Risk map

Description of the General Risk Management System

Relevant Company Departments acting as risk owners within their sphere of operation are involved in risk identification, assessment, and development of measures to mitigate specific risks.

Financial risk management in the Company is carried out in accordance with FPC Financial Risk Management Policy (the “Policy”) approved by the Board of Directors. In accordance with the Policy, the Company defines and identifies financial risks and determines the principles and processes to manage them.

On 14 December 2015, FPC’s Board of Directors approved FPC Risk Management Policy, which set out the goals, objectives and general approaches to the organisation of the Company’s risk management system and the principles of its structure and operation, determines the parties involved in risk management, their roles, responsibilities and cooperation within the risk management framework, as well as the infrastructure and stages of the risk management process.

The major risks map shows the main risks and measures implemented by FPC to reduce the likelihood of these risks being realised.

Risk Map

Risk Risk description Measures to mitigate adverse consequences
1. Market risks
1.1 Traffic decline due to an increase in fares, decline in the population’s transport mobility and purchasing power
  • The increase of fares (ticket prices) projected in the Strategy at the level above inflation but below the growth rate of real disposable income may lead to a drop in long distance passenger rail transportation volume.
  • Deterioration of the economy: a rise in inflation and unemployment and a reduction of real disposable income may reduce the population’s transport mobility and purchasing power.

Introduction of a long term subsidy system.

Reduction of VAT rate for long distance passenger services..

Improvement of the service quality to substantiate an increase in prices and reduce the loss of customers to air transport.

Application of dynamic pricing.

Price changes based on the elasticity of demand in terms of price and comfort.

Use of various marketing initiatives: special fares for domestic and international long distance trains.

1.2 Decline in international traffic
  • Worsening geopolitical situation, tougher economic sanctions against Russia, and the appreciation of foreign currencies against the Russian rouble may lead to a drop in long distance passenger rail traffic.
1.3 A change of passenger preferences in favour of alternative modes of transport
  • A change of passenger preferences in favour of air transport (reduction of air transport fares through state sponsored subsidies for regional transportation) or buses (in case of household income declines) may lead to a drop in the volume of transportation by FPC trains.

Implementation of a competitive strategy for passenger retention and attraction of new passengers from other modes of transport..

Wider application of the Revenue Management System(covering 75% of trains on regular domestic routes  — dynamic pricing applied on 400 trains serving 119 deUse of innovative rolling stock — acquisition of double decker carriages, including carriages with open plan seating, to use on busy routes.

Optimisation of train schedule, including acceleration of trains.

2. Regulatory risks
Fare growth in the regulated segment at a faster pace than projected in the Strategy, with no compensation from the state.
  • To improve affordability of long distance rail transport services for the population the state can index the fares at a rate lower than that projected in the Strategy.3
Reduction of the amount of unprofitable transport services in case of insufficient subsidies from the state.
3. Investment risks
3.1. Insufficient financing of the investment component when providing compensation for revenue shortfall caused by the government regulation of the prices of long distance fares.
  • The passenger railcar fleet largely deteriorated, FPC’s own sources of investment being insufficient. This can lead to a loss of quality and reduction in rail transportation volume in the regulated segment.
Active cooperation with federal executive bodies, business and expert communities to justify the need for state support to finance rolling stock replacement in the regulated segment.
3.2. Failure to achieve the target performance of investment projects when implementing the investment programme
  • Failure to comply with the timelines of capital investment and commissioning, along with material changes in the fixed assets’ operating conditions may lead to investment projects results falling short of expectations.
Using project management approaches at all stages of investment projects implementation.
4. Risks of costs growing faster than anticipated
Growth of suppliers’ prices and the cost of long distance passenger services outruns the growth of transportation fares
  • Accelerated growth of FPC’s suppliers’ prices as compared with the growth of fares for long distance passenger services threatens to reduce FPC’s operational efficiency.

Long term planning of supply requirements.

Signing mutually beneficial long term contracts with suppliers.

5. Technical and process risks
5.1. Technical, economic and performance characteristics of the passenger rolling stock lagging behind international levels
  • Technical, economic and performance characteristics of the passenger rolling stock lagging behind international levels creates the risk of reducing FPC’s competitiveness and falling behind the required rate of operational cost reduction.

Development and implementation of FPC Long Term Innovative Development Strategy.

Building the infrastructure and identifying the sources for FPC’s innovative development.

Procurement of advanced rolling stock meeting international standards.

5.2. Insufficient pace of innovation in the transportation process
  • Insufficient pace of innovation in the transportation process will impede the realisation of the potential offered by advanced technology to improve transport safety and passenger service quality.
Introduction of new technologies and enhancements to the existing software.
5.3. Safety breach
  • Events occurring due to the breach of traffic safety rules.
  • Equipment failures.

