After the 15% cargo tariff increase in October 2017, the Ukrzaliznytsya this year decided to apply a practice of discreet increase. The state-owned corporation is raising its rates for cargo transportation by increasing the price of particular components of the tariff and extra services. There are a few new initiatives that are expected to lead to over UAH 20 billion in additional costs of cargo transportation for corporate clients alone. If the situation persists, metallurgical enterprises will be forced to shut down their investment programs, whereas grain traders will have to cut their procurement costs, while confectioners will have to revise their goods range.
How Ukrzaliznytsya is raising corporate rates
Ukrzaliznytsya, the state-owned monopolist in rail transportation raised its cargo transportation rate by 15% on 31 October 2017. At the time, the Ukrzaliznytsya’s decision caused businesses to object. According to the president of the Ukrainian metallurgist federation Serhiy Bilynky, this has resulted in additional costs for the dispatcher, amounting to some UAH 6.5 billion annually.
Now the state monopoly has decided to raise its rates discreetly. The first step in this direction was made through the so-called deregulation of the carriage component of the rate in February of this year. Its implementation has created an additional pressure on domestic businesses to the tune of UAH 6.5 billion. “Up until now, the carriages of the Ukrzaliznytsya’s inventory stock were cheaper than the carriages of private operators, which would often lead to competition. While the Ukrzaliznytsya carriages cost less than UAH 200, the market price of private carriages was as high as UAH 500. Intermediary companies were profiting from that difference, corruption was also present at the Ukrzaliznytsya itself, as everyone was obviously doing everything to obtain the cheaper carriages. While presenting the idea, the Ukrzaliznytsya announced that with the help of deregulation of the carriage component the company would overcome the negative obstacles, the market is going to be filled with an abundance of Ukrzaliznytsya’s carriages that would be adequately priced, causing the market price of carriages to drop by circa 10%. In practice, when the Ukrzaliznytsya raised its carriage price by UAH 542 on 19 February 2018, the market price rose to around UAH 1,000-1,200 very soon”, - Serhiy Bilenky told 112.ua.
Another round of rate increase occurred on 28 July – the Ukrzaliznytsya raised its price on carriages to UAH 600.
It should also be pointed out that over half of the entire inventory stock – 11,000 of them – are owned by the corporation itself (the stock includes 19,000 carriages).
Another aspect of Ukrzaliznytsya’s discreet rate increase is a change in the T-extra coefficient (providing for the fact that by the time a carriage is used, an extra daily rate is added to account for filing permits for the cargo), Bilenky says: “Ukrzaliznytsya has added another day even to the empty carriages. We consider this not just illogical, but also unlawful. Dispatchers are going to incur another UAH 1.2 billion per year as a result of this”.
Another round of rate increase coming in autumn?
Businesses are apparently worried by the draft decree of the Infrastructure Ministry “On making amendments to the coefficients applicable to the tariffs included in the Register of tariffs on cargo transportation by rail within Ukraine and to additional services regarding the unification of tariff policy on transportation of empty carriages”, according to which the rate increase is going to continue.
“The document provides for the equalization of different categories of cargo, just on deliveries of empty carriages so far”, - Bilenky explained. According to Bilenky, freights are divided into three classes: raw materials and semi-finished products (such as grain, timber, coke, etc. ), marginal products (rolled metal products, light oil products). The freights that were not classified (sand, road metal) were transported according to the cheapest rate. The rates were calculated by taking this differentiation into account – the higher the class of the freight, the more expensive it is to transport. “We have calculated that an equalizing of first-class freight and non-classified freights would bring about at least a 95% increase. That means it would double overnight. Overall, if this initiative proves successful, the rate increase for businesses will constitute another UAH 5 billion annually”, - the president of the metallurgist federation of Ukraine said.
Bilenky also does not rule out the possibility of the Ukrzaliznytsya reconsidering the direct transportation rate increase: “Inflation and devaluation will be blamed, as will the need for investment and the need to finance loans. Why should we cover all that for the monopoly that has the power to raise tariffs and prices of other services either directly or discreetly? Ukrzaliznytsya enjoys at least a 23% yield in its cargo transportation segment – there is no need to milk domestic corporations by increasing pressure on them”.
