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Ukrainian Railways on the path to renewal

22 Apr 2008

UKRAINE: With traffic volumes and customer expectations increasing, Ukrzaliznytsya has started to renew its rolling stock and upgrade its infrastructure. Structural reform would allow the railway to become more commercial and raise funding for investment from external sources.

Kateryna GolovachPrincipal Specialist, Ukrainian Railways

The introduction of through electric operation on the main line between Kyiv and Kharkiv marks a significant milestone in the modernisation of the railways of Ukraine. With growing demand for both freight and passenger transport, and the need to provide higher levels of quality, infrastructure upgrading and rolling stock renewal are proceeding apace, following many years of under-investment.

International and local financing have helped to support a series of investment projects, and last year the railway administration Ukrzaliznytsya approved a US$2bn investment programme that will continue the technical modernisation of the railway over the next few years. The biggest single priority remains the renewal of rolling stock, with US$920m allocated for the purchase of new freight wagons, passenger coaches, locomotives and EMUs. The other main emphasis is on infrastructure upgrading for operation at higher speeds, plus further electrification to reduce the transport sector's reliance on fossil fuel.

Strategic network

Ukraine has one of the most extensive rail networks in Europe, with a total route length of approximately 22 000 km, employing 420 000 people. Ukraine inherited a strong transport infrastructure from the former USSR, and the country's geographical position gives the railway a major advantage as a key transit route between western and central Europe, Russia and other CIS countries. In terms of rail freight volumes, Ukraine currently ranks fourth in the Eurasian market behind only China, Russia, and India.

Ukrzaliznytsya (the State Administration of Rail Transport) was established in December 1991, to centralise the management of the country's rail network after Ukraine declared independence from the Soviet Union in September 1991. The enabling legislation transferred control of six regional companies from SZD to UZ (Table I).

At present, UZ combines both public administration functions and those of a commercial operator. It monitors and manages the activities of the regional railways and oversees their operational and financial performance, but they are directly owned by the state and are not technically subsidiaries of UZ.

One of the key drivers behind the current investment programme is UZ's ambition to become an important player in the international transport market. Historically there has been a close interaction between the rail networks of central and eastern Europe. Thanks to political and economic reforms and the globalisation of trade, the inter­relationship between the region's railways is developing more and more ?dynamically, in terms of both technology and economic liberalisation.

Today, freight traffic accounts for approximately 71·7% of UZ's revenues, compared to just 10·1% from the passenger sector, where fares are closely regulated by the government. The remaining 18·2% is derived from other activities such as construction, rolling stock maintenance, research and development, medical facilities and communications.

In 2000, UZ instituted a number of measures to improve its operational performance. These led to increased traffic volumes, more transit business and an improved financial performance. In the last five years, UZ has seen a steady growth in freight traffic, both in terms of the volume of traffic moved and the average journey length (Table II).

Ukraine's geographical position provides a great opportunity to act as a transit hub, and in recent years the volume of transit freight has been growing steadily, from 30·7 million tonnes in 2000 to 68·6 million tonnes in 2007. The development of international corridors is a critical element in aligning the country with the wider European transport policy. Three of the designated pan-European railway corridors run across Ukraine, with a total length of more than 3 000 km.

UZ believes that its focus on modernisation will help to make the railway more competitive for transit freight. This will allow rail to attract a greater proportion of the traffic now moving by sea between Asia and Europe, thanks to a more flexible tariff policy, better information and management technologies and the development of intermodal operations.

As an example, UZ has recently embarked on a staged programme to enhance network capacity for traffic moving to and from the Crimea region, and in terminal handling capacity.

Meanwhile, the number of passengers carried by UZ has been declining in the past five years, although the distance travelled in passenger-km has been increasing. Because of the regulated fare structure, the passenger business is currently loss-making and cross-subsidised from the profits generated by the freight sector. Passenger operations are split between commuter and long-distance services, both domestic and international.

