In three months of 2022, the Ukrainian Railways transported 56 million tons of cargo. This is 18.5% less than in the corresponding period of 2021. On the eve of the war, Ukraine’s railway market grew, but now its volume is declining. In order for the successful development of our country’s transport system, as well as for its future to be “green”, it is important to correct this dynamic. Andrii Bukovskyi, an expert of the Infrastructure Sector of the BRDO, talks in more detail about the national freight market and its synchronisation with the requirements of the European Green Deal.
BRDO experts have been researching the domestic market for freight services for several years in a row. Today, given the wartime and further reconstruction of the country, we have prepared a new analytical review. It presents statistical indicators of the industry and contains proposals for the resumption of work in this area, taking into account the “green” requirements of modern times. Their need is dictated by the further European integration of Ukraine and the implementation of state environmental policy, which will synchronise the national sphere of freight with the European Green Deal (EGD).
The most dependent on the transport industry are agriculture, metallurgical production, coal industry, mining and metallurgical and defence complexes. Due to the geographical features of Ukraine and the structure of the real sector of the economy, especially export-oriented segments, railway transport is a key part of the entire freight transport and logistics complex of our country.
How did the war affect rail freight?
In January 2022, the volume of traffic provided by Ukrzaliznytsia increased significantly (transit, in particular, increased by 38.8% compared to January 2021), but with the beginning of Russia’s war against Ukraine it decreased. Domestic transportation (mostly of grain and iron ore), as well as imports and transit, fell by almost a quarter. Russia’s aggression has done the least damage to export rail transport via Western rail freight crossings, reducing it by only 10%.
The sphere of export transportation is currently characterised by several factors. First, since the beginning of the war, all railway crossings to Russia and Belarus have been closed. Secondly, there are 10 checkpoints with EU countries: 4 with Poland, 2 with Slovakia, 2 with Romania, and 2 with Hungary. Third, as in pre-war times, in the western direction, this type of transportation inhibits the need to move from the Ukrainian to the European track. Due to the related technical difficulties at the busiest railway crossings – in Izov, Chop, and Uzhgorod – carriers have to stand in line for 20 days.
In terms of cargo most affected by the war is transportation of building materials, the least is coal transportation.
Was the freight market in Ukraine “green” before the war?
Over the last ten years, the volume of cargo transported by all modes of transport ranged from 600 to almost 812 million tons, reaching a maximum in 2011, a minimum in 2020, and ending 2021 at 619.9 million tons.
The undisputed leaders were rail and road transport. At the same time, motor transport showed a steady increase from 140 million in 2009 to a record 244 in 2019, and rail in this period was steadily moving towards the anti-record, carrying 312.9 million tons in 2019 and only 305.5 million in 2020. As of the end of 2019, the market shares of freight traffic were distributed as follows: 36% were carried out by car, 46% by rail (historical minimum).
Analyses of the freight market in terms of determining the volume of transport services indicated a significant change in market shares. This is especially true in the case of market segmentation in terms of specifications of each mode of transport cargo.
The corresponding trend has developed in the dynamics of changes in market shares of modes of transport, in particular without much change: aviation – less than 0.02% annually, water – about 1% annually, pipeline – from 22% in 2009 to 16.7% in 2019 .
According to the State Statistics Service of Ukraine, transport companies in 2021 compared to 2020 increased freight traffic by 3.3% to 619.9 million tons. At the same time, rail traffic increased by 2.9% to 314.3 million tons, automobile by 16.2% to 222.6 million tons, pipeline decreased by 20.4% to 77.6 million tons.
In 2021, the shares of modes of transport in the total volume of transported goods were distributed as follows: rail – 51%, road – 32%, water – 1%, pipeline – 16%, aviation – 0.02%.
Since each mode of transport usually served the relevant sectors of the economy, such sharp changes in market shares may indicate the formation of negative factors for the development of the national economy, which in turn may adversely affect the transport industry due to overloading roads.
In summary, in recent years motor transport has increased its market share by half (+57%), water, on the contrary, lost almost half (-44%), a significant decrease occurred in the railway (-8%).
Based on the above, we can draw an intermediate conclusion: in the last ten years, motor transport has been quite successful in its expansion to the freight market of Ukraine, while its competitors are weakening their positions. This trend is extremely threatening, as in terms of Ukraine’s tasks and commitments in the EGD vector, rail and water transport need to increase their market shares. Unfortunately, this is not the case.
