A rival to the Ukrainian High-Speed Railway Company – the company that operates the Hyundai and Skoda high-speed passenger trains – may be created soon. The state railway administration (Ukrzaliznytsia) is preparing to transfer all long-distance passenger transportation to a separate entity called the First Passenger Company. According to Ukrzaliznytsia, such a move would allow optimization of costs and improvement of the quality of services. The latter should also logically follow from the fact that two entities will now be operating in the sector instead of one, and each one of them will have to battle for the sympathy of customers. However, it is hardly appropriate to say that this will break the monopoly of Ukrzaliznytsia because Ukrzaliznytsia will continue to dictate terms on the market since both companies will remain its subsidiaries. The possibility of appearance of private investors in the sector is not excluded, especially since there is similar experience in neighboring Russia. However, this is not a matter for the immediate future because experts believe that this will not happen as long as tariffs remain social.

Passengers will be separated from cargoes The fact that Ukrzaliznytsia is preparing to transfer passenger transportation on long-distance trains to a separate entity was announced in an interview with the Intercity Magazine by the head of Ukrzaliznytsia’s main passenger department, Oleksandr Ivanko. According to him, there are plans to create a number of branches in the passenger sector as part of part of the reform of Ukrzaliznytsia, and one of these branches will be the First Passenger Company. "Passenger cars, including dining cars, café cars, 14 passenger-car depots, and 9 car depots, are to be transferred. The main type of operation will be passenger transportation," said Ivanko. "It will become possible to improve the quality of the repair, upgrade rolling stock and fixed assets, and simultaneously improve the quality of services, thanks to specialization, concentration of fixed assets, and optimization and reduction of costs,” added Ivanko, explaining the motives for creation of the First Passenger Company.

The fact that passenger cars will be transferred to subsidiaries eventually along the lines of the transfer of freight cars during the reform of the cargo sector was discussed in the past. Such a step is also stipulated in the targeted state program for railway reform during the period of 2010-2019 that was approved by the Cabinet of Ministers a few years ago. However, according to this program, establishment of a company for long-distance transportation of passengers should occur only in the third stage of the reform (during the period of 2016-2019). This should be preceded by another stage of development of the passenger sector – separation of suburban and regional passenger transport into individual entities, with transfer of the corporate rights to them to Ukrzaliznytsia itself, as well as to local government agencies and private investors. These transformations should occur during the second stage of the reform, which the program stipulates should be implemented from 2013 to 2015. Meanwhile, we know that not even the first phase of the program has been completed now because the process of creation of a joint-stock company based on Ukrzaliznytsia has stalled. In response to a question by CTS, Infrastructure Minister Volodymyr Kozak assured last week that the preparation of the relevant resolutions of the Cabinet of Ministers was in full swing and that the joint-stock company would be created before the end of the year.

At first glance, it would seem appropriate to consider the motives for the transformations that are being prepared in the context of the recent acceleration of government efforts to search for measures for supporting the steel industry. Steelmakers are specifically the ones that have repeatedly raised the issue of the injustice inherent in the principle of subsidizing passenger transportation at the expense of freight transportation and lobbied for early separation of these segments. Today, when the problem of upgrading the fleet of freight cars threatens to deteriorate from critical into catastrophic, reshaping the period of reform at the initiative of the ore mining and steel complex would seem natural. "Separation of passenger transportation into a separate company is a step that is necessary to eliminate cross-subsidization,” said Oleksii Andriichenko, a senior analyst at the Art Capital company. "But after such a reform, it will still be necessary to seek transfer of the financing of passenger transportation to the state budget. In this case, freight transportation will increase its profitability and become a more transparent business that will be able to raise funds on international capital markets at low interest rates."

Phantom competition Ukrzaliznytsia has assured that there are no plans for expedited separation of passenger transportation. "Until a Cabinet of Ministers resolution on establishment of a joint-stock company is adopted, nothing will be transferred or separated. However, in the future, everything will most likely go according to the reform program,” said the press service of Ukrzaliznytsia.

