In compliance with Article 31, Para. 3, and in reference to Article 4, Para.

2, of the Law on Public Companies and Performance of Activities of Public Interest. ("Official Gazette of the RS", Issues 25/00 and 25/02), the Government of the Republic of Serbia hereby adopts DECREE N ESTABLISHMENT OF THE PUBLIC RAILWAY INFRASTRUCTURE MANAGEMENT AND RAILWAY TRANSIT COMPANY

Article 1
This Decree shall establish a public company for public rail infrastructure management and rail transit.

Article 2
The public company for the public rail infrastructure management and rail transit shall be registered under the name: "Zeleznice Srbije" Public Company [Serbian Rail Public Company]. The abbreviated name of the company shall be Zeleznice Srbije PC, Belgrade. The seat of the "Zeleznice Srbije" Public Company is in Belgrade, 6 Nemanjina Str.

Article 3
The activities of the Zeleznice Srbije Public Company (hereinafter: the Rail Company) shall be: 1) public passenger and freight transport and rolling stock maintenance; 2) public rail infrastructure maintenance: and 3) other activities stipulated by law and the Statute. The public rail infrastructure management shall imply: maintaining the public rail infrastructure; organizing and regulating rail transport; ensuring access and use of public rail infrastructure for all interested transporters, including legal entities and physical persons performing transport activities for own purposes; modernization of the public rail infrastructure; protection of the public rail infrastructure, and acting as the investor of the works on the public rail infrastructure new construction and reconstruction.

Article 4
The Rail Company shall ensure permanent, regular and adequate maintenance and protection of the public rail infrastructure, free use of the public rail infrastructure facilities and other rail transport operating assets, safe and uninterrupted rail transport, as well as adequate and regular passenger transport and adequate rolling stock maintenance. In performing its activities, the Rail Company shall comply with the environmental protection provisions stipulated by law and other regulations.

The Rail Company shall be liable for any damage caused to passengers, transporters, companies, other legal entities or entrepreneurs, due to failure to perform its responsibilities specified under Para. 1 above.

Article 5
The Rail Company may establish affiliate companies to perform specific activities under its scope of operations.

Article 6
The funds for the establishment and operation of the Rail company shall comprise the operating assets of the Beograd Public Rail Transport Company, established under the Rail Law ("Official Gazette of the RS", Issue 38/91), being state owned, recorded in the balance sheet September 30, 2004. The ownership of the public rail infrastructure managed by the Rail Company, as public goods in the ownership of the Republic of Serbia, cannot be transferred without prior consent of the Government of the Republic of Serbia.

Article 7
The Rail Company shall perform its activities in its divisions, formed in accordance with the principles of the division of the activities of the public rail infrastructure management and rail passenger and freight transit, and rolling stock maintenance. The Rail Company divisions under Para. 1 above shall maintain separate performance accounts and separate sub-accounts, and shall have the adequate level of authority in legal transactions stipulated by the Statute. The funds on a sub-account cannot be transferred to other sub-accounts.

Article 8
The Rail Company shall adopt rolling five year work and development plans in the form of a five year plan from which the current year is dropped and planned in greater detail in the annual business plan, and a subsequent year ending a following five year period included. The plan under Para. 1 above shall be subject to the approval of the Government of The Republic of Serbia, at the proposal of the ministry in charge of transport. The Rail Company shall adopt also a business plan for the following year subject to the approval of the Government of the Republic of Serbia, at the proposal of the ministry in charge of transport. The program under Para. 3 above shall be submitted to the relevant ministry by the end of October of the current year. Subject to prior consent of the Government of the Republic of Serbia, the Rail Company shall adopt also an annual public rail infrastructure maintenance and rail transport organization and regulation program, specifying operating expenditures, as well as the recurring operating expenses of 2

the Rail Company division performing the rail infrastructure maintenance activity, and the financial requirements for its implementation.

Article 9
The new construction, reconstruction and modernization of the public rail infrastructure shall be undertaken in accordance with a special program adopted by the Rail Company. The program under Para. 1 above shall specify the type, scope and timelines for completion of the works, the financing requirements, and the sources of financing. The program under Para. 1 above shall be subject to the approval of the Government of the Republic of Serbia.

Article 10
The funds for investments in the new construction, reconstruction and modernization of the public rail infrastructure shall be provided from the following sources: 1) 2) 3) 4) the Serbian Republic Budget, earmarked funds; a local government unit budget; borrowing; other sources in compliance with the law.

