Back on Track
Against the backdrop of the pandemic, local and international analysts have suggested that Georgia could use the new reality to establish itself as a regional logistics hub. This is mainly due to the changes in supply chains, with many large companies determined to diversify away from China, which may open new possibilities for Georgia. A lot of improvements will have to be made along the way, but according to the Georgian government, it is already in talks with over 400 large companies that have shown a serious interest in tapping into Georgia’s potential. Georgian Railway is set to play a central role in this process. Forbes Georgia was interested to find out what effect the pandemic had on the organisation, and what its key figures look like. The Georgian Railway CEO, Davit Peradze, answered our questions.
Can you take us through Georgian Railway’s key figures?
Based on2019 figures, we have around 13,000 employees and 30,000 people for whom we are socially responsible. Our totalsalary budget was ₾180 million and we paid around ₾54 million in taxes in 2019. We transported more than 3 million passengers and 10.9 million tonnes of cargo. Total revenue was ₾503.7 million. The volume of container cargo from China was 1,239 TEU (a 34% increase from the previous year), and the volume of container cargo from other countries was 33,195 TEU (a 10% increase year on year). The volume of cargo transported on the Baku-Tbilisi-Kars line was 5,474 TEU (a 161% increase from the previous year), and the volume of dry cargo was 3.4 million tonnes (a 13% increase year on year). These are the latest figures available for Georgian Railway.
To what extent does Georgian Railway contribute towards the country’s economic development and growth?
First of all, we are significantly contributing towards the Georgian economy as a major taxpayer. Due to its geostrategic location, Georgia has the potential to become a major logistics hub. We are working towards maximising the country’s transit potential by initiating and implementing projects such as organising regular feeder vessel traffic in the Caspian Sea and the Black Sea.
What impact has the COVID-19 pandemic had on your operations?
Naturally, the pandemic has affected everyone’s life and business activities, Georgian Railway is no exception. Our organisation has great strategic importance for Georgia. Ensuring the smooth and orderly operation of Georgian Railway is, therefore, vital for the country’s economy. The safety of our employees was our priority. As a result, we devised appropriate internal regulations and adapted our resources to the new reality during the early stages of the pandemic.
As you know, passenger traffic ceased for several months during lockdown. Nevertheless, demand for passenger transport remained high, so we reactivated five routes as soon as restrictions were lifted. At the same time, the Ministry of Health helped us devise certain regulations that must be followed by staff and passengers alike. To ensure physical distancing, we have placed greater emphasis on the sale of electronic tickets.
I must point out that our passengers have been following the new guidelines impeccably. Until the borders are reopened, domestic tourism plays a particularly important role in the country’s economy. We are ready to play our part in supporting domestic tourism, and to this end, we have not increased our fares. We have also managed to maintain growth in cargo transport during the first five months of 2020, although we realise that the pandemic will ultimately affect our figures too.
What are the main challenges in this regard, and how do you intend to deal with them?
The pandemic has affected supply and demand on the global market, particularly in East Asia. Businesses have shut down; borders have closed, and direct communication has become impossible. Nevertheless, Georgian Railway has retained its cargo contracts, and has not stopped operating even for a single day. This is largely because we adjusted to the cargo owners’ needs and did everything in our power to ensure a smooth operation.
Have you identified any new opportunities that our country could take advantage of?
First of all, the pandemic showed us that administrative resources can be used more effectively. Like all other businesses, Georgian Railway began working remotely in order to continue operating without interruption. Furthermore, we have been working closely with ports to maintain regular maritime and railway cargo traffic. Georgian Railway can transport more goods by involving less people compared to road transport, which is an additional advantage during the pandemic. More specifically, a train driver can perform the job of 110 truck drivers in terms of the volume of transported goods. All of this has created an opportunity for cargo owners to safely redirect their goods from road to railway and have them transported smoothly and at competitive rates to Azerbaijan, Central Asia and Armenia.
What is the most frequently asked question with regards to Georgian Railway?
The most frequently asked questions concern the reduced flow of goods over the years, as well as our financial losses. However, there are objective reasons for both these factors: the volume of goods fell largely because of oil being transported more effectively through pipelines instead of by rail. There has also been a shift in supply and demand. As for the financial losses, they are mainly related to the Tbilisi bypass project that was started in 2010-2011 and cost CHF 250 million. Apart from the direct costs, this project was also affected by asset devaluation and subsequent loss of revenues. In 2012, Georgian Railway issued bonds worth USD 500 million for funding large infrastructural projects. Our duty to present financial accounts in local currency leads to revaluation of financial liabilities that are denominated in U.S. dollars. Changes in the exchange rate directly affect the value of these liabilities in local currency, and the difference affects profit. Due to the large sums involved, even minor changes in the exchange rate have a significant effect on the company’s profits and losses.
Do you measure customer satisfaction in the passenger and freight transportation segments, and what is the overall picture in this regard? Do you believe that our readers would agree with your analysis?
