Road transport sector facing an abrupt turn in the Eastern Baltic region
By Michael Tuzhikov
The three Baltic States future memberships in the European Union, i.e. Estonia, Latvia and Lithuania will inevitably provide for changes applicable for participants of the international road transportation.
Photo: Volvo Truck Latvia
During the last 12 years international road transportation requirements have been more or less stable and predetermined. Bur what will be the new transportation conditions in the Baltic region when the states join the EU? Who can win or loose in this development? Whether small firms can survive? These kind of questions bother both drivers and transport operators in the Baltic region.
A bit of history
Motor transport carriers started to develop their transportation systems in the beginning of the last century. There were about 11.000 vehicles all over the world in 1900; already 20 years later there were 11 thousand times more trucks, i.e. almost 11 million. Then the rate of growth reduced a little, but still annually the motor fleet in the world is replenished on the average by 4,5 million units. Today the turnover of goods by motor transportation in the world is about 2000 billion ton/km, of which European share is not more than 15%.
After restoration of independence, the former Soviet Union’s republics have divided among themselves huge Soviet motor transportation system, making several separate and independent companies. As a result, the motor vehicle fleet in the Baltic region presently consists of approximately equal number of trucks. Only Finland has a considerably greater motor-vehicle fleet, i.e. of about 27.000 trucks (See Table 1).
Russian transportation market
Presently all types of inland road transport in Russia can carry more than 300 million tons of goods (at a value of about 80 billion US dollars) annually. But the share of motor road transport in the total amount of Russian transportation is not more than 5%; which is obviously quite small for a huge state like Russia. Moreover, foreign transport operators still continue to consider Russia mainly as a transit territory, e.g. as a bridge between Europe and Asia, but not as an active transportation participant.
Russian’s ASMAP general director Mr. Michael Nizov described for our magazine the present situation in the following way: " Now the capacity of the Russian international carriers’ market is estimated by experts at a value of 3 - 3,2 billion US dollars. The share of sole Russian carriers although does not exceed one third of it. As a result the Russian budget is deprived annual revenues of about 300 million US dollars, the money which instead goes to foreign transportation carriers and companies. These currency amounts are "withdrawn" from Russia by carriers from the Baltic States, CIS countries and Byelorussia ".
One of the reasons for that is Russia’s catastrophic aging of all means of transportation. More than 30% of the vehicles used in international goods’ transportation does not correspond even to the minimal ecological requirements of the Euro – 1 standards; only 23,9% of trucks satisfy the Euro – 1 norms, and 34,2% that of the Euro – 2 standards. Only 7,6 % of the whole cargo fleet satisfy the requirements of Euro - 3 standards. As a result, Russian cargo transport’s entrance into Europe is quite limited, and Russian carriers are compelled to be satisfied with cargo transport within the countries of the CIS and to China and Mongolia in the Far East.
Russian Federation Transport minister Mr. Sergey Frank acknowledged that "…stricter environmental standards do not influence only carriers. Thus the Euro – 4 standard that will enter into force in 2005, requires fuel usage with the low sulfur contents; but that kind of engine fuel is not produced in Russia. Absence of such fuel at our gasoline stations will create problems both for foreign and Russian drivers. The Russian side having spent considerable resources for the developing of environmentally safe vehicles as a result could not use them in her own territory ".
According to Russian Federation Transportation Ministry, the share of international goods transportation in the Russian segment of the European transport market in 2002 was at 1103,2 thousand tons. The greatest share of cargo transport belongs to carriers of the Baltic States - 48,4%, the countries of the CIS (without Russia) - 23,4%, the countries of the Central Europe - 2,6%, Russia itself - 24,8%. A share of the European Union member states carriers is less than 1%.
Russian Ministry of Transport intends to correct the negative situation by increasing twice the Russian companies’ motor-vehicle fleet, i.e. up to 34 thousand trucks and allowing to the market western companies cars, including those of the Baltic States. As the internal value of the Russian transportation market counts in billion of dollars, a fierce struggle between international carriers is going on at present.
Estonia is tired to wait for favors from the EU
The Estonian association of international carriers ERAA and transportation company Parme Trans AS have decided to build in 2003 two customs terminals on the Russian border (on the border territory in Shumilkino and in Pechori). In the beginning of 2002 intensive negotiations have been carried out concerning these issues with Mr. Vladimir Blank the then vice-governor of the city of Pskov.
