The Baltic Times, TALLINN
Interview by Kairi Kurm
Dec 21, 2005
When Edward Burkhardt decided to invest in the Baltics, he went for broke. He sold his railroad business in Wisconsin and bought a 66 percent stake in Estonian Railway in 2001. He assumed the position of chairman, but the job has been anything but calm. Government interference has prevented the company from fulfilling its development plans, Burkhardt says, and has even disillusioned many U.S.-based shareholders.
Thanks to two state decisions – not to allow Estonian Railway to raise infrastructure charges for other cargo handlers and to revalue its assets –Estonian Railway has seen a drastic shortfall in revenues. Not surprisingly, Baltic Rail Service, which owns 66 percent of the company (the state owns the remaining shares) has responded by decreasing its financial commitments.
Burkhardt, who also owns a rail connecting the U.S.A. and Canada and another in Poland, believes the government is protecting Russia’s transit interests in Estonia. Some fear that Estonian Railway, like other parts of the transit business, will come under the control of Russian transit. Responding to these rumors, Burkhardt says that, as long as the government continues to treat the company this way, investors don’t care who takes over the lucrative transit business.
Do you regret your investment?
There have been many problems that should not be – all related to the government. But it is also a very fine railway, and an interesting and good experience. I am more interested in running a successful railway than I am in dealing with governments. But we do what we have to do.
Did you see a lack of willingness on the part of the state to privatize Eesti Raudtee [Estonian Railway]?
I knew that the various political parties saw it differently, but my experience is that if a government makes a deal, the next government will comply with it. This is a norm around the world, but seems not to be in Estonia.
Is it only the Center Party that wants Estonian Railway back in the government’s hands
They have led opposition to the privatization, but some other parties don’t like it either. I don’t know why, because I thought Estonia was now supposed to be a free enterprise economy not a socialist economy. So I don’t understand this desire to have a government-owned railway. Perhaps we should have government-owned supermarkets and department stores. It didn’t work when it was a Soviet system, so why will it work now? Socialism is a poor economic model.
Transit is the main advantage of Estonia due to the country’s good location, and Estonian Railway is in a monopolistic situation here.
I never saw this as a kind of monopoly because Estonian ports have to compete with ports in Latvia, Lithuania, Finland and Russia itself. Railways you could look at as a national monopoly, but they all operate within a competitive economy. Railway has to be competitive, or it won’t have any freight to handle.
Last year the company had 133 million kroons (8.5 million euros) in losses according to current accounting principles.
We only have one kind of accounting that we believe is proper, and it resulted in a loss, and of course it will be a bigger loss this year if the present, very negative situation continues.
The normal capital renewal cost for Estonian Railway is 385 million kroons. With this you will have a railway that is no better or worse at the end of the year. But the railway inspectorate is allowing us 129 million kroons for this purpose, for replacement of capital assets. The weighted average capital cost of the railway, based on the value of assets, the return that we should receive should total 606 million kroons, while the railway inspectorate is giving us 180 million kroons.
This means that the company, unless there is a change, will not be able to maintain its infrastructure. It will go straight downhill, and it will hardly have enough money to pay the bank debt – and nothing for the shareholders. This is a very negative situation to be in, of course.
Our financial figures look bad under these circumstances. We receive no state subsidies. Many railways in Europe do. We should not receive a subsidy because our own market here is robust enough to be able to pay its own way. There is no reason why the transit business in Russia should not pay these costs, which are fair costs that come out of our regulatory framework. These are not some kind of super profits or monopoly profits. They are regulated earnings according to normal regulations. We recognize that the railway is a monopoly here. It is a regulated monopoly.
You’ve said that you lose about 800 million kroons in revenues due to low infrastructure fees that the government has set. Is this the reason you don’t want to follow the privatization contract’s commitment to invest 350 million kroons annually?
What are we going to use for money? I don’t want to have this property deteriorate, to have speed restrictions and a bad track. We spend a lot of money fixing the track up. When we bought the company it had just come out of government ownership, where it was in poor shape. It had poor locomotives, poor wagons and a poor track. We fixed all of this in the first five years.
It was a big issue in the press that the 74 locomotives that you purchased were too heavy for the Estonian track.
Where do these ideas come from? You see, we have people here who don’t like us. You know who they are? They are the oil transit interests. We have had a public relations war on us from the day we arrived. Under the days of the government-owned railway they could come in, pay somebody and they could get the price that they wanted. It was full of corruption. You should see the interesting prices that existed at that time. We don’t operate that way. We are honest people. That makes some people very unhappy. So they have had a constant war on us.
