Despite recent accomplishments, Ukrainian Railways are still facing serious problems, such as endless depletion of assets, poor quality of freight transport services, or cross-financing of passenger and freight transport and deficient financial activities which are not always and fully conducted based on commercial prospects. In the past years, Ukrainian Railways have successfully dealt with the general economic depression and managed to prove profitable performance.
Poor organisational structure and political pressure impose the necessity of reforms towards sustainable profitability and the capacity of meeting the demands of different types of industries that rely to a great extent on railway transport. Currently, the main obstacle is the political dependence of UZ, managed by the Ministry of Transport which controls both the regulatory and economic activities of Ukrainian Railways. A structure like this distorts investment priorities and operation targets.
A tax policy that would support fair competition, a activity based on more transparency in decisions, Ukraine’s trump as “gateway” between two continents where freight volumes are massively shipped, the European Union and European Commission’s support in commercial activities, the wish towards the transport system development, railway transport in particular, seem to transform Ukraine into a bet won in the long term.
Ukraine directs its attention to the West
However, Ukraine implemented structural reforms at a very slow pace. After gaining independence, the Government elaborated a legal framework for privatisation. However, the resistance to reform manifested by the Government, as well as that of a major part of the country’s population have blocked reform efforts, so that many state-owned companies have been exempted from privatisation. Following this very slow, yet constant reform process, in 2008, Ukraine managed to become member of the World Trade Organisation, which is seen as a premise for a much stronger collaboration with the European Union.
Seriously affected by economic recession, which affected worldwide economies starting 2008, Ukraine is enjoying the financial favours of the IMF and the European Union, with significant loans granted by the two institutions. The international financial downturn has made the production in Ukraine plummet and damaged the budget situation, also increasing the need for external financing. Ukraine’s economic stabilization and recovery are backed by financial assistance from the International Monetary Fund (IMF), the Stand-By Agreement (ASB) with IMF being approved in November 2008.
Following a new aggravation of Ukraine’s fiscal situation, part of the second instalment granted under the ASB with the IMF and the entire third instalment went to the budget. The entire loan allocated by the IMF to Ukraine hits USD 16 Billion. Although non-member of the European Union, Ukraine enjoys the union’s support in the development and completion of economic relations. Relying on the EU’s support, Ukraine requested macro-financial assistance from the Union based on the gradual aggravation of the situation and economic prospects. The Union’s assistance consists in a EUR 500 Million loan.
Considering the fact that during 2009-2010, the balance of payments presented a residual financial deficit, the Union sees the macro-financial assistance as a natural answer to Ukraine’s demand for economic stabilization support in association with the IMF’s current programme. It is also expected that the current financial assistance would contribute to a diminution of the foreign financing needs of the state budget. In May, the European Parliament approved a EUR 500 Million loan to Ukraine to help it overcome the financial crisis, pay its deficit and cover budget needs. The loan will have to be returned in 15 years.
According to a declaration of the European Parliament, the allocation of the loan should ensure a wider efficiency, transparency and commitment. “The loan is granted at a time when the EU directs its financial support towards Ukraine’s power sector reform, including sustainable development. However, the EU”s macro-financial assistance can only contribute to economic stabilization, if the main political factors in Ukraine prove to be politically stable and establish a rigorous consensus for the implementation of the necessary structural reforms”, declared Jerzy Buzek, President of the European Parliament.
The Ukrainian Parliament has failed to adopt the budget for 2010 and has committed to make the reductions demanded by the International Monetary Fund. President Yanukovych has assured EC President Jose Manuel Barroso that Ukraine could guarantee for the safety of the natural gas transit from Russia to Europe. The new leader of Ukraine also said that European integration is also a priority of his country’s external policy.
Reform process is slower
A reform strategy was adopted at the end of 2006, mainly planning to transform UZ into a fully state-owned company. The reform completed the separation process of operation activities and cancelled crossed subsidies. A commission led by Minister of Transports Vasyl Shevchenko, which includes specialists within the Ministry of Transport and Communications and UZ, is to be established with the aim of reforming the railway industry.
