Economy, Domestic Economy

Call for Merger of Small Companies to Develop Railroads

Call for Merger of Small Companies to Develop RailroadsCall for Merger of Small Companies to Develop Railroads

Railroad construction in Iran has been traditionally carried out by the public sector, since according to Article 44 of the Constitution, railroads and all large-scale industries are regarded as public property.

Law grants 100% ownership of all railroads, either existing or at different stages of construction, to the government and prohibits transfer to the private sector.

However, since 2006, with the government’s shift towards privatization in line with the policies outlined in an amendment to the article, the private sector has been allowed to engage in the construction of main railroads, while it is also allowed to utilize railroads, albeit without having ownership rights.

However, private enterprises involved in the sector are finding themselves struggling with financial difficulties, which has prevented them from contributing substantially to railroad development due to lack the sufficient financial backing.

This has prompted the Islamic Republic of Iran Railways to set a new condition for the companies already active in or willing to enter the sector. In an interview with Persian daily Donya-e Eghetsad, IRIR chairman Mohsen Pour Seyyed Aghaei has elaborated on the issue.

“The IRIR is preparing a new set of regulations which mandate private companies active in railroad development to have a minimum startup capital of 1.2 trillion rials (about $36.4 million), of which at least 25% is invested by the company and the remaining 75% can be obtained through loans or other incentives,” said the official.

According to Pour Seyed Aghaei, the IRIR’s assessment of private companies’ performance over the past years reveals that most of these companies had entered the sector with very little investments (merely 5-10% of the required startup capital), hoping to generate the rest through their activities’ capital turnover.

“This has resulted in financial difficulties for these companies and rendered them unable to invest in development projects or provide high-quality services,” he noted.

He says the new condition will eventually lead to small enterprises merging to form bigger and stronger private railway companies.

There are currently 11 private companies active in the passenger train sector, but Pour Seyed Aghaei believes what the country needs is fewer number of companies that can provide better services. “Three large passenger train companies such as Raja are sufficient to meet the demands of passengers,” he said.  

Raja Passenger Train Company is an associate of the IRIR and manages passenger trains including international trains between Tehran and Istanbul, and Tehran and Damascus.

Pour Seyed Aghaei also believes the number of private companies active in freight transport should reduce from the current 21 to about 5-6 major freight transport companies.

He is, however, not very optimistic about foreign interest in investing in the sector.  “Foreign companies would be reluctant to invest in the railroad sector as it entails investing in foreign currency but earning in the national currency. Considering the fluctuations in foreign exchange rates in Iran, foreign companies are at the risk of losing their revenues.”

Unlike a number of other Middle Eastern nations, Iran has a railway system which carries not only passengers but also freight. There is a total of 8,442 kilometers of railway handling approximately 25% of the total freight transported in the country.

The Rail Transport Development Plan, approved by the Economy Council last year, aims to increase the capacity of railroads for freight and passenger transport from 21.7 billion ton-kilometer (tkm) and 17.4 billion passenger-kilometer (pkm) in 2013 to 75.8 billion tkm and 34.2 billion pkm in 2023 respectively.