unemployed, whereas in Sakhalin - page 75 - region there were 23 "applicants' for one vacancy, in Leningrad region - 11, in the republic of Tuva - more than 8. In the republic of Komi (1995), Kemerovo region and to a less extent in Sakhalin region the lay-offs in the coal mines to be closed down will have especially adverse consequences. It will be necessary to devise special programs of reemployment for these regions with budget transfers and probable subsidies from the federal part of the State Employment Fund of the Russian Federation. In other coal mining regions, such as Rostov, Perm, Tula and Chelyabinsk regions the local administrations and the Federal employment service agencies will be able, in FES estimation, to secure the preparation and implementation of regional employment programs independently. Additional problems that may arise in the labor markets of Primorski krai, Leningrad and Novosibirsk regions as a result of the closures of unpromising coal mining enterprises will not be so acute and could successfully be dealt with by the administrations of the subjects of the Russian Federation and employment agencies. If an emergency situation is predicted in a regional labor market both regional and federal agencies are to act according to the procedure set forth by the FES of Russia and approved by the State Commission on prevention of emergency situations in the labor market in July this year. The Federal Employment Service of Russia has reserved the necessary resources from the federal part of the State Employment Fund of the Russian Federation in the fourth quarter of 1994 to allocate subsidies to regional employment agencies in case of emergency situations. M.V. Moskvina - page 76 - FEDERAL EMPLOYMENT Interdepartmental Commission on SERVICE OF RUSSIA Social and Economic Problems of Coal Mining Regions In addition to the letter of Federal Employment Service of Russia dated September 14, 1994. No M-1-1-1136 The Federal Employment Service of Russia forwards tentative estimates of unemployment level in the coal mining areas in 1997, based on calculated data from the World Bank report on the restructuring of the coal industry of Russia. The calculation of the projected unemployment level in 1997 in coal mining regions took into account the scheduled lay-offs in barren mines in 1 997 and the premise that the tendency of unemployment growth in the regions in January-September 1994 will remain the same in 1995-1996 Unemployment level is determined as a ratio between the probable number of unemployed citizens in 1 997 and the able-bodied population (according to the labor resources balance for 1992). Supplement: 2 pages, 1 copy M.V. Moskvina - page 77 - List of BASINS No. of Level of No. of Direct Assumed Expected Expected and Unemployed Unemploy- Mines Employment redundancies level of number of Constituent as of 1 SEP ment (%) as as of in 1992 at mines in unemploy- unemployed in Regions 1994 of 1 SEP 1992 ('000s) 1997 ment in 1997 ('000s) ('0008) 1994 1997 (%) Var. 1 Var. 2 V-r. 1 Var. 2 Var. 1 V.r. 2 PECHORA 18 70.4 49.0 38.4 Komi Rep. 24.0 3.3 8.1 6.7 59.9 49.3 MOSCOW 22 41.0 27.0 8.0 Tula obl. 4.9 2.9 46.5 27.5 DONBASS 42 135.4 38.7 24.6 Rostov obl. 3.6 3.0 86.9 72.8 URAL 33 79.4 63.4 52.5 Chelyabinsk 32.0 1.6 7.1 6.8 136.1 129.5 obl. Perm obl. 37.6 2.3 14.4 14.1 231.9 226.7 KUZBASS 91 296.3 213.7 224.5 Kemerovo 14.2 0.8 14.5 15.1 250.9 261.7 obl. Novosibirsk 20.6 1.3 2.0 3.2 31.8 49.2 obl. KANSK- 9 25.5 12.7 17.9 ACHINSK Krasnoyarsk 23.3 1.4 7.5 7.7 127.4 131.0 krai Khakassiya 5.6 1.8 10.7 11.1 34.1 35.6 Rep. EAST 12 24.4 10.0 13.2 SIBERIA Irkutsk obl. 29.9 2.0 7.3 7.4 112.3 112.6 Chita obl. 3.8 0.5 1.4 1.4 10.4 10.4 Buryatiya 6.4 1.1 2.6 2.6 14.6 14.6 Rep. Tuva Rep. 2.2 1.4 5.6 5.6 9.1 9.0 FAR EAST 36 63.1 46.6 32.5 Primorskiy 13.5 1.0 3.7 3.7 50.2 50.2 krai Khabarovskiy 15.6 1.6 11.8 11.8 113.4 113.4 krai Amur obl. 12.1 2.0 14.2 14.2 87.8 87.8 NORTH-EAST 10 27.1 14.5 13.0 Sakhalin obl. 11.3 2.6 5.6 5.6 24.2 24.2 Sakha Rep. 2.0 0.3 1.1 1.1 7.1 7.1 (Yakutia) Magadan obl. 4.8 2.1 7.8 7.8 17.7 17.7 - page 78 - Fax 203 74 82 Committee Interagency Commission of the Russian Federation on Social and Economic Problems on Metallurgy of Coal Mining Regions 103 718 Moscow, Slavyanekaya PI. 2 Cabe: Moscow, K-11, Metallurgy Committee September 12, 1994 No.11-66 Re: ALU-nl14-26707 of 25.08.94 On the report by the Intemational Bank for Reconstruction and Devlopmnt: On the situation in the soctor and reconstruction of coal mining industry of the Russian Federtion' The Committee of the Russian Federation on Metallurgy, having considered the report by the International Bank for Reconstruction and Development: "On the situation in the sector and reconstruction of coal mining industry of the Russian Federation" and its annexes, is noting hereby a quite high level of the papers prepared, an ample scope, and comprehensive solution of the issues raised. The findings and proposals as contained in the report may well serve as a basis for further formulation of a reconstruction program for Russian coal mining industry. Some findings and statements by the report authors seem, nevertheless, to offer a cause for argument. Thus, the suggestion to further raise coal prices does not take into account the fact that their rise would result, as substantiated by the current practices, in growth of consumers' debts and would fail to resolve the problems of coal mining enterprises. The report entirely overlooks the fact that a price rise for coal, given limited opportunities of its export expansion, would cause significant distortions in the economy and land-slide bankruptcies of the operational