"New ways" of Ukrzaliznytsia: Business wants to posses its own locomotives

Author : Olena Holubeva

Source : 112 Ukraine

The idea to eliminate the state monopoly in the field of freight traffic on the railway will soon be articulated the form of a bill
13:00, 25 April 2018

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The idea to eliminate the state monopoly in the field of freight traffic on the railway will soon be proposed to the parliament in the form of a bill. Some deputies, in particular, the head of the Transport Committee Yaroslav Dubnevych, intend to obtain permission for the businesses to have their own locomotives. The bill itself, which was developed in accordance with Ukraine’s obligations in terms of the Association with the EU, can be adopted this autumn.

The issue of admission of private companies to locomotive traction has been topical for a long time. This initiative has long been supported by the Minister of Transport and Infrastructure Volodymyr Omelyan. For several years he has been lobbying the influential "European Business Association" (EBA). "The Logistics Committee of the European Business Association for several years has been working on the issue of deregulation of the locomotive traction market, despite the fact that the car deregulation has been launched, and the businesses have purchased the cars, the turnover of these cars worsens due to the lack of locomotive traction," Yaryna Skorokhod, coordinator of the EBA Logistics Committee, said.

Related: Exports of agricultural goods from Ukraine reach $2.8 in January-February 2018

"Each year, Ukraine produces 80-83 million tons of grain and oilseeds, while the average annual exports reach 42-45 million tons of grain. Ukrzaliznytsia is now using its maximum of logistics capabilities. And the purchase of 32 Locomotives General Electric is unlikely to help improve the situation. About 160 locomotives currently stand on Odesa railway, and this is not enough to meet the current demand for transportation. In addition to Odesa railway, there are five more railways with the same number of locomotives," said Mykola Gorbachov, president of the Ukrainian Grain Association.

According to him, last year there were 14 thousand grain carriers at the disposal of grain traders, this year there are more than 18 thousand.

"By 2022, Ukraine could increase the harvest of grain and oilseeds to 100 million tons and export up to 70 million tons. This means a significant increase in the load on the railway, on the roads of which 70 percent of all exports of cereals and oilseeds (29-32 million tons in the year.) Of course, Ukrzaliznytsia is not ready for this," Andriy Ryazantsev, director of economics and finance at Ukrzaliznytsia, noted. However, asserts the growth rates of harvest volumes will be much less ... “ Over-production in the country might lead to an increase in unsold balances, drop in prices and bankruptcy of the entire agricultural industry! There is demand, and the possibilities to deliver grain to the buyer are limited," Gorbachov stressed.

Related: Three quarters of Ukrainians oppose abolition of moratorium on sale of agricultural land - poll

The metallurgists also claim problems with providing locomotive traction. "Because of the problems with the railway, Ukrainian metallurgical enterprises produced 1.5 million tons of steel last year, and the roots of the problem are related to the traction problems. It is more the problem of the turnover of wagons, which is associated with the timely supply of locomotives. Turnover decreased by 1.5 times," said the president of "Ukrmetallurgprom" association of enterprises Olexander Kalenkov.

There are supporters of the idea to allow locomotive business come to the Verkhovna Rada. First of all, this is the head of the Transport Committee Yaroslav Dubnevych. He, together with his brother Bogdan, is not a stranger to Ukrzaliznytsia.

Enterprises, connected with Dubnevych brothers, have repeatedly won tenders for the supply of materials for the construction of tracks, spare parts for wagons, locomotives, and electric locomotives.

Dubnevych told that on May 16 his committee plans to consider the draft law No. 7316 "On Railway Transport", which provides for the liberalization of locomotive traction. Ukraine has undertaken to introduce such a norm until 2023 when the Association is signed with the EU. "It is very important that Ukrzaliznytsia is opened and does not restrain the possibility of attracting private locomotive traction for cargo transportation," said Dubnevych

Related: Ukraine’s exports of agricultural goods to EU increase by 37% in 2017

According to him, the adoption of the draft law "On Railway Transport" will provide an opportunity for equal access of private investors to both cargo and passenger transportation. But the direction of passenger transportation of investors, most likely, will not be of interest. "With current tariffs, passenger transportation for the railway is unprofitable, and there are no means of compensation in the state budget," the head of the parliamentary committee explained.

Dubnevych expressed hope that the draft law could be adopted in the first reading in June-July, and in autumn it might be approved in general.

"The draft law "On Railway Transport" is very important, and market participants are interested in ensuring that the terms of the game are clearly set up in advance. We do not want all the changes to be reduced to the appearance of a private operator who would make his small monopoly instead of Ukrzaliznytsia," Olexander Kalenkov said.

Related: Ukraine, U.S. discuss modernization of locomotives for Ukrzaliznytsia

Yaroslav Dubnevych says that even before the adoption of the document, Ukrzaliznytsia might offer to implement some pilot projects. This issue, in particular, will be discussed on May 16 with the head of the Ukrzaliznytsia Yevgen Kravtsov. "They might even attract the investors to the pilot projects even without the adoption of the draft law "On Railway Transport." And we insist that private investors are attracted to the transportation of loose materials in the form of pilot projects (grain, for example - Ed.), " Dubnevych said.