One of the key drivers that represented the foundation of the investment programme for 2000-2005 has, in fact, been the ambition of the Railway Company of becoming an important player on the international transport market. Historically speaking, there has been a close interaction between Central and Eastern railway networks. Due to political and economic reforms and trade globalisation, the interdependency of the railways in the region is growing dynamic both in technological terms, as well as in terms of economic liberalisation.
In 2008, freight traffic amounted to nearly 71.7% of the Railway Company’s revenues, compared to just 10.1% contribution of the passenger sector, where tariffs are regulated by the government. The remaining 18.2% derives from other activities, such as constructions, rolling stock maintenance, research and development and communications.
“Starting with 2000, when Ukraine recorded a slight economic growth, UZ has adopted a series of measures to improve the company’s operation performances. All these have generated an increase in traffic volumes to several transit activities, as well as financial performance improvements. Over the past five years, UZ has experienced a constant growth of its freight traffic, both in traffic volumes and long and medium-range journeys”, shows a short ana-lysis circulated in the international press as well by Kateryna Golovach, senior specialist within Ukrainian Railways.
UZ believes that the infrastructure modernisation focus will help increase the railway competitiveness for freight transport transit. This will help railway transport attract a higher percentage of the volumes now shipped by sea between Asia and Europe, due to a more flexible tax policy, better information and management technologies, as well as intermodal operation development.
For example, UZ has been recently engaged in a programme elaborated for boosting the network’s capacity for services towards and from the Crimean Peninsula, but also the capacity of handling goods inside terminals.
UZ should invest an annual average exceeding UAH 4.4 Billion (EUR 575 Million) for replacing worn equipments. Other UAH 15 Billion (EUR 1.9 Billion) per year would be needed to rehabilitate and modernise the existing fleet of vehicles.
Transports
Ukraine is characterized as a transit country, covering most of the routes that connect Asia and Europe and especially controlling Europe’s connections with Russia, both inland transport and maritime transport. The country is crossed by important transport lines and gas and oil pipelines. Inside the country, the railway and road networks inherited from Soviet times are very dense but lack rehabilitation and modernisation. However, special attention has been lately given to the railways which benefited from various investment projects.
Ukrainian Railways (Ukrzaliznytsia-UZ) is a 100% state-owned company, the state controlling both infrastructure and train operation. UZ is a centralized company established in 1991 after the country became independent of USSR. It holds several undertakings that manufacture or repair railway equipments. UZ is divided into regional companies in several oblasts, such as Donetsk, Lvov, Odessa, Pridneprovskaya, South (Pivdenna), South-West (Pivdenno-Zahidna). The Black Sea access is managed by Odessa and Pridneprovskaya regionals. Railway transport in Ukraine connects the main urban areas, ports, industrial centres and neighbouring countries. The densest network of railways is in Donbas. Currently, UZ combines the activities of infrastructure manager and operator. The company monitors and manages regional rail activities and surveys operation and financial performances, but these are directly owned by the state and technically speaking they are not UZ’ subsidia-ries. Ukraine is one of those countries that strongly rely on railway transport. The overall length of the railways in Ukraine measures 22,473 km, 9,250 km of which are electrified. Today, Ukraine is crossed by three pan-European corridors, 3 (Brussels – Lvov – Kiev), 5 (Venice – Budapest -Uzhhorod – Lvov – Kiev) and 9 (Helsinki – St. Petersburg – Kiev – Ljubashevka – Chisinew – Bucharest – Alexandropolis with extension to Odessa).
International and local financing means have helped Ukraine support a series of investment projects and in 2009, Ukrzaliznytsya approved a new investment programme worth USD 2 Billion, a programme that will carry on the technical modernisation of the railways over the next years. The main priority remains rolling stock renewal, passenger coaches, locomotives and electric units. The modernisation of the infrastructure is very important for enabling higher speeds, plus additional electrification to reduce the fossil fuels dependency of the transport sector.
