Editor’s Note: Our 2019 Doing Business in Ukraine magazine is out. Get a PDF version online or pick up a copy in Kyiv.
Ukraine’s state-owned railroad monopoly Ukrzaliznytsia is among the most heavily criticized enterprises in Ukraine.
The company faces multiple challenges — an obsolete and inefficient fleet, causing severe financial losses most notably to agrarians who are forced to wait days for their products to be transported, a bloated workforce employing over 260,000 people, while the company is struggling to break even due to below-market prices both for passengers and freight transportation, which primarily benefits producers of steel, coal, and ferroalloy, thus, oligarchs.
Andriy Ryazantsev, Ukrzaliznytsia’s financial director, in September, told the media that the state-owned company needs around Hr 1 trillion ($37 billion) and 30 years’ time, to solve all existing problems.
“The services provided by Ukrzaliznytsia do not satisfy either goods suppliers or passengers,” said Infrastructure Minister Volodymyr Omelyan, in a comment to Kyiv Post back in November.
He estimated that over 90 percent of the rail company’s assets are obsolete, with cargo train depreciation reaching 98 percent. Yevhen Kravtsov, head of Ukrzaliznytsia, told the Kyiv Post that the depreciation is a direct cause of the company’s lack of funds due to below-market prices.
Not willing to wait 30 years, the Kyiv Post looks at three European examples of a successful railroad policy — German state-owned monopoly, Polish steady modernization and the privatization of the British rail.
German monopoly
Germany’s railroad system is the obvious choice when comparing to Ukraine. Germany has 33,331 kilometers of tracks, making it Europe’s largest railroad network. Ukraine’s line is the second-longest with slightly more than 28,000 kilometers of tracks.
The second similarity is that Germany has a state-owned railroad monopolist — Deutsche Bahn (DB) — responsible for over 65 percent of all passenger and cargo transportation in the country, carrying over 2.5 billion passengers by train and carrying 255 million tons of goods through rail freight transportation in 2018. Ukraine’s freight transportation accounts for over 322 million tons in 2018.
The company’s net income in 2018 was 542 million euros, making it the largest European rail company in terms of passenger volume and net income.
DB’s success was guaranteed by market prices for passenger and cargo transportation, as well as the government’s financial support.
The German federal government declared an intention to invest over $12 billion in 2018, to repair 1,500 kilometers of tracks and to ensure better service quality on German railroads.
According to Anders Aslund, economist and member of Ukrzaliznytsia’s supervisory board, the biggest problem of Ukrzaliznytsia is the pricing policy set by the government. Passenger prices are below the market.
“The cargo transportation covers the losses of passenger traffic,” said Aslund, adding that without market prices the company can’t generate profit.
“Economically, for Ukrzaliznytsia it makes sense not to perform passenger transportation at all,” says Kravtsov, adding that the company lost Hr 12 billion ($450 million) with the pricing policy.
DB is also decentralized, having separate subsidiaries operating regional passenger traffic, nationwide traffic, cargo transportation and maintaining infrastructure, allowing the company to be more efficient.
According to Kravtsov, Ukrzaliznytsia is planning a similar model by creating a separate UZ Cargo subsidiary later this year.
Additionally, in Germany, private companies are permitted, ensuring competition, something that the Ukrainian business community had been advocating for years. But Ukrzaliznytsia is hesitant to allow private players into the market any time soon.
“We still have four years to implement European directives and allow private companies,” says Kravtsov. He added that Ukrzaliznytsia’s monopoly should be maintained to have time to renew its train park and be competitive.
Mykola Gorbachev, head of the Ukrainian Grain Association, told the Kyiv Post that since private companies aren’t permitted on Ukrainian railroads, some grain storage facilities have to wait nearly a month for their grain to be shipped by Ukrzaliznytsia. “We gathered only 70 percent of the corn (in 2018) because there was nowhere to store it,” Gorbachev said in November.
Yevhen Kravtsov, head of Ukraine’s state-owned railway monopoly Ukrzaliznytsia, is against allowing private locomotives on Ukraine’s railroads.
Polish modernization
Poland and its state-owned railroad company PKP Group faced similar problems — a depreciation of locomotives and wagons, worn-out infrastructure and Soviet-type price regulation.
The government began by decentralizing the company, creating separate subsidiaries for long-distance travel, freight transport, and track maintenance.
Further deregulation followed, with the government allowing private companies and introducing market prices. In 2018, around 50 percent of passengers used PKP, while the company’s main competition comes from Deutsche Bahn and regional railroad companies owned by local governments.
Even though PKP transports fewer passengers and cargo than Ukrzaliznytsia, PKP is making substantial profits ($124 million net profit in 2018), while Ukraine’s monopoly is struggling to break even ($8 million net profit in 2018).
This is due to Ukrainian cargo fares being among the lowest in Europe, up to 10 times cheaper than in neighboring Poland. While Poland has a flat rate for all freight passing through the country’s railways, Ukraine divides commodities into groups, with those owned by oligarchs, such as coal and ferroalloy, usually transported substantially cheaper.
Additionally, PKP employs three times fewer people than Ukrzaliznytsia. According to Kravtsov, maintaining old assets, such as locomotives and wagons, requires more personnel.
While Kravtsov agreed that Ukrzaliznytsia employs too many people, he refused to say how many people should be laid off.
Nonetheless, PKP still receives government compensation for below-market prices on some routes, as well as for social prices for retirees and children. PKP in a 10-year span has received around $1 billion in price co-financing from the government.
Both the state and the European Union have also financed projects to renovate train stations and to electrify tracks, allowing modern locomotives to enter the country.
British privatization
A number of Ukrainian experts called for the unbundling and privatization of Ukrzaliznytsia, citing that the business is more efficiently run by private companies. While the scenario is unlikely, there are examples of a privatized railroad network.
According to the 1993 British Railways Act, the state-owned monopolist was fractured and privatized. The procedure was one of the final steps of a large privatization wave initiated by Prime Minister Margaret Thatcher.
Today, the state controls the tracks, stations, and other assets, while leasing transportation rights to private companies for a fixed sum. The long-term advantages are the substantial increase in passenger volume and a rapid modernization due to private direct investments.
Yet, the system has its downsides, with train tickets in the UK being among the most expensive, the government still investing billions in the renovation of tracks and services, while the public dissatisfaction of the current railroad system being so high, politicians speculate on the topic prior to elections.
Another point worth mentioning is that the privatization did not increase competition as franchises most often monopolize a certain direction, sometimes having a single competitor. Last, most British rail companies are owned by large European monopolists — Nederlandse Spoorwegen, a Dutch state-owned monopoly, and DB owns the largest UK bus and train companies, while DB’s subsidiary DB Cargo UK is the largest freight company in Britain.
Looking ahead
The Ukrainian government, on June 12, approved a new railway strategy up until 2023. According to Kravtsov, the strategy is meant to ensure modernization, financial stability and draw investments by ensuring efficient rates and rationalizing the company’s assets — centralizing the company’s governance, while dividing the freight and passenger transportation into separate entities.
This is not the first time similar claims have been made by Ukrzaliznytsia. However, with reforms overdue, the roadmap for a successful railroad strategy is set by European regulations — ensuring market prices for passenger and cargo transportation, permitting private carriers and modernizing infrastructure by financing the renovation of stations and tracks.
