The government-run railway monopoly Ukrzaliznytsya plans to raise cargo tariffs by 25 percent in May. Tariffs have already been raised twice in the last year – by 12.5 percent in July 2014 and by 30 percent in February 2015.
Ukrzaliznytsya insists that it provides cargo services below cost. Its clients in heavy industry, however, say that the increase put some out of business. Higher transportation costs are a major threat to the metallurgy, construction and chemical industries, which experienced declines in production ranging from 28 to 31 percent in 2014.
The tariff hike is short-sighted, market players said.
Yuriy Zinchenko, CEO of Illich Mariupol Metallurgical Plant, said that Ukrainian metallurgy might cease to exist soon.
“The last increase of 30 percent cost an additional Hr 600 million ($25.4 million) for my plant in 2014,” Zinchenko said at a roundtable in Kyiv on March 24. “And the next one of 25 percent will cost an additional Hr 800 million ($33.9 million) by the end of this year.”
Others counter that those currently opposing the tariff spike are not representative of the larger business community. “Those are oligarchic businesses – metallurgists and connected productions,” says industry expert Dmytro Podturkin. “Their situation is not that critical, devaluation has only increased their competitiveness on export markets”
He says Ukrzaliznytsya has no other choice. “Previous management had almost led Ukrzaliznytsya to default. The railway met 2015 with zero reserves, obsolete carriage equipment and a portfolio of accumulated ‘bad loans’,” Podturkin says.
He estimates Ukrzaliznytsya has $ 1.5 billion in foreign currency loans.
Ivan Khoryakov, deputy head of Ukrzaliznytsya’s commercial department, said that tariffs must be raised because they constantly lag behind the growing producer price index.
“Diesel fuel and energy rose in price,” he says. “Hryvnia devaluation and debts produce additional pressure. Cargo turnover decreased significantly, and this reduced our revenue. We cannot work below cost.”
However, even the increase will not allow for infrastructure improvements or in the enhancements of services. Only Hr 400 million ($16.9 million) in capital investments are planned for 2015, as compared to the Hr 30 billion ($1.27 billion) needed.
The business model has been to make up for losses in passenger services, estimated at Hr 10 billion ($0.42 billion) in 2014, with revenues from cargo transportation.
Many experts think this is not an efficient model, although hiking passenger fares is risky.
Iryna Kosse, an expert on transportation and energy from the Institute for Economic Research and Policy Consulting, says that railway losses incurred by local commuter traffic are supposed to be paid from local government budgets. But these payments are historically delayed and Ukrzaliznytsya receives only 30 percent of these payments.
Kosse believes that the introduction of market prices for passenger transportation together with targeted state subsidies for those who cannot afford the new prices is the best way.
“Such a mechanism is currently being designed for subsidizing utilities, and if it proves successful, it could be later applied to other services,” Kosse says. “Ukrzaliznytsya is not considering this option at the moment.”
Kosse hopes, however, that business meetings on the cargo tariff next month will result in a tariff increase below the announced 25 percent.
As railway costs increase, companies will inevitably adjust, switching to road freight and water transport.
“Ukrzaliznytsya has already lost Hr 13.5 million ($0.57 million) in 2014, as we switched to water transportation,” says Pavlo Kravchenko, chairman of the board of the Zaporizhia ferrous metals plant. “With higher tariffs (Ukrzaliznytsya) will lose even more.”
Water cargo turnover in 2014 grew by 18 percent to 5.5 million ton-kilometers, a measurement of when 1 kilogram moves a distance of 1 kilometer.
The fear also is that producers will pass the price increases to consumers.
“High cargo tariffs will hit the cement industry and economy as a whole,” says Miguel Machado, the head of Ukrcement Association, an industry group. “As a result, the difference in prices for cement in oblasts with and without cement factories will become dramatic.”
Inefficiencies and corruption inside Ukrzaliznytsia also contribute to the state-run company’s losses.
“Both businesses and individuals would not have been so critical of the higher tariffs if the corruption level was not so high,” says Angela Bochi, senior economist at International Centre for Policy Studies. “They should first review their expenditures, transparently set their tariffs and applied criteria, and fight corruption inside Ukrzaliznytsia.”
The former head of state fiscal inspections, Mykola Gordiyenko, said that corruption at Ukrzaliznytsya has cost the state Hr 258 million ($10.93 million), namely through procurement schemes and embezzlement.
Prime Minister Arseniy Yatsenyuk has asked the General Prosecutor’s office to look into Gordiyenko’s allegations.
Kyiv Post staff writer Olena Gordiienko can be reached at [email protected].
