EC Takes Up Investigation of Bulgarian Railway Company BDZ

Politics » BULGARIA IN EU | November 9, 2011, Wednesday // 15:15
Bulgaria: EC Takes Up Investigation of Bulgarian Railway Company BDZ The EC has started to probe BDZ just as 13 000 Bulgarian railway workers are to go on a general strike over the expected layoffs of 2000 of them. Photo by BGNES

The already vastly troubled and insolvent Bulgarian state-owned railway company BDZ has now become the subject of an investigation by the European Commission.

The European Commission has opened an in-depth investigation into a restructuring aid plan for Bulgarian state-owned railway company BDZ, the EC announced Wednesday.

"The Commission has doubts that the plan is appropriate to restore the company's long-term viability and whether it contains sufficient measures to ensure the company's own contribution to the restructuring costs and to off-set distortions of competition. The opening of an in-depth investigation allows interested third parties to comment on the measures under investigation. It does not prejudge the final outcome," the Commission said in a statement.

It explained that in May 2011, Bulgaria notified it of a BGN 550 M (approx. EUR 278 M) capital increase for BDZ to be provided in six tranches over the period 2011-2016 in order to help restructure the company, which has been in financial difficulties for several years, namely by repaying some of its debts.

The capital increase plus cost-reduction measures, the sale or scrapping part of the rolling stock and a reduction in the workforce are expected to return the company to viability in 2012, according to the plan submitted by Bulgaria, the EC stressed in its announcement.

The EU executive pointed out that BDZ operates both freight and international passenger railway services. It carries out80 % of domestic freight transport and 100 % of passenger transport.

At the end of 2010, the Commission temporarily approved public financing of BGN 249 M (approximately EUR 128 M) towards the company because of the disruption its sudden disappearance would have provoked and to allow time for Bulgaria to submit a restructuring plan ensuring its future viability and other key aspects.

"The aid has, however, not been paid out. The Commission has a number of doubts about the restructuring plan submitted in May, including on the viability aspect since the plan lacks several crucial elements, such as whether the company would still be viable were the revenue forecasts contained therein too optimistic. Bulgaria has also provided no evidence that the privatization of BDZ' freight subsidiary will be sufficient to compensate for the distortions of competition or indeed that it represents an adequate contribution of the company to its restructuring costs since the timetable and outcome are uncertain," Brussels stated.

The write off by the State of debts accumulated by BDZ prior to Bulgaria's accession to the EU, in January 2007 might be compatible with EU state aid rules, according to Section 4 of the EU's Railway Guidelines but to date Bulgaria has not provided the necessary clarifications for a proper assessment, the EC explained further.

According to the Commission, Rescue and restructuring aid is highly distortive of competition as it goes to one company only to the detriment of others. The 2004 EU Rescue and Restructuring Guidelines set as conditions that the restructuring plan is such as to restore the company's long-term viability on the basis of realistic assumptions.

This is to avoid that the company keeps asking for government support. The plan must also include measures to compensate for the distortions of competition. Such measures typically include capacity and market share reductions or the lowering of entry barriers. Finally, the beneficiary needs to make a significant own contribution to the costs of restructuring.

The Commission reminded that in July also opened an in-depth investigation to verify whether restructuring measures in favour of the Greek state-owned railway company TRAINOSE are in line with EU state aid rules.

The non-confidential version of the BDZ investigation decision will be made available under the case number SA.31250 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

The management of the state-owned BDZ Holding announced last it intended to lay off 2 000 workers, and reduce the number of trains in operation by 150 by January 2011, which led the syndicates to declare a mass strike as of November 24, 2011.

The syndicates have been demanding a new collective labor contract from the BDZ company, and have risen up against the intended privatization of the only profitable unit of BDZ, BDZ Freight Services.

They had threatened to launch a general strike in October 2011 but decided to call it off over continuing negotiations with the government. Earlier this year, in March, the launch of their general strike got the government to yield to their pressure. However, their victory appears to have been brief and inconclusive, especially against the backdrop of the increasingly worsening situation at the Bulgarian railways.

The austerity measures are supposed to help stave off the bankruptcy of the hugely troubled state railway company BDZ, declared at a news conference the head of the BDZ Board Vladimir Vladimirov.

"We've got two options. We are either laying off 2 000 employees, or we are going towards bankruptcy, and then all 13 000 employees will lose their jobs," he stated.

In addition to laying off 2 000 anyway impoverished workers, and to shutting down 150 trains, BDZ Holding is also planning to make money by selling some of its assets, and by upping train ticket prices.

Thus, ticket prices along state-subsidized routes will be increased by 9% as of January 1, 2012, and those of "business trains", i.e. the handful of profitable railway routes in Bulgaria – by 15% as December 1, 2011.

The termination of the 150 trains will save BGN 22 M annually, and about BGN 105 M over the next five years; the funds in question are to be used to cover some of the debts of the ailing state company, according to Yordan Nedev, BDZ CEO.

In 2011 so far, the BDZ management has made BGN 4 M from selling assets and other measures, and some BGN 8 M more are expected from austerity and privatization measures by the end of the year. The management plans to make another BGN 25-30 M in the first six months of 2012.

The BDZ management is firmly intent on privatizing the only profitable department of the company, BDZ Freight Services; they argued Friday that in the past 5 years the freight transport by the railways declined by 50%.

The crisis at the Bulgarian State Railway company BDZ has been worsening as in October 2011 Transport Minister Ivaylo Moskovski declared it to be "technically insolvent."

At the beginning of October, Finance Minister Simeon Djankov revealed the massive debts of the BDZ company total BGN 771 M. Of those, BGN 531 M are debts to financial institutions. This revelation came in the wake of an announcement in September 2011 that for the time being the World Bank has refused to grant the Bulgarian railways an urgently needed loan of BGN 460 M, which was negotiated in December 2010.

Another major issue of dispute on the agenda is the proposed privatization of BDZ Freight Services, which is traditionally more profitable than the passenger services of the state company.

Raising several hundred million BGN is necessary if BDZ wants to receive a massive, BGN 460 M loan from the World Bank for restructuring and repayment of old debts.

Since December 2010, when a preliminary loan agreement in the form of a memorandum with the World Bank was signed, the Bulgarian government had been hoping to get a loan of BGN 460 M for BDZ, together with a loan of BGN 160 M for the National Company "Railway Infrastructure", from the World Bank for badly needed reforms.

Unlike BDZ, however, Bulgaria's National Company "Railway Infrastructure" is expected to get its BGN 140 M loan from the World Bank because it is not going to cover old debts with the money but will invest them in new railway network equipment.

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Tags: EC, European Commission, state aid, restructuring, bank, Germany, KfW, Bulgarian State Railways, trains, Siemens, BDZ, syndicates, railway strike, KNSB, Plamen Dimitrov, Boyko Borisov, Plamen Dimitrov, Petar Bunev, National Company "Railway Infrastructure", Yordan Nedev, syndicates, trade unions, BDZ Freight Services, freight, Privatization and post-Privatization Control Agency, Privatization Agency, privatization, loan, World Bank, Transport Minister, Ivaylo Moskovski, railways, BDZ, Bulgarian State Railways, KNSB, Peter Bunev, Boyko Borisov, Prime Minister
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