The average distance of transportation by rail is more than 500 km, and by road more than 200 km. It is worth noting that for rail transport this figure is growing every year, and for road transport is declining: in 2009 501 km and 242 km, in 2019 581 km and 200 km, in 2021 574 km and 209 km respectively. Indicators of water transport (2009 – 809 km, 2019 – 555 km, 2021 – 556 km) can be used as a benchmark, but its very small share has little effect on the activities of current transport “heavyweights”.
The change in this indicator confirms the implementation of a scenario that is negative for the national economy and its environmental aspects:
- railway transport reduces its participation in short segments of logistics chains, while it is actively replaced by road transport;
- in motor transportations, the load (specific weight) of one conventional vehicle increases, which, taking into account the peculiarities of the national transportation market, can be interpreted as increasing the load on the axle – that is, the well-known factor of “destruction” of roads.
Grain transportation: how have the market shares of different modes of transport changed recently?
In January this year, BRDO experts have already published an analysis of the national grain transportation market. In 2021-2022, Ukraine harvested the largest harvest of cereals and legumes during the years of independence. The entire harvest of cereals and legumes forms a freight base for transport companies – road, rail, river and sea. And the greater the grain harvest, the greater the volume of its domestic traffic. At the same time, transport companies also transport foreign grain and legumes in transit through Ukraine and import grain to domestic consumers.
Road, rail, sea, and river transport interact closely during the transportation of cereals and legumes. The vast majority of crops grown in Ukraine are exported to various countries around the world through seaports. Grain is usually delivered to seaports by rail, road, and river.
According to Ukrzaliznytsia, 21.2 million tons of grain were transported by rail in July-December 2019, 19.3 million tons in the same period in 2020, 20.8 million tons in 2021. Given the record grain harvest and of legumes in 2021-2022, Ukrzaliznytsia should also significantly increase the volume of grain transportation, but the actual figures do not show a sharp increase.
At the same time, there is a significant increase in grain transportation for export by road and river transport. It is logical to assume that the leader in the transportation of grain and legumes in Ukraine is road transport, which transports grain from fields to elevators, railway stations and access tracks of stations, seaports, processing plants, and other points. Most of the grain is delivered to the places of loading on the railway (railway stations, access tracks of stations) by road and then the railway carries out their transportation for export to seaports.
Unfortunately, there is no complete and reliable information on the volume of transportation of grain and legumes by road, as most of such transportation is not made out by consignment notes, or made out with underestimation of the weight of the cargo. However, objectively, road transport transports the most grain, as it participates in all logistics chains.
This trend requires more in-depth research to determine the competitive position and prospects for the development of each type of freight. This is especially important given the need to adapt the Ukrainian freight market to the requirements of the EGD to increase multimodal and intermodal freight.
Multimodal and intermodal transport have some differences, despite the similarity of characteristics. The common features of these methods of transportation include the use of several subtypes of vehicles.
In this case, intermodal transport is the gradual transportation of goods by two (or more) modes of transport (usually with the use of special containers or packaging). The goods are not reloaded during the change of transport. Such delivery can take place by different means of transport, the client can, if necessary, involve two or three companies at once. It is possible to use different types of transport with the issuance of several invoices, and the responsibility for the safety of the goods and the timeliness of delivery is distributed among the transporters.
The peculiarity of multimodal transportation is the presence of one carrier responsible for the cargo during the entire transportation, and a single invoice. Multimodal delivery is carried out with the use of one tariff rate on the entire route of transportation. Conditions and procedure for organising multimodal transportation with the participation of railway transport are determined by the Law of Ukraine “On multimodal transportation”.
The railway is the future of “green” freight
In recent years, international environmental experts have placed great hopes on rail transport. The International Energy Agency (IEA) recently released its 2019 report, “The Future of Railways. Opportunities for energy and the environment”. A thorough study describes the modern landscape, the parameters of which determine the future of the railways, and also presents two scenarios for the development of this transport industry until 2050.
To make the IEA report available to the public, Andrii Bukovskyi and Victoria Yanovska, Head of the Center for Railway Transport Research, prepared a Ukrainian-language review of the document.
The report notes the rapid growth in global demand for transport due to social and economic progress and the corresponding increase in demand for energy, CO2 emissions and air pollutants, but rail transport is recognised as one of the most energy efficient modes of transport.
