The September 18 meeting in the Ukrainian Ministry of Infrastructure was absolutely packed. Members of the parliament’s transport committee, business representatives, the management of the Ukrainian Railways joint-stock company (JSC Ukrzaliznytsia), and, the leadership of the Transport Ministry gathered there. The topic of discussion was the draft law on rail transport, the impact of which on both the transport industry and the country's economy as a whole cannot be overestimated. The draft law No. 1196-1 was registered in the parliament only a week earlier, but the parliament intends to adopt it by the end of the year.
Attempts to adopt a law on rail transport began in 2015. That was when an active push for the idea of vertical break-up of Ukrzaliznytsia and granting private traction access to the company’s rail network began. Globally, the essence of the draft law – vertical break-up of Ukrzaliznytsia, opening up of the traction market, and creation of a National Transport Regulatory Commission – has not changed since then.
The relevant associations – the American Chamber of Commerce (ACC) and the European Business Association (EBA) – and Ukrzaliznytsia generally support the current version of the draft law, although Ukrzaliznytsia and businesses both agree that it still needs to be improved.
Minister of Infrastructure Vladyslav Kryklyi believes that the draft law needs to be adopted no matter what and that all its shortcomings can be addressed during the transition period, which is planned for next year.
“We will need to adapt about 50 resolutions to the law. That is only now. This figure could increase two- or even three-fold. There will be much more practical work and Ukrzaliznytsia will remain a de-facto monopolist for about one more year despite the fact that it will be broken up," Kryklyi said.
Which of the draft law’s controversial aspects that require improvement were brought to the attention of the participants in the meeting?
Yevhen Kravtsov, board chairman of JSC Ukrzaliznytsia
The first issue is related to passenger transportation. According to the draft law, the cross-subsidization mechanism will no longer apply to passenger transportation. Given the current state of affairs, there could be two options for financing passenger transportation: substantial increase of tariffs (which is impossible, in my opinion) or subsidies from the state. Such a mechanism needs to be implemented after abolition of cross-subsidization.
The second issue involves suburban transport, for which orders are placed by local administrations. We must have a strict mechanism stipulating that transportation should be based on contracts that stimulate reliable cooperation between local communities and Ukrzaliznytsia.
The third is the issue of stimulating competition in the passenger transport segment. We see the possibility of introduction of effective mechanisms for competition for state subsidies if there is a balanced approach to the use of subsidies. This is to ensure that not only Ukrzaliznytsia, but also potential competitors, have the opportunity to receive subsidies.
Regarding freight transportation, we believe that the current model is not conducive to investment. At the same time, we want to draw attention to the risks associated with opening up the traction market. There are currently about 1,000 decommissioned locomotives, which are several times cheaper than new locomotives, in Russia. We should understand that an operator could emerge and indirectly gain a large share of the Ukrainian market, which will directly affect our economy. We believe that this issue should be addressed in the draft law.
Olha Kopiika, co-chair of the EBA logistics committee
The draft law is the result of 2-3 years of work, and it generally reflects the main approach to reforming the railway industry, both in terms of granting private traction free access to the market and in terms of, for example, low-density stations. The draft law makes it possible to transfer the operation of these low-density stations to businesses, which is critically important for the agricultural sector.
The draft law also reflects the implementation of the European Union’s directives. We all know that since the signing of the Association Agreement between Ukraine and the European Union, we have very much insisted on the need to implement it legislatively.
Some proposed changes to the draft law can be considered before the document is considered in the parliament and in the period between its first and second readings in the parliament.
The first involves tariffs. It is very important for the tariff-formation methodology to be determined at the legislative level to allow us to depart from the existing classifications and switch to formation of tariffs based on distance and train mass. There are some questions regarding the operations of the National Transport Regulatory Commission, but we generally support the draft law and believe that there is no need to delay its adoption.
Serhii Vovk, co-chair of the ACC’s Infrastructure Committee
We expect this draft law to be adopted in the near future. I would like to draw attention to three points.
The first is cross-subsidization. Businesses support the position that we need to provide real mechanisms for compensating Ukrzaliznytsia for losses from transportation of passengers on both urban and suburban routes.
