Discontinuation of passenger transportation at below-cost prices, separation of the railway operation services, introduction of a mechanism for compensating private investors for funds invested in rolling stock, and renewal of infrastructure are only some of the important novelties in the new draft of the Law on Rail Transport that the Ministry of Infrastructure submitted for debate in the parliament. Based on the document, it looks as if Ukrzaliznytsia has decided finally put an end to its age-old problems: loss-making passenger transportation, the use of profits from freight transportation to subsidize its unprofitable operations, and the shortage of funds for capital investments. In general, the draft law contains the right ideas, but the mechanisms it prescribes for realizing these ideas raise concerns that the result will not quite be the one that is expected. In any case, the changes will be painful for many.
Operators will be divided into categories The new version of the draft law "On Rail Transport of Ukraine" is published on the website of the Ministry of Infrastructure. It proposes a completely new version of the active law. The last time the parliament adopted amendments to this law was in February 2012. Then, the package of laws that was approved as part of the reform of Ukrzaliznytsia also included a law that outlined the peculiarities of creation of a public joint-stock company on its basis. In fact, both laws have still not come into effect. The Cabinet of Ministers resolution on creation of the public joint-stock company, which has already been prepared and approved many times by the relevant agencies, sits on desks the highest offices, according to the CFTS’ sources. The law on amendments to the Law on Rail Transport has not come into effect because its transitional provisions stipulate that it should come into effect immediately after the creation of the public joint-stock company.
Perhaps adoption of the new version of the Law on Rail Transport will nonetheless provide some impetus for the long-awaited transformations in the industry. Indeed, the financial plan of Ukrzaliznytsia that the Cabinet of Ministers recently approved makes it clear that it barely makes ends meet. This is also evidenced by the meager size of its projected profit, the coefficients reflecting its liquidity and solvency, and the traditional under-funding of the capital investments program.
"The prepared law is a step within the framework of the reform of the Ukrainian railway industry, but it does not make sense without creation of a public joint-stock company on the basis of Ukrzaliznytsia. The document will create a regulatory framework for reform by concretizing and detailing the previously adopted program," said Ivan Rodionov, the deputy rector for scientific work at the State Economic and Technological University of Transport.
Establishment of regulated tariffs that are below the economically justified levels without identifying the sources of funds for compensating for this is prohibited, and court appeals can be filed against it
According to the expert, there are two important novelties in the draft law. The first is transformation of the operation of general-use railway infrastructure into a separate business. The second is formalization of a business that is already in existence – operation of rolling stock. The first type of operation is reserved exclusively for Ukrzaliznytsia or, more precisely, the joint-stock company into which Ukrzaliznytsia will be transformed. "To understand how this will work, consider the example of Germany. There, the national railway company manages the infrastructure and sells the “train paths," i.e. the right to perform transport operations on a certain route at a certain time," explains Rodionov.
the legal framework is being aligned with the railway operation business that exists to some extent currently by introducing into the law the terms "operator of railway rolling stock" (it can be any other than hauling operations, which is a niche that Ukrzaliznytsia reserves for itself), "the investment component of fares,” and “investment program." The document also contains an article on the basis for the operations of operators of rolling stock. It contains a fairly extensive list of obligations and requirements for such entities. The operator should also be included in the state register of operators in addition to owning the rolling stock (an operator can also operate the rolling stock without owning it), performing technical maintenance of the rolling stock with its own funds, and organizing technological processes.
Time for free tariffs A nice bonus compensates for the red tape involved in the process of obtaining the status of operator: free rail fares will emerge on the market. That is, the investment component of fares will remain “free” (it will be determined by the operator at its own discretion, based on the laws of the market). The locomotive and infrastructural components of the rail fares will continue to be regulated by the state. However, there is an element of de-monopolization here: the law divides infrastructure into public and non-public (i.e., the infrastructure that is used by everyone and the one that is used only within certain enterprises and not technologically connected to the general network). On its “territory,” the owner of a non-public infrastructure can decide independently to make the infrastructure available to those that want it and earn money from this.
In the context of earnings, it is necessary to speak about investment programs. The operator must develop and approve an investment program in order to generate the investment portion of rail fares. This document is subject to approval by Ukrzaliznytsia, the Ministry of Infrastructure, and the National Transport Regulation Commission. The program provides information about the investments that the operator has made or intends to make to enable it to perform its operations. If the program is approved, funds will be transferred into a special account of the operator (the term used in the document is "current accounts with special regime of use for conducting settlements under investment programs"). The law provides for the possibility of using these funds exclusively for compensating for investments made or conducting settlements on loans obtained under investment programs.