At this stage, we cannot evaluate the 2020 figures, but in 2019 we transported around 3.1 million passengers, which is 7% more than in the previous year. The volume of cargo was approximately 11 million tonnes, representing a 9% increase. These were record figures for the last few years. We managed to maintain growth during the first five months of 2020. We measure customer satisfaction through our results, and as you can see, the results have been steadily improving both in the passenger and freight transportation segments. We are certainly not satisfied with what we have achieved so far and are constantly exploring other areas where we can improve and deliver better value to our customers. To this end, customers can call our 24-hour hotline to provide feedback regarding our passenger or goods transport operations at any time.
What advantages does Georgian Railway currently offer?
Our main advantage is the sense of stability and trust that we have maintained over many years. We offer safe and time-effective long-distance transport of a large volume of goods at affordable prices. It is also worth noting that rail is the most eco-friendly mode of transport thatmeets the global challenge of reducing emissions.
What about your main weaknesses?
Our carriage fleet still presents us with a significant challenge, as it requires gradual renewal to ensure that our revenue corresponds to the volume of transported goods.
I also think that it would be beneficial for the state to manage certain port infrastructure and maritime container traffic along with the railways. This would be vitally important during the initial stages of operating a logistics route, as well as tosubsequently ensure that the route remains competitive. Georgian Railway currently has to offer customers advantageous terms to balance out the weaknesses in other parts of the logistics service chain, as well as to ensure that using our corridor remains attractive to customers. Although this is not a common global practice among railway companies, I believe that it would be the right thing to do.
As you know, there are numerous private and state operators involved in our specific corridor. Unfortunately for us, not everyone shares the same vision for strategic development of the ‘central corridor’. Georgian Railway is a state company, and its current management team is interested not only in financial profit, but also in positioning Georgia as a regional transport hub both domestically and internationally.
I would also add that the presence of many independent players in the transport corridordoes not have a positive effect on Georgian Railway.
On a scale of 1to 10, how would you assess the performance of your company’s management team?
I think we can judge the current management team based on the company’s performance in recent years. Despite the global pandemic, Georgian Railway managed to maintain growth in freight transport during the first five months of 2020. The volume of transported goods increased by 330,000 tonnes year on year, while revenue grew by ₾17 million. The results have improved both in the passenger and freight transportation segments, but I am also aware that the current management team inherited an extensive loan agreement, and coupled with the fact that the full effects of the pandemic are still unknown, I will refrain from issuing top marks to the management at this stage.
During the first quarter of 2020, Georgian Railway transported a total of 2.8 million tonnes of freight, which represents a 10% increase year on year. Nevertheless, the company has made significant losses this year. Based on the financial results for the January-March 2020 period, revenues grew by 23.7% to ₾122 million. However, due to the significant increased costs, the company posted a loss of ₾163.5 million for the quarter.
Devaluation of the local currency had a direct effect on the $500 million in liabilities that the company took on board on 5thJuly 2012, with the equivalent figure in local currency increasing by approximately 15%. When the exchange rate is stable, devaluation does not create major problems for Georgian Railway, as most revenues are in dollars and natural hedging takes place. However, it takes time for the higher exchange rate to be reflected proportionally in revenue figures.
What are your company’sdevelopment priorities?
Our priorities are to attract freight from new markets, operate a transparent and competitive pricing policy, offer a time-effective service, and implement new services, along with improving existing ones. With regards to new services, our plans have been affected by the pandemic to a certain extent. Although there were already plans to implement contrailer transportation, this has now become a priority for Georgian Railway. We aim to set up terminals in Batumi and Rustavi very soon, where road transit cargo will be loaded on contrailer platforms and transported in both directions. At the same time, we are implementing a modernisation project that represents one of the development priorities for Georgian Railway. This project will allow us to deal with modern-day challenges and increase the capacity of the Georgian railway corridor through higher safety and speed. The pandemic showed us that we are on the right track.
Let us address the much talked about problematic projects of the Tbilisi bypass, the Kutaisi Airport line, and the Anaklia Port line. Why were these projects announced but never completed?
I think it would be wrong to view these three projects through the same prism. The Tbilisi bypass project was initiated in 2010, and I must point out that no feasibility study was conducted. Numerous reputable international companies concluded that this project had a wider urban significance, rather than merely an infrastructure alone. We can talk endlessly about the faults in this project, but it has been shelved and is no longer topical.
Regarding the Kutaisi Airport line, which is designed to help develop local tourism, it is actively ongoing and will be completed within the deadlines set by the Georgian government. As for the port infrastructure in Anaklia and elsewhere, we would welcome any such development, as it will help increase the volume of rail freight transport. I believe that it is in the government’s strategic interests to develop port and rail operations alike.
Who are your regional competitors, and how are you performing against them?
The volume of freight and the number of containers transported through the central corridor is growing each year, which makes Georgian Railwayincreasingly competitive against the alternative international routes. It is important to correctly identify the challenges. The northern corridor avoids using maritime transport and crosses less borders to connect Europe and Asia compared to our corridor. However, we are currently working on integrating operational programmes and creating a joint document that will enable us to minimise transit time and speed up border crossing.