enterprises as a result of price and tariff rises for electric power, transportation services, and industrial goods. In the last analysis, the industry would loose its domestic users. This is why the views of coal mine management, the Rosugol company, the Committee of the Russian Federation for Metallurgy, the Ministry of Economy, and the Ministry of Finance seem to be more pertinent as to establishment of an ad hoc coal fund to subsidize the coal industry. A statement to the effect that consumption of coking coals would drop by 27.5% by 1997 as against 1993 (p.10) does not seen to be correct, for our estimates do not run over a 10% drop. The idea to immediately (as from 1995) abolish regular subsidies, but for those for social needs (that runs all through the report) does not seem to be acceptable under the current situation in Russia for a number of reasons: First, this would result in land-slide price and tariff rises in the supplier industries using coal (power generation, transportation, steel, etc.) and would render their products non-competitive; second, given unreal - page 79 - opportunities of the employees to get housing and employment in other regions, this kind of solution would be a source of high social tension in the region; third, wage/salary subsidies in 1995 merely to the regions with an employment rate in the coal mining of over 5% of total employees would chase the employees of those regions (Amur, Chelyabinsk, Irkutsk, Magadan, Perm, Sverdlovsk, Tula, Krasnoyarsk, Primorskiy Krai, the republics of Bashkiriya and Yakutiya) into deadlock. That approach absolutely dismisses the fact that the coal miners are housed in a given region in compact settlements, i.e. in some towns and villages rather evenly in the whole of the area. To our mind, it would more appropriate to apply that approach to the number of jobs in the town or industrial agglomeration in question. Head of the Department for Economy and Forecasting (signed) V.G. Bobylev Remizova E.A. 220 87 76 - page 80 - PROPOSALS of the joint stock company "Severokuzbassugol" pertaining to the conclusions and recommendations of the World Bank concerning the restructuring in the coal industry of the Russian Federation 1. To adopt appropriate policy in the coal industry the requirements in coal produced separately by enterprises of each joint stock company should be determined. In our opinion, without State support enterprises of the joint stock company cannot remain stable. A level of State support and a period of State support should be determined. When decisions on these matters are taken the problem of released industrial and production workers should be addressed. 2. Subsidies for the development of production should remain. Subsidies should be provided in accordance with the existing procedure, i.e. through "Rosugol'. Subsidies should be provided for the development of production, closure of mines, personnel reduction and for the production as well. Subsidies for the production should be provided on the selective basis. 3. An amount of subsidies should encourage the retirement of workers while ensuring their social protection. 4. Programs should be developed for each coal field with spelling out every direction. 5. Mines should be closed in accordance with a strict Government program simultaneously with the development of a program of social protection of workers and engineer and technical personnel. General Director AO "Severokuzbassugoln E.V. Kukharenko - page 81 - OPEN JOINT STOCK COMPANY "CONCERN KUZBASSRAZREZUGOL" TO: S.V. Loparev Deputy head of the administration of Kemerovskaya oblast Ref: Proposals of the World Bank regarding the restructuring of the coal industry in Kuzbass With reference to your letter N2 10-10/1 584 of 29 August 1994 we are ready to advise you as follows: Enterprises making a part of open joint stock company "Concern Kuzbassrazrezugol" are not planning to cut the coal production in the years to come. During eight months of 1 994 the output at the enterprises of the joint stock company increased by 386 thousand tons as compared with the same period of the previous year. To increase the competitiveness of produced coal the enterprises of the joint stock company have developed and carry out measures aimed at increased efficiency of production, growth of labor productivity, cutting of production costs for all components of cost value, reduction of the number of workers and introduction of advanced cyclical assembly-line technologies at the enterprises of joint stock companies: "Razrez Bachatsky", "Razrez Taldinsky", "Razrez Krasny Brod'. According to technical and economic estimates, implementation of developed measures and introduction of new technologies will permit to cut the number of workers and at the same time to increase the coal production by 4 - 4.5 million tons in the next two or three years. High quality of coals produced at the enterprises of the joint stock company allows them to compete with coals produced in other fields. The enterprises of the joint stock company are constantly expanding the coal sales market. For example, an agreement with energy producers in the Ural region has been reached concerning the use of our coal instead of coal produced in Ekibastuz. Moreover, the need for coal in Kuzbass itself is increasing due to the reduced supplies of natural gas. At the same time the search for new consumers of our coal in the regions of Siberia, Far East and other regions still remains a priority task, and for its solution ways to cut the costs of the Ministry of Railroads for the transportation of cargo should be found. - page 82 - It would be appreciated if in the process of considering the proposals of the World Bank for Kuzbass in general this position of our joint stock company is taken into account. Chief engineer of the joint stock company A.L. Virula - page 83 - OF THE INDEPENDENT LABOR UNION OF COAL MINING INDUSTRY EMPLOYEES (R OS U G LE PRO F) 109004, Moscow, Zemlyanoy v.l 64 Phone 915 80 81 Fax (modem?) 