Implementation of a traffic safety management system in FPC.

Analysis of traffic safety and equipment failures.

Technical inspections and traffic safety management audits.

Analysis of non destructive testing activities and development of measures for their improvement.

Introduction of security and communication monitoring systems in staff carriages of passenger trains.

Technical audits of repair shops of the branches’ business units.

5.4. Fire safety
  • Fire breakouts on trains.

Carrying out fire safety compliance audits on trains.

Upgrades of passenger carriages to ensure compliance with fire safety requirements.

Equipping FPC facilities with security and fire alarms and automatic fire extinguishing devices.

5.5. Environmental safety
  • Emissions

Upgrades of the rolling stock and civil engineering structures of FPC branches’ business units.

Measures to save and protect water resources used for operational purposes.

5.6. Infrastructure constraints
  • Inability to determine the most convenient long distance train schedule for passengers and increase the trains’ net speeds will impede the enhancement of FPC’s competitive advantages on short and medium range routes and create the risk of passengers’ switching to alternative modes of transport.
Long term planning of rail infrastructure development for passenger traffic in cooperation with Russian Railways.
5.7. Threat of terrorist attacks
  • Potential or actual unlawful interference (including terrorist attacks) at transport infrastructure facilities and FPC vehicles.

Implementing preventive measures in cooperation with the General Administration for Transport of the Ministry of Internal Affairs, the Federal Security Service, Russian Railways Security Department, and Russian Railways regional security centres.

Strengthening the access control and internal security regime at FPC facilities.

Fitting FPC transport infrastructure facilities with engineering and technical equipment ensuring transport security.

6. Social risks
6.1. Public dissatisfaction with FPC’s activities
  • Unpopular measures related to fare increases and closure of loss making routes can cause mass discontent among the public.
The introduction of government orders for long distance services and targeted subsidies to ensure wide geographical accessibility and financial affordability of transport services.
6.2. Emergence of tensions among the staff
  • Optimisation of repair facilities and other assets, accompanied by staff layoffs, may cause employee discontent.

Retraining and transfer of laid off employees to vacant positions in FPC or the Holding.

Development of the internal labour market in FPC and the Holding.

Increasing the use (work load) of optimised assets through diversification of activities.

7. Reputational risks
Damage to corporate reputation
  • Possible increase in tension in the media environment as a result of train cancellations and issues relating to government subsidies for passenger services.
  • Negative feedback in case of poor travel conditions on FPC trains.
  • Increased competitive pressure from air and motor carriers.
  • Projected decline in passenger traffic due to objective factors.

Communication campaign in socio political, business and specialised mass media and online, varying in intensity as required.

Promoting a positive external assessment of the Company by the expert community through participation in industry exhibitions and conferences and holding events to enhance the Company’s image.

Monitoring consumer loyalty to FPС’s activities (initiating and maintaining passenger feedback).

Monitoring negative reports about the Company in the media environment and ensuring prompt anti crisis response.

Monitoring competitors — key players in the transport services market in the air, road and rail sectors. Ensuring the Company’s comprehensive presence in the media environment. Generating a proprietary positive information flow.

8. Occupational injuries
Occupational injuries
  • Damage from occupational injuries and illnesses of the Company’s employees.

Compliance with industrial, fire and environmental safety regulations.

Regular employee training and certification, in process control of industrial safety and preventive measures to ensure fire safety.

9. Financial risks
9.1. Currency risk
  • The risk of rising FPC’s costs under agreements and contracts denominated in foreign currency: service contracts with foreign contractors to grant FPC trains access to foreign railway infrastructure, contracts for the development and delivery of foreign made passenger trains, contracts for settlements with foreign carriers for sold travel tickets.
Hedging of payments in foreign currency using derivative financial instruments; renegotiation of contracts denominated in foreign currency.
9.2. Interest rate risk
  • The risk of increase of interest rates on borrowed funds and funds being raised.

Obtaining credit ratings from leading international rating agencies.

Maximum interest rates on loans are limited by the terms and conditions of long term contracts signed with creditor banks following public tenders. Revision of interest rates in accordance with the terms and conditions of loan agreements can be implemented only by mutual consent of the parties.

9.3. Liquidity risk
  • The risk related to threats and opportunities arising in the process of managing the Company’s surplus funds (insolvency risks, cash gap risks).
Daily planning of payments, availability of long term credit facilities, placement of surplus funds on deposits with early withdrawal provisions.
9.4. Credit risk
  • Risk of contractors’ failure to fulfil their obligations to the Company under signed contracts/agreements.

The use of standard terms of payment to minimise advance payments and pre payments for contractors’ services.

Requesting contractors in the risk group to provide bank guarantees to secure the fulfilment of their obligations.