Andriy Bukovskyi: Back on Track. Financial analysis and forecasts

17-06-2020

Artificial cost reduction as well as lack of systemic changes in the company’s structure and transport management creates conditions, in which rail transport does not meet the needs of the economy in transportation at the level of 24%. The need for additional funding of Ukrzaliznytsia and the threats that may arise on this basis are briefly discussed in the first article of Andriy Bukovsky, Infrastructure sector expert at the Better Regulation Delivery Office (BRDO).


Railway transport is the basis of the transport system of Ukraine and the basic branch of the national economy. But, like other state-owned enterprises, Ukrzaliznytsia has an extensive list of tasks to improve and refine. Most of them are not only important but defining its further operation. Let’s look in detail at what is happening in the joint-stock company “Ukrzaliznytsia” and why it is so important to draw the attention of the government and the public to this state-owned enterprise.

Let’s start with freight transportation, which is the basis of the company’s profits. Currently, there is a threatening trend of annual reduction in freight turnover. Compared to 2013, its decline is 17%. If we look at the financial component, the figures are not promising. For example, in 2013, Ukrzaliznytsia received revenue of $4.85 billion from freight transportation, and in 5 years, in 2018, this figure amounted to $2.5 billion. That is, today the company does not receive almost half of the revenue compared to the figures reported five years ago. The results of 2019 indicate a continuing downward trend in transportation volumes. While 322.3 million tons were transported in 2018, this figure reduced by 3% and amounted to 312.9 million tons in 2019. The prospects for 2020 are also far from rosy. According to the results of 2019, railway transport did not meet the needs of the economy in transportation by almost 24%.

One of the reasons for this situation is the artificial reduction in the cost of transportation. When establishing the JSC “Ukrzaliznytsia”, the state took an unprecedented step and contributed fixed assets revalued to market value to the company’s authorized capital. In such a way, depreciation deductions for the full restoration of fixed assets were increased by 3 times, creating the appropriate investment opportunities for the company’s development. But in fact, the difference between the forecast and the actual depreciation only increased each year. Thus, in 2016, the shortage amounted to UAH 5 billion, and in 2018 – already UAH 8.1 billion.

In other words, in 2018, Ukrzaliznytsia lost UAH 32.6 billion because it did not include depreciation costs in the prime cost. This is almost 50% of the annual income from all freight transportation of the enterprise.

Due to the reduction in the prime cost, Ukrzaliznytsia cannot meet the existing needs for repairs of fixed assets, such as tracks, locomotives, and wagons. In the last five years, the total investments in repairs have barely reached the figure reported for 2012. More than half of locomotives and about a third of main tracks need major repairs and are operated in violation of safety standards.

Currently, more than 9,000 km of tracks are operated without the necessary reconstruction and major repairs. The volume of annual repairs barely reaches a third of the need. As a result, 12% of main tracks do not allow the speed of more than 40 km/h. It is necessary to annually perform at least the reconstruction and major repairs of 2,100 km of tracks and medium repairs of 4,500 km of tracks for the gradual elimination of postponed repairs.

Today Ukrzaliznytsia has about two thousand locomotives. Their deterioration has already exceeded 90%. That is, the vast majority of them require immediate repairs. According to manufacturers’ technical specifications, the company has to repair and restore about 300 locomotives annually. Instead, Ukrzaliznytsia now has 800 diesel and electric locomotives requiring to be urgently repaired due to postponed repairs. To cover this need, Ukrzaliznytsia needs an additional investment of UAH 5 billion annually for four years.

Investments in the repair of passenger cars and freight wagons, multiple-unit passenger trains and other infrastructure facilities are currently only 35-40% of the specified amount.

Compared to the data of 2013, manufacturer prices increased by 2.4 times, while the financing of repair and maintenance of fixed assets of the JSC “Ukrzaliznytsia” decreased by 15% in 2015-2017. The backlog trend also continued in 2018-2019.

However, the reduction in the prime cost of freight transportation caused an outflow of personnel due to a payroll budget reduction. Over the past five years, the growth rate of salaries of Ukrzaliznytsia employees has been many times lower than that of national consumer prices. In 2018, this difference was negative 33% and continues to grow. As a result, there is a lack of qualified personnel capable of ensuring the smooth railway operation.

Additional UAH 5 billion is needed in 2020 and annually in the following years to meet specified annual expenditures and eliminate the accumulated postponed repairs in four years.

This situation within the Ukrzaliznytsia company leads to a wide range of threats:

the threat to socio-economic development: railway transport in its current state cannot meet consumer demand for transport services. This critically restrains the development of the state’s economy as well as reduces its transit potential and export promotion of the national product;
the threat to the defense capability: the industry loses its ability to effectively carry goods and passengers, personnel and equipment in case of special situations, emergencies and military situation;
the threat to the security of critical infrastructure, including extreme depreciation of fixed assets of infrastructure and insufficient level of their physical protection, protection from terrorist attacks and subversive actions;
the threat to energy security: railway transport does not provide appropriate conditions for reliable energy supply and transit of energy resources through the territory of Ukraine;
the threat of increasing corruption and inefficient management of enterprises of strategic importance for the economy and security of the state.
Another dangerous factor is that as of June 16, 2020, the JSC “Ukrzaliznytsia” has not approved its financial plan for 2020. This indicates that the company is not ready to forecast its revenues and be responsible for the figures presented. In this case, special official inaction is that the JSC “Ukrzaliznytsia” works without a financial plan while the decline in transportation volumes is about 10% compared to 2019, the surplus of active high-sided wagons owned by Ukrzaliznytsia is more than 20 thousand wagons, and the carrier cannot sell any transportation by its grain wagon at the Prozorro auction for a month.

Additionally, the technical deterioration of railway equipment and infrastructure leads to massive violations of environmental and man-made safety and generates the threat of disasters and emergencies.

Thus, today industry challenges and threats have become systemic. The above analysis gives grounds to expect that the tendency to worsen the situation with the JSC “Ukrzaliznytsia” will continue until there are some fundamental changes.

Also, read Vsevolod Velykodny’s article “Not by contract alone” created within the joint project of the Better Regulation Delivery Office (BRDO) and Rail Insider “Back on Track” https://railinsider.com.ua/vsevolod-velykodnyj-ne-dogovorom-yedynym-1/

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