New investor lifts money out of railway

The new owner of the freight arm of the Estonian rail system Baltic Railway Services wants to earn a fast buck from the partly privatized Estonian Railway (Eesti Raudtee) by taking all of the previous years? profits out of the company, according to the Ministry of Transport and Communication.

The state as a minority owner in the company is against the plan.

Baltic Railway Services bought a 66 percent stake in Estonian Railway last August after it surfaced that the representatives of Rail Estonia, the initial bidder, had a shady background.

Because a syndicate of banks collapsed at the last moment before the deal, Baltic Railway Services had difficulties in paying the 1 billion kroon ($59 million) purchase price on time and had to finance the deal with their own resources.

?It would have been logical if Baltic Railway Services had invested first and thought about the distribution of dividends later,? said Kuldar Vaarsi, spokesman for the Ministry of Transport and Communication.

Baltic Railway Services as the majority owner pushed through the decision at a general meeting on May 15 to take out 250 million kroons in dividends, 66 percent or 165 million kroons of which would be paid out to BRS and 34 percent or 85 million kroons to the state.

Margus Varav, a spokesman for Estonian Railway, explained the move by saying it was useful to take out the profits in 2002 rather than next year because dividends paid by businesses to businesses would be taxed by a 26 percent income tax from 2003.

This is about 60 million kroons, the expense of which Baltic Railway Services had not taken into account in its business plan when privatizing the company, he said.

?BRS will take out the money and not give it to the owners, but spend it on financing its obligations,? said Varav. ?Two hundred fifty million kroons will be taken out with one hand and 872 million kroons will be placed back with the other for purchasing 74 U.S.-made locomotives and renovating the infrastructure. I do not see any problems here since three-and-a-half times more money would be brought in.?

The Ministry of Transport and Communications declared this week that the profit distribution decision did not correspond to Estonian legislation, because it required affirmative votes from all shareholders.

The ministry now demands an extraordinary general meeting of the shareholders of Estonian Railway in order to cancel the decision and make a new profit distribution proposal.

?It?s about the legal interpretation of the business legislation, ? said Vaarsi.

According to Vaarsi, it would have been acceptable if the new investor had taken out only last year?s profits. Money was needed in the company, he said, for making investments.

?The ministry is not in principle against the distribution of dividends, but it should not be too high. We previously agreed on 140 million kroons,? he said.

Estonian Railway made a 144 million kroon profit on a 1.61 billion kroon turnover in 2001 and a 38 million kroon profit in 2000.

Tonu Koiv, an MP who represents the state on the supervisory council of Estonian Railway, also condemned the decision to take out profits.

According to Koiv, the railway company had many development projects that had to be financed, and there were certain instructions regarding the distribution of dividends that had to be followed.

Koiv said he would have liked to see Baltic Railway Services follow their business plans first before taking out dividends.

According to media speculation, Baltic Railway Services has placed some of the expenses in an income statement under investments in order to show a bigger profit, but Koiv denies this.

The company also received huge sums for management services. The initial plan was to charge 350 million kroons for management over five years. But the council cut that sum by half.

BRS shareholders include the U.S. rail operators Rail World Inc. (25.5 percent) and the Railroad Development Corporation (5 percent), a subsidiary of the British infrastructure group Jarvis International (25.5 percent) and Ganiger Invest (44 percent), which is led by Estonian businessmen Juri Kao and Guido Sammelselg.