915 01 02 STAND OF THE MINERS' LABOR UNION on the paper "Report on the situation in the sector. Restructuring the coal industry. August 8, 1994" prepared by the World Bank Bankers' Recommendations and an Obscure Outlook for Russian Economy A distinctive feature of the report by the World Bank is its thrust on purely financial issues with no account taken of the specific nature of the coal mining industry. The World Bank is first and foremost a BANK and its reDort is a BANK DOCUMENT as aDolied to the coal mining industry. Except for plans to cut subsidies, no mechanisms of making the sector competitive are suggested. It all is to materialize in some inconceivable way, and that way remains off screen. The calculations disregard the following: - the role the coal mining industry plays in Russian economy; - the potential of the coal mining industry to develop upwards; and - the eventual social repercussions of a massive shut-down of mines. Restructuring is aimed at two basic results: to imDrove the financial Dosition of the Government and TO CUT EMPLOYMENT in the coal mining regions, in both instances - the sooner, the better (p. 1 9 of the English version), which is hard to rate as a strategy of restructuring the coal mining industry. The inadequate translation of the English original into Russian gives rise to doubts. Thus, the above outlined aims are worded in Russian as follows: the pace of the implementation of the actions recommended for setting target figures is kind of a trade-off between two principal tasks, i.e. to imDrove the financial gosition of the Government and - page 84 - TO CUT DOWN THE LEVEL OF UNEMPLOYMENT in the coal mining reaions, in both instances the sooner, the better (pp. 19-20 of the Russian version). The said misinterpretation is a matter of principle, and a negligent translation (we leave aside the assumption that the contents of the report have been purposefully distorted) can result in mutual misunderstanding of the Russian and American parties, given the fact, in particular, that this error is not the only one in the report. Under the Russian version, the paper is a joint report by the World Bank and the Russian Government. The English original identifies it as a report by the World Bank. As the Government's own position is politically meaningful, the Miners' Labor Union would like to clarify the issue: is the paper submitted for deliberations a ioint report by the World Bank and the Russian Government setting forth the views of the latter or is it a report made by the World Bank for the Russian Government? RUSSIAN REALITIES: COAL AND THE FUTURE OF RUSSIA The need for the Russian coal mining industry to be restructured is beyond doubt. The current subsidy system is apparently too heavy a burden on the public budget and is unable to improve housing or working conditions of the miners or to promote the long-term development promise for the sector either. The suggestions by the World Bank are resting, however, on an ideal market economy model and on an analysis of the coal mining industry that proceeds from entirely unrealistic statistics. For seventy years, the "planning" of the Russian economy has been based on utopian schemes which were a product of morbid imagination of its fuhrers. Russia has just only begun getting rid of ideological dogmas. What people now need is not the market bolshevism of the World Bank, but rather a well-conceived program for the coal mining industry that rests upon the reality of Russian economic and social environment. The coal mining industry is the basis of coal regions economy. When there is no coal mining, the coal regions will simply die out and millions of people will become refugees. The only way to avoid an economic and social catastrophe is the development of the coal mining regions economy on the basis of coal through developing and updating coal user industries and the diversification of the region industrial basis. Coal mining enterprises are not mere bank accounts and equipment; they are a core of miners' community settlements surrounding the mines. In a due course, the mines holding no promise must be closed down, but the settlements should develop production substitutes with the participation of the available work collectives. Having familiarized itself with the report of the World Bank on restructuring the Russian coal mining industry, the Miners' Labor Union disagrees on the following issues: FORECASTING A CRISIS AND MOTH-BALLING RUSSIAN ECONOMY AT THE CRISIS STAGE OF DEVELOPMENT The sum total of estimates and the coal industry restructuring concept as a - page 85 - whole are built upon an idea of a continuing production decrease in the country. Such formulation of the problem is incorrect for a number of reasons. First of all, it is contrary to fact. Some figures show a halt in the production drop and some stabilization ensuing. In its turn, the report by the World Bank also allows of an eventual recovery of the economy, after it has passed its crisis peak in 1995. The World Bank's tactics aimed at a dramatic reduction of the production capacities of the coal industry results, therefore, in moth- balling Russian industrial groduction at the veak of the crisis. It is not by chance that the coal industry has been chosen, for it is