Investments in the new construction, reconstruction and modernization of the rail infrastructure shall be recorded separately from the operating expenditures, under the Rail Companys recurring operating expenses. The public rail infrastructure new construction, reconstruction and modernization rationalization report shall be submitted by the Rail Company to the ministry in charge of transport, which shall report to the Government of the Republic of Serbia thereon.

Article 11
The Rail Company shall operate under market conditions.

Article 12
Within the scope of its activities, the Rail Company shall obtain and raise funds from the following sources: 1) transport revenues; 2) the Serbian Republic Budget and a local government unit budget under contracts specifying service fees for specific statutory public transport obligations; 3) the Serbian Republic Budget and a local government unit budget in the form of transfers for the public rail infrastructure maintenance, and the organization and regulation of the rail transport; 4) route sale proceeds and other revenues collected from the infrastructure user fees; 3

5) financial loans; 6) domestic an foreign investments; 7) other sources in compliance with the law.

Article 13
The Rail Company shall have the following bodies: 1) Management Board; 2) General Manager; 3) Supervisory Board; 4) Executive Board of Directors.

Article 14
The Management Board of the Rail Company shall comprise 11 members appointed for a period of four years. The Chairman and the members of the Management Board shall be appointed and released by the Government of the Republic of Serbia. The Chairman and six members of the Management Board shall be proposed by the minister in charge of transport from among the professionals and experts in the following areas: finance, banking, law, and transport techniques and technologies, with relevant experience in commercial transactions, i.e. with relevant academic and research accomplishments. Four members of the Management Board shall be selected from among the employees, under the terms and conditions and in line with the criteria specified in the Statute.

Article 15
The Management Board shall: 1) formulate business policy; 2) adopt the companys Statute; 3) appoint and release the General Manager; 4) adopt rolling five year work and development plans, annual business plans, annual public rail infrastructure maintenance and rail transport organization and regulation plans, as well as special rail infrastructure new construction, reconstruction and modernization programs; 5) adopt the companys business performance reports, periodical and annual statements; 4

6) decide on the distribution of profits; 7) decide on the companys capital increase and decrease; 8) decide on capital investments; 9) adopt investment programs and investment criteria; 10) determine the methodology for the application of the criteria for the assigning routes; 11) adopt timetables; 12) decide on closing public transport on unprofitable rail infrastructure or rail infrastructure sections; 13) decide on the establishment of affiliated companies; 14) determine tariffs for public transport of passengers and freight; 15) perform other activities in compliance with the Statute. The decisions under Para. 1 above, Items 2), 4), 5), 6), 8), 12), 13) and 14), shall be adopted by the Management Board, subject to the approval of the Government of the Republic of Serbia.

Article 16
The General Manager of the Rail Company shall represent and act on behalf of the company, organize and manage operating process and manage the companys business, be liable for the compliance of the Rail Companys operations, propose rolling five year work and development plans, annual business plans, annual public rail infrastructure maintenance and rail transport organization and regulation plans, as well as special rail infrastructure new construction, reconstruction and modernization programs, and undertake measures for the implementation thereof, execute the decisions of the Management Board, perform other activities in compliance with the law, the Statute and the collective agreement. The General Manager shall be appointed for a period of four years.

Article 17
The Chairman and the members of the Management Board, the General Manager, and the Executive Board of Directors of the Rail Company shall perform their functions in the interest of the Rail Company, and, in managing its business activities, shall act in line with the entrepreneurial due diligence, respecting the interests of the owners and the employees.

Article 18
The Supervisory Board of the Rail Company shall comprise three members, appointed to a period of four years. The Chairman and the members of the Supervisory Board shall be appointed and released by the Government of the Republic of Serbia. 5

The Chairman and one member of the Supervisory Board shall be proposed by the minister in charge of transport from among the professionals in the areas of finance and commercial law, with relevant experience in commercial transactions. One member of the Supervisory Board shall be selected from among the employees, under the terms and conditions and in line with the criteria specified in the Statute.

Article 19
The Supervisory Board shall supervise the operations of the Rail Company, review the companys business performance reports, periodical and annual statements, and shall issue their opinion on the proposed distribution of profits. The Supervisory Board shall report to the Government of the Republic of Serbia about the supervision results in writing at least twice a year.

Article 20
The Statute of the Rail Company shall regulate the companys internal organization, the cope of activities of the companys bodies, the number of the members on the Executive Board of Directors and their competencies, the rights and obligations of the Rail Company divisions in legal transactions, the competencies of the company divisions pertaining to the management of funds and other issues of importance for the companys operations.

