The Ministry of Infrastructure plans to increase tariffs for rail freight

29/ 07/ 2021

On July 5, 2021, the draft order of the Ministry of Infrastructure On Amendments to the Coefficients Applicable to the Tariffs of the Collection of Tariffs for Transportation of Goods by Rail within Ukraine and Related Services was published on the Ministry’s website. It is implied that the document will enter into force starting from September 1 of this year. The European Business Association does not support the draft order. Thus, the EBA experts note that the tariff system of Ukrzaliznytsia needs a comprehensive revision, not a pinpoint increase. For this, it is necessary to reorganize Ukrzaliznytsia, which is provided for in draft Law №1196-1 On Railway Transport dated September 6, 2019, and which needs to be adopted as soon as possible. Besides, draft Law №1196-1 provides for the powers of the National Commission on Transport Regulation (NCTR) to regulate prices for railway transport and control their observance. The planned tariff increase will exacerbate the tariff burden on business as a whole by UAH 10.1 billion annually. The costs for companies that work, for example, in the fuel and energy sector, will potentially increase by more than 30% or UAH 2 billion annually. Such an increase in costs will have catastrophic consequences for the coal and energy industries, in which a significant number of companies are currently unprofitable or being subsidized and are in a difficult financial situation. Besides, the construction industry will be significantly affected. When delivering granite rubble from quarries in the Zhytomyr region over a relatively long distance, for example, to build a road in the Sumy region, the cost of transporting one ton of rubble will be about 30% (from about 148 UAH/t incl. VAT up to 194 UAH / t incl. VAT) given the need to pay for empty mileage back. Also, an increase in freight tariffs for the cement industry will mean an increase in the cost of raw materials and, as a consequence, will lead to higher prices for finished products and construction projects. Thus, the increase in tariffs for rail freight will lead to construction materials being carried on road transport. It should be noted that the tariff increase was not foreseen by the Consolidated Financial Plan of Ukrzaliznytsia for 2021 and is not justified. According to the Explanatory Note to the draft Order, the need to revise the Coefficients is due to the increase in the number of unprofitable and empty carriages but there were no calculations provided on the cost of transportation by type of cargo in the accompanying documents, that would establish the fact of the losses. Moreover, when drafting the document, the impact of tariff increases on various industries, including the growth of the share of transport costs in the final price of products, was not fully assessed. Thus, there was no full risk assessment of the production reduction. And in this case, such an assessment is critical. As stated in the Explanatory Note, the effect of increasing Ukrzaliznytsias revenues will amount to UAH 10-12 billion in total for 2021 and 2022 in the case the draft Order is implemented. According to business representatives, this number is significantly overestimated. Some of the cargoes for which indexation is planned (including crushed stone, sand, slag, construction cargo, grain) are flexible, and when the cost of railway services increases will be refocused on road transport, which, on the one hand, will not allow Ukrzaliznytsia to receive the expected level of revenues. on the other hand, will significantly increase the load on the roads, which in turn will potentially lead to a deterioration in the quality of the road surface. One of the key problems of Ukrzaliznytsia is the loss of passenger traffic, which, according to business representatives amounted to - 13 billion UAH, in 2020. According to our information, 100% of Ukrzaliznytsias profit from freight was used to cover the growing losses from passenger traffic in 2020. Therefore, an important task should be to solve the problem of significant losses of passenger traffic. It is noted that the higher tariffs will bring greater revenues which can be used for funding the repair of freight services facilities and infrastructure in accordance with the needs of sectoral departments, as well as directing funds to capital investment to ensure train safety. According to business representatives, previous tariff increases were also justified by the need for repairs and reconstructions. In this regard, the business considers it is appropriate to get information from Ukrzaliznytsia on the use of funds derived from previous increases in transportation costs and capital investments. Meanwhile, the plans for the reconstruction of railway infrastructure and modernization of traction rolling stock in 2021-2022 have already been envisaged in the Consolidated Plan without considering the increase in the cost of freight transportation. Therefore, the European Business Association reiterates the importance of predictability and transparency for doing business in Ukraine. The business usually considers any tariff increases in its budget in advance, so it is worthwhile to understand what will happen in a year, two, three, or more. Besides, it is necessary to understand where it is planned to direct funds from the increase and why transparent businesses are constantly being pushed against the wall, given the fact that there is currently high profitability of freight. Therefore, EBA appeals to the Head of the Office of the President of Ukraine – Mr. Andriy Yermak, the Prime Minister of Ukraine – Mr. Denys Shmyhal, and the Minister of Infrastructure of Ukraine – Mr. Oleksandr Kubrakov to help revoke this draft order. It is important to create a Working Group that would develop a comprehensive, transparent system of Ukrzaliznytsias tariff formation, work out alternative ways to improve Ukrzaliznytsias financial results apart from tariff increases, namely, by optimizing costs, reducing non-core taxation (abolition of land tax), reducing the losses of passenger traffic. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

On July 5, 2021, the draft order of the Ministry of Infrastructure “On Amendments to the Coefficients Applicable to the Tariffs of the Collection of Tariffs for Transportation of Goods by Rail within Ukraine and Related Services” was published on the Ministry’s website. It is implied that the document will enter into force starting from September 1 of this year.