basic for the heavy industry, and its moth-balling involves a chain-moth-balling and aggravating of the crisis in all the heavy industry sectors. The argument of the World Bank to the effect that world coal consumption is on decline and the same would, therefore, happen in Russia is not logically true either. The principled error consists in the fact that the world coal consumption drop was the result of a technological restructuring of all industrial sectors. New energy-conserving technologies emerged, along with change-over from coal to oil, propane/butane, etc.; in other words it was a natural stage of the scientific and technological revolution. Unlike the situation in the West, the causes for the decrease in Russia were not technological ones, for its production potential has not been renewed or updated. The immediate cause was scarce turn-over funds which bring about debts and mutual non-payments. Fundamentally, now in Russia. we are witnessing a crisis of a structural change-over from the wrevious system of economic management to a new one: this is why it is inappropriate to talk about an over-production crisis. (The crisis that the World Bank intends to resolve by hard market methodology is actually a response of the Russian economy to the application of market methodology to it - and its failure. A restructuring of a vast economic complex requires a planned regulation, which was mentioned, as a matter of fact, in the November report by the World Bank). The simplest example to substantiate the above mentioned is as follows: agricultural machinery has not been renewed in kolkhozes for 5 to 8 years now, and not because there is no need to, but rather because the State has not paid its debts to kolkhozes for several years. Hence, the missing demand for agricultural machinery - and metals, and coal. Would the heavy industry be able to overcome the crisis if there is a drastic reduction of coal mining capacities? UNSYSTEMATIC APPROACH OF THE PROGRAM A major drawback of the report is that a systematic approach is lacking, one production sector is artificially dissociated from its social context, its cultural environment, and from the whole of the production complex, though its interconnection with other sectors is easy enough to see. The suggestion to phase out mining power coal in the Pechora field (p.32) which would black out vast areas of the Republic of Komi is one of the oddest. A major issue of the structural change-over facing Russia, and one that is highlighted in the report by the World Bank is the location of industry that was preconditioned rather by past military and political and not economic considerations. It resulted in coal mining, metal production, and heavy industry prevailing in the Kuznetsk and Urals coalfields which supply the far regions of Russia, with limited catering to the needs of the local population. The ideas of the World Bank agplied to other production sectors may lead to the same conclusions as the report on the coal industry does. Metal - page 86 - production, chemical, and heavy industries in the Urals and Kuznetsk coalfields are noncompetitive because of high transportation costs, and, in the wake of World Bank's logic, are to be shut-down. In fact, it looks as if the World Bank forecasts of a decrease in coal demand were based on the assumption that the mentioned sectors are to wrap up. But what would replace them? Who is supposed to invest in services and production of goods for people if they have neither work nor profits? The lack of a systematic aoproach is based on a tactics of isolation of the coal mininq from other sectors and the miners from the rest of the powulation. NEW SOCIAL PROBLEMS AS THE RESULT OF THE IMPLEMENTATION OF THE WORLD BANK'S PROGRAM The implementation of the World Bank's program poses more new problems, for the Government inclusive, than it promises to solve. The World Bank experts have no idea whatsoever of the social and cultural context within which the Russian society is functioning. In their suggestions, they proceed from their own experience, that has nothing in common with the Russian reality. Their advice in this field tends to destroy the social infrastructure unstable as it is. Such are, for instance, the recommendations on the speediest possible shifting of the social matters from enterprises to municipal authorities. In doing this, the "Housing' Section (p.16) indicates the housing available and in no way the construction of the new one. With the matters of housing transferred to municipal authorities, people who have lined for (free) dwellings for years are deprived of this right. Under the current conditions, a worker cannot solve his housing oroblem without the supoort of the enterwrise. Thus. even if the younger generation can find a job, it would be incapable of facing the Droblem of housing. Even more dubious seems the advice to the effect that upon having attained the goal of lowering the employment level in a given coalfield by 25 to 30% (p.14, para.1), the main thrust must be made on the formulation of regional programs involving measures to promote migration from the most critical areas to the ones with better mining opportunities or simply with more favorable economic outlooks (p.14, para.1). People suggesting measures to encourage migration are absolutely unaware of the Russian reality although even the 'experts' of the World Bank should have heard about the problems of the redeployment of the Russian military, not to mention numerous refugees from the former Soviet republics. For the reasons of lacking a housing market, of the obligatory administrative registration, and other