Publication: Ukraine – Ukrzaliznytsia Modernization Strategy: Policy Note 3 - Selected Cargo Business Issues
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2019-06-24
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2019-06-24
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The draft law on Railway Transport of Ukraine (the ‘new Railway Law’) is currently awaiting sign-off from other ministries and the approval of the Cabinet of Ministers. The Law, among other aims, is intended to align with commitments contained the EU-Ukraine Association Agreement 2014. The Agreement commits the parties to cooperate and seek to harmonize policy, legislation and regulation across a broad range of areas. In its railway sector, Ukraine undertakes to approximate its legislation to specified EU legislation (the ‘rail acquis’) within stipulated timeframes, generally by 2022. The ‘market opening’ provisions of the new Railway Law will include arrangements allowing properly licensed cargo train operating companies, whether public or private, to provide transport services on Ukraine’s rail network on a fair and equal (competitively neutral) basis. JSC Ukrzaliznytsia has already begun a wide-ranging reform program with its development strategy for 2019-2023 that includes a comprehensive strategy dealing with its vision and values, market analysis, objectives, reorganization into business segments, and actions that are commensurate with best practice observed by the World Bank. The strategy should result in a sustainable and expanding railway to meet the country’s needs. The focus of this policy note is on selected cargo business issues involved in JSC Ukrzaliznytsia (UZ) preparations for competing in the provision of rail cargo transport services.
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“World Bank Group. 2019. Ukraine – Ukrzaliznytsia Modernization Strategy: Policy Note 3 - Selected Cargo Business Issues. © World Bank. http://hdl.handle.net/10986/32287 License: CC BY 3.0 IGO.”
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Publication Ukraine - Ukrzaliznytsia Modernization Strategy(World Bank, Washington, DC, 2019-06-25)This summary report assembles and distills the main finding and recommendations of five separate policy notes that originated in a request from Ukraine’s Ministry of Infrastructure (MoI) and state-owned railway company, JSC Ukrzaliznytsia (UZ) to the World Bank to help address specific topics concerning Ukraine’s railway sector. The topics were: (1) railway market opening for cargo services; (2) loss-making long-distance passenger services; (3) selected Cargo business issues; (4) debt management; and (5) infrastructure asset management and prioritization of investment. Asset management strategy and life-cycle costing in the renewal and reconstruction of UZ’s railway infrastructure network. This summary note is organized with the market opening as the anchor for catalyzing and achieving the modernization of UZ and putting it in a strong position to compete with other railways once the market is opened. And while many of the regulatory and institutional actions will depend on the pending railway law, UZ and MoI can continue and in some cases start preparations to be ready once the law is passed.Publication Ukraine - Ukrzaliznytsia Modernization Strategy(World Bank, Washington, DC, 2019-06-24)This summary report assembles and distills the main finding and recommendations of five separate policy notes that originated in a request from Ukraine’s Ministry of Infrastructure (MoI) and state-owned railway company, JSC Ukrzaliznytsia (UZ) to the World Bank to help address specific topics concerning Ukraine’s railway sector. The topics were: (1) railway market opening for cargo services; (2) loss-making long-distance passenger services; (3) selected Cargo business issues; (4) debt management; and (5) infrastructure asset management and prioritization of investment. Asset management strategy and life-cycle costing in the renewal and reconstruction of UZ’s railway infrastructure network. This summary note is organized with the market opening as the anchor for catalyzing and achieving the modernization of UZ and putting it in a strong position to compete with other railways once the market is opened. And while many of the regulatory and institutional actions will depend on the pending railway law, UZ and MoI can continue and in some cases start preparations to be ready once the law is passed.Publication Ukraine – Ukrzaliznytsia Modernization Strategy(World Bank, Washington, DC, 2019-06-24)This Policy Note describes the methodology, data requirements and next steps for implementation of an asset management system that could identify necessary maintenance and renewal budgets to guarantee a sustainable railway infrastructure, measure the backlogs, identify optimum track technologies for individual parts of the network and assist decision-making in individual investment projects. The Ukrainian network covers some 27,000 track-km, (excluding stations, sidings etc). In the absence of detailed data yet available to the consultant, the number of rehabilitated tracks of 2296.8 km in the last 5 years implies an average yearly renewal rate of some 450 km. This is little more than 1.5 percent of the network, implying that average service life will need to be around 60 years. Service life depends on the loading, on the many technical boundary conditions already addressed in this report, and on the maintenance regime applied. However, an average of 60 years’ service life is most unlikely to be attainable with today’s track components and the amount of rail traffic in the Ukraine. Implementation of a life cycle based asset management system is a challenging task for the infrastructure managers. Based on international experiences, it takes at least 1 and half years, to reach the level necessary for strategic decision making based on an asset management system. This time schedule needs an active working group inside UZ meeting at least every six weeks. Starting the work requires an initial two-day seminar on the main principles for describing track behavior using the Standard Element approach to ensure commitment of all working-group participants. The first milestone of the working group is a set of Standard Elements describing the present situation and its history of maintenance and service lives of track in the Ukrainian railway network. The second milestone is a set of alternative technical scenarios enabling the definition of a sustainable solution. Reaching this second milestone, the renewal demand as well as the maintenance demand for a sustainable network can be calculated.Publication Ukraine - Ukrzaliznytsia Modernization Strategy(World Bank, Washington, DC, 2019-06-24)This summary report assembles and distills the main finding and recommendations of five separate policy notes that originated in a request from Ukraine’s Ministry of Infrastructure (MoI) and state-owned railway company, JSC Ukrzaliznytsia (UZ) to the World Bank to help address specific topics concerning Ukraine’s railway sector. The topics were: (1) railway market opening for cargo services; (2) loss-making long-distance passenger services; (3) selected Cargo business issues; (4) debt management; and (5) infrastructure asset management and prioritization of investment. Asset management strategy and life-cycle costing in the renewal and reconstruction of UZ’s railway infrastructure network. This summary note is organized with the market opening as the anchor for catalyzing and achieving the modernization of UZ and putting it in a strong position to compete with other railways once the market is opened. And while many of the regulatory and institutional actions will depend on the pending railway law, UZ and MoI can continue and in some cases start preparations to be ready once the law is passed.Publication Ukraine – Ukrzaliznytsia Modernization Strategy(World Bank, Washington, DC, 2019-06-24)This note focuses on the current debt situation of UZ, the associated risks and ways to manage them. It does not address broader financial sustainability issues and how to finance the investment backlog. This is of paramount importance and should be a priority for future work. This note uses an analysis of the available audited financial statements in the January 1, 2014 -June 30, 2018 period to discuss risks and concerns regarding the financial viability of the UZ going forward given the near-critical liquidity situation and widespread solvency concerns in the financial markets. This note suggests some steps for ameliorating the present dire liquidity situation: (i) A clear market opening and corporate restructuring strategy; (ii) detailed review of the asset valuation exercise carried out by reputable asset evaluators; (iii) based on the results of asset revaluation, seek Government consent to sell non-core assets and (iv) seek support in raising substantial investment resources at reasonable cost necessary to carry out the adopted modernization strategy and reach sustainable levels of business operation in the medium-to-longer run (such as increasing the share of current assets by selling non-core fixed assets such as land and buildings). Any sustainable solution going forward, hinges on an open commitment to market opening and deep organizational and management restructuring programs discussed in other policy notes. Given the ownership structure, political and social importance of UZ, and the legal status of the company, this cannot be done without full ownership and support of the government (including the Ministry of Finance). Additionally, given the size of the company and present institutional and governance risks, successful restructuring and changed perception of domestic and international financial markets will critically depend on the credibility of the program.
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