In her interview with Dr. Farhang Toloei, the Managing Director and member of the Board of Directors at Rail Pardaz Seir Co., , Etela’at-e-bourse daily correspondent, Farahnaz Sepehri, reports: Rail transport is a key strategic industry and can play a significant role in boosting the country’s economic growth. We can even assert that it is one of the important branches of major industries such as mining. Moreover, rail transport has more advantages compared to road transport. Less fuel consumption, greater safety, being more environmentally friendly, and suitability for bulk cargo are among some of such advantages. Although the costs of improving the rail system is among the challenges and concerns of rail companies, one way of funding these operations could be through financial instruments of the capital market. Rail Pardaz Seir Co., active in the secondary market of Iran Fara Bourse Co. (IFB), is an experienced company in this area. However, its CEO, with 25 years of experience in the field of transport, believes that rail companies still face challenges such as guarantees and collaterals. We conducted an interview with the Company’s CEO, Dr. Farhang Toloei, asking him for his opinions on the challenges and outlook of the rail industry as well as the issues related to the abovementioned company.
Q: What innovative schemes and projects does Rail Pardaz Seir Co. have to boost the quality of the services?
A: In our country the liaison between academia and industry is poor and the emphasis is placed more on theory at universities. Industry does need practical aspects and these two must be brought together and knowledge needs to be put into action so the two sides can benefit from each other’s experience and expertise. To realize this, we founded Rail Pardaz research center at Iran University of Science and Technology three years ago as we were given a physical space by the university. Equipping the center provided the students and craftsmen with a spot for cooperation. In the first year, attempts were made so that there would be a kind of common language between academics and craftsmen in order that they could figure out the analyses and experiences of each other and make the most of them.
On the other hand, another important step taken by the Company was making a structure for cargo unloading. Throughout the world, tipplers are used to unload the cargo. This is too costly. Through our studies back in 2013, we realized that the problem with carrying mineral products (iron ore) to Bandar Abbas province was unloading the cargo. Examining a simple structure made by a foreign company, Seir Pardaz Seir planned to manufacture the structure. Of course, that structure was welded, hence the possibility of getting damaged by impact. Therefore, our company built it in a spiral form. The drawings were designed and the structure was manufactured by our Company’s experts.
It took a few months before it was approved and accepted by Iran’s Railway. In 1394 (Mar 2015-Mar 2016), using the same structure, we managed to create 40 percent of the tippler capacity at about one percent of the cost [of purchasing it] and were also able to carry 500,000 tons of cargo to Bandar Abbas province. As it happens, the structure is now being utilized in many industrial locations including the Persian Gulf Special Economic Zone, Bandar Abbas and Khouzestan Steel Co.
Q: What have been the results of this innovation and the structure you manufactured?
A: This small structure facilitated several developments in this area. If the whole rail transport process is 100 percent, we lose 30 percent of the time for loading and 40 percent for unloading. Therefore, 70 percent has an important role in the efficiency, while only 30 percent is the movement time; the more we can reduce the 70 percent, the more we can accelerate the process. In 1397 (Mar 2018-Mar 2019), we had a 100 percent increase in the capacity of rail transport expected in Iran and succeeded in carrying 2 billion ton-kilometers of cargo. Had this not been fulfilled, we would have had to buy 200 wagons which would, in turn, have led to heavier network traffic and more control and consequently less speed.
Last year, since the currency exchange rate was not stable, the contracts were made in rial (IRR), but this year, given the stability of the currency exchange rate and closeness of the currency rate of the market with the NIMA system exchange rate, the contracts are concluded in foreign currency, and in the worst case scenario, the same amount as the last year’s, i.e. 210 billion rials, will be earned.
Q: Given the 28 percent increase in the Company’s carried tonnage and the 59 percent growth in the amount of loaded cargo in ton-kilometers in the year 1397 (Mar 2018-Mar 2019) compared to 1396 (Mar 2017-Mar 2018), there has been an 81 percent increase in sales revenues. This is while in the year 1396, we noticed a 23 percent decrease in the amount of loaded cargo in ton-kilometers in comparison with the year 1395 (Mar 2016-Mar 2017). On behalf of your company, what is your prediction of the amount of loaded cargo in ton-kilometers in in the year 1398 (Mar 2019-Mar 2020) and the years to come?
A: With the fixed number of the fleet and addition of no wagons, we are going to have a 10 to 15 percent ton-kilometers increase in 1397 (Mar 2018-Mar 2019) compared to 1396 (Mar 2017-Mar 2018). Of course, based on what was approved in the Committee of High-sided Wagons (Association of Rail Transport Companies), the transport cost increase rate will be 30 percent in comparison to 1397. This will depend on other factors including the distance between the departure point and the destination as well as the services offered en route.
Q: What is the Company’s prediction about the rise in the cost of carriage for each ton-kilometer compared to the year 1397 (Mar 2018-Mar 2019)?
A: The rise in the cost of carriage has been set to be approximately 400 rials on average for each ton-kilometer as an ownership right, and the average cost of carrying each ton-kilometer will be 1240 rials including the costs of haulage and access.