"Ukrzaliznytsia has always been wary of the issue of admission of private traction because we do not have a very positive experience in the field of deregulation of cars. Ukrzaliznytsia currently has only 30-40% of the freight car market, but still, there is a deficit. As a national railway operator, we believe that there should be a transition period during which the state company will retain the priority right to operate locomotives," Kravtsov noted.

According to him, this will save financial income from the operation of traction. "In addition to economic, there are security issues. There are certain risks of accidents on the liberalized part of freight traffic. It is about the work of shunting stations. While such stations have a low speed, there are cases of very serious accidents; they took place in Ilyichevsk, in Chornomorsky ports," he said.

However, representatives of business with whom communicated, do not believe Kravtsov and claim that his words about supporting deregulation are false.

Related: Ukrzaliznytsia to buy new high-speed trains until 2020

"Kravtsov clearly said that he was against the deregulation of locomotive traction. He defended his position by the fact that according to the agreement signed with the EU, at least five more years for the implementation of the norm are needed. He says that passenger transportation is unprofitable for Ukrzaliznytsia, unlike freight one, so Ukrzaliznytsia does not want to give away those profitable part," says Gorbachov.

Railways are private in the US. In Europe, the railways are public, but private operators carry out transportation, they also provide locomotive traction services.

"The business is ready to work with Ukrzaliznytsia with its own locomotives in certain directions before the adoption of the draft law "On Railway Transport." They are already negotiating with Ukrzaliznytsia on this issue, but so far they are at the stage of calculating the risks. Market participants fully understand the warnings voiced by Ukrzaliznytsia, they are ready to discuss them and also do everything possible to eliminate all risks," said Yaryna Skorokhod.

Mining and metallurgical companies (MMC) are also ready to consider buying their own locomotives, Kalenkov asserts: "Ferrexpo, Metinvest think about such an opportunity, and other companies, to some extent or other, were also considering it.” The president of Ukrmetallurgprom assures that metallurgists are interested in liberalizing locomotive traction in moving on a clearly coordinated schedule from one point to another (from the cargo destination station to the nearest marshaling yard).

Related: Court cancels recovery of $55 million from Ukrzaliznytsia to Sberbank

Business representatives do not support an alternative option, which Kravtsov offers as a compromise. "We offer a mechanism for financial leasing for private companies, which are ready to finance the purchase of locomotives, but at the same time emphasize that Ukrzaliznytsia must remain the operator and owner of these locomotives," said the head of Ukrzaliznytsia.

"The companies-grain traders are ready to start investing in locomotives, since they are interested in increasing the volume of exports, but not on the terms that Ukrzaliznytsia insists on. Financial leasing is generally uninteresting. Only over the last 5 years, the hryvnia devalued by more than 200 %. How can you fix money or leasing obligations in hryvnia in this case? Settlements are possible only in the national currency. The new managers will come and say that they have not received anything, no locomotives, and therefore they do not have anything. There are no business trusts to the state-owned companies. We only talk, but no one hears us. The profit of Ukrzaliznytsia for some reason is considered to be of a higher priority than the profit of all other companies involved in the agricultural sector of the state (which can grow at times if the volume increases)," Gorbachov claimed.

Metallurgists are cautious about the idea of transferring locomotives to Ukrzaliznytsia on the terms of financial leasing includes. "Ukrzaliznytsia management says that it is ready to consider the scheme. Those locomotives that are acquired by shippers and transferred to Ukrzaliznytsia on financial leasing terms should be provided for them exclusively. The companies calculate this option, but there are not enough guarantees for them to agree. The companies are perfectly aware that if this scheme, which does not mean any profits for them. They say that they will not earn money and will not pay off investments in locomotives, but consider this option as one that could guarantee them the transportation of their cargoes," Kalenkov said.  

Related: First Ukrainian Agricultural Cooperative to establish agricultural clusters in Khmelnytsky region

The president of Ukrmetallurgprom added that at the same time there is no understanding of how Ukrzaliznytsia will be able to guarantee companies that their locomotives would not be used for their cargos in priority order: "Millions of dollars should be invested in the purchase of locomotives, but there is no guarantee that they will not be idle. For example, due to lack of fuel. Or it cannot be returned because it has stuck. There are a lot of nuances that make it difficult for companies to decide on the proposal to transfer locomotives under a financial lease."

The issue of admission of business to locomotive traction in cargo transportation cannot be discussed without taking into account the sphere of passenger transportation, says former Deputy Minister of Transport and Infrastructure Olexander Kava. "For today, freight transportation is the main item of Ukrzaliznytsia’s incomes, and the transfer of traction to private hands will be measured by losses of tens of billions of hryvnias. For passengers this will mean a significant rise in the price of tickets, because the UZ does not have the means to subsidize this direction, and will be forced to raise the prices," he says.

Related: 474 investment projects worth $1.6 billion currently underway in Ukrainian agriculture

The representatives of Ukrzaliznytsia have repeatedly said that they subsidize unprofitable passenger transportation at the expense of freight ones. According to Kava, "the oligarchs want to take the most profitable type of activity from Ukrzaliznytsia and provoke the company’s losses."

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