These locomotives have been a total success here. They are the best thing we did on this railway, because they solved a big problem. The railway had very poor locomotives. We could not keep them running.
The Pechory area [Russia] does not want United States locomotives on its track. Is it some sort of market protection?
We operated our trains in Pechory with our locomotives, and with no problems. One day the phone rings, and there’s a big problem. This was politics. We know what happened: These Russian transit interests called their friends at the Russian railways and said, “Give these guys a hard time.” So they did.
One-third of rail transit goes through Pechory. How did you solve the situation?
We had to buy some Russian locomotives just to use across the border. As soon as we get into Estonia, we change these locomotives and put the general locomotives on the track. It is a substantial extra cost. We had to buy these locomotives that are terrible, exactly like the ones we got rid of. They are very expensive to maintain and operate, and of course it is very inconvenient to have to change locomotives. But this is exactly what these Russian interests wanted to achieve here. They raised our costs, but we’re dealing with it.
Raivo Vare, former minister of transportation and current development director of Estonian Railway, said that Estonian transit is coming under the control of a big Russian company, Severstal-trans, and the government ignores the takeover process.
I think Estonia would be very foolish to trade its sovereignty, which was achieved with a huge personal cost after 50 years of occupation, for financial control of these Russian interests. It is not the way honest and progressive democratic government should behave. This is the problem we face here.
Some people fear the shares privately owned in Estonian Railway will get in the hands of Russian transit companies. You have previously said you would not sell it to the Russians. How would you convince them?
Hmmm….very interesting question. When I was first here, if I was asked that question, my answer would be, ‘We would never consider selling to Russians.’ Because we understood the long history of Estonia, and we wanted to be ‘good Estonians’ running this railway, and that means a railway owned by Western interests. The objective of the shareholders was to have an initial public offering, where the shares could be sold in Western Europe and America and to Estonians. And that is the way this railway would be owned. It would not be owned by Russian interests.
Meanwhile, in the intervening years we have been treated so badly by this government that, in my opinion, I have no more interest in protecting this government. So some of our shareholders would like to sell. They are tired of fighting every day to run this business, so they say, ‘We’d like to sell our stock.’ So far as I am concerned, if Russians come along and say, ‘We wanna buy these shares,’ we will talk to them. Why not? There is no interest in working with us in Estonia, so why not?
I am trying to be rational. We try to run a business here. Every time we turn around we have another problem from this government.
The government, as a co-owner, has the priority to buy these shares, I understand.
I am not so sure. No. It depends on what the transaction might be. I would have to look at the agreements. We have Ganiger here, an Estonian investor. What they do with their shares is their business. If Baltic Rail Service wants to sell their shares, it maybe that the government has the option to pay the same price as somebody else offers.
Russian railway is bringing down its prices, which are discriminating across the Estonian border.
Yes, because they are going to join the World Trade Organization, which requires that they cannot discriminate against the Baltic states and their railway pricing.
This brings an opportunity to start a railway container transit of Chinese products, for example, to Russia.
We are quite interested in that market. We are also interested in looking at the north-south market. This is the Rail Baltica. That is Helsinki, Tallinn, Riga, Kaunas and Warsaw. It should be developed aggressively by this railway. But now, can we do any of this if we don’t have money for infrastructure development? We can’t even maintain the infrastructure.
Do you have an opportunity to apply for EU funds?
There is no reason why we can’t have EU funds, except for the fact that the government has not been willing to apply for them. We have told them time and time again, ‘Please apply for this money. You can get it.’ The money has to go through government – we cannot apply directly.
What should be the best compromise for both parties?
We want the Estonian government to follow their own law. For example, they don’t want to have [our] assets revalued. But they have revalued the assets of the electric company, the water company and the telephone company here. If they didn’t, you would not have a good electric company, but a deteriorating service. Why should they come in with a different rule for the railway that may do for these other utilities? The assets are not worth the same as they were years ago. I am afraid the government has used every way that they can to hold down these prices for the benefit of these transit interests. So they are starving us.
You bought the company for 1 billion kroons and some extra. What is it worth today?
I can’t answer that exactly without looking at some data. It is worth several times what we bought because it is a much-improved company, and we have invested heavily in it. The assets of the whole company (including 33 percent state shares) are worth about 4 billion, and this is less of a mark-up than the electric company had.
So you consider it a profitable business?
It has been a good business up until recently, but has turned into a bad investment. We will work our way through this, and if we don’t, we have courts and arbitration panels that will handle the problem. Estonia just can’t go and violate the law and European regulations. If some country grabs the assets of a private company there are provisions for arbitration.
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