Having direct access to the Black Sea is advantageous for our corridor. More specifically, the newly established direct ferry and feeder ship routes to Eastern Europe will allow us to increase the flow of goods towards that region. Georgian Railway was directly involved in devising a single tariff for transporting containers and other carriage shipments from Asia to Ukraine, Bulgaria and Romania under a single-window system.
In spite of these advantages, we cannot relax and be content with what we have achieved. Competition in freight transport is very high. For example, the Volga-Don channel provides an alternative route for transporting oil from the Caspian Sea to the Black Sea. However, its resources are limited due to seasonality. The competitive advantages of rail and maritime transportation over each other are based on the factors of time and price.
Does Georgia have the potential to become a regional logistics hub, and who will play the key role in achieving this goal?
I think the role of the state is crucial. Georgia is the only country in the region that has free trade agreements with China, the European Union and United States. Additionally, it has a strategic geopolitical location that links Asia and Europe by sea. Smooth and effective operation of rail transit routes is highly significant for any investor.
Georgian Railway and its management model has often been subject of discussion. What does the company’s structure look like, and who are your subsidiary firms, your CEO and your supervisory board accountable to?
Georgian Railway is a joint stock company. The management structure of such a company is determined by Georgian and international laws. The company’s directors have curatorial duties in specific areas. Decisions are taken jointly by the board of directors, the supervisory board or the shareholder assembly, based on the importance of the issue. All decisions, including those that concern our subsidiary companies, pass through this hierarchical chain.
With regards to certain issues of national importance, we – as an indirectly state-owned enterprise – are naturally accountable to the Georgian government. It is also important to note that Georgian Railway holds membership / partner status in influential international rail unions such as CER, UIC, ERA and OCJD, and we constantly share experiences and practices. Most importantly, however, we are accountable to the public. All Georgians can learn about the operational activities of Georgian Railway through the company’s public financial statements.
With more than 12,000 staff, Georgian Railway is one of the largest employers in the country. However, against the background of the company becoming a large social enterprise that shares the state’s social responsibility, how do you see its future as a business? Will Georgian Railway remain a large social enterprise and employer in the long term?
As I mentioned earlier, Georgian Railway is a state company that operates across the whole country and is aware of its social responsibility towards its employees and their families. At the same time, our challenge is to develop our human capital, which is why we have established a rail transport college to train qualified professional staff.
In your last interview, you spoke about refinancing the company’s Eurobonds. With the due date approaching, and the added challenge of dealing with the pandemic, what did the company decide on this issue? Which organisations are you working with, and how are you planning to repay the Eurobonds?
The pandemic has slowed down international capital markets, but they are already bouncing back. Therefore, our refinancing plans for 2021 are still in place. We are working with international banks and financial institutions, though in order to help develop the local capital market, we are also considering the possibility of involving Georgian banks and financial organisations in this transaction.
The government of Georgia has also decided to involve Georgian Railway in programmes that are designed to support local manufacturing, which includes providing concessionary prices to companies such as Georgian Sugar (Agara processing plant). How happy are you with the results of this initiative? How competitive are the company’s pricing policies, and specifically with regards to supporting local manufacturing?
I can only reiterate that Georgian Railway is a state enterprise that frequently shares government policies with regards to supporting the development of local manufacturing. Agara Sugar, Tkibuli Coal and HeidelbergCement are examples of this, but I must point out that supporting local manufacturing has also allowed us to attract additional freight.
How do you cooperate and interact with other railway companies in the region? Is the corridor effect beneficial in terms of tariffs, and which routes would you highlight?
Georgian Railway is in constant communication with the region’s other railway administrations, as well as ports, terminals and ship operators. Working groups have been established to achieve strategic development in certain areas, and we are working jointly towards enhancing the transit corridor’s competitiveness. This cooperation concerns technical issues, pricing policies, communication with potential clients and other areas.
The central corridor is a particularly important route, linking Central Asia and the Far East with Europe. I would also highlight the Baku-Tbilisi-Kars line, which provides a rail connection between Europe and Asia via Georgia while bypassing the Black Sea. With regards to recent developments, I would highlight the agreement signed by various state and private companies operating in the regional logistics chain (Georgian Railway, Azerbaijan Railways, Batumi Oil Terminal, Azerbaijan Caspian Shipping Company, Baku International Sea Trade Port and Dubandi Oil Terminal) to devise seasonal tariffs for the Volga-Don canal.
If you were to summarise 2020, what would you regard as your company’s greatest achievement?
Our greatest achievement this year has been to maintain positive dynamics in the company figures in spite of the pandemic. We have tried to view the pandemic as an opportunity, revitalising our infrastructure to a degree not done for many years. We have laid 21km of new tracks, renovated 7km of communication network, equipped the main line with new LED lights and thoroughly repaired all heavy equipment that is used for installing and repairing railway infrastructure. As I mentioned earlier, we also speeded up implementation of the contrailer transport initiative during the pandemic.
What can passengers and businesses expect from Georgian Railway in 2021?
The COVID-19 pandemic has caused significant changes on the global economic market. Experts are predicting the global economy will shrink by at least 5%. Inevitably, Georgia and Georgian Railway will also be affected, but based on the current figures, we still view 2021 with optimism.