The Estonian association of international carriers ERAA was formed in Tallinn in October 30, 1991. In 1992 it has become a member of the International Road Transport Union (IRU). Presently (in April 30, 2003) there are 471 individual members registered in the ERAA.
The new terminals are aimed at shifting car-trailers from one truck to another, that will allow usage Estonian containers’ park more efficiently as well as partly compensate for shortage of the Russian vehicles that are not up to European standards.
Estonian Member of Parliament and Parme Trans AS Board Chairman Mr. Jurij Shechovtsov in an interview to our magazine emphasized, that " our own custom terminals will resolve a number of problems concerning road transportation to Russia. And at the same time will eliminate waiting time on the cross-border sections and avoid great headache affiliated with quotas and road permissions (authorizations) from the Russian side. The responsibility for cargo will be taken off from a truck driver and hence the cars will not be anymore arrested or standing idle for half a year in border’s warehouses, before the case in question is cleared.”
Estonian companies plan to make ready all necessary documents up to summer 2003 and receive the construction permission. The administration of the Pskov region is ready to give the investors all possible privileges, including clearing of payment of the land taxation within the coming three years. According to experts, construction costs will be within 1 million US dollars. J. Shechovtsov thinks that first trucks will be expedited at the terminal already in autumn 2004.
Much more difficult is going to be the terminal project in Shumilkino the cost of which is estimated at 3,5 million US dollars. The resources of the Estonian carriers themselves would be obviously inadequate. Citizens of Pskov city extended their support and now the state unitary enterprise Rostek-Pskov has been created at the Russian customs border, which will actively participates in the project’s implementation.
By the way, Russia has had already an experience in creating similar warehouses. Thus Estonian firm Transervis-N AS together with SUE Rostek-Kingisepp have already constructed in the city of Ivangorod the first 200-sq. meters customs’ warehouse.
The Finnish carriers are not bad after all
Finnish carriers’ experience is of great interest for Baltic States’ transportation system; so far its the only EU member state having a common border with Russia. Latvia, Lithuania, Estonia and Finland have been united by almost absolutely identical conditions concerning their relationships with Russia, i.e. territorial affinity, bilateral agreements, a uniform railway size and almost the same life-styles within the structure of Russian empires. However, after 1991 these four independent Baltic States have been involved in an unequal competitive struggle the leadership of which so far belongs to Finland.
The quantity of the goods transported in Finland by road haulage, railway and maritime cabotage routs is valued at about 430 million tons per year. The share of motor transport is about 88 % of the total or 380 million ton, railway transportation takes 9%, and internal maritime – 3%.
There are 60.000 registered truck units in Finland out of which more than 27.000 vehicles belong to firms specializing in cargo transport, which perform about 90% of the amount of internal cargo transportation.
There are about 12.600 motor transportation companies in Finland and most of which are having only one vehicle. Only about 10 firms are having more than 100 truck units. About 3 000 Finnish companies (having in total 13 000 trucks) have EU-type international transportation licenses. Transport agencies in the country provide employment for more than 120 000 people.
The most significant international directions of goods transportation are for Russia, Sweden, Norway, Germany, Denmark and Estonia.
The government of Finland supports domestic auto-carriers in every possible way, exploring sometimes to rather unlawful methods. Thus, since August 1, 2002 Finnish Government had limited the permissible weight of Russian timber carrying trucks crossing Russian - Finnish border from 42 to 38 tons, which was in violation of the EU Commission Directive no. 53, adopted in 1996.
As retaliation measure Russian Transport Ministry had limited the permissible weight of Finnish trucks to 38 tons. As a result Finns have cancelled their decision, but in their turn had rejected Russian offer to increase to 200.000 in 2003 the number of authorizations and left them at a former level of 135.000.
On the other hand, quite in the center of Finland, in the city of Kouvola, the new Schenker AG transportation and logistic center was open covering an area of 14.500 sq. meters which will service Russian transit of goods. Besides, the new container terminal on the area of 7,1 hectares was opened, intended to process cargoes going on Tras-Sibirian railway to the Far East. Cargoes to Russia are sent from the new terminal, naturally, by Finnish motor transport companies through boundary customs checkpoints in Nuijamaa and Vaalimaa (Torfjanovka and Brusnichnoe on the Russian side of the border).
