Ukrainian Law On Rail Transport Has No Details For Business - Interview With Rail World Ukraine

Artem Dashkovsky, deputy director of Rail World Ukraine, tells the CFTS on locomotives renewal, private rail business perspectives and Western attitude towards Ukrainian Railways reforming process.
Mykola Zasiadko 17 December 2015 13:14

Rolling stock of Ukrainian railways (UZ) is about to spend its life time period. There is no time to delay any more and UZ developed 10-years program to renew its fleet of locomotives. During 2016-2025 it plans to modernize locomotives of ChME3, M62, 2TE116, 2TE10ut, 2M62 series.

Potential providers of modernization have already lined up for UZ orders. A while ago, Polish rolling stock manufacturer Newag announced its prototype of renewed M62 diesel locomotive with new technical characteristics for Ukraine. There are no details announced yet, but there was a declaration to supply first modernized locos next year.

But there is a competitor – daughter company of Rail World Inc. in Ukraine, it modernized two M62 locomotives in 2011. The locomotives are now in service at Lviv Railway.

Rail World – international group of railway companies, it was established by US businessman Edward Burkhardt. In the past, the group was managing railroads in Australia, New Zealand, UK, Estonia and US.

Currently Rail World unites companies in Poland, US, Estonia and Ukraine. In Poland – rail carrier and rolling stock manufacturer Rail Polska, in US – investment and consulting company Rail World Inc. and leasing company Rail World Locomotive Leasing, in Estonia – Adriatic-Baltic container trains operator AS Baltic Rail, and in Ukraine – Rail World Ukraine.

Rail World group's principle businesses are investments in railways and freight shipments, why did you start modernization of diesel locomotives?

After Polish rail market was liberalized in 2004, Rail World established rail carrier Rail Polska. Naturally, we had a choice between renewing or buying new rolling stock. We acted rationally and chose to renew it by modernization. M62 locomotive was main type of freight diesel locomotives in Poland and other Eastern Europe countries. Our team of engineers received many offer of light and heavy modernization. But decided to work harder at the beginning for the best quality – and chose to design own modernization project inside our depot. It was the right decision then, because now we are enough reliable to service our clients and are guaranteed to lease our locomotives to other carriers.

But how the young company accomplished to modernize locomotives?

We should take into account, that Rail World has an extensive cooperation history with one of the leading locomotives producers in US - Electro-Motive Diesel (EMD). That is why it was not new for our group. In Poland we tooled up a facility to perform all types of works for the modernization. Our modernized loco received type approval to operate in Poland and EU countries.

What is your modernization story in Ukraine?

Back in 2007 Rail World first presented itself to the Ministry of transport and Ukrainian Railways. We received very good feedback on our proposals, and decided to establish Rail World's company in Ukraine – Rail World Ukraine. That was done in 2009.

After company's registration, we translated words into deeds. In 2010 we sent our modernized M62M from Rail Polska's fleet for testing operation on Lviv Railway's network. We signed an agreement with the railway indicating all terms of locomotives' hand-over, and a contract for supervision of the testing operation. At the beginning of cooperation we decided to pass the locomotive on free of charge basis. Testing operation confirmed our statement on locomotive's performance data indicating the increase in locomotive productiveness by 38%, decrease in oil consumption by 6 times and decrease in fuel consumption by 23.5%. Moreover, testing operation indicated that there was space to improve performance of the modernized locomotive.

Our approach in renewal is heavy modernization. We decided not to replace individual assemblies – such as power unit or others, leaving ourselves with a trouble of continuous   modernizations of other old assemblies, but chose to replace all the components. In fact, we have a new locomotive created on old loco's frame and bogies, but it is much more cost effective than placing and order for a new series.

What is modernized loco purchase price compared to a new locomotive?

Modernization is about 60% of a new loco value, but their life time is equal. That is not the rule and ratio could be changed because of schedule, volume, place of works, payment conditions and etc.

Could you tell us about your modernization contract with UZ signed back in 2011?

There was public purchase procedures announced earlier, we won it and signed a contract for renewing 30 units. In 2011 we had 2 units handed-over for modernization. That's all.

But what happened to other 28 units?