112.ua has submitted a request to the press service of the Ukrzaliznytsya, but as of the time of the publication, no response has been received.
Serious consequences for everyone
Ukrzaliznytsya's actions influence the interests of producers across many budget-creating industries.
The increase in rates for Ukrzaliznytsya carriages from 28 July has already caused a $3-4 rise in the transportation component per ton of grain. Grain traders are worried by the rise of the transportation component and are expecting the Ukrzaliznytsya to make further moves increasing the transportation rates – not necessarily through the indexation of tariffs, but rather by the methods of discreet raise. Such actions by the Ukrzaliznytsya will create more pressure on the domestic procurement cost, which may lead to: the lower the prices, the fewer funds agrarians will have for investment in the intensification of production, additional productivity”, - the president of the Grain Association of Ukraine Mykola Horbachyov told 112.ua.
The Ukrcondprom association has reported that due to the changes in the procedure of price-setting for the utilization of own carriages that are required for confectionery exports have become three times more expensive – from UAH 213.6 to UAH 684 per day. After the rise from 28 July the rates have increased by another 19.5% - to UAH 817.2 per day. Therefore, just in 5 months of the present year the carriage component of rail transportation cost has increased by over 4-fold, the association said.
Domestic producers are complaining that with these actions the Ukrzaliznytsya is taking, the monopoly is squeezing Ukrainian confectioners out of Central Asian markets that make up 25% of the total volume of exports. In the light of the fact that Russia has blocked transit for Ukrainian manufacturers, such actions by the state-owned monopoly are playing to its benefit, the chairman of the Ukrcondprom association Oleksandr Baldynyuk: “The goods have to be shipped across the Black Sea by ferries – the cost of transportation has grown 2.5-fold. We are trying to balance on the verge of profit-making in Central Asia. I have talked to executives at confectionery corporations and they are saying that they had to get rid of a few trade positions from their export structure even after the first rate increase (the carriage component)”.
"We are talking about general additional costs for industrial manufactures to the tune of UAH 20 billion. That money could have been invested in the so necessary to the modernization of production facilities, to the implementation of social and environmental projects. Now we have to give that money to the Ukrzaliznytsya. It will come as an advance payment with hopes for the positive changes in railroad operation that are, by the way, far less numerous than we would like there to be”, - Bilenky told 112.ua.
According to the cairman of the metallurgist federation of Ukraine, most businesses cannot exceed their retail prices: they are operating in extremely competitive markets. “Companies will keep lowering their profit margin, and once it becomes negative – they will shut down their factories. The volume of the most important of Ukraine’s exports positions have not significantly dropped yet, but if the situation remains unchanged, within a year we are going to see a substantial fall in the volume of exports, which means less foreign currency in revenue and, hence, an unstable exchange rate.
Another consequense of the rate increase may lay in the rise of coal prices for domestic households, says Bilenky: "This is going to lead to the increase in utility prices. Coal producers have already announced their transportation costs are going to go up by at least UAH 600 million a year".
According to Bilenky, professional associations have petitioned Prime Minister Volodymyr Groysman, Deputy Prime Minister Volodymyr Kistion, transportation and infrastructure minister Volodymyr Omelyan and the Acting Head of the Ukrzaliznytsya Yevhen Kravtsov to somehow influence the situation. But that has not produced any results yet: “Given that the Ukrzaliznytsya is the only monopoly in the fiekd of rail transportation, businesses insist on the establishment of an independent institution that will be setting the Ukrzaliznytsya’s rate policy and taking the interests of corporations and the state into consideration – the National commission for transport regulation. Until that institution is set up and running, it makes no sense to speak of any mandatory rate increases. There is only the monopolistic domination on the part of a state-owned corporation that may remain inefficient while working amid greenhouse conditions forever”.
Members of the U.S. Chamber of Commerce have also come forward to object to the increase of cargo transportation rates prior to the establishment of a National commission on transportation and to the introduction of a nationwide rate-setting model.