Lithuania: neither a friend, nor an enemy
The volume of cargo transportation carried out by Lithuanian carriers is 2,5 times higher than that of their Latvian and Estonian colleagues taken together. According to the Lithuanian national carriers association LINAVA, transportation of goods is performed in more than 40 countries in Europe, Asia and Africa. The main delivery destinations are Poland, Germany, Russia, Holland, Belgium and Italy.
LINAVA’s general secretary’s deputy Mr.Vidmantas Adomajtis has emphasized to our magazine that "the company pays great attention to Lithuania’s transport legislation analysis, and to prevention of infringements within the TIP-system". Mr. V. Adomajtis acknowledged that "this year would be a difficult one, as the carriers’ taxation was growing and the new EU requirements were adopted. However we are ready to pay our price for the membership in the EU as big perspectives for business development would open. Nevertheless, in order to minimize possible losses concerning transportation business, Lithuanian transport scientists and experts are preparing, under LINAVA guidance, a forecast of possible difficulties and obstacles concerning motor carriers after Lithuania joined the EU. The results of this forecast will be ready in July this year".
LINAVA’s management has already appreciated the importance of European level’s customs terminals and has made up its decision to build more. With this purpose in mind, LINAVA together with Lithuania’s association of forwarding agents LINEKA, and Vilnius’ regional administration, as well as other interested bodies, have created a non-profit enterprise with a touching title " The Small village of cargoes " (Istaiga kroviniu Kaimelis). This enterprise will be involved in construction of customs terminals according to the EU standards.
It would seem that LINAVA association is developing in the right direction, having bright plans for the future and one just have to follow it’s example, but...for veterans – carriers in the region the mentioning of Lithuanian drivers has aroused only one association, i.e. the "smugglers".
As a matter of fact, auto-carriers of various Lithuanian companies working on West-East routes regularly broke rules of the International TIR-convention. For example, many goods that were declared at customs as transit-goods were illegally left in territory of Russia and Byelorussia and thus promoted shadow business activity in these countries.
As is known, a year ago Byelorussia has applied to the Lithuanian auto-carriers an exclusive measure – an obligatory police follow-up along the whole route territory in connection with chronic Lithuanian drivers’ infringements of Byelorussian customs legislation. The damage of such infringements to the country’s budget has been at the rate of 10 million US dollars.
The Lithuanian national association of auto-carriers LINAVA was formed on October 4, 1991 and presently unites about 1500 transport agencies (two years ago there were 1700 members). Since May 1992 the association joined IRU. LINAVA’s motor-vehicle fleet consists of 12 700 trucks, out of which more than 5000 trucks correspond to “Euro-3” standard. 1195 trucks work within the international TIR-system.
The damage to Russian Federations by Lithuanian smugglers in 2002 is estimated at a range of 3,5 million US dollars. And this was in spite of the fact that Russia at the end of 2001 for the whole month had installed a police follow-up for all cargoes delivered by the Lithuanian carriers and forwarding agents. As a result clients began to avoid Lithuanian carriers, and into the occurred empty niche immediately penetrated transport companies from Russia, Poland, Bulgaria and Hungary.
LINAVA accused the Russian side of the attempts to supersede Lithuanian firms from Russian auto-carriers market. According to the Lithuanian association, more than 50% of all cargo transport is aimed at Russia’s territory and in this business about 30.000 people are employed.
Nevertheless, LINAVA was compelled to provide some compensation for the damage caused to other countries firing some personnel and signing off about 120 TIR-licenses for Lithuanian auto-enterprises. This has yielded positive results: Byelorussia in February 2003 cancelled obligatory police customs’ follow-ups for Lithuanian auto-carriers.
Latvia: a sort of farm psychology persists
The Latvian association of international cargo-carriers Latvijas Auto was created in 1990 and since 1992 is a full member IRU. There are at present 783 companies having membership in association about 700 of which work within TIR-system. There are 5.820 trucks in the association, 85% of the companies included in Latvijas Auto are having from 3 to 5 trucks.
After 1991 the auto-transportation market situation had changed and Latvian international cargo carriers had become suddenly foreigners for Russian companies. At that moment the authorization system for cargo transportation between Russia and Latvia has occurred which has been in operation since July 1, 1996 when the quantity of mutual authorizations was established, nicknamed as "permissions" or authorizations (dozvoli). Since then this item of trucks’ authorization has been a constant problem for auto-carriers; the corresponding numbers are shown in Table 4.
