The degree of depreciation of the fixed assets of the State Railway Administration (Ukrzaliznytsia) has reached the limit. The problem of upgrading the locomotive fleet is particularly acute. For example, some depots operate mainline locomotives that have exceeded double their service lives. There is also a huge problem associated with the aging of shunting locomotives, which, along with mainline locomotives, play a key role in the technological process.

"The Ukrainian railway’s working fleet consists of about 800 shunting locomotives of the series ChME3. Ninety-three percent of these locomotives have long been in operation beyond their normal service life, which is 25 years. However, two-third of the fleet will be subject to write-off in the coming years because even the 15-year extension of their service life is expiring," said Andrii Bukovskyi, an expert with the reform council at the Ministry of Infrastructure.

According to experts, if large-scale upgrade of the locomotive fleet does not begin in the near future, it will pose the threat of collapse of the railway industry. "The current situation will cause interruptions in the provision of traction for the transportation process if not today, then tomorrow. Simply put, there will be nothing with which to carry loads to various destinations. In addition, there can be no talk of radically improving the efficiency of rail transport without introduction of modern locomotives that allow the productivity of traction to be increased several times," said Anatolii Lashko, a former deputy general director of Ukrzaliznytsia and an industry analyst

In search of a balance However, experts are critical of the ability of the railways themselves to perform a large-scale upgrade in the near future. "The current economic difficulty at Ukrzaliznytsia does not allow it to finance purchases of traction rolling stock with its own resources. In addition, the railways have extremely limited opportunities to borrow external funds or divert state budget funds for these purposes. In such a situation, the most realistic source of upgrade of the traction fleet remains the private sector," said Bohdan Yarmolenko, a partner at Ernst & Young Ukraine.

Former Polish transport minister Tadeusz Syryjczyk said in an interview with the CFTS portal that private carriers, in addition to the PKP group, operate their own locomotives, as well as leased locomotives, in Poland. The fleet consists of the inheritance of the state-owned PKP - which gave rise to smaller private companies - and second-hand locomotives imported by foreign carriers. However, according to him, renewal of the locomotive fleet is taking place slowly.

However, admission of private capital also has a number of negative consequences for the industry. In particular, private carriers will quickly focus on transportation of high-value cargo, which will only aggravate the financial position of Ukrzaliznytsia and increase the burden on the state treasury.

"One does not need to be a prophet to understand that private locomotives will pretty quickly take only the most profitable transport operations away from Ukrzaliznytsia and leave the state with the low-profit and unprofitable transport operations, thus exacerbating the already difficult financial situation of the railways," said Deputy Minister of Infrastructure Oleksandr Kava.

"It is necessary to take a balanced approach to creation of private carriers - it is important to find a balance between granting private carriers access to railway infrastructure and the level of compensation for Ukrzaliznytsia’s possible economic losses from the use of this infrastructure"

Indeed, the difference in tariffs for transportation of different classes of goods is currently 60-70%. When there is such differentiation within a single legal entity, there is internal subsidization of low-margin transport operations.

According to Kava, reference to the experiences of other countries is not entirely appropriate, since private locomotives have operated efficiently only in countries with low traffic intensity or countries in which a vertically integrated model has been implemented. Even then, it is assumed that a company owns locomotives, wagons, and infrastructure. However, Ukrzaliznytsia is one of the 10 largest railways in the world and one of the world leaders in terms of traffic intensity. For comparison, the freight traffic density of the Ukrainian railway network is four times more than that of Germany, seven times more than that of Poland, and 13 times more than that of France.

Ownership without control "It is necessary to take a balanced approach to creation of private carriers - it is important to find a balance between granting private carriers access to railway infrastructure and the level of compensation for Ukrzaliznytsia’s possible economic losses from the use of this infrastructure," said Yarmolenko.

According to the expert, there are various forms of mutually beneficial cooperation. For example, limiting the operations of private carriers to block-train shipments - using trains composed by them - on agreed routes without processing of wagons along these routes or with minimal processing of wagons at intermediate stations.

"In addition, it is possible to go the way of determining the optimal infrastructural tariff for private carriers, which will ensure provision of such services at sufficient levels of profitability, minimize damage to infrastructure, and minimize Ukrzaliznytsia’s possible economic losses from such use of its infrastructure," the Ernst & Young partner said.

However, this is only theory because the legal framework for operations of private carriers is still under development. In particular, this applies to the new version of the law of Ukraine “On Rail Transport” and other legislative acts. "Back in 2011, the AT Kearney international consulting firm drafted the "Target Model for the Market of Rail Services in Ukraine." Normative legal documents, including the new version of the law of Ukraine "On Rail Transport," were prepared based on this document. This target model provides for allowing private capital to own locomotives without the opportunity to manage the traction fleet," said Lashko.

This form of cooperation is possible if private investment is made in the form of leasing. Financial leasing is one of the options for solving the problem of upgrading the locomotive fleet, says Kava. According to him, Ukrzaliznytsia is currently formulating a modern policy on new traction rolling stock, which will include all the modern international developments in the field of locomotive manufacturing. This will improve transport efficiency, reduce costs, reduce the number of required locomotives, increase speed, and increase the weight of freight trains. New locomotives should not only meet the current needs of the railways, but also lay the foundation for efficient operation in 20-30 years. For example, widespread use of dual-motive power locomotive will allow replacement of 20-25% of the old locomotives that operate only on direct or alternating current, as well as an end to the waste of time and re-composition of trains at stations where two types of current meet. In addition, the use of modern, more powerful electric locomotives will increase the weight of freight trains to many destinations and increase their speed. New passenger locomotives will be purchased with design speeds of 200-220 kilometers per hour, which will enable railways to increase speed and competitiveness.

Lease of new equipment to Ukrzaliznytsia is seen another possible form of cooperation, although there are various opinions on this mechanism. In any case, the Ukrainska Zaliznytsia public joint-stock company that is currently being created will look for methods and mechanisms for upgrading the traction fleet.