Existing problems in the railway transport operation require regulatory and administrative measures to be addressed

Basic components of the transportation process are infrastructure and locomotive traction services, and the provision of wagons for use.

BRDO experts published a study “Railway Freight Transportation” and are planning to publish “Unbundling of the JSC “Ukrzaliznytsia”: liberalization of the freight car market”.

The study found that:

Each year, the JSC “Ukrzaliznytsia” (UZ) systematically fails to meet the portfolio performance of capital investments in fixed assets approved by shareholders. In 2020, compared to 2012, total capital investments in the replacement of fixed assets decreased by 32% (-UAH 3.9 billion), and almost by 5 times in dollar terms. In general, only 64.7% of the capital investment plan has been implemented, and UAH 29.4 billion (USD 1.2 billion) has not been used over the past 5 years.

Only 65.1% of the plan for rolling stock replacement and modernization, which is crucial for the sector performance, has been implemented, and about UAH 13 billion has not been used.

Only 65% (-UAH 29 billion) of the financing sources of capital investments determined by the Government (in particular, 74% of shareholder’s equity (depreciation) (-UAH 17 billion) and 30% of third-party funds (-UAH 12 billion) were used in 2016-2020.

The results of such harmful sector management in 2016-2020 are:

1) A fleet of locomotives in operation was reduced by 1.8 times, hundreds of locomotives were dismantled for parts, spoiled, and damaged beyond repair. The company suffered tens of billions of hryvnias in losses.

Under the requirements of current regulations, about 60% of locomotives in operation are technically unsuitable to be operated due to a threat to traffic safety. To repair them, it is necessary to spend UAH 8.2 billion in 2021, but the plan envisages only UAH 1.0 billion. 

2) Only 36.7 thousand units (or 35%) of the inventory fleet of freight cars owned by the JSC “UZ” that amounted to 105.4 thousand units in 2020 were constantly in operation, while other freight cars are not suitable for operation.

3) A passenger rolling stock fleet was reduced by 20-30%. Currently, 41% of the operational passenger rolling stock fleet needs various types of repairs that have been delayed. 61% of unserviceable electric trains and almost all diesel trains are operated while endangering passengers and train crews.

4) In recent years, 400 km of main tracks and 1,800 km of station tracks, as well as 2,500 of track switches, have been closed due to the impossibility of their operation.

31.8 thousand speed limits for trains (on average one speed limit per 1 km) have been set.

Currently, more than 11,000 km of railways lines, or every third kilometer operated, need major repairs and reconstruction. For 9 months[1] in 2021, the length of main tracks that need major repairs and reconstruction increased by 626.8 km (+ 6.85%) compared to 2020 (from 9,145.3 km to 9,772.1 km).

Summary data on the serviceability status and the need for repairs of main types of production assets demonstrate a situation close to catastrophic. The total cost of delayed repairs that can no longer be delayed is UAH 73.7 billion in current prices, which is equal to the annual income of the JSC “UZ”. 

The financial plan for 2021 provided UAH 4.23 billion for production asset repairs. This is UAH 1 billion less than in 2020 and UAH 10.3 billion less than urgent needs.

In our opinion:

A key factor in the deterioration of operating capabilities of the JSC “UZ” and the generation of risks of violation of legislation on protection of economic competition is a combination of activities carried out by one legal entity (business entity) in both monopoly and competitive market segments. This factor is multiplied by the fact that the JSC “UZ” is a natural monopoly (in terms of providing the railway transport infrastructure in use) and a supervisory (control, inspection) entity that monitors the compliance with requirements of regulatory acts to ensure traffic safety in railway transport.

Existing problems in the railway transport operation require the urgent implementation of certain regulatory and administrative measures to be addressed, specifically including but not limited to:

  1. 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 economic competition.
  2. The identification of freight car operators of the JSC “UZ” as separate legal entities. This step will allow removing them from the natural monopoly’s influence and ensuring fair competition between them and private rolling stock operators.
  3. The separation of organizational and financial functions of the infrastructure operator, freight and passenger carriers, traction rolling stock operators (including by approving separate financial plans by the Government, changing the current approach — the approval of a consolidated financial plan of the JSC “UZ”).
  4. The introduction of Government target programs for rolling stock replacement.
  5. Introducing an investment component in the tariff (as part of the infrastructure share in the transportation cost), ensuring transparency in setting the tariff for infrastructure services and the further use of funds exclusively for the maintenance and repair of infrastructure facilities.

ІСС Ukraine experts and transport commission members share the opinion of colleagues from the BRDO and will also try to make it visible to improve the situation in the railway sector.