social and cultural factors, people would hold on to the mining to their very utmost. Furthermore, people, former miners who have left the areas of a planned disaster and lost housing there would not be able to have it elsewhere. The program of actions to encourage migration, if implemented, would not only result in a tragedy for many families but in a new problem for the Russian Government. i.e. the one of refuaees from coal mining regions. The program of the World Bank thus intends to make the miners and their family members not only unemployed but also homeless people who have been sacrificed to the idea of restructuring in Western style. The program suggests that subsidies be channelled to indemnify the - page 87 - dismissed, i.e. the subsidies are suooosed to be paid for closing current iobs instead of investing them into the generation of new ones. The indemnification of the dismissed employees is an act of payment for closure of a job, i.e. the individual occupying the given job sells it. The Trade Union is against the idea of forcing employees to sell their jobs. On top of that, a job is not a property of the individual who occupies it. Instead of discussing the matter of poor indemnities to the dismissed and the amount of those indemnities, it is more appropriate to think of the generation of new jobs. Closing mines and the imvlementation of the proaram of a comprehensive restructuring would involve 300 000 to 500 000 emolovees dismissed - not counting the loss of jobs by those employed in the infrastructure servicing the miners - and lacking jobs for the younger generation. Does the Russian Government have funds for the construction of new enterprises to orovide jobs for such a number of the unemdloved? And if not the Government, who is supposed to invest into the deserted coal mining regions? HOW THE TWO VERSIONS OF THE REPORT BY THE WORLD BANK DIFFER An analysis of the two versions of the report by the World Bank shows that the report issued in August 1994, as against the one formulated in November 1 993, has considerably shifted its thrust. The November version identified labor costs as not being one of the crucial factors bearing on the growth of production costs and subsidies (p.2, para.6), while the August version makes a sharp turn: Rises in wages were the main driving force of the growing production costs in 1993 (p.8, para.4), hence mass dismissals and a drop in oversized miners' wages (the latter - through abolished Tariff agreements governing the wage levels in the sector). It is an open secret what Russian statistics are. This is why the figures on the changing subsidy pattern is but a juggle with statistics. Actually, the subsidies have been relatively stable as from 1991, the reason being not the rising miners' wages, but rather the collapse of the Russian economy in general. Furthermore, subsidies for coal mining were heavily cut down in 1994 which was not followed by any kind of planned action to reform the coal industry or economy in general (judging by the figure at page 9 of the report the cut was by 20% and by the figure at page 88 of the same report the cut amounted to 40%. Such considerable difference is one more evidence of a shaky statistics reference for the global findings by the experts of the World Bank). The November report displays a kind of criticism of market economy and concern for eventual chaotic and unorderly changes resulting in major economic and social after-effects (p.1, para.3) and suggests that the process of changes be put under control (i.e. as based on planning) by turning to coordinated efforts to formulate a comprehensive policy of structural changes in the sector and to settle social consequences (p.2, para.5). In the Auaust report. the market covers everything and a cut-down of subsidies for minina industry is rated as the most important mechanism. But the November report has cautioned us against exactly this kind of policy in noting that the experience gathered by other countries is indicative of the fact that this kind of action would have limited effects and would involve maior costs manifest in social and Dolitical unrest (p.1 2, para.45); in this instance, increased subsidies for metal production, heat generation, and electric power generation are to be substituted for a subsidy cut for coal industry. - page 88 - The following actions aimed at making miners drop their jobs are suggested: - to ban the retired from being employed; - to cut miners' wages; and - to opt for a modest and short-term indemnity for the dismissed instead of paying subsidies for the coal sector. In other words, the two versions of the report are controversial and even conflicting. This kind of dashing is a case for caution and no one can guess the position of principle to be taken by the experts of the World Bank in the year to come. Though it is not far-fetched that the second version has merely disclosed the previously concealed purpose: to cut the subsidies ASAP; in doing so, the version does not take into account the prospects for those dismissed from the mining industry in miners' regions. SUBSIDIES Actually, the issue of subsidies has no bearing whatsoever either on the fact that certain mines produce coal at higher costs as compared with other mines, or on low labor productivity level and oversized personnel of the mines. The November version of the report (p.5, para.1 8) states that in 1990, the subsidies were absolutely insignificant. This is why the World Bank is in the know that, apart from the dramatic price rise for materials, the problem of subsidies has emerged from a general production drop. The World Bank is puzzled