The draft law No. 7316 On Rail Transport in Ukraine, which did not pass the first reading in the Verkhovna Rada, unexpectedly received a new lease of life.
The President of Ukraine instructed: “In a month, prepare amendments to the law and ensure acceptable for Ukraine norms of fund raising to this process. It does not have to be private diesel locomotives, it can be private capital.”
A few words about the prerequisites for the start of work on the preparation of the draft law No. 7316. State regulation of tariffs for rail transportation, financial burden on Ukrzaliznytsia of social functions such as transportation of persons entitled to benefits, local transportation of passengers on suburban routes at rates below cost, lack of public investment in the industry led to catastrophic aging of fixed assets. This situation directly affects the performance of domestic enterprises, which suffer from enormous losses due to the impossibility of withdrawing the cargo on time under signed contracts, including export contracts. Thus, in 2017, the requests of agricultural producers for the export of grain were fulfilled by 65%, and this year only by 45%. According to the Ukrmetallurgprom association, during 8 months of 2018, undelivered residues have accumulated in the warehouses of the mining and concentrating companies of Ukraine – about 700 thousand tons of iron ore products, with a standard of 150 thousand tons.
Honestly, a state monopolist is not able to provide timely supply of either traction or rolling stock, which is due to heavy wear and tear of equipment, which is constantly in need of repair.
Thus, the inventory fleet of Ukrzaliznytsia traction rolling stock, according to the director of the locomotive department of the company Serhii Pavlov, is 1,628 mainline electric locomotives, 680 mainline locomotives and 1258 shunting diesel locomotives. The average wear and tear of locomotives is 96.8%, including electric locomotives – 93.3%, mainline diesel locomotives – 99.6%.
As predicted by UZ, taking into account the decommissioning of locomotives, it is necessary to purchase at least 310 new locomotives until 2025, 110 out of which are alternating current freight electric locomotives, 40 – dual-motive power freight electric locomotives and 70 – freight locomotives. The framework agreement with General Electric provides for the supply of 225 diesel locomotives until 2034 and the modernization of 75 diesel locomotives of the UZ inventory fleet.
The situation in the car building segment is a bit better. In the current year, for the first time, starting from 1992-1993, more than 8 thousand cars, according to Oleh Motin, Director of the Railcar Management Department of Ukrzaliznytsia, have been built by the Ukrainian car-building plants, and this will slightly reduce the average percentage of fleet wear. I want to note that it was liberalization of pricing in the car building that stimulated the construction of new cars and in such a way the market can react to the liberalization of the traction market. However, let me remind you that the rolling stock renewal is taking place against the background of falling indicators of the car turnover. That is, cars, in fact, turn into warehouses on wheels, which due to the lack of traction are forced to stand idle at railway stations around the clock, which, unfortunately, at this stage completely eliminates the fact of rolling stock renewal.
The draft law No. 7316 was aimed at global reforming of Ukrzaliznytsia and its main innovation was the proposal to liberalize the traction market, which implies the opening of this market to private companies.
On October 16-18, railway logistics challenges were discussed in Kyiv at the II International Exhibition RAIL EXPO 2018. Among the speakers in various discussion panels there were both business representatives and the Ministry of Infrastructure, Ukrzaliznytsia. The main conclusion I made is that experienced officials of the old school and representatives of business in Ukraine are two parallel realities. And the issue is not that there is no communication, there is a dialogue but what is its result?
At the RAIL EXPO 2018, there was much talk about foreign experience in reforming state railway monopolies in the EU countries. It is expected that the most heated debate has developed around the idea of liberalization of the railway traction market in Ukraine. The head of the Reform Support Team of the Ministry of Infrastructure Olexandra Klitina, focused on similar European experience and stressed that the existence of a vertically integrated state monopoly is ineffective. EU countries have come to the conclusion that liberalization of the traction market is a necessity. In European countries, a similar to Ukrainian situation was back in the 70s when state monopolies through their inefficiency declined. Tariffs were increasing, companies were accumulating debts and as a result, the railway lost competition with road and rail transport.
Unfortunately, at the moment we are still at the point of preparing for the start of reforms, and but for the intervention of the President of Ukraine, the rejection of the draft law would have slowed down their implementation for many years.
Obviously, the issue of reforming the railroad state monopolist is complex and ambiguous but the situation in the industry is already critical, there is no time to spare.
In this context, the experience of Germany is interesting for Ukraine, where along with liberalization new players emerged at the rail market – 451 companies. By 1990, the debt of a state monopoly of railways in Germany had amounted to about 50 billion Deutschemarks, and liberalization made the company more profitable. If to compare the period before the introduction of the reform, – 1994, and after – 2016, the use of the railway network became by 32% more efficient, the average wage increased by 86%, the income of Deutsche Bahn AG (the main railway operator with 100% state participation) – by 174%.
According to the Reform Support Team of the Ministry of Infrastructure, the main risks from introducing private traction to the country are discrimination against private operators; bankruptcy of the state operator and slow implementation of reforms.
As we see, all risks are quite serious but the third, in my opinion, is the most critical.
It is important that all participants in the process of preparing reforms on the railway do not rely on their local interests, but unite and solve this set of issues jointly, openly and honestly basing on nothing but the interests of the country. I hope that after presidental interference in the process of preparing the draft law No. 7316 the document will be finalized as soon as possible and resubmitted for approval to the parliament.