Article 21
The employees in the Rail Company shall have a right to go on strike in compliance with the law regulating the terms and conditions for the organization of strikes, with the collective agreement and the founders act on the minimum work process.

TRANSITIONAL AND FINAL PROVISIONS Article 22

The "Zeleznice Srbije" Public Company start with operations from December 1, 2004.

Article 23
The Government of the Republic of Serbia shall undertake the financial consolidation of the "Zeleznice Srbije" Public Company, in compliance with the program that shall be adopted by the start of the companys operations.

Article 24
As of the date of the start of its operations, the "Zeleznice Srbije" Public Company shall take over the rights, obligations, funds, employees, documentation and files pertaining to the performance of the public responsibilities of the Beograd Public Rail Transport Company, established under the Rail Law ("Official Gazette of the RS, Issue 38/91), and the founders rights and obligation of that company in the companies founded by the Beograd Public Rail Transport Company and its legal predecessors. 6

As of the date of registration of the "Zeleznice Srbije" Public Company, the Beograd Public Rail Transport Company shall be dissolved.

Article 25
The Government of the Republic of Serbia shall appoint an Acting General Manager of the "Zeleznice Srbije" Public Company to perform the general managers functions specified under this Decree in the transitional period, i.e. until such time the General Manager is appointed. Until such time the Management Board under Article 14 of this Decree is appointed, the Government of the Republic of Serbia shall appoint a Transitional Management Board to perform the functions of the management board specified under this Decree. The Transitional Management Board shall comprise eleven members, with four Transitional Management Board members appointed by the "Zeleznice Srbije" Public Company employee representatives, selected as stipulated in the Beograd Public Rail Transport Companys Statute. The Acting General Manager and the Transitional Management Board shall be appointed by the Government of the Republic of Serbia by October 15, 2004.

Article 26
The Transitional Management Board shall adopt the Statute of the "Zeleznice Srbije" Public Company by November 15, 2004.

Article 27
On the date of this Decree coming into effect, the Decree on Establishment of the Public Rail Infrastructure Management and Rail Transit Company ("Official Gazette of the RS", Issue 13/02) shall be abrogated.

Article 28
This Decree shall come into effect on October 1, 2004. No: In Belgrade, __________, 2004 GOVERNMENT OF THE REPUBLIC OF SERBIA DEPUTY PRIME MINISTER,

JUSTIFICATION
The Beograd Public Rail Transport Company was founded on June 29, 1991 under the Rail Law ("Official Gazette of the RS", Issue 38/91) and started its operations on July 1, 1991. With the Law on Public Companies and Performance of Activities of Public Interest ("Official Gazette of the RS ", Issue 25/00) coming into effect, on July 25, 2000, the founders rights for the public companies founded by the Republic of Serbia were bestowed upon Government of the Republic of Serbia. Considering that the Beograd Public Rail Transport Company is a unique integrated technical and technological system, the Government of the Republic of Serbia, exercising the founders rights, is authorized, in compliance Article 31, Para. 3, of the Law on Public Companies and Performance of Activities of Public Interest, to adopt the founding stipulating inter alia the company organization principles, the Decree Proposal aims to harmonize the founding act of the Beograd Public Rail Transport Company with the provisions of the aforesaid republic legislation. The main argument for adopting the proposed Decree is based on the necessity of harmonizing the legal status of the Beograd Public Rail Transport Company with the European Council Directive (No. 91/440/Z) on Rail Development and the Directives N. 95/18/Z and 95/19/Z, specifying in greater detail the Directive No. 91/440/Z, which have become a legal framework for the restructuring of all European rail networks, i.e. national rail companies. The Directives 2001/12/C and 2001/13/Z were also taken into consideration. At the same time, the main guidelines of the above Directives and their integration into the legislation has been taken on as a commitment under the closed Loan Agreement (Beograd Rail Transport Company Yugoslav Rail Reconstruction Project), the Project Support Agreement and the Agreement on Guarantees signed between the European Agency for reconstruction and the Beograd Public Rail Transport Company on October 25, 2001 in Belgrade, under the guarantees of then Federal Government and the Government of the Republic of Serbia. In its capacity of a founding act, the proposed Decree provides for the restructuring of the Public Rail Company and the conditions for the market operation of the company. The main principles underpinning the solutions in the proposed Decree are as follows: The reorganization of the Public Rail Company into two separate organizational divisions with a certain level of independence in legal transactions, separate business performance accounts and separate sub-accounts. Such reorganization of the Public Rail Company is the basis for delegating in the companys Statute the activity of the public passenger and freight transport and rolling stock maintenance to one organizational part, and the rolling stock maintenance activity (maintenance of the public rail infrastructure, and organization and regulation of the rail transport) to the other part of the company. This is a precondition for directing the Public Rail Company towards operating under market conditions, increased efficiency and higher quality services. The company division performing the public rail infrastructure management activity would have a status of the public rail infrastructure manager, in compliance with the Draft Rail Law, ensuring access and use of the infrastructure for all interested transporters, i.e. the other company division performing the public passenger and freight transport activity, and other companies, legal entities or entrepreneurs registered for performing public rail transport activities, with the fees for the use of capacities, i.e. train route, charged. The operation of the Public Rail Company under market conditions would be ensured by its independence in terms of management, i.e. the Management Board decision making not 1