to see that the enterprises do not tend to dismiss their employees in spite of the output drops, that the latter was relatively uniform at all enterprises, and low cost mines failed to dramatically raise their output. This is, however, a policy of the industry sustainable enough to retain production capacities and labor force pending an economic revival, all the more so at times where The Employment Fund is short of funds to support the unemployed. EVENTUAL EFFECTS ECONOMIC EFFECTS The program of restructuring the coal mining industry proposed is a policy of a drastic cut of the industrial potential of Russia. In the August report, all moves are directed to soft-pedal discontent with and protest against the policy of the World Bank. In doing so, the Bank has no argument in support of the implementation of the policy proposed and there is no evidence of its positive effects on Russia's economy and welfare standards of its people. There is no other purpose there than to reduce production capacities, cut the number of the employed by the industry and, thus, to abolish the subsidies. An instrumental aim is promoted as a major one, but its purpose stays off screen. It is absolutely unclear how the mines that survived could possibly grow competitive, and the report indicates no way of meeting the challenge. Should the answer - page 89 - be new technologies, would the surviving mines be capable of updating, provided that the main purpose of restructuring is to abolish the subsidies, and they would rapidly decrease? The orovosed vrogram tends to undermine the fundamentals of the heavy industry and is productive in turning Russia into an importer of metals. heavy machinery, etc. The reduction is a purpose per se. It is a wrap-up for wrap-up's sake. A false analogy with the West is being drawn where the reduction was conditioned by technological updating. Here we are facing either a logical error or a well-conceived policy. SOCIAL EFFECTS In its drive towards abolishing the subsidies for the coal industry, the Government could dismiss miners. It would have, however, to )av funds thus saved on the subsidies through other channels. The costs of unemployment are vast and of a long- term character. Those payments are not merely the ones for social needs made through municipalities. The costs include gigantic economic losses, the loss of skills by the dismissed, the demoralization of the unemployed under impaired social conditions, the cost rise of health care (given a tendency for mental disorders and drug addiction to rise in the areas of mass unemployment), of controlling crime that, under mass unemployment, could become the only source of subsistence. The surging wave of refugees from coal mining areas generated by the "measures to promote migration" proposed would exact huge additional costs which are unsustainable under the current situation and are not envisaged in public budget. POLITICAL EFFECTS The implementation of a program that forecasts and perpetuates Russia's backwardness would be the best promotion in favor of oppositional political forces, the party of Zhirinovsky inclusive. The Miners' Labor Union is informed of a growing disapproval of the policy of the current Russian Government in the field. In recent months, the workers' movement most definitely has grown politicized. At the town and enterprise level and in miners' collectives, the issues of forming their own party by workers or of backing up one of the active parties are discussed. There have appeared initiatives to restore workers' and strikers' committees have. The absence of its own oroaram of reforming the Russia's industry and the implementation of the vroaram of the World Bank by the Russian Government would bring the country to the brink of economic collagse and would mean a suicide of the current Government. OPINION OF THE MINERS' LABOR UNION 1) The Miners' Labor Union absolutely disagrees with the inhuman principles taken as a basis for the implementation of the restructuring program proposed by the World Bank. The Union deems it impossible to agree to the plans of turning the coal mining regions into areas of mass unemployment, the plans to organize impoverishment of miners and a surge of refugees from the miners' areas which would be the result of the World Bank's programs proposing "measures to encourage migration" from one areas to another. 2) The Miners' Labor Union rates the indemnities to be paid to the - page 90 - employees fired from the enterprises as a payment for the liquidation of their jobs and insists on the main thrust to be shifted to the forward-looking generation of new jobs rather than to indemnities. 3) The Miners' Labor Union thinks that, for all its draw-backs, the report by the World Bank has played its positive role in prompting public and private agencies to get down to discuss the issues concerning the future development prospects of the coal industry. The Miners' Labor Union suggests that the Russian Government should carry on with the discussion of the problems of the coal industry and initiate a forward olanning of the reconstruction of the Russian economy. To the contrary of the World Bank's approach that promotes a mass vacation of jobs (i.e. mass unemployment) as a conceptual and instrumental purpose and condition of the implementation of the program, the Miners' Labor Union oroooses that the main thrust in the formulation of restructurina programs should be on the retention of social aains, and in deliberations and formulation of a program of comprehensive economic revival of Russia. Prominent line experts of the industry, labor unions as well as intellectual potential of academic and research institutes should be involved. The only thing reauired is the will of the Russian Government to refuse the suggestions by the World Bank and to initiate its own revival groaram for the Russian economy targeted at the needs of the Russian people. For the implementation of a revival program for the coal industry, the Miners' Labor Union insists on the following: 1) The coal industry should be managed and funded by a sole central body that would be able to harmonize the development of the coal industry and its suppliers. 