Ukrainian railways Ukrzaliznytsia might cause economic slowdown by raising tarifs

Author : Olena Holubeva

Source : 112 Ukraine

The state monopolist intends to automatically index tariffs on the industrial producer price index
09:20, 13 February 2019

Open source

Ukrainian railways Ukrzaliznytsia (UZ) intends to raise tariffs for rail transportation once again. The state monopolist intends to automatically index tariffs on the industrial producer price index. Over the past year, UZ has implemented several initiatives, which made logistics much more expensive. At the same time, the quality of services of the Ukrainian railways has not increased, the market participants assure. According to them, against the background of the transit war with Russia, the next unjustified increase in UZ tariffs would lead to a decrease in exports from Ukraine, a decrease in foreign exchange earnings and a significant slowdown in economic growth.

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A draft resolution of the Cabinet of Ministers appeared on the website of the Ministry of Infrastructure on February 1, which introduces a mechanism for the annual automatic indexation of tariffs for freight transportation at the level of the producer price index for industrial products. This means that the state monopolist Ukrzaliznytsya will be able to arbitrarily change the tariff rates upward, revising them quarterly. Previously, every next increase was approved by the Cabinet.

According to the press release on the UZ website, the adoption of the draft resolution on automatic price indexation will allow improving the quality of services provided. Despite the fact that lately, UZ has already implemented a lot of initiatives that have significantly increased the cost of logistics, the quality of services has not yet increased, market participants say. “With a standard of 250 km per day, we have anti-record, when a cargo rides for weeks those couple of hundred kilometers," said Mykola Gorbachov, President of the Ukrainian Grain Association.

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“Today, everyone is well aware of the main challenge – the lack of traction. At the same time, we see a failure to fulfill the plan for capital investments: in 2018 the level of fulfillment was 60%, in 2017 it reached 11, in 2016 it amounted to 69 %. Not even talking about the purchase of new locomotives, at least about the repair of existing ones," said Oleksandr Kryvoruchko, head of the Wagon Owners Association, in an interview with

Related: EBRD supports Ukraine’s efficient grain logistics

Impact on business and GDP

UZ had the opportunity to independently determine the rate for the use of cars. According to the Anti-Monopoly Committee of Ukraine (AMCU), the share of the state monopolist only in covered wagons (used to transport food products) reaches 78%. Given that the rate is determined by the formula, at least two of its components (profitability and discount) are determined by UZ independently. Thus, last year, the rate went up three times and increased six times from its original size, said the head of the Ukrkondprom railway association, Oleksandr Baldynyuk: "This actually kills food industry exports taking into account the transit war with Russia, which illegally blocks transit through its territory, thus closing Ukrainian products access to the markets of Central Asia."

According to Baldynyuk, Ukrainian manufacturers are forced to use alternative routes through the Black Sea and Caspian ferries, which is 2.5 times more expensive than transporting through Russia. "All these factors negatively affect the trade presence of Ukrainian products in the markets. Only confectionery exports have lost 60 thousand tons in four years."

Metallurgists do not support the initiative of automatic indexing. Ukraine’s Federation of Metallurgists states, if the initiative of UZ is approved, an additional increase in costs for industrial producers will be 428 million USD. At the end of last year, the index grew by 14,2%.

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Grain traders are opposing automatic indexation of tariffs on the industrial price index, as this will undermine the entire pricing system in the grain market, said President of the Ukrainian Grain Association Mykola Gorbachov. According to him, at least one-third of the whole grain is purchased under the forward contracts, that is, even before the crop is grown and harvested. "It is very important for us to plan and understand the costs of such logistics in September, October, November. Without knowing the exact size of tariffs, it is impossible to predict the price for the forward contracts. Thus, grain traders will put logistics risks into purchase prices, and this will lead to lower profitability in the production of grain," said Gorbachov.

Destruction of the monopoly is the answer

Experts and market participants indicate that despite the fact that UZ constantly increases the cost of the logistics components, increasing its cash receipts, it does not have time to use these funds.

"Cash balances is another odd figure, given the failure to implement the investment plan (the planned balance at the end of 2019 is about 142 million USD). There is no sense in keeping these funds in the company, they don’t work there. In fact, UZ withdraws the investment business itself but does not use it itself. Similarly in 2017: at the end of the year, account balances amounted to 185 million USD. In 2018, this figure was about 178 million USD," Kryvoruchko notes.

Related: Ukrzaliznytsia to launch 30 General Electric locomotives in 2019

The situation can be saved by the admission of private operators to the locomotive burden, which they now do not have. "A fair tariff will be formed only if there is competition, and this requires public-private partnership projects and the locomotive component liberalization. Only the market will be able to adjust the size of tariffs to a normal level of profitability that ensures profitability. In the US, there are three private railway operators and if you buy services from forwardly, you can get a significant discount," said Gorbachov.

The draft law "On Railway Transport," which provides for the liberalization of the railway transportation market, was registered in the parliament at the end of January. "The industry requires a new law of Ukraine "On railway transport" with the European industry management system and basic principles for the formation of a competitive model of the railway services market. Completion of the "first stage" of reform requires pragmatic and systematic work with a main focus on reforming the tariff system (changing the economic business model), admission of private traction (the beginning of the formation of a competitive market), and priority investments in infrastructure (the target goal of "Ukrzaliznytsia"). The law needs to update the monopolist’s responsibility for meeting delivery deadlines since it is a great issue today,” Kryvoruchko explains.

Related: Ukrzaliznytsia risks to lose $145-181 million until end of 2018

While the parliamentary decision is not made, the Ukrainian manufacturers urge UZ, the Ministry of Infrastructure, the Ministry of Economic Development and Trade, the Cabinet of Ministers, and all interested authorities to start a dialogue.

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