The country’s geographical position provides major advantages as essential transit route between Western Europe and Central Europe, Russia and other countries within the Commonwealth of Independent States (CIS). As for the volume of freight shipped by railways, in 2007, Ukraine ranked fourth on the Eurasian market, after China, Russia and India. Once the economic recession began to make its presence felt in the Ukrainian freight transport as well, the traffic dropped and…
…figures began to fall
Even if the first year of international economic crisis has not significantly affected transportation in Ukraine, 2009 has seriously hit the transport shares below the 2008 level when losses in transports were minimal, with drops only to the end of the year, writes RZD Partner International. In 2009, the situation became worse, the railways, which, as we have already said before, represent the foundation of transport potential in Ukraine, carrying 25% less than in 2008 and 50% less than before the economic downturn. Transit capacity in ports, where most cargo transports are made by railways, also decreased. Naval transport has also been affected, road transport, on the contrary, has succeeded in maintaining a quarter of the cargo volume in Ukraine due to greater flexibility.
With an increasing demand both for freight and passenger transport and due to the necessity of providing services of improved quality, infrastructure and rolling stock modernisation are renewal procedures that should be rapidly implemented after many years of no investments, more precisely in the past 16 years.
Surprisingly, it was not the lack of orders for international freight transport that caused the drop in figures, but higher freight transport tariffs, especially because of the recession and Russia’s policy of redirecting cargo volumes towards ports. The result? The railway transport network became extremely expensive once transit tariffs were established at the equivalent of the American dollar. Port tariffs also increased by 30-40% compared to 2008. In 2009, Russian transit via the Ukrainian network dropped by 1/3. The volume of crude steel carried through Ukraine also dropped by half. Moreover, because of the non-competitive tariff policy, the traffic volume from Kazakhstan has been significantly reduced. However, in order to maintain transit volumes, the Ukrainian Railways decided by end-2009 to reduce the charges for the goods shipped through ports, but specialists believe the measure came too late. Consequently, in 2009, UZ lost around 24 tonnes of freight with revenues of just USD 5 Billion at the end of the year, 10% of which went to credits. The Government in Kiev has decided to freeze railway transport tariffs, boost fiscal pressure on UZ and stop all investment plans. Among them, the renewal of the rolling stock and port infrastructure development. UZ’ s current poor position on the market, together with the unstable political position in the past two years put an end to the cooperation with the European Bank for Reconstruction and Development (EBRD) which stopped the loan previously allocated for the acquisition of the 1,400 freight transport wagons.
Ukraine is waiting for investors
According to World Bank, Ukraine is a country with low middle-income, with a GDP per capita of USD 3,210, but with high economic potential due to specialized work force, access to resources and strategic location.
During 2000-2007, Ukraine had an economic growth of around 7% as annual average. However, Ukraine is still characterized by incoherent macro-economic policy and small control of the fiscal and monetary regime. Ukraine is the only country in Europe described by the World Bank as having a difficult situation in the ease of doing business. The Doing Business Classification is based on three indicators: easy, moderate and difficult. Thus in the 2009/2010 classification, Ukraine holds the 142 position of 183 countries monitored, with a slight increase of four positions compared to 2009. The Starting in business indicators are also low (the 134th position, 8 positions lower than last year) and so is the Dealing with Constructions Permits (181), Paying taxes (181), Trading across borders (139) or Closing a business (145).Ukraine holds the best position in Getting credit (30) slightly lower than last year. Nevertheless, Ukraine is one of the best reformers in the last year in Protecting Investors: the 109th position, but 34 positions better than last year’s 143th position. Ukraine imports most of its energy sources, especially oil and natural gas and is mostly dependent of Russia as energy supplier. While 25% of the natural gases in Ukraine come from internal sources, almost 35% come from Russia and the remaining 40% from Central Asia, through transit routes controlled by Russia. At the same time, 85% of the Russian gas is delivered to Western Europe through Ukraine.
The Ukrainian Railways most profitable action would be shifting to a public corporation and its division into three independent companies that would operate freight, passenger and suburban traffic. It is also necessary to create a regulatory body independent of the resort ministry. Once these institutional changes take place, railway competition could also be introduced and the interest of private operators will no longer be awaited.
by Elena Ilie
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