Advantages And Disadvantages Of European Integration For Transport Industry

The advantages of the association agreement will be simplification of access to foreign loans, improvement of the investment climate in Ukraine, access to new markets, and harmonization of Ukraine’s legal framework with European standards. The disadvantages will be the risks associated with Russia's response and increased competition.
Kateryna Hrebenyk 17 December 2013 12:58

While the fate of the association agreement between Ukraine and the European Union remains unclear, there is still time to think about the possible consequences for the transport industry if this document is signed. Despite the number of arguments over whether rapprochement with member countries of the Russia-led Customs Union or integration into the European economic area is better for the Ukrainian economy, both scenarios have their pros and cons.

See also “About-Turn on the March: What the Transport Engineering Industry Will Lose and Gain Under Association Agreement With EU”

After analyzing the two sides of the European-integration coin, the conclusion is more or less the same for all industries. The advantages of the agreement will be easier access to foreign loans for Ukrainian companies, improvement of the investment climate in the country, opening up of new markets, and harmonization of Ukraine’s legal framework with that of the European Union with the aim of simplifying the conduct of business. The clear disadvantages are the risks associated with Russia’s reaction if the agreement is signed, the possible expenditures connected with these technical regulations, and increased competition. However, if the last point looks like a disadvantage from a business perspective, it is also an undisputed advantage in the eyes of consumers, who will ultimately have access to better and cheaper products or services.

Rail transport The most important issue on the agenda for the railway industry today is finding funds for financing upgrade of its fixed assets. The critical state of the fixed assets in the industry has long become a standing joke. In recent years, relations between the State Railway Administration (Ukrzaliznytsia) and the creditors capable of financing its needs (and such creditors are mainly in the West) have cooled noticeably. The reason is the absence of structural reforms in the industry. Despite the fact that the legislative framework for the reform is ready, the authorities are procrastinating because the reforms will require unpopular steps that will affect the interests of broad strata of the electorate. Signing the association agreement will oblige Ukraine to restructure the industry’s management and harmonize its standards. The agreement sets the task of integrating the Ukrainian railway system into the European intermodal transport system. Guarantee by Ukraine that it will comply with these steps will attract much-needed investment into the industry.

The document seeks to integrate the Ukrainian railway system into the European intermodal transport system

The association agreement does not stipulate specific conditions for mutual opening of the railway markets of Ukraine and the European Union. Liberalization and the terms of access to the railway markets will be stipulated in separate agreements. However, the association agreement contains provisions on scientific and technical cooperation and information sharing with the aim of developing a multimodal trans-European transport network. Closer technical cooperation with railways and industrial companies in the European Union may become the basis for high-technology cooperation during creation of joint ventures for production of trains and locomotives.

Of course, the claims by opponents of European integration that the association agreement will require the entire railway infrastructure of Ukraine to be changed from the 1520-millimeter gauge used in the CIS to the 1435-millimeter gauge used in Europe does not hold up under any scrutiny. The track widths in many European countries are different, but this has not prevented them from successfully integrating their transport systems. However, one of the basic principles based on which European regulators are trying to build their economy is development of free competition. This approach is not liked by European monopoly companies, which have long been resisting adoption of the so-called "fourth railway package." This is the European Union’s directive that requires speedy liberalization of the rail services market and transfer of railway companies to private operators (as opposed to the current holding system). In the long term, this also awaits Ukrzaliznytsia, although the concept for reform of the Ukrainian railway industry provides for preservation of state dominance of freight transportation and monopolization of ownership of shares in the national railway company. Adoption of the "fourth railway package" will hit the railway industry’s social infrastructure.

Road transport The degree of integration of the road transport industry into the European market is already high. This is reflected not only in the fact that Ukraine is a party to practically all the major international conventions regulating international road transport on the territory of the European Union (for example, the European Agreement concerning the Work of Crews of Vehicles Engaged in International Road Transport (AETR) or the Convention on International Transport of Goods Under Cover of TIR Carnets (TIR Convention), which is one of the main conventions), but also in the fact that Ukrainian carriers seriously competing with their counterparts from European countries. According to information from the Ministry of Infrastructure, Ukraine is second among 54 countries in terms of the number of permits issued for international road transport within the basic ECMT multilateral quota (337 permits) this year, and 354 permits (5% more) are expected in 2014. However, the Association of International Road Carriers (AsMAP) has said that Ukraine’s share does not exceed 3% (about 30,000 vehicles against the 1 million operating on the European market).

Road transport is specifically the area where liberalization and the opening up of markets would be more advantageous to Ukrainian companies than European companies today. Ukrainian truckers win in terms of price (the cost of their services is lower mainly due to the low wages of their drivers and their cheaper – often secondhand – vehicles). For several years, AsMAP representatives traveled with Ukrainian negotiators to Europe to ensure that commitments to lift restrictions on road transport are included in the association agreement. The ECMT multilateral quota system is a system that artificially limits transport opportunities by distributing each trip as quotas between countries. These quotas are eternally insufficient for Ukrainian carriers, which solve this problem partly by buying TIR Carnets (another licensing system that is less beneficial to truckers but offers a way out of the situation when ECMT quotas are exhausted).