The second is the National Transport Regulatory Commission. The opinion of members of the committee is that this commission should be independent of private influence groups operating on railways and state influence groups, including state-owned carriers. A predictable and reasonable tariff policy is necessary for the commission to be able to perform its main function.
The third is to ensure the safety of rolling stock and cargoes on the railway. The situation is currently critical because components of braking systems are often stolen, and this affects both private wagons and Ukrzaliznytsia’s wagons.
Yulia Klymenko, first deputy chair of the parliamentary committee on transport and infrastructure
Is reform of Ukrzaliznytsia envisaged in the state budget for 2021? Is it reflected in it to ensure that we will not have a situation in which we vote for a good draft law but a budget is adopted in 2020 that makes no provisions for subsidies and compensation for passenger transportation from the state budget and local communities also make no provision for it in their own budgets? In that case, we will have a de-facto collapse.
Ukrainian Minister of Infrastructure Vladyslav Kryklyi’s Response
Since we have made provisions for a transition period, we will prepare next year and funding will be allocated for 2021. However, it is too early to speak about the budget for 2021.
Baher El-Hifnawi, program leader for the World Bank's Infrastructure and Sustainable Development programs in Belarus, Moldova, and Ukraine
There are very high hopes for reform of Ukrzaliznytsia. The ministry and Ukrzaliznytsia have done a lot, but much work remains to be done before the traction market launches in 2022.
Reform of rail transport will also put a lot of responsibility on the shoulders of the Ministry of Economy and the Ministry of Finance, and they will not want to get involved until they see its effectiveness.
For Ukrzaliznytsia to be ready for the launch of the market, it must increase its own cross-subsidization efficiency.
István Heinczinger, senior transport economist at the European Investment Bank
The law should provide for a transition period. Otherwise, there will be confusion in its implementation.
In the European Union, the railway legislation was adopted in order to avoid cross financing in the passenger transportation system. This means that the railway’s commercial operations (freight transportation) cannot subsidize passenger transportation on the railway.
On the issue of privatization ... only freight carriers are subject to privatization in the European Union. Private passenger carriers are always created from scratch.
As for the railway infrastructure, it is owned by the state in 99% of the cases in the European Union. I am referring to rail tracks and assets such as the power substations that supply electricity to the railway network. These are always owned by the state.
Dmytro Demydovych, development director at the Lemtrans company
We can say today that there is no conceptual disagreement on the draft law. We support the EBA and the ACC, but the law requires a clear approach.
In particular, in our opinion, the tariff policy does not provide a complete conceptual picture of the rules laid down in the tariff-setting system. Elementary things are absent in the draft law, for example, the fact that the tariff should depend on whether passengers or freight are being transported and the fact that the tariff should depend on the distance and mass of a train. This article of the draft law should be spelled out more clearly.
Serhii Belenkyi, chairman of the Ukrainian Federation of Metallurgists
Regarding the draft law itself, we have been talking about the need to create a National Transport Regulatory Commission for about five years now. We are pleased that an independent body that will influence the formation of freight transport tariffs, among other things, will emerge. However, it would be nice if this this body had the ability to consider Ukrzaliznytsia’s investment programs, including short-term ones, as well as to coordinate them in some way and impose penalties if funds intended for these programs are used for other purposes.
In addition, we would like to support Ukrzaliznytsia on the issue of land tax, which is sucking significant amounts of funds out of the company. Perhaps, this could be implemented in the transitional provisions of this draft law or another. This would benefit both Ukrzaliznytsia and its clients, who essentially pay this absurd tax.
Oleksandr Tkachuk, director of the Quadro Center
The main issue in the railway industry today is attracting investment in infrastructure. Unfortunately, the proposed draft law, like previous draft laws, does not provide an answer to this question. Reforms of European railways have been going on for decades, but no result has been achieved regarding reduction of budget spending and attraction of new volumes to the railroad.
Perhaps we need to analyze how the Ukrainian railway has managed without budgetary allocations for 28 years despite everything. There is no doubt that it is far from operating efficiently, which demonstrates that it has potential. Why should inefficient state management of national wealth result in significant state and local budget expenditures?