The World Bank launched a project involving evaluation of the efficiency of agro-logistics in Ukraine in 2014 to determine its main physical and regulatory constraints. An action plan for eliminating the negative factors affecting agro-logistics in the country was prepared for the government on the basis of this project in 2015. CFTS Consulting was the logistics consultant for this project. CFTS Consulting’s lead expert Andrii Shkliar discusses the results of the study and the key problems affecting the supply chain for goods Ukraine, which were uncovered during this project.
Why is the World Bank paying so much attention to agro-logistics in particular?
The agricultural sector is now one of the engines of the Ukrainian economy, and the World Bank Group is one of its key creditors. Therefore, the World Bank wants to understand where the bottlenecks are and how to eliminate them to enable businesses to operate better. One of the critical areas for efficiency of the agricultural market is specifically logistics. For example, agricultural producers in France retain 90% of the value of FOB prices, compared with about 60% in Ukraine. This is because of the high cost of intermediary services and the high cost of handling and delivering goods to the port. We provided our vision of the most important distortions on the market and the consequent financial and time losses.
On which methodology did you base the study?
The study was based on the Supply Chain Analysis (SCA) methodology, i.e. we analyzed the time and financial losses in the entire logistics chain for export of corn, wheat, barley, and sunflower seeds: from the field to loading onto ships. The worst and best delivery scenarios were modeled.
Have you conducted similar studies in other countries?
Yes. It is common practice for the World Bank, and Ukraine is not unique here. For example, we examined identical studies conducted in Latin America and Southeast Asia in detail. By the way, the logistical problems in Ukraine have many similarities to those in Brazil.
Which of your recommendations involve the operations of public institutions?
We recommended switching government agencies (customs, laboratories, etc.) to a 24-hour schedule during peak periods of grain exports. It is also necessary to bring export cargo out of the government’s quarantine control.
Where is the largest margin currently concentrated in the agro-logistics chain?
A large proportion of agro-logistics costs are assumed by intermediaries, which perform the function of making informal payments for certification or, for example, access to railcars. In addition, a shortage of capacity also results in high storage costs and shipment to large linear granaries, as well as in port transshipment.
What are the key trends you identified in agro-logistics?
There are currently sufficient grain cars. This was influenced by two key factors. Firstly, private companies acquired about 1,400 railcars in 2013. Secondly, the State Railway Administration (Ukrzaliznytsia) has allowed private companies to repair more than 900 grain cars, having leased these railcars to them. Thirdly, some goods have left railways for automobile roads because transportation of loads weighing 40 tons by road has become profitable even compared with the railway (this is a violation of the rules, but carriers are doing this because there is no effective control system).
The logistical problems in Ukraine have many similarities to those in Brazil
However, we are proceeding from the forecast that the cargo base will grow and the expectation that the government will eventually combat the violation load limits on roads. Otherwise, we will never see good roads. Ukrzaliznytsia will face the need to write off 11,800 grain cars by 2020, out of its entire fleet of 13,500. Thus, the railway will be forced to overhaul the old railcars and continue using them for a further 15 years, which will delay the necessity to replace the existing fleet. However, considering the fact that the cargo base is expected to increase by 16,500,000 tons to 39,200,000 tons in 2020, the demand for grain cars will be about 21,000. That is, even if all the grain cars can be overhauled, there will still be a shortage of about 7,000 railcars in five years. At the same time, there are still few private grain cars in Ukraine because the existing tariff system does not stimulate companies to invest in creation of their own fleets of grain cars.
There is definitely a need to increase the number of granaries in Ukraine. Agricultural producers are forced to sell grain not during the best period and under poor market conditions because they lack their own storage capacities and need to calculate their financial obligations.
The existing granaries are mostly obsolete, and it is expensive to dry grains there. Equipment for weighing grain trucks with weights of 40-60 tons is not available everywhere. Obsolete laboratories create long lines of vehicles at entrances to granaries during peak periods. There are also problems with cargo handling equipment because modern, large grain cars cannot get onto ramps.
Port railway stations
There are problems involving approaches to the ports of Yuzhny and Nikolayev during peak periods. Railcars and trucks are idling and businesses are losing money.
There is a shortage of grain trucks during peak periods. The problem of road quality is also significant. For example, it is more expensive for senders to bypass routes that have zones of bad roads, and the carrier takes this factor into account and includes it in the cost of its services. At the same time, the practice of exceeding load limits for grain trucks leads to further deterioration of roads.
We recommended investing funds in dredging River Dnieper and optimizing interaction with operators of river infrastructure. For example, it is necessary to introduce systems for raising bridges in other to move away from the practice in which every ship makes payments separately.
Under the current conditions, it is possible to work efficiently with river logistics only if one controls the entire chain of granary-fleet-offshore loader (only the Nibulon company currently operates in this manner). It is necessary to introduce a program for stimulating construction of fleets because the shortage of fleets is slowing down the development of river logistics.
Export consignments of Ukrainian grain are now getting larger because demand is increasingly shifting to South and Southeast Asia. It is more profitable to transport goods over such long distances in large consignments. Therefore, the importance of deep-water ports is increasing and the need to dredge is arising. It is also necessary to determine the mechanisms for attracting investments to the Ukrainian port industry through the widest possible range of mechanisms - through both concessions and privatization.
The problem of access to ports during peak periods makes logistics much more expensive. In addition, a big problem involving the load on municipal transport infrastructure arises during the season, particularly in Nikolayev and Odessa. Therefore, it is necessary to develop a site for parking vehicles and introduce a signaling system for calling them into the port (this is already beginning operation in Odessa).
Carriers are also encountering problems involving synchronization of document flow. Ukrzaliznytsia may be satisfied with scans of a shipper’s documents while a port may demand originals of the same documents. A situation arises in which a railcar carrying grain arrives at a port while its documents are delivered by a courier and submitted by the train driver. As a result, they are often lost, resulting in downtime. Meanwhile, every day of downtime costs the cargo sender, not to mention the fact that this adds to the load on port stations, which are already overloaded.