BRDO research: how to start Ukrzaliznytsia’s unbundling

The railway is one of the most popular methods of cargo transportation. The share of cargo turnover by rail is 75%. But in recent years, rail transport has lost its capacity and rapidly declined.

While being a dominant player in the market for the provision of wagons for use within Ukraine and a supervisory entity that monitors the compliance with requirements of regulatory acts to guarantee traffic safety in railway transport, their classification, accounting, and analysis, the JSC “Ukrzaliznytsia” acts as a monopolist in the market of cargo transportation by rail. That is, in practice, the JSC “Ukrzaliznytsia” provides services in the market and has the powers of a technical policy regulator, ie it controls itself.

Accordingly, there is no competition and impartial control in the market, and things will never be better without systemic changes. 

For example, in 2021, the cargo turnover of the JSC “UZ” amounted to 180.6 billion tkm. This is only 2.6% more than in the epidemic 2020 year and 1.1% less than in 2019. In contrast, the increase in cargo turnover of road transport is 10.5% compared to 2020. Additionally, compared to 2021, the volume of goods transported by road increased by 16.2%, while it is only increased by 2.9% for railways.

BRDO experts analyzed the freight wagon market, identified its key problems, and outlined possible solutions. The results of the study are available in the Green Paper “Unbundling of the JSC “Ukrzaliznytsia”: liberalization of the freight wagon market”.

What is the problem?

A poor situation in the railway sector is primarily due to the low level of renewal and restoration of fixed assets through their repair and maintenance. Over the past 5 years, the fleet of wagons owned by the JSC “UZ” has not changed too much: its average deterioration level remains critical — 90%. 

73.3 thousand wagons (70%) have exceeded their specified service life, 18.4 thousand — have been used for one and a half terms of their specified service life and should be removed from service for traffic safety reasons. 39,000 wagons, or one in three, should be removed from service by 2025.

According to experts, Ukraine’s railway transport needs to move to a market-based organizational structure that is vertically integrated by main activities. Currently, we have an inefficient and super-monopolized company engaged in all types of activity in the market.

The regulatory framework to reform the market and prepare the company for the launch of a competitive railway market has been already developed — it is set out in the Government’s plans adopted on the basis of decrees of the President of Ukraine and the National Transport Strategy of Ukraine. However, as of the end of 2021, no measure has been taken. 

How to solve market problems?

BRDO experts propose, in particular, the following steps:

  1. Ensuring proper implementation of measures provided for in the Government’s plans for the implementation of the National Transport Strategy of Ukraine 2030 and the Association Agreement by the JSC “UZ” the Ministry of Infrastructure of Ukraine.
  2. Providing the unbundling of the JSC “UZ” within the deadlines set by the National Transport Strategy of Ukraine 2030, Government programs, and plans. This step will allow to significantly improve the manageability of newly formed business entities within corporate governance procedures, reduce corruption risks and increase compliance with legislation on the protection of economic competition.
  3. Identifying freight wagons operators of the JSC “UZ” as separate legal entities. This step will allow to remove them from the natural monopoly’s influence and ensure fair competition between them and private rolling stock operators.
  4. Separating organizational and financial functions of the infrastructure operator, cargo and passenger carriers, traction rolling stock operators.
  5. Introducing Government target programmes for rolling stock replacement.
  6. Ensuring the development and timely approval of regulatory acts on the traffic safety management within the public railway system, which is mandatory for all transportation process participants, set out in the Government’s plans for the implementation of the National Transport Strategy of Ukraine 2030 and the Association Agreement.

BRDO is launching a public consultation to develop effective solutions in the sector, taking into account the views of all stakeholders. Please fill out the online form.