The study notes that in the world as a whole, the transport sector accounts for almost 1/3 of final energy demand, about 2/3 of oil demand and more than 1/4 of global carbon dioxide (CO2) emissions from fuel combustion. At the same time, if the current trends continue, it is projected that by 2050 the volume of passenger and freight traffic will more than double, and thus, energy needs will increase and the environmental impact of the industry on the environment will increase. That is why changes in the transport sector are essential to achieve energy transitions on a global scale.
Rail transport is one of the most energy efficient modes of transport for freight and passenger transport. Railways provide transportation of 7% of cargo and 8% of world passengers. At the same time, the railway sector accounts for only 2% of the energy consumed by transport in general.
Rail transport is more energy efficient than road and air transport (on average 12 times, in terms of final energy per passenger, 8 times per ton of cargo). The railway has the ability to ensure mobility with minimal emissions of harmful air pollutants and due to the effect of agglomeration promotes sustainable economic growth.
According to the legislation of Ukraine, railway transport is designed to meet the needs of social production and the population of the country in domestic and international traffic and provide other transport services to all consumers without restrictions.
This appointment has not been fully implemented for the last 3 years. Railway transport, which accounts for 75% of freight turnover (excluding pipeline) and 30% of passenger turnover, systematically loses its transport capacity and rapidly degrades, posing a real threat to the national economy, social stability and defense capabilities.
Already today there is an incomplete satisfaction of the needs of the economy in rail freight, as evidenced, in particular, by the analysis of changes in GDP and freight turnover. The previously stable correlation of these indicators over the last 3 years has been sharply broken and turned into a steady divergence (such a kind of “scissors”: GDP – up, turnover – down).
In 2021, Ukraine’s GDP grew by 3.2%. Also, our country has the highest dollar GDP in history – almost $ 200 billion. This was announced by the First Deputy Prime Minister – Minister of Economy Yulia Svyrydenko during a meeting with companies of the European Business Association.
At the same time, the freight turnover of railway transport lags behind the dynamics of GDP every year, currently the gap reaches about 18 percentage points and indicates the formation of a threatening trend for the national economy.
State policy: how to promote the development of rail freight?
State policy is already promoting the development of rail freight, taking into account the EPC. In addition to two aspects: it is necessary to ensure strict control over the implementation of market plans and strategies by market participants, and for irresponsible leaders – to draw appropriate conclusions in favor of the state.
BRDO experts are convinced that the fragmentation of Ukrzaliznytsia JSC will contribute to the solution of this problem, as well as many others, which were set during the formation of a legal entity that is too multicomponent in terms of activities. Unbundling and formation of the holding structure of the carrier should take place through the formation of separate business entities, formed taking into account the peculiarities of certain activities and the degree of competitiveness (monopoly) of the relevant market segment.
Currently, all necessary measures to restructure Ukrzaliznytsia JSC in accordance with EU legislation have already been reflected in the plans of the Ukrainian Government adopted on the basis of decrees of the President of Ukraine and the National Transport Strategy of Ukraine (NTSU-2030). According to these documents, the separation of the functions of infrastructure management and transportation, preparation of the company for the launch of a competitive market for rail transport in Ukraine should take place soon.
What practical recommendations do we offer?
What steps of UZ JSC and the Government (as the sole shareholder) can provide a quick, adequate and sufficiently effective response to the challenges that arise at the intersection of urgent and strategic tasks of the country’s functioning? At what point can the vectors of the EPC, plans for the implementation of NTSU-2030 and the Association Agreement between Ukraine and the EU, and on the other hand the vectors arising from changes in global logistics chains, the need for rapid recovery of Ukraine’s economy and intentions many countries to help in this? International business is interested in investing in Ukraine, but consistently refuses to invest in the amorphous, unstructured and almost unmanaged business structure of the domestic railway.
The answers to these questions are already being voiced by the state – it is “the creation of the holding structure of Ukrzaliznytsia (JSC UZ) on a functional basis.” The structure of the organization will include a business association for the provision of multimodal and intermodal services (including the widespread use of container and piggyback transport), formed on the basis of property and staff of the branch “Transport Service Center Liski” JSC “UZ” and to which potential interest many logistics operators, other investors and potential recovery donors.
The directions of railway transport development are discussed in more detail in previous studies of BRDO experts, in which we have already paid attention to the issue of unbundling Ukrzaliznytsia, analyzed the freight car market, identified its key problems and outlined possible solutions. The results of the study are available in the Green Paper “Unbundling of JSC” Ukrzaliznytsia: Liberalization of the freight car operation market “.
This publication was produced with the financial support of the European Union. Its contents are the sole responsibility of BRDO and do not necessarily reflect the views of the European Union.