Thanks to its strategic location, Ukraine has good international connections, with through trains or through coaches to 18 countries: Russia, Belarus, Moldova, Azerbaijan, Kazakhstan, Uzbekistan, Latvia, Lithuania, Poland, Germany, Hungary, Serbia, Croatia, Bulgaria, Romania, Slovakia, Austria, and the Czech Republic. Direct connections with Italy and Slovenia are currently under discussion, as well as a possible through service to and from China.

Recent economic development has raised passenger expectations in terms of comfort, speed and reliability, which are reflected in UZ's timetable and investment plans for 2009-12 and the draft strategy for the following years. Investment in both infrastructure and rolling stock, along with a relaxation on state control of fares, is expected to transform the passenger segment into a profitable business.

Funding essential renewals

As with the railways in neighbouring countries, many years of regulated tariffs have left Ukraine's rail network significantly under-financed. In particular, rolling stock renewal has been running at around 25% less than the level needed to maintain a stable age profile. As a result, around 70% of UZ's current fleet has a service life exceeding the target average of 25 to 30 years. One immediate consequence is much higher maintenance costs - UZ calculates that locomotives and rolling stock cost around 2·2 times as much to maintain during the last third of their life compared to the first third.

UZ needs to invest an average of more than 4·4bn hryvna (€575m) per year replacing worn-out equipment. Another 15bn hryvna (€1·9bn) a year is needed to repair and upgrade the existing fleet. In 2006 UZ embarked on a major programme of rolling stock renewal and modernisation at the railway's own workshops. As far as possible the new stock is being built by Ukrainian companies, but to the latest international specifications.

In 2002 Ukraine embarked on an energy-saving programme which envisaged the introduction of alternative fuels for the transport sector by 2010. The intention is to reduce the overall energy consumption of the railways, with a particular focus on further electrification. The commissioning in September 2007 of 25 kV 50 Hz wiring on the 53·9 km from Kolomak to Radnarkomivska at a cost of 106m hryvna marked the completion of electrification between Kyiv and Kharkiv (RG 11.07 p674). The 78 km line from Debaltsevo to Luhansk has been electrified at 3 kV DC, at a cost of 138m hryvna and work is now underway to install 25 kV on the Konotop - Vorozhba corridor.

Following the acceleration of international trains between Kyiv and Moscow from August 2005, UZ embarked on a 10-year programme to upgrade the speed of its domestic inter-city passenger services. The launch of Stolichny Express services in 2002-03 had already seen journey times cut by up to 6 h on the routes from Kyiv to Kharkiv and Dnipropetrovs'k. Since 2005, daytime services from Kyiv to Poltava, Kremenchuk, Khmel'nytsky and Sumy have been accelerated, along with the cross-country routes from Odesa to Vinnitsa, Kharkiv to Simferopol and Dnipropetrovs'k to Simferopol.

The programme has been given fresh impetus by the recent decision to hold the Euro 2012 football championship in Ukraine, and the Ministry of Transport is currently working to finalise a 37·5bn hryvna investment package which should see the launch of 200 km/h operation from Kyiv to Donetsk, Dnipropetrovs'k, Kharkiv and L'viv by 2012.

On October 4 2007 UZ signed an agreement with Siemens for joint development of a dual-system AC-motored electric locomotive, designated DC-4. Intended for 200 km/h operation, this will be an evolution of the 25 kV 50 Hz Class DC-3 locos supplied jointly by Siemens and Dnipropetrovs'k-based Electrovozostroenie. Between 2009 and 2014 UZ expects to take delivery of 50 DC-4s, with the first 10 being built in Germany and the remainder assembled locally by the Zaporizkhky Locomotive Plant. A prototype will be rolled out in 2009, and 28 locos are due to be in service in time for the Euro 2012 championships.

Raising external finance

For the last 16 years, the Ukrainian railway industry has been self-financing, as well as contributing to the state budget through a special-purpose fund. But raising funds for a higher level of investment from internally-generated resources will require a significant increase in tariffs, as well as a focus on cost reduction. But these approaches are limited by external factors, such as the ability of customers to pay, government policy, and the taxation regime.