2) The Miners' Labor Union turns down the attempt to restructure the coal industry by a forced cutting of miners' wages and insists that the Tariff agreement should stay in place, and the issues of labor remuneration and of wages should stay on as a main item of line tariff agreements. 3) Budget funds should be used for investments in the development of coal regions and for the generation of alternative jobs. The need for and expediency of such measures are substantiated by the experience of restructuring of coal industries in the countries of Western Europe, the operation of the Agreement of the Century in the FRG and the actual experience of the European Coal and Steel Union. Moscow, September 21, 1994 - page 91 - MINUTES OF THE MEETING OF "KUZBASS COAL" ROUND TABLE PROBLEMS AND PERSPECTIVES September 21, 1994 City of Novokuznetsk The round table was held within the framework of the workshop "Kuzbass Invites to Cooperation". The round table meetings were attended by the heads of the production associations, joint-stock companies, mines and open pits of the coal industry, by the heads of the joint-stock companies in metallurgical industry, by representatives from the administrations of Kemerovo region and Kuzbass coal mining towns, by scientists from the academic and departmental research institutes and higher educational institutions of Kuzbass, by representatives from the company "Rosugol", by representatives from foreign engineering companies, geological exploration agencies and other organizations operating in conjunction with the coal miners. The round table chairman - V.Ye. Bragin, first deputy director, Kuzbass administration for the coal industry "Rosugol". G.l.Gritsko - Chairman of Kemerovo research center, Siberian branch of the Russian Academy of Sciences, corresponding member of RAS. The reports on the agenda were presented by: V.Ye.Bragin - First deputy director, Kuzbass administration for the coal industry 'Rosugol": "Survey of Kuzbass Coal Industry. Economic Indices of the Coal Mining Enterprises. The place of Kuzbass in the Coal Balance of Russia". G.l.Gritsko - Chairman of Kemerovo research center, Siberian branch of the Russian Academy of Sciences, corresponding member of the RAS: "Energy Program of Russia and the Role of Kuzbass in its Implementation". V.M. Stankus - head of laboratory, the Institute of Coal, the Siberian branch of the Russian Academy of Sciences: 'Kuzbass Coal Industry Strategy in a Market Economy". A.A.Baichenko - head of laboratory, the Institute of Coal, the Siberian branch of the Russian Academy of Sciences: "Reprocessing Coal Slime from the Outer Settlers of Kuzbass Coal Enterprises. At the participants' request an additional report "On Recommendations by the IBRD Regarding the Perspectives of the Coal Industry of the Russian Federation" was presented by S.V.Loparev, deputy head of Kemerovo regional administration. The reports examined the situation in the coal industry of Kuznetsk coal basin, the use of production capacities, the measures to stabilize the coal output. The reports clearly outlined a number of drawbacks that make it impossible to improve the technical and economic indices of the mines, open pits and other coal enterprises of Kuzbass region. Some of the drawbacks are: a decline in the coal production from 159,2 m1n.tons in 1 988 to 107 mln.tons in 1 993 and a decline by 1 2% in 1994; unjustified high railway tariffs for - page 92 - _ - - - - - coal transportation and a complicated payment procedure at terminals; delays in payments by customers; unstable prices on equipment, materials and power supply, excess staff on payroll (overstaffing) because of the shortage of jobs in the coal mining towns; reduced demand for coal in summer months and in general, which relates, to a great extent, to a general decline in the industrial output in the Russian Federation. Various strategies of the development of Kuzbass region were analyzed. It is worth mentioning that the reports and the ensuing debates displayed much controversy on the perspectives of Kuzbass. Moscow central bodies and the International Bank of Reconstruction and Development suggest a decline in the coal production of both the Russian Federation and of Kuzbass to 220 and 73 mln.tons accordingly. This suggestion is substantiated in the first place by a decline in the paying capacity and the need for coal production subsidies. The majority of the round table meeting were very critical of the unsubstantiated and even harmful nature of such proposals. To prove this point a number of well grounded arguments were presented, among them are the following: - the world tendencies in the development of energetics ( of primary energy resources in particular) point to a rise of the share of coal from 24% in 1990 to 27-28% by 2010. - the energy program envisages a decline in the power capacity of the GNP by 220- 250 mln.tons of coal fuel without specifying the concrete measures to be implemented now in order to transfer the national economy to a new scientific and technological level. - the program did not predict a sharp decline