A revolution for passengers Nothing less than a revolutionary change is coming to the passenger sector. Firstly, transportation of passengers is clearly divided into segments - long-distance, urban and suburban, and international. Although, the involvement of private carriers in some of these areas is not detailed in the document, experts explain that establishment of private railway companies is possible at a certain stage of the reform. In contrast to the existing law on railways, the new law, if adopted, will require fulfillment of government orders for passenger transportation in the unprofitable sectors on a contractual basis. Government orders will apply to the "social segment of passenger transportation." The Cabinet of Ministers will later specify this segment by compiling a list of destinations, fares, and train categories that are considered social. Simply put, these are the types of transportation that are the most sensitive to price increases and because of which Ukrzaliznytsia is unable to earn revenues normally today.
The possibility of establishing free tariffs for operators compensates for the complexity of the process of gaining the status of operator
Government orders can be both local and national. Its peculiarity lies in the fact that the issue of subsidized fares and compensation for them should be an essential condition for such orders. If a customer wants to obtain transport services at a lower price than the price stipulated by the size of the regulated tariff, the customer must use its own (budget) funds to compensate the carrier for the difference between the subsidized fares and the cost-based fares. If compensation is delayed or not received within three months, the carrier has the right to terminate the provision of services under the contract.
Tariffs should be mentioned separately. A common thread running through the document are the concepts of "profitability," "return," and "economic feasibility." "Yes, the main idea is specifically that the entire operations of the railway are divided into a number of businesses. The task of any business is to make a profit,” said Rodionov. The article on fares and fees even contains a section stipulating that establishment of regulated tariffs that are lower than the economically justified tariffs without identification of the sources of funds for compensating for them is prohibited and this may be appealed to the courts.
Where the thread is weakest Now, about the weak points. It is immediately evident that Ukrzaliznytsia will remain a privileged entity, contrary to the declarations of movement towards competition and the free market (at least in the freight segment). Since it will simultaneously perform the function of national transport operator by managing the infrastructure and fully controlling the process of access to it. That is, Ukrzaliznytsia will compete on the free market with those that will depend on its infrastructural decisions. If we remember that no provision is made for provision of hauling operations in the competitive segment and carriers will be forced to conclude separate contracts with the company for the use of locomotives, it is clear that the issue of competition somehow becomes irrelevant. However, experts believe that the threat of discrimination can be avoided. "The functions of the operator of the infrastructure and the rolling stock are performed by state-owned companies in many countries, including Germany. In addition, the draft law stipulates that access to infrastructure is to be provided on a nondiscriminatory basis," says Rodionov. At the same time, he agrees that it is necessary to make provision for more active intervention in the issue of distribution of the "train paths" of some third-party agencies – the Transport Regulation Commission – or create the relevant self-regulating public organization.
The investment programs on the basis of which operators will receive compensation for their investments are another source of alarm. The draft law introduces the term without separately spelling out the concept for the programs, the requirements for them, or the selection criteria and mechanism. "Since a lot depends on these programs, I think that a similar article should have been written into the law. In the meantime, this category can be regarded as a prerequisite for creation of a corruption component in the system,” said Natalia Huk, a lawyer with the Center for Transport Strategies.
Experts also warn that introduction of both laws – the law on establishment of a public joint-stock company on the basis of Ukrzaliznytsia and the law on rail transport – will invariably result in increases in fares in all segments of the railway services. "On the one hand, the deep differentiation of fares that is stipulated in the draft law will make fares more flexible, which is good. On the other hand, every component will be based on economic justification, which will result in the raising of fares," explains Huk. In other words, every participant in the emerging service creation chain will want to earn money, and the law will protect this right. However, Rodionov doubts whether the introduction of the investment component of fares is right. "When making a decision about investments, a business owner usually looks at costs. Can he cut costs in order to also include the cost of capital investment? If yes, investment programs will be financed from profits. Then, it turns out that profits are included from the beginning and the investment component is added on top of it, i.e. at the cost of raising fares," said the expert.
Even if the draft law is redrafted in due course to include several of the nuances mentioned above, it is hardly worth hoping that the reform will go smoothly. In any case, increase of fares cannot be avoided.
