Ukrzaliznytsia: how to be cured of “low activity”?

02-04-2020

Where will the savings on repairs lead to?

In Ukraine, the epidemic and the economic crisis have been marked by the struggle for access to the service of the enterprise which is responsible for 66% of the total cargo traffic of the country. It is about Ukrzaliznytsia (UZ, Ukrainian Railways). This state-owned giant has an impact on profits of any business related to the export of goods by rail. However, sometimes it has a negative impact.

A brief discourse on the Ukrzaliznytsia’s operation

The company’s Supervisory and Management Boards are obliged to ensure the enterprise’s break-even operation. The tools for this are chosen at the discretion of the management. The easiest way is to increase profits and minimize cost of repairing railway tracks and rolling stock by any means through the limitation of transportation volumes. The Ukrzaliznytsia’s top management that has been running the company since 2016 took this approach.

Indeed, increasing profits by reducing the actual cost of repairing railway tracks and rolling stock is a sure way to show high company profit figures. However, such approach led to restrictions on the speed of movement, the deterioration of locomotives and the mass dismissal of employees. In turn, this led to a decline in both transportation volumes and the company’s revenue. That is why the Management Board came up with a scheme under which the UZ will be able to collect additional charges from cargo shippers and demand payments from the state without increasing the transportation volume. This is how the term “low-active station” was born.

Ukrzaliznytsia prescribed that no less than “x” boxcars with cargo should be dispatched from each station per day in a given period. If the average number of boxcars dispatched from a particular station is less than the specified level, then such a station is considered low-active.

Railways tracks and rolling stock are depreciated 90%, and Ukrzaliznytsia repeatedly postponed scheduled repairs

What does it mean in practice? Ukrzaliznytsia proposes to local governments to pay extra fee for the functioning of “low-active” stations and to entrepreneurs that use railways to carry cargo to pay for such transportation at a higher rate. However, the number of boxcars dispatched from a particular station is different than the volume of cargo available for transportation:  the cargo is being transported at the exact amount as Ukrzaliznytsia takes.

For example, a no-name enterprise currently has 10 boxcars of grain. The UZ examines its rolling stock and track condition and states that it will take only 1 grain boxcar per day. Bang! According to the UZ instructions, the station of the sender-company becomes “low-active”, and therefore the cost of transportation increases. After that the UZ can take out all 10 cars, but at a higher rate.

If local authority refuses to pay for the station’s operation or an entrepreneur does not want to pay for the cargo transportation only because the station, located nearby, was artificially recognized as “low-active”, the Ukrzaliznytsia may decide to close its service.

One may wonder why the monopolist should take such measures while it is possible to make more profit by carrying all the cargo offered. The answer is prosaic: railways tracks and rolling stock are depreciated by 90% and Ukrzaliznytsia repeatedly postponed scheduled repairs. That is why the company has decided to use a “low-active station” tool to reduce the number of traffic and generate additional revenues. Involving entrepreneurs that use highways proactively into the rail transportation is not even discussed. Probably, this is only about a land tax that the Ukrzaliznytsia pays to local authorities and plans to pay back in the form of “extra charges” for “low activity”.

Having saved on repairs, the company really showed maximum profits. However, savings on repairs will result in the situation when there is nothing with and to transport in the long run. Thus, the state-owned company, which is supposed to provide mobility and development of Ukrainian business of any size and geographical location, obviously hampers this. This is the method of killing any rail-export related business simply by referring to the “low activity” of its shipping station.

The only possible cure for the “low activity” disease is to demonopolize the rail transportation, i.e. to involve private companies. This is one of Ukraine’s obligations under the Association Agreement with the EU. The launch of a pilot project on private rail transportation is already planned. The next stage is the division of the UZ into infrastructure, cargo, and passenger operators, of which only the infrastructure operator should remain 100% state-owned. Given the economic crisis and the projected 20-30% decline of annual revenue, the UZ reform issue is actually urgent.

Source: Novoye Vremya


This material is prepared by the Better Regulation Delivery Office (BRDO), an independent expert and analytical center, funded by the European Union under the FORBIZ project and within the framework of EU4Business Initiative.

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