The European Business Association does not support the draft order. Thus, the EBA experts note that the tariff system of Ukrzaliznytsia needs a comprehensive revision, not a pinpoint increase. For this, it is necessary to reorganize Ukrzaliznytsia, which is provided for in draft Law №1196-1 “On Railway Transport” dated September 6, 2019, and which needs to be adopted as soon as possible. Besides, draft Law №1196-1 provides for the powers of the National Commission on Transport Regulation (NCTR) to regulate prices for railway transport and control their observance.

The planned tariff increase will exacerbate the tariff burden on business as a whole by UAH 10.1 billion annually. The costs for companies that work, for example, in the fuel and energy sector, will potentially increase by more than 30% or UAH 2 billion annually. Such an increase in costs will have catastrophic consequences for the coal and energy industries, in which a significant number of companies are currently unprofitable or being subsidized and are in a difficult financial situation.

Besides, the construction industry will be significantly affected. When delivering granite rubble from quarries in the Zhytomyr region over a relatively long distance, for example, to build a road in the Sumy region, the cost of transporting one ton of rubble will be about 30% (from about 148 UAH/t incl. VAT up to 194 UAH / t incl. VAT) given the need to pay for empty mileage back. Also, an increase in freight tariffs for the cement industry will mean an increase in the cost of raw materials and, as a consequence, will lead to higher prices for finished products and construction projects. Thus, the increase in tariffs for rail freight will lead to construction materials being carried on road transport.

It should be noted that the tariff increase was not foreseen by the Consolidated Financial Plan of Ukrzaliznytsia for 2021 and is not justified. According to the Explanatory Note to the draft Order, the need to revise the Coefficients is due to the increase in the number of “unprofitable” and empty carriages but there were no calculations provided on the cost of transportation by type of cargo in the accompanying documents, that would establish the fact of the losses. Moreover, when drafting the document, the impact of tariff increases on various industries, including the growth of the share of transport costs in the final price of products, was not fully assessed. Thus, there was no full risk assessment of the production reduction. And in this case, such an assessment is critical.

As stated in the Explanatory Note, the effect of increasing Ukrzaliznytsia’s revenues will amount to UAH 10-12 billion in total for 2021 and 2022 in the case the draft Order is implemented. According to business representatives, this number is significantly overestimated. Some of the cargoes for which indexation is planned (including crushed stone, sand, slag, construction cargo, grain) are flexible, and when the cost of railway services increases will be refocused on road transport, which, on the one hand, will not allow Ukrzaliznytsia to receive the expected level of revenues. on the other hand, will significantly increase the load on the roads, which in turn will potentially lead to a deterioration in the quality of the road surface.

One of the key problems of Ukrzaliznytsia is the loss of passenger traffic, which, according to business representatives amounted to – 13 billion UAH, in 2020. According to our information, 100% of Ukrzaliznytsia’s profit from freight was used to cover the growing losses from passenger traffic in 2020. Therefore, an important task should be to solve the problem of significant losses of passenger traffic.

It is noted that the higher tariffs will bring greater revenues which can be used for funding the repair of freight services facilities and infrastructure in accordance with the needs of sectoral departments, as well as directing funds to capital investment to ensure train safety. According to business representatives, previous tariff increases were also justified by the need for repairs and reconstructions. In this regard, the business considers it is appropriate to get information from Ukrzaliznytsia on the use of funds derived from previous increases in transportation costs and capital investments. Meanwhile, the plans for the reconstruction of railway infrastructure and modernization of traction rolling stock in 2021-2022 have already been envisaged in the Consolidated Plan without considering the increase in the cost of freight transportation.

Therefore, the European Business Association reiterates the importance of predictability and transparency for doing business in Ukraine. The business usually considers any tariff increases in its budget in advance, so it is worthwhile to understand what will happen in a year, two, three, or more. Besides, it is necessary to understand where it is planned to direct funds from the increase and why transparent businesses are constantly being pushed against the wall, given the fact that there is currently high profitability of freight.

Therefore, EBA appeals to the Head of the Office of the President of Ukraine – Mr. Andriy Yermak, the Prime Minister of Ukraine – Mr. Denys Shmyhal, and the Minister of Infrastructure of Ukraine – Mr. Oleksandr Kubrakov to help revoke this draft order. It is important to create a Working Group that would develop a comprehensive, transparent system of Ukrzaliznytsia’s tariff formation, work out alternative ways to improve Ukrzaliznytsia’s financial results apart from tariff increases, namely, by optimizing costs, reducing non-core taxation (abolition of land tax), reducing the losses of passenger traffic.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.