Ukrzaliznytsya, the nation’s railway company and fourth biggest revenue-maker, is undergoing major changes aimed at acquiring faster trains, as well as providing passengers with more comfortable and more modern amenities such as Wi-Fi Internet for the journey.
The state-owned company, which runs the world’s 14th longest track of 22,000 kilometers, is surrendering its regulatory power to the Infrastructure Ministry, according to a June 25 decree. Starting from 2015 it will be no more than a business entity without the right to set tariffs.
While popular, the railway company is also known for poor comfort, late arrivals and old Soviet locomotives. While inconvenient for passengers, such slow and unreliable service is a major detriment for businesses delivering cargo.
Ukrzaliznytsya remains a hard-to-manage, bureaucratic structure in need of simplification and separation of its various functions, said Infrastructure Minister Maksym Burbak.
Ukrzaliznytsya’s urgent need for expensive modernization – estimated by deputy head Maksym Blank at $20 billion — can’t be covered without the support of the World Bank and European Bank for Reconstruction and Development.
In April, railway company’s corporate accounts were transferred to the state-owned Oshchadbank from the minor Express Bank to keep profits in the state budget.
One problem to overcome is that Ukrzaliznytsya is seen by politicians as an instrument of social support, not a business. Government has been subsidizing the railway giant to keep fares below the market rate.
As a natural monopoly, Ukrzaliznytsya controls 100 percent of the track in a country. The railways’ share of freight transportation reaches 60 percent, while the stake in transporting passengers is around 33 percent.
Oleksandr Parashchiy, an analyst for Concorde Capital investment house, thinks that the Ukrainian government is not an effective manager. However, Ukrzaliznytsya’s Blank said that “it’s too early to talk about privatization” except for some divisions “that might become stand-alone private companies.”
The company is considering raising private capital through offering shares on the stock exchange. Given Prime Minister Arseniy Yatsenyuk’s backing of the Ukrainian stock market, a free-floating package of Ukrzaliznytsya’s shares may find itself on the local equity trading platform.
“They should not privatize track and railway stations, while service centers and train operators could go into private hands,” thinks Oleksandr Paskhaver, who has given economic advice to former Ukrainian presidents Leonid Kuchma and Viktor Yushchenko. “However, the government should keep the majority stake in Ukrzaliznytsya.”
Ukraine should consider introducing a U.S.-type railway ownership model of competition among several track owners who are also train operators, says Russell Pittman, the U.S. Department of Justice’s expert on monopoly issues. But Ukrzaliznytsya is more attracted to the German model of a single track owner which is also one of several train operating companies.
Private companies can run their trains on Ukrzaliznytsya’s railways already. Billionaire Rinat Akhmetov’s Lemtrans is the biggest among them. “I would like to bring more private train operators to the market,” Blank said. “But freight carrying is declining along with declining gross domestic product.”
Russia has turned several transportation units of the local railway monopoly into privately owned companies. However, transportation industry analyst Oleksandr Kava criticized the Russian model because it transferred the most profitable units to the private sector.
“Let’s take Estonia. The Estonian government privatized the railway but then had to nationalize it and pay a substantially higher price to buy it back,” he added.
Meanwhile, Ukraine’s state-owned railway operator plans to lay off 5 percent of its 350,000 workforce under an austerity policy aimed at cutting corporate expenses by up to $120 million. The company’s last year net earnings were $66.3 million, 40 percent down from the previous year, while this year management expects $53.5 million in net income.
With the three companies out of the top four revenue generators belonging to the state, Ukraine is facing privatization dilemmas. Efficiency, not type of ownership, is what ultimately matters – and what will be Ukrzaliznytsya’s challenge for the future.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