being subject to prior consent of the Government of the Republic of Serbia, exercising the founders rights, with the exception of the decisions pertaining to the passage of the plans, companys performance reports, periodical and annual statements, suspension of transport on unprofitable infrastructure and establishment of affiliated companies. Separate budget items have been budgeted for both the company divisions with the aim of achieving cost reductions and better efficiency and accountability. For the company division managing the infrastructure, the accountability will directly be taken over by the state in the form of transfers, similarly as with the road transport (the Road Directorate). The assumption used is that only a small portion of the expenses would be covered from the route fees, which is the case in the EU countries as well. The company division in charge of the public passenger and freight transport would generate revenue primarily on the transport service market. The Draft Rail Law brings an innovation in terms of the relations between the state and this division of the public company, stipulating fees charged for the lines that are not profitable. Therefore, provided there is a general interest, the Government of the Republic of Serbia or the local government unit would introduce the public transport obligation and define tariffs, quality of service and the fee levels, which would finally result in a contract. The funds for the new construction, recontruction and modernization of the rail infrastructure provided by the Government based on a special program adopted by the Management Board of the Company with prior consent of the Government were also budgeted under a separate item. The company, i.e. the relevant ministry, is under obligation to submit regular program progress reports. In correlation with the increased level of discretion in the decision making of the Management Board, as a managing body of the company, the accountability of the Chairman and the members of the Management Boards has also been raised, in terms of them being obligated to perform their functions so as to protect the interests of the Rail Company and to apply in performing their functions entrepreneurial due diligence, thus respecting the interests of the owners and the employees. The increased independence of the Management Board in decision making is based also on the set of criteria pertaining to qualifications and experience of the Management Board members, as the Government representatives, with stipulating that they are appointed by the minister in charge of transport from among the professionals and experts in the areas of finance, banking, law, and the transport techniques and technologies, with the experience in commercial, i.e. adequate academic and research accomplishments. The authority vested in the Management Board to appoint and release the General management of the Rail Company comes from the membership of the Management Board appointed in compliance with the above stated criteria, guaranteeing valid decision on the appointment of the General Manager, as the business body of the company, i.e. on the selection of the best manager to implement the Management Board decisions. At the same time, it has been stipulated that the Supervisory Board should report to the Government on the results of the supervision at least twice a year. The improvement of the financial position of the Public Rail Company, i.e. more specifically the financial consolidation to a level that would not constrict sound business operations of the company, [is stipulated] as the obligation of the state. The timelines and for the financial consolidation and the process of the consolidation itself would be specified under a special Government program to be adopted before the start of the operations of the new company.

The Decree Proposal changes considerably the form and concept of the act on the foundation of the "Zeleznice Srbije" Public Company and supercedes the existing general act on the foundation of the Beograd Public Rail Transport Company.

The proposed concept of the founders act requires a new and adequate concept of the Rail Law, which has to be adopted before the effectiveness of the Decree, in order to harmonize the founding act with the terms and conditions for the public rail transport, and the terms and conditions for the management and use of the rail infrastructure, considering that the implementation of the founding act, independent from the implementation of the new Rail Law, does not have grounds on the solutions adopted under the excision Rail Law. The passage of the proposed Decree and the new Rail Law is a precondition for the restructuring of the "Zeleznice Srbije" Public Company and its integration into the European rail service market and into the Serbian and EU transport markets. For the implementation of this Decree the funds have to be provided form the Serbian Republic Budget, for the financial consolidation of the Rail Company, in order to facilitate its operation under market conditions.