In general, trucking companies and AsMAP, which represents their interests, are seeking full liberalization of markets. Judging from the published text of the association agreement between Ukraine and the European Union, the European Union has not yet taken this step. At least, the issue of mutual access to the markets of transport services was considered only briefly in the context of "separate agreements," which must be signed on this issue. However, there is a detailed list of the directives that Ukraine should adopt in four areas of road transport: technical, social, fiscal, and safety. Adoption of these regulations will substantially bring the conditions under which Ukrainian road carriers operate closer to the conditions under which European road carriers operate. It will bring these conditions closer to each other not in the best sense for Ukrainian companies because the requirements on the technical conditions of vehicles, the health of drivers, and the wages of drivers, etc. will increase significantly. In addition, the tax burden on Ukrainian road carriers will increase: for example, the European Union has a rule on levying charges on trucks for "the use of certain infrastructures."

Air transport and airports This is perhaps the thorniest issue because competition will cost Ukrainian airlines too dearly. This issue has been left out of the draft association agreement along with the issue of liberalization of access to other transport markets. It turns out that although the aviation industry is more vulnerable than other industries even before borders are eliminated, the aviation industry is specifically where elimination of borders will happen first (discounting the maritime industry, which is perhaps the most internationally integrated industry). Ukraine and the European Union initialed an agreement on a Common Aviation Area during the Eastern Partnership summit in Vilnius (Lithuania) in late November. The negotiations on this agreement were long and complicated, having begun at least in 2007.

The document will come into force in less than a year and a half (in March 2015). Of the nine “freedoms of the air” that are used in international aviation legislation to designate the degree of integration of the aviation markets of various countries, Ukraine and Europe have agreed on the third and fourth freedoms, and the fifth freedom will be the next stage of liberalization. Until new opportunities to perform flights and create routes emerge, everything will remain the same but without the cumbersome procedure of intergovernmental agreements.

The advantages exist more from the viewpoint of passengers, who can theoretically expect cheaper flights if the market justifies the optimistic expectations

Airline companies themselves see little advantages for themselves in "open skies." They believe that the balance of power is too unequal and that Ukrainian companies may be forced into bankruptcy under the pressure of price dumping by foreign operators. From their perspective, borders should be opened gradually as the market grows and a significant growth spike is impossible without abolition of visas between Ukraine and the European Union. Moreover, according to Yurii Miroshnikov, the head of Ukraine International Airlines (UIA), which is the largest airline company in Ukraine, operators have will to operate under conditions of fierce competition in the transport market, on the one hand, and monopolization of provision of services to airline companies, on the other hand. According to Miroshnikov, this will create a millstone effect that will manifest itself in systematic reduction of airline companies’ margins.

Therefore, the advantages are more from the viewpoint of passengers, who can theoretically expect cheaper flights if the market justifies the optimistic expectations. However, this may not happen immediately because there are currently no queues of foreign carriers (especially low-cost carriers) wishing to conquer Ukraine immediately and aggressively. Under these same conditions, airports will be able to benefit from liberalization because arrival of new companies and increase of passenger traffic will naturally result in increased revenue for them.

Ports and shipping In the maritime transport sector, especially shipping, the provisions of the association agreement will be sufficiently felt because this sector is currently the most globalized sector of the Ukrainian transport industry. This means that Ukraine is party to all sorts of international conventions and agreements and that the country has largely adapted its legislation in this area to the international legislation. Nevertheless, there is still room for progress here in terms of liberalization of trade in services. The association agreement grants most-favored status to vessels sailing under the flags of Ukraine and member states of the European Union. This means that sea carriers from the European Union should be granted national treatment, i.e. the same working conditions as Ukrainian sea carriers or other foreign carriers that are granted more favorable conditions, explains Andrii Seliutin, the director of the south Ukrainian branch of the Arzinger law firm. This applies to market access, port infrastructure, services, the rates of various fees, etc. For example, in practice, such an approach would allow foreign vessels to perform cabotage operations in Ukraine without prior authorization.

Sea carriers from the European Union should be granted national treatment, i.e. the same working conditions as Ukrainian sea carriers

On the one hand, implementation of the terms of the agreement will help to avoid discriminatory restrictions on vessels operating under the Ukrainian flag at ports in member states of the European Union, says Yevhen Blynov, a partner at the Astapov Lawyers law firm. On the other hand, it is no secret that the size of the Ukrainian merchant fleet is reducing steadily, which means that only a fraction of carriers will be able to enjoy the full benefits of this agreement. Meanwhile, the opening of Ukraine’s inland waters to foreign vessels will virtually eliminate the possibility of emergence of a Ukrainian fleet in the future, said Seliutin.

Transit Implementation of the European legislation on unification of technical regulations, information systems, approaches to organization of document processing, and customs procedures in Ukraine will certainly facilitate acceleration and simplification of the process of transit through Ukrainian territory. Globally, in terms of transport, the association agreement is subordinated to the concept of creating in the entire area from Lisbon to Lugansk and from the Barents Sea to the Mediterranean Sea a pan-European multimodal transport system that will operate as smoothly as possible to achieve a common goal that is clear to all - fast and cheap delivery of goods. In this context, Ukraine is, of course, in a strong position because its interests as a transit state coincide with the interests of all the members of the European community. The agreement focuses on development of the TRACECA corridor, which can attract European funding as well as new cargo flows to Ukraine.

Nevertheless, it is necessary to consider the subsequent reduction in the volume of transit of Russian goods, especially by sea and rail, when speaking about transit. Russia has its own ambitious infrastructural projects. A significant loss of Russian transit cargo cannot be avoided if - by choosing the European direction of development - Ukraine has to redirect its efforts toward the areas that interest its western neighbors to the detriment of its eastern neighbors. However, it should be borne in mind that reduction of its dependence on Ukrainian transit corridors has been a strategy of Russia for a long time. This strategy will most likely be implemented gradually, regardless of whether Ukraine signs the association agreement with the European Union.

Tags: EU, Ukraine