Nevertheless UZ has good experience of attracting credit from the European Bank for Reconstruction & Development. In 1999 EBRD provided a loan for UZ to purchase track maintenance machines, which are used across the network. This programme was completed in 2005, and today the railway has a fleet of 27 machines in operation, funded from both the loans and from internal resources. Further track renewal machines will be purchased as part of the US$200m passenger train acceleration programme, which will also include with the construction of a new tunnel on the L'viv - Chop route.

UZ is currently negotiating with EBRD for assistance towards the US$150m modernisation of the Poltava - Kremenchuk - Burty - Koristivka route. UZ is also in discussions with the World Bank to support the introduction of energy-saving technology at a cost of US$800m, including the upgrading of the Znam'yanka - Dolinska - Mykolayiv - Kherson - Dzhankoy route. Other schemes to be funded by external investment over the next few years include US$1·5bn for rolling stock in 2007-11 and a further US$149m for to improve the operational efficiency of UZ's electrified network.

Structural reform postponed

Attracting non-state investment within the current economic system is complicated by the need to grant sovereign guarantees to foreign investors. Some outstanding legal and financial issues remain unsettled, and there are other issues related to the organisational structure of the industry, and the railway has been looking at ways to overcome this through structural reform.

In 2006 UZ drew up proposals to put the Ukrainian railway sector onto a more commercial footing, paving the way for investment in modernisation and enhancement of the national network. These initial proposals were approved by the government at the end of that year, with the intention of implementing the reforms in a three-stage programme running until 2015.

Phase 1 would see UZ established as a joint stock company by the end of 2008, followed by a series of internal reforms in Phase 2 lasting until 2010. Stage 3 was scheduled for 2011-15, and would see the divestment of non-core activities. Implementation of the reforms was to be aided by government support, together with finance from international lenders.

However, the new government that took office after the parliamentary elections in December 2007 announced a change of strategy, and reform of the rail sector has been postponed until 2012-15 at the earliest.

Nevertheless, the government recognises the strategic importance of the national rail network, and remains committed to maintaining its role in the economy. The current capital expenditure programme will help to position UZ as the leading operator in the domestic transport market, enhance the role of Ukraine's railways as a reliable link in the international transport network, and pave the way for further investment to meet growing market demand.

 

  • CAPTION: Ukraine's extensive network is heavily reliant on freight traffic to drive revenues. However an acute shortage of dual-system electric locomotives for use on both 3 kV DC and 25 kV AC networks has caused operational problems, particularly for freight services to and from Russia.
    Photos: Sergei Dontsov
  • Rolling stock renewal is a key priority for UZ. This Skoda-built ChS2 locomotive has been refurbished at the Zaporizkhky Locomotive Plant.
  • The DC-3 25 kV AC locomotive was jointly developed by Siemens and Electrovozostroenie. A fleet of 15 is used for express passenger services to and from Kyiv.
  • A programme of electrification continues in Ukraine, with catenary now installed between Kyiv and Kharkiv.
  • This EPL9T 25 kV AC EMU was built at the Luhansk Diesel Locomotive Works. More high-capacity passenger rolling stock is likely to be required to cater for visitors to the Euro 2012 football championships.
  • The first of a new design of diesel locomotive designated TEP150 is now being trialled on express passenger services between Kharkiv, Hrebinka and Kremenchuk.

 

Table I. Ukraine's six regional railways

1. Lvivska West
2. Pivdenno-Zakhidna Central/North
3. Odeska Southern
4. Pivdenna North-East
5. Prydniprovska South-East
6. Donetska East

Table II. UZ traffic 2002-07


Freight Passengers
million tonnes billion tonne-km million journeys billion pass-km
2002 330 193 465 50·5
2003 363 225 477 52·5
2004 388 234 452 51·7
2005 380 224 445 52·6
2006 398 241 448 53·2
2007 416 262 416 53·3