Ukrzaliznytsia’s stumbling blocks

Viktor Myronenko, an expert with the consortium Management Consulting Group and head of a department at the State Economics and Technology University, is urging the government to pay more attention to railway transport, whose wear and tear rate is dramatically increasing and causing regular breakdowns. While Russia and Kazakhstan are carrying out full-scale reforms of their railway transport systems, in Ukraine the situation is significantly worse and complicated by Euro-2012.

According to Myronenko, there are objective reasons for this situation: “Ukrzaliznytsia is outwardly a perfectly self-sufficient business in terms of finances, but experts insist that the real picture is entirely different...The reason for its underfunding is that railway transport is regarded as the state budget’s financial donor. In order to renew our assets fully we’ll have to find 94 billion hryvnias’ worth of investments, whereas Ukrzaliznytsia earns 25 billion a year at the most. Therefore, five years’ worth of revenues will have to be channeled into generating these funds.”

Myronenko says that the reform of railway transport has already begun: “A concept of structural reforms was worked out in 2006, and a draft program has been submitted to the Cabinet of Ministers.” The term of the project, which envisages three stages, is 2015. The first is already underway and was supposed to be completed next year, but according to Dmytro Podturkin, the head of the analytical group at the Management Consulting Group, this deadline does not look very realistic because a revaluation of assets is involved. Thanks to this, their value, experts believe, will rise by nearly four times. “As much as 64 billion hryvnias will be channeled into the project through deductions from the depreciation of these assets,” predicts Myronenko, although he does not sound overly enthusiastic. “Where will the rest of the money come from? Nothing can be expected from the budget. Foreign investors are the only solution to the problem, but they will deal only with an attractive business with liquidity. So far, Ukrzaliznytsia is not this kind of business.”

Analysts name Ukrainian legislation as one of the obstacles on the road to effective reform and the cause of the problems in railway transport. They believe that the legislative base must be changed so that certain spheres of railways’ activities can be distributed among private companies. “The state would control the railway transport’s infrastructure, whereas both government-run and private companies could take care of its maintenance and services. All we have to work out is the optimal ratio,” explains Myronenko.

According to plans, the third and final stage of reform will begin after the second one is completed, namely, the final structuring of transport operators, with each specializing in a certain kind of transport. Here the share of private capital will be rather large. “We have plans for raising the share of private train cars to 40-50 percent; there is nothing frightening about these figures. That’s how all of Europe works now.”

Meanwhile, railroad companies in Russia and Kazakhstan are coming out ahead of their Ukrainian counterparts, although not so long ago they were all in a rather difficult situation. “In 2001 the railroads in Russia, Kazakhstan, and Ukraine had the same system problems, including deviations from the principle of restoring key assets and the absence of economically substantiated mechanisms of operation. Since the USSR’s collapse the railroad companies’ investment needs were met by 20-30 percent. As a result, the depreciation of key assets reached the critical mark of 80 percent. In these countries the railroad companies were unable to resolve all their problems unaided, without global restructuring and complex reform,” explains Myronenko. Kazakhstan carried out this reform in 2004-06, and Russia expects to complete its reforms in 2010.

Analysts say that the consequences of this lag may have unfortunate consequences for Ukraine. “Unless we launch active reforms before Russia completes its own, we will have no place in the railway transport market; we’ll have to forget all about this project,” says Podturkin. He is echoed by Myronenko: “If we don’t start this kind of reform, the state will lose control of railway transport and this will be a real catastrophe.” He also hopes that Euro-2012 will serve as a kind of stimulus for private investments, particularly in regard to passenger cars. The question is whether Ukraine will have carried out these transport reforms by the time the soccer championships start. So far it looks as though all those soccer fans that will be boarding trains abroad will be in for some unpleasant surprises on Ukrainian railroads. “Until our railroad companies learn to provide services to passengers, consumers will not accept the reforms that are taking place now,” notes Podturkin without much enthusiasm.