Estonia begins Operail privatisation

Operail privatisation The Estonian Government Cabinet has approved a proposal submitted by the Ministry of Climate for Operail privatisation with the sale process being carried out by the investment banking unit of LHV Bank, the legal advisor of the process is Ellex Raidla law firm.

The proposal says that all business operations of the state-owned company AS Operail will enter public auction. Operail’s freight and repairs businesses are for sale along with assets, licenses, contracts, employees, and the Operail brand.

Operail privatisation process is implemented into two stages. In the first stage, the interested buyers can review the initial information package and submit non-binding offers while in the second stage the qualified buyers will be provided additional information allowing them to submit their binding offers. The interested parties must demonstrate their interest and capability to purchase the company and to sign a non-disclosure agreement.

Operail’s owner, supervisory board, management board, and employees do not participate in carrying out the auction process. We ask that all questions related to participation in the auction process be addressed directly to the mentioned representatives of LHV Bank.

Operail’s management prepared the strategy plan which was approved in November 2023 and introduced to the owner’s representative, Ministry of Climate and was then left to wait for the government’s approval to proceed with the plan. On 15 February 2024, the government made a substantive decision during the cabinet meeting when it was proposed the full privatisation or divestment of Operail, which is a part of Operail’s strategic plan.

Operail’s business activities on the Estonian freight market are currently unprofitable but its privatisation will unlock its potential to deliver significant benefits to the Estonian rail sector.

The freight volume on the Estonian railway has decreased by 39% in 2023 with Operail’s volume decreasing by 70%. In august 2023, Operail announced that due to the direct and indirect effects of the war in Ukraine, the company has experienced an 83% reduction in cargo volume, incurring a projected loss for the first six months of 2023. In the pre-war year of 2021, Operail’s cargo volume in Estonia was 6.6 million tonnes for the first six months. In contrast, in the same period in 2022 the figure stood at 3.6 million tonnes, and this year it was just 1.1 million tonnes.

The drastic decline in cargo volume is attributed to the sanctions imposed on Russia and Belarus in 2022 and the owner’s decision to halt all transport of goods from Russia and Belarus starting from 2023.

In 2023, Operail exited the cargo transport business in Finland and the wagon rental business and the revenue from these sales should enable the company to navigate the challenges and focus on finding new solutions.

Operail with its subsidiaries is the oldest and largest rail freight transport company in Estonia. Until the end of 2022, the companies of the Operail Group operated in three lines of business including freight transport in Estonia, rolling stock rental on the 1,520 mm and 1,524 mm railway and maintenance and repair of rolling stock and modernisation of locomotives.

As of 2023, the group’s main activity was reduced to freight transport under limited conditions in Estonia and maintenance and repair of rolling stock.

The large-scale military action in Ukraine, which began on 24 February 2022, and the sanctions imposed have had an adverse impact on the group’s revenue. The change in the market situation has negatively affected the freight volumes (transit transport between the West and the East previously made up a significant part of the freight volumes of the Operail). As of 1 January 2023, the owner has prohibited Operail from transporting non-sanctioned goods from Russia and Belarus.

To compensate for the negative impact of the decrease in freight volumes, Operail placed a great emphasisin 2023 on improving the efficiency of its operational and business processes and the development ofclient relationship within rail transport. For this purpose, the Group cooperated with large and small clientsand other companies in the logistics sector.At the beginning of 2023, Operail completed the exit of the business areas that are non-strategic for theEstonian state by selling the assets of the wagon lease business and the Finnish freight transport company,as was the owner’s expectation.

The freight transport volume on the Estonian public railway as a whole was 4.8 million tonnes in 2023 (-39% compared to 2022). The most important commodity groups were liquid mineral fuels (1.6 million tonnes; -29% compared to 2022), bulk goods (0.8 million tonnes; +25% compared to 2022), and oil shale (0.9 million tonnes; -45% compared to 2022). In 2023, the total freight volume of the Operail group in Estonia was 2 million tonnes (-69% compared to 2022). This made up 42% of the total freight carried on the infrastructure of Eesti Raudtee. The decline in the freight volume of AS Operail compared to the previous year was mainly related to the sanctions imposed to Russia and Belarus, additional sanctions imposed by the owner of Operail, partial diversion of local timber and scrap metal volumes to road transport, and the smaller than forecasted grain harvest. The most significant decline in the freight volume for Operail occurred in the transport to and from Russia due to the war in Ukraine: the total volume decreased -100% over the year – from 3.6 million tonnes in 2022 to 0 tonnes. The freight volume with Belarus in 2023 was also 0 tonnes, decreasing -100%. The freight volume of container goods was 177 thousand tonnes in 2023 (-62% compared to the same period in 2022). The volumes decreased in the case of multimodal transport within Estonia by 28%, in the export by 81%, in the import by 99.5%, and in the transit by 98%. The annual freight volume was 24,739 TEU (-58% compared to the same period in 2022).

Operail is an Estonian state-owned railway company that specialises in freight transport, as well as the maintenance, repair and construction of rolling stock in Estonia. The company employs around 250 people. Until the beginning of 2023, Operail also provided international wagon rental and freight transport services in Finland. Following the owner’s directive, Operail exited these business directions, as they were not deemed strategically essential activities for the state.

Operail inspects, maintains and repairs all its wagons and locomotives and also provides this services to other customers. The company also modernised C30-M universal locomotives at the Tapa depot and had completed the construction of the first LNG line locomotive in the Baltic States.

The depots of Operail Repairs OÜ in Muuga and Tapa service mostly companies that belong to the Operail and, to a limited extent, other clients, including Finnish companies. Rolling stock is maintained and repaired, and to a small extent, other metal works are also carried out. Out of the planned 13 locomotives included in the modernisation project of the new C30-M locomotives, 12 have been completed, and the modernisation of one locomotive has been suspended due to changes in the economic environment.

As of December 2023, all the wagons of Operail Leasing have been sold (as of December 2022, the company had in total about 2,000 wagons). In December 2023, the wagon lease business of Operail Leasing was recognised in the statement of financial position as assets and liabilities held for sale and in the income statement as discontinued operations. The sale of the Finnish freight business was completed in February 2023 and in December 2023 all wagon lease agreements of Operail Leasing Finland Oy have been terminated and the wagons have been transported to Estonia.

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