Q: Considering the increase in the foreign currency exchange rate and certain wagons parts being imported, what will be the rise in the cost of the parts in the current year compared to the year 1397 (Mar 2018-Mar 2019)?
A: The freight wagon has a simple structure consisting of 250 parts as a whole with 75 percent of the part being manufactured domestically and the rest being imported. In an automobile, there are some 4000 parts. Meanwhile, we are planning to purchase a number of wagons. Fifty wagons will be delivered to us within the next month or two. I should note that, on average, 25 percent of the cost of manufacturing a wagon is in foreign currency. Given the turbulence of the market in 1397 (Mar 2018-Mar 2019), we bought all the parts we needed for £150,000 total. The amount will be even less this year. So we can say the increase in the foreign currency exchange rate has no effect on this.
Q: What are your plans for the 100 billion toman funding through Sukuk al-Ijara bonds [Islamic bonds of lease]?
A: 200 wagons are to be added to the fleet of the Company via the five-year Sukuk al-Ijara bond (Islamic lease bonds) and based on the plan of bourse organization. That will add some 30 percent to the capacity of the Company.
Q: Given the international conditions and the imposed sanctions, how can the prediction of the 205 billion rial revenues of the Company in 1398 (Mar 2018-Mar 2019) be realized?
In 1398, we earned 210 billion rials in revenues through international sources of revenues while last year international contracts were concluded in rial (IRR) and this year the contracts will be concluded in foreign currency. The contracts were in rial last year because the currency exchange rate was not stable; however, this year, because of the stability of the currency exchange rate and its getting closer to NIMA system, the contracts will be concluded in foreign currency and in the worst case scenario, the same amount as the last year’s, i.e. 210 billion dollars, will be earned.
Q: How will the sanctions impact rail transport?
A: The sanctions are regarded as opportunity for the rail industry due to the fact that the cost of ship insurance increased tenfold in the past few weeks and the increase resulted in about some five to six dollars difference per ton in the sea transport cost. In addition, given the traffic limitations, the sanctions have created an opportunity for the rail transport. Furthermore, via the rail connections we have with China and Commonwealth of Independent States (CIS), it is possible to transport the cargo of the ships on to the wagons. It is worth mentioning that we have negotiated with some Chinese companies regarding shipment of goods to Iran. This is going to happen this year.
Q: Do you confirm the Company’s 31 billion rials recognized revenues from the contract with Opal Parsian Co.?
A: Yes I do. We have a contract with Opal Parsian now and the figures are expected to go up in the current year.
Q: In case of 100 percent increase in the Company’s capital via the reappraisal of the wagons in the current year, what will be the increase in the cost of depreciation and its effect on each share? What is the depreciation rate of the Company wagons?
A: The reappraisal of the wagons was conducted in 1392 (Mar 2013-Mar 2014). Since we benefited from it, we are committed to performing it once every five years. So we have put it on the agenda this year. When the cost of depreciation is to be included in financial statements, this better be turned into the capital so that the shareholders will benefit from it. If we have this increase in the capital, there will be an impact of depreciation increase on each share in 2019. But if it is postponed to 2020, it will have no impact in the next year. Note that the useful lifespan of wagons is 30 years.
Q: Tell us about the official documentation for tax exemption from capital increase. What is the purpose of the shareholders of conducting the reappraisal and its effect on the operational structure of the Company?
A: I should note that in 1397 (Mar 2018-Mar 2019) the exemption applied solely to those businesses operating at a loss and subject to Article 141. But based on the latest directive by the Iranian National Tax Administration, considering the inflation of the years 1397 (Mar 2018-Mar 2019) and 1398 (Mar 2019-Mar 2020), this requirement was removed to further support the private sector so that all companies were exempted from tax payment for increasing their capital via reappraisal of assets. So we are committed to complete the preliminaries in 1398 to benefit from it. If it is postponed to 1399 (Mar 2020-Mar 2021), the tax exemption might not be extended, and since we plan to have a 100 percent increase in the capital, in such a case our assets will be nearly 200 billion tomans, so the tax (about 25 percent of the capital) will be a considerable amount.
Q: Loading the cargo by excavators decreases the speed of loading. What are the Company’s plans to modify the loading system?
A: Currently, loading is done by loaders. Of course, in the mines where they merely do mining work, mechanical loading hoppers are used instead of loaders. We have actually given a sketch to the students at Sharif University to conduct research on and design a kind of sucker machine capable of absorbing different sizes of iron ore like a vacuum cleaner. They are to deliver the design by the end of September so a prototype will be built in a small scale. Considering that the amount of investment and capacity must be analyzed, we cannot specify an exact date for its implementation.
Q: Under Article 12 of the law for removing barriers to production and Article 52 of the law for the Sixth Development Plan, the expenses of purchasing operation wagons will be reimbursed to the Company at a certain time. Considering the purchase of 50 wagons in 1397 (Mar 2018-Mar 2019) for 153 billion rials and the plan to buy another 50 wagons for 293 billion rials in 1398 (Mar 2019-Mar 2020), when will this investment return to your Company? How much will the Company’s recognized revenues be in this regard in 1398?
