Armenian Railways: Five Year Business Plan
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Five Year Business Plan October 2000 Armenian Railways: Five Year Business Plan
The World Bank Prepared By Martha B. Lawrence Richard G. Sharp John H. Winner
2111 Wilson Blvd., Suite 700 Arlington, Virginia 22201 USA
Tel: 703-527-2955 Fax: 703-526-0217 Email: LawrenceHWTSL@aol.com
October 2000 Table of Contents1 Structure & Organization of Armenian Railways 1 1.1 Introduction 1 1.2 Organizational Structure 2 2 Marketing & Pricing 4 2.1 Introduction 4 2.2 Pricing & Policy Issues 7 2.3 Traffic Projections 11 3 Operations and Cost Reduction Opportunities 14 3.1 Introduction 14 3.2 Transportation Services 15 3.3 Infrastructure Services 21 3.4 Rollingstock Services 26 4 Financial Forecast 34 4.1 Financial Model 34 4.2 Financial Forecast 35 4.3 Rollingstock CJSC 37 Appendix A: Traffic Forecast 58 Market Segmentation for Forecast 58 Base Case 60 Open Borders Case 62 Appendix B: Financial Model 66 Transportation CJSC 67 Rollingstock CJSC 68 Infrastructure CJSC 69 Appendix C: Methodology for Measuring Profitability by Line of Business 71 Revenues 72 Rollingstock Costs 72 Infrastructure Costs 73 Transportation Costs 74 1Structure & Organization of Armenian Railways1.1IntroductionA  rmenian Railways (AR) is an 842 km network of rail lines that link the main cities in Armenia, and connects Armenia with the neighboring countries of Georgia, Azerbaijan and Turkey.1 Before the dissolution of the Soviet Union, AR was part of the Trans-Caucuses Railway within the Soviet Ministry of Railways (MPS). The Trans-Caucuses Railway, headquartered in Baku, also included the railways of Georgia and Azerbaijan. The AR lines were operated as part of this larger network. Following Armenia’s independence in 1991, AR was established as a separate railway. Shortly after independence, fighting broke out between Armenia and Azerbaijan over Nagorno-Karabakh and Azerbaijan and Turkey closed their borders with Armenia. Although a cease-fire was announced in 1994, the borders remain closed. The border closures isolate a 46 km segment of AR in southern Armenia, which is now closed. An additional segment of line between Dilijan and the Azerbaijan border is closed because of a landslide. AR’s only open international connection is at Airum with the Georgian Railway. This connection is a strategically important link for imports of oil and food products into Armenia. At the end of the Soviet era, AR carried nearly 35 million tonnes of freight and 5 million passengers a year. The economic dislocations stemming from the dissolution of the Soviet Union, the war in Nagorno-Karabakh, and the border closures depressed the Armenian economy and devastated rail traffic. By 1999, AR carried only 1.5 million tonnes and 1.3 million passengers. The economy of Armenia contracted again in 2000, but growth is expected to resume in 2001. While economic growth expected to encourage rail traffic, the Armenian economy is growing away from rail-based industries, so rail traffic is expected to grow slowly and not recover to Soviet era levels. 1.2Organizational StructureArmenian Railways has undergone tremendous change in the last decade. It became an independent national railway in 1991. Since that time, the railway experienced major reductions in traffic and has started to adjust its physical plant to its much smaller traffic base. It has experience severe financial constraints and slashed expenditures for materials and capital goods. In 1998, in a move to reform the railway and make it more commercial, AR was reorganized. It now consists of:
This structure is shown in the chart on the following page. The units are expected to pay one another for services rendered. Mechanisms for billing and payment are not fully developed and are the subject of considerable discussion within the railway. AR is planning to divest the non-core companies. AR is discussing the possibility of merging the Rollingstock Company back into the Transportation Company. If AR chooses to do this, hwtsl recommend that only the rollingstock and facilities reasonably needed to serve AR’s traffic be transferred. AR has significantly more assets than will be needed under any reasonable traffic forecast. These excess facilities and rollingstock should be put into a company, whose mandate is to maximize the value that can be derived from the assets. It should be free to sell, scrap or lease the assets for any transportation or non-transportation purpose.2 Armenian Railways Organization Structure 
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