The auto-transportation of goods’ market situation in the Baltic States on the eve of their accession to the EU the Latvian association of auto-carriers’ general secretary Mr. Pavel Groshev has described for our magazine in the following way. "We have to understand one thing for sure: the time has gone, and we are loosing the battle. For the last three years we have been eaten up what we have earned during previous 5 or 7 years. There are many explanations for that and I can mention some of them:
- We have been waiting for too long at the borders – and time is money- that was too bad;
- Due to complicated debtors-creditors’ relationships we’ve been losing profits, i.e. you wait for a day and your freight profit has diminished. You make a deal today but get money in three months, therefore the final calculations is not, of course, in your favor;
- We did not earn enough due to low profitability rate and high expenses caused by currency’s exchange rate fluctuations and increased fuel prices.
The reason for such a gloomy picture is rather simple. We live in a strange market with a prevailing chaos and anarchy where the competition occurs not in sphere of services but in road management offices with intense struggle for "permissions". We have to work by strict rules. That is, we have to be serious and thoughtful in approaches to market regulation and management based on authentic statistics and qualitative licensing of market participants. We have to take into consideration technical conditions of our motor fleet, as well as personnel professional qualities and financial solvency of our companies. Licensing procedure in Latvia from the very beginning implied a primitive license distribution. As a result of it problems with “permissions”/authorizations occurred coupled with coercive professional training system and problems of collecting statistical data, etc. Now only one way is left, that is to wait for those to survive in this chaos and then to put things in order and make a fair authorization’s distribution system. But then we have to remember that time is going by and competitors do not doze.
It could be expedient to adopt Finnish experience of creating a “general management office” for several transport companies to cut down expenses. However in Latvia it is difficult to implement this idea as here a "farm psychology " very often prevails over common sense.
Let’s imagine a firm with four founding persons and each thinks, "I’m smarter than all others, but why do I get so little?" As a result the enterprise breaks up into four very small, but very independent fractions each with its own accountant, own route manager and auto-mechanic. Instead of economic efficiency we have an increase of expenses, with an “own farm” instead”.
And what can the Baltic States expect in the future? It’s difficult to say what will happen with the authorization system after we join the EU; whether at all transit permissions will be necessary to cross the countries within the European Union? What will happen to the Baltic roads designed for 32 ton-trucks while Scandinavian standards are for roads for 60 ton-trucks? What will be done with Latvian warehouses that, according to European opinion, are to be united and made bigger? Probably, Europeans are going to build such warehouses eliminating the present ones in Latvia. If Latvia becomes the EU border state, does it mean that Dutch and German carriers will transport goods and cargoes to Russia just because they have better technique? According to Mr. Pavel Groshev: " we have only one way out, i.e. to create in Latvia a zone of most favorable conditions for transit goods’ treatment, and hoping that cargoes will storm into the country. In order for this come true we need both incentive and government’s power“.
We are doomed to cooperation
A lot of questions connected to the Baltic States’ accession consequences to the EU have been hanging in the air. What can be done? A possible answer appeared during our magazine interview with Russian association ROSTEK-terminal’s president Mr. Michael Burchak.
"Our association has been connected to Latvia, Lithuania and Estonia by partnership relations, therefore our joint activity and investment lies in creating a joint infrastructure that should be the common field of activity of all our four countries, Mr. M. Burchak said. “We can create in Russia joint ventures (JV) with Latvian companies and by that legally bypass bureaucratic obstacles and freely move with those cargo volumes that we can get at international transport market. Today already about 40 Estonian and Latvian JV enterprises exist in the region.
The association ROSTEK-terminal began its goods transportation activity in 1995 and at present unites 15 enterprises. Association branches are located on the Russian Federation borders where most of goods transportation occurs, e.g. in Velikie Luki, Pitalovo, Pechora and Sebezh. The ROSTEK-terminal’s head office is in Pskov.
Presently, major part of freight traffic goes through Finland, whose geographical position is much worse than that of the Baltic States. Long ago Finland territory has been a warehouse of temporary cargo storage for the Soviet Union and consequently West-European countries preferred Finnish carriers. But when the Baltic States join the EU where all member states have identical rights then geographical advantage of Estonia, Latvia and Lithuania will come into being providing positive economic benefits. Therefore we are doomed to cooperation".