A: The subsidy for fuel saving based on Article 12 of the law for removing barriers to production will be granted based on the kilometers travelled by the wagons and based on the travel of the wagon; the statement will be submitted and, if approved, paid.
Q: In the past, shares of major shareholders were pledged due to their debt to Kosar Institute and were issued on the capital market by the institute due to their default on payment. Tell us about the debts as they stand now.
A: In 1395 (Mar 2016-Mar 2017), forty percent of the shares were sold by Kosar Institute as a block and bought by Arzesh Afarinan Fadak. The same forty percent was then taken as a guarantee until the payment of the installments. Each share was worth 1425 rials, with the total number of shares being 780 million.
Q: The Company’s revenues come mainly from transport of Zob Ahan Esfehan Co.’s freight. What are the Company’s plans in order to increase the variety of the customers and reduce its dependency?
A: In 1393 (Mar 2014-Mar 2015), the dependency was 85 to 90 percent but was reduced to 44 percent in 1398 (Mar 2019-Mar 2020). Meanwhile, we have considered having alternative customers so that in 1398, Khouzestan Steel Co. was added to our customers, and we have a three-year contract with the said company.
Q: The majority of Company’s wagons are very old, steel-based Romanian wagons from four decades ago with a limited capacity of cargo transport compared to the new six-axis wagons. They are also too expensive to maintain and repair. What are the Company’s plans to replace them?
A: A wagon has an average lifespan of 100 years. There are actually some wagons in Germany still working 75 years after the year of manufacture. This is because transport wagons have a simple structure. Also, based on the requirement by Iran’s Railway Organization, the wagons must undergo thorough repairs, with all the parts dissembled and the damaged parts replaced every three years. By the way, at the moment, all the wagons are manufactured domestically.
Q: In 2014, Reil Parzaz Seir Co. joined the International Union of Railways (UIC). Are the standards taken into account in the wagons? If yes, how?
A: Yes, we do have the standards, since in addition to the unique ID number each wagon has in the world, if it is a member of UIC, a unique code must also be allocated to it. Otherwise, the member countries will not allow the wagons without the UIC code to carry freight.
Q: How much are the Company’s debts and why have they been on the rise?
A: We owe current debts and debts related to Sukuk-al-Ijara (Islamic bonds). The cost of rail freight transport has three components: locomotive, the right of access, and ownership rights. Note that the more activity by the Company leads to further debts.
Q: What is your take on the high profitability by Rail Pardaz Seir Co.?
A: In the operational section, besides the addition of the 50 wagons, the question of efficiency was also effective such that in 1397 (Mar 2018-Mar 2019), 45 to 50 percent of the courses were taken with loading at both departure and destination.
Q: What do you think about the new financing instruments? What challenges does the rail transport face in this respect?
A: Since the rail transport is asset-based, it needs considerable financial resources. For instance, if we want to purchase 100 wagons, we will need 800 billion tomans. This is while the wagons will become operational in three years and that discourages the investors. Sukuk al-Ijara (Islamic bonds) are one way of supporting such investments. Another way is through Istisna’ Sukuk (type of Islamic bonds) but the problem is that since for each method of financing a guarantee is required to assure the money will be repaid, and given the fact that the assets of rail companies are the wagons, in spite of the enactment by the Economic Council that the wagons must be accepted by the banks as guarantees, the banks refuse to accept the wagons. A positive measure taken by the Exchange Organization was giving authority to two credit rating institutes. These institutes will evaluate the credit of the companies and if the credit satisfies the level required by the Exchange Organization, there will be no need for the guarantor. We have not yet seen such a case operationalized.
Q: Which countries are your target export markets and in which countries do you have subsidiaries?
A: We have set up a subsidiary in Kazakhstan. It serves more than the role of a mere subsidiary because the subsidiaries are not authorized to draw up contracts and can only introduce customers and inform the parent company of the proposed price and it is up to the parent company to conclude the contract. However, our company in Kazakhstan can conclude contracts as well.
Q: What is your take on the level of road transport right of access to roads versus rail transport right of access to railroads?
A: We should note that road transport right of access is 4 percent while that of rail transport is 30 percent. We have a total of 285,000 kilometers of road and the costs of maintenance, management and security must also be taken into account which will be a considerable amount. On the other hand, we have a total of 11,000 kilometers of railway with the level of right of access being 30 percent. For instance, our studies showed that the sum total of revenues of the Railway Company from the right of access in 1396 (Mar 2017-Mar 2018) was 500 billion tomans which is an insignificant amount. The Railway Company has used government power to earn this money and realize its business profits. In other words, it raises the right of access with increase in the costs; however, the companies also reduce their activities accordingly, which will in turn lead to the decrease in rail transport. Since I am the chair of the High-sided Wagons Committee of Trade Association of Rail Transport Companies, we discussed the issue with the media so that the right of access will be omitted. Actually, the fuel consumption in rail transport is seven times less than that of road transport, and if five percent of the road freight is moved to the rail transport, we will save fuel consumption greatly. However, as long as the issue of right of access is not resolved, private companies will not be willing to cooperate because they do not wish to be dominated by the Railway Company.