According to arguments by experts with Ukrzaliznytsia, the sequence proposed for the reform is precisely the logical one in terms of liberalization of the passenger sector: first, separation of regional companies and then separation of companies servicing the long-distance transport segment. Firstly, this is because the finances of suburban transport services are dragging down the entire railway economy. When they are separated, it will be much easier to obtain loans from banks for the freight sector, which itself has a good profitability margin.

By establishing the First Passenger Company, Ukrzaliznytsia will essentially be creating a competitor to the existing subsidiary Ukrainian High-Speed Railway Company, which operates the Hyundai and Skoda high-speed trains

Secondly, from the viewpoint of the developers of the reform program, the segment of suburban transport services is specifically the most likely to interest private capital (ironically despite its losses). A necessary nuance is involvement of the local authorities, which will compensate for the difference between social fares and the economically justified fares, along with the private investor. Why local budget be able to fulfill this condition when the state budget is currently unable to fulfill it is a question remains unanswered for now. However, even from the electoral point of view, the municipal authorities are more interested in development of regional rail networks and there is no doubt that they are certainly better aware of the needs of their regions.

By establishing the First Passenger Company, Ukrzaliznytsia will essentially be creating a competitor to the existing subsidiary Ukrainian High-Speed Railway Company, which operates the Hyundai and Skoda high-speed trains. Under normal market conditions, these companies could compete for passengers based on attractive prices and quality of services. However, by remaining subsidiaries of Ukrzaliznytsia (or later its successors), they will be hostage to its policies and financial needs. For example, abolition of VAT on tickets for the Ukrainian High-Speed Railway Company’s Intercity+ trains or a redraw of the timetable in this context would appear to undermine competition in favor of the Ukrainian High-Speed Railway Company. It is true that experts do not rule out improvement of the quality of services after the creation of the First Passenger Company.

"The experiences of the Ukrainian High-Speed Railway Company confirm this. The consequences of steps such as the transfer of cleaning services and the hiring of personnel by third-party companies have been positive. Opinion polls show that passengers give high marks to the services on these trains," said Irina Kose, an expert at the Institute for Economic Research and Policy Consulting. "The quality of passenger services will be higher only if the costs of these services are appropriate and vice versa,” added Andriichenko. Therefore, according to him, it is necessary to begin by raising tariffs and demanding high quality service from the private owners. "I think that services will cost many times more when the time comes to privatize passenger rail transport. At the same time, the share of transport services in the family budget will be even lower than it is today and the quality and comfort of the rolling stock will be higher," predicted the analyst with Art Capital.

What investors expect Ukrzaliznytsia is not yet saying that passenger transportation will be separated in order for it to be quickly transferred to private businesses. However, considering the fact that the reform is based largely on the experience of Russia, the possibility that such an option is being considered cannot be ruled out. After liberalization, Russia not only created a state company for passenger transportation, but private entities with similar services also emerged. They are organizing private trains on individual, most congested routes, purchasing their own rolling stock, operating them, and competing with the state-owned Russian Railways. Moreover, the latter is operating based on state-regulated tariffs while the private companies are operating based on free tariffs. However, this has so far not helped these businesses to earn good profits and the bulk of private trains remain unprofitable.

The business of passenger transportation in Ukraine does not interest private companies at this stage. The reason is that fares are too low

According to experts, the business of passenger transportation in Ukraine does not interest private companies at this stage. The reason is that fares are too low and do not allow profitability. "The main problem of this business today is the low purchasing power of the population and the social tensions that can result if passenger transport fares are raised to economically justified levels,” said Andriichenko. The expert noted that only 22 out of 169 trains were profitable in 2012. "Therefore, it is necessary to raise fares and reduce costs. The government will be able to raise fares either when the level of the population’s prosperity increases or by providing targeted subsidies to the poor sections of the population in exchange for higher fares for the remaining sections of the population," said the analyst.

"In case of privatization of the passenger sector, it will be necessary to first answer this question: who will set fares? No matter who runs the company, it will not be profitable if fares remain at the current levels," said Kose, agreeing with Andriichenko.

At the same time, the experts agree that some sort of cost optimization is theoretically possible if the company falls into the hands of a more efficient owner. "But the main problem is the high depreciation of the rolling stock, and Ukraine will also be solving this problem for many years. In summary, interest is possible, but not in the near future,” said Andriichenko.