The Privatisation of Estonian Railway System Constitutes a Precedent in Europe

Estonia has risen to share (with Ireland, the Netherlands and the USA) fourth place in the Index of Economic Freedom made up by the Heritage Foundation together with The Wall Street Journal for year 2001.

Therefore it cannot be surprising that Estonia has managed to successfully use the model of free economy also in its privatisation policy. The privatisation of state enterprises in Estonia, which in the first years of re-institution of independence was first and foremost envisaged to create a functioning market economy, has advanced even farther than can be noticed in the privatisation practice of several states with "deep-rooted" market economy.

The privatisation of the railway system in Estonia was actually the first grant of the use of a railway system entirely to the private sector in continental Europe.

Railways have been privatised also in Great Britain. However, the privatisation model applied in Great Britain and the conditions for the functioning of railway undertakings in Great Britain are substantially different from those in Estonia. Therefore, it would not be appropriate to transfer the problems that arose in the privatisation of British railways into the context of Estonia.

Instead, the privatisation of the railway system in Estonia can to a certain extent be compared with the USA where larger railway enterprises are completely in private ownership and where is no such an extensively authorised possessor and regulator of infrastructure like Railtrack in Great Britain.

The privatisation of the gigantic monopoly Estonian Railways that originated from the times of Soviet occupation was a complicated and responsibility-involving task from both legal and economic aspect.

In the privatisation of Estonian Railways, first the state enterprise was transformed into several smaller companies. The transformation was based on the functions that the new companies founded on the basis of state enterprise Estonian Railways were to fulfil.

The two key companies founded on the basis of state enterprise Estonian Railways were AS Eesti Raudtee (Estonian Railways Ltd) engaged mostly in freight traffic, and AS Edelaraudtee (South-eastern Railways Ltd) engaged in passenger traffic within the territory of Estonia.

After the transformation of the "old" Estonian Railways, the state decided to sell, by way of international competition, the shares of the public limited companies established as a result of the transformation. The privatisation of the shares of Estonian Railways Ltd and South-eastern Railways Ltd was carried out by Estonian Privatisation Agency by way of international competition.

100% of shares in South-eastern Railways (the public limited company engaged in passenger traffic) and 66% of shares in Estonian Railways (the public limited company engaged in freight traffic) were put to sale.

For the sake of clarity it needs to be mentioned that, differently from the railways of many other European countries, the Estonian railways engaged in freight traffic are capable of earning profit first of all through the large transit flows between Russia and the West, while the railways engaged in passenger traffic need state subsidies for operating due to the small and dispersedly dwelling population of Estonia.

The significant difference between the sales price of shares received by the state out of the privatisation of the shares of Estonian Railways Ltd and South-eastern Railways Ltd is due to this very circumstance...