in the oil production by almost two times from 1990, but this decline is already a fact and it is not clear how to make up for it. - in case a decline in the industrial output in the Russian Federation stops and, on the contrary, the economy improves, it will not be possible to cover the power deficit earlier than in 10-15 years, given the reduction in the capacities of the mines and open pits. - the termination of investments in the coal industry will not permit the existing mines and open pits to introduce new technologies and to replace the old mines by new highly productive ones, extracting cheap coal of high quality. - the termination of subsidies to the mines will inevitably result in their closures and, consequently, in a sharp increase of unemployment. The opening up of one job vacancy requires Rb52-84 mln. in production investments in the January 1994 prices (a simple calculation: Rb7O mln. x 70000 unemployed = Rb4900 bin.). The following speakers participated in the debates: Ye.V.Pugachev - professor, Siberian metallurgical institute; A.l Tartyshkin - deputy general director, Kemerovo factory "Khimvolokno" ("Chemical fiber"); - page 93 - G.N.Sharov - chairman of Yuzhsibgeolcom; S.V.Loparev - deputy head, Kemerovo regional administration; Yu.A.Kustov - general director, West-Siberian metallurgical concern; M.l.Reizin - general director, association 'Kuzbassuglemash". The following recommendations and decisions were drawn up and approved by the coal section of the workshop "Kuzbass Invites to Cooperation" after a broad discussion and expert debates: - Kuznetsk basin remains the principal coal producing center of the Russian Federation, providing power engineering with high quality ecologically clean fuel, metallurgical industry - with high quality coking coal, developing new coal extracting and reprocessing technologies, stabilizing, on the whole, the power engineering of the Russian Federation. Kuzbass is to supply 43 mln. tons of coal for coking annually, supply fuel coal to Novosibirsk, Tomsk, Omsk, Kemerovo regions and Altai krai, export 10 mln.tons; besides, the Ukraine declares a demand of 8-10 mln.tons of coking coal a year. In the transitional period because of the economic recession there is a natural lack of demand for coal. This situation must be used to improve dramatically the technical and economic indices of the mines and open pits and to accelerate the social development of the coal mining towns. The excess labor and material resources must be used to carry out the technical reequipment of the basic production, the upgrading of the mining industry and the infrastructure of the coal mining towns and of the coal basin on the whole. The attempt to veil the existing 'latent' unemployment through a dramatic decrease of the technical and economic indices of the basic production is politically and economically inexpedient - it increases the cost of coal and serves as a false premise to cut down the share of coal in the fuel balance of the country. - It is necessary to devise scientifically based criteria of the profitableness of the coal fields and on this basis to carry out an inspection of the production capacities of Kuzbass coal industry in order to make a decision on the further operation of the mines and open pits, on the investments for reconstructing or reprofiling them or, in rare cases, on closing down barren mines. - the organization of work of public importance will improve the infrastructure of the mining towns: - housing - renovation and building; - sewer system, water supply, heating; - roads; - living conditions - the improvement of services and the quality of life. Provision of different levels of life for different categories of people: the minimum of services must be provided for all the population, better quality paid services - for the bulk of the population, superior services - for talented and well paid categories of people. The work of public importance will enable to improve the quality of life and to create permanent jobs; people will stop considering it disgraceful to work in the servicing. - page 94 - - Due to unreasonably high railway tariffs and in order to decrease the spacial component in the commodity cost it is necessary to channel the investments to devise technologies increasing coal marketability: Enrichment of all kinds of coal up to the world standards Ash 10%, Sulfur 1,0%; Briquetting and sorting of coal; Use of captured methane and methane from exhausted mines; Underground gasification of coal; Construction of thermal power plants of high capacity, supplied with "liquid coal" through pipelines, in Kuzbass and on the Ob and the Irtysh river (there is shortage of water in Kemerovo region); Setting up "liquid fuel" distribution stations along the perimeter and as far as the area of economical railway coal delivery. Use of underground chambers and cavities for the need of the national economy. - To change the procedure for the use of the funds (budget for restoration of the resources), permitting their use not only for coal prospecting but also for the prospecting of other mineral resources. - To continue the manufacturing of highly productive coal mining equipment at the machine-building plants of Kuzbass, including defence plants. - To secure the use of a multiple approach with due account of the ecological requirements in developing Yerunakovski coal field in Kuzbass; to ensure the use of a unified project for the whole coal field and its implementation in accordance with the schedule attached to the engineering project. Heads of section V.Ye. Bragin G.l. Gritsko Scientific secretary V.M. Stankus - page 95 -