Those were not passed to for modernization, contract was terminated  by the buyer because he did not fix the issues of financing the deal. In fact, the buyer received 2 locos at a price of 30 units order, took advantage of getting into details of our design and educated his staff for servicing. One could say – well, he could have started his own production, why not? But it did not happen. Our project pioneered here and other rolling stock market players draw a lot of attention towards it. That is why nobody should be surprised that manufacturers applied and continue to apply hard terms for Ukrainian buyers.

What was the purchase price?

Each loco cost UAH 16.6 mln. But it was price for an order of 30 locomotives.

Did you modernize in Ukraine or Poland?

In Ukraine, in locomotive depot. Our design project and works algorithm do not require large factory. Works were done in Kowel, that was reasonable, because the depot operates almost all M62s. Locomotives primarily service Kowel-Izov line of freight shipments.

Do you monitor performance of modernized locos?

We had a warranty period of 18 months. We are done with that and operator continued  servicing locomotives independently. Naturally, we keep track of this locomotives. Everything points to the fact that our project was succesful, and modernized locos are worth their money.

What do you plan to do next?

We reasonably hope to complete our minimum order from 2011. And we are ready to partner with the state structures for this. It would be an investment project – the only way to fix the financing issues. Starting from December 1st we have UZ re-organized into Public Joint-Stock Company “Ukrainian Railways”, we await, that new structure would not only understand the necessity of attracting investors to renew its rolling stock, but would develop strict procedures for that. We wait for the right moment.

When do you think you would have a chance for a new offer?

Only when there would be a strict procedure for cooperation with an investor. We, as a potential investor, do not find from publicly available information or official letters whome should we contact, what are the check points of the process, what schedule is needed, how we can guarantee the returns. It is necessary to answer to those questions. From words of thirst for investments to deeds of publicly available procedures and basic principles of cooperation with investors.

If that does not happen, what is your plan?

We have a choice: to wait more or  to develop the rules by ourselves. As you already know, we understand enough well how private investments works in rail business in other countries. But this second approach for our relatively small project would be very expensive and nonsense.

Do you plan to start a rail carrier like Rail Polska?

The issue of private locomotives is similar to the investment. What do we know about private rail carriers in Ukraine? Today we read only draft of the Law “On railway transport”, but it has no details inside on how business could work. Our team understands from its extensive experience that each country needs its  separate re-organization and privatization plan for rail market. There is recent example of privatizations in Poland, and it should be studied not only from the point of view of a state trying to become more effective owner, but from the angle of the state trying to solve its internal and sometimes not only technical issues, but including rolling stock renewal.

In Eastern Europe, private locomotives appeared after the legislation was adopted....

Chronologically you are right, but actual things may differ. First you should understand whether you really need private locomotives or not. You will have private locomotives when somebody decides to start rail carrier business. Unconditionally, there should be legislation, but public regulations must have more details inside.

Adopting new Law “On railway transport” in Ukraine is not similar to creating new legislation, it creates framework for future legislation. If the Ministry and UZ talk about private locomotives, than potential rail carriers should have more details from them. From our international experience –  you need leaders' willpower in order to have rules for investors; it does not depend on legislation.

Read more: The New Law For Ukrainian Railways: Five Key Aspects

A while ago, Polish company Newag announced it plans towards M62 locos modernization. Do you consider them as a competitor?

Our competitor is a company, which passed cooperation stages similar to ours in Ukraine. Recently, there are no one, but competition is a natural process, and many parties could benefit from it.

What about companies such as Siemens?

Our project has a niche market. We offer modernization for a fleet of М62/2М62 locomotives. Siemens offers much wider range of products, and there is no reasonable base for competition.

Could new rolling stock become a competitor for you?

It is a potential competitior. We continue to analyse the market. Buying new rolling stock – it is too much expensive and sometimes not very fast. Not all Eastern Europe countries even with international donors help could afford buying it. Ukraine is not an exemption at the moment.

When Rail World privatized Estonian railways, it supplied new diesel locomotives in parallel to modernizations. Do you plan to offer UZ the same?

It is true, Estonia received US locomotives. For Ukraine – it could also become a solution to have powerful traction on part of its network. But, as always, for this kind of offers we need to have strict rules for cooperation with investors, and we do not have them at the moment. We pioneered here by sending our loco for testing operation, we were first to set such a production in Ukraine. But you cannot have pioneering being your lifestyle for ever. We have experience, vigor and investments – our partner should also start moving.

Read more: Creditors need transparency in the accounts of Ukrzaliznytsia - Interview With Resident Twinning Adviser Jose Samino

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