DB and Ukrainian Railways — a helping hand or a hostile takeover?

15.05.2020
Having control of the Ukrainian state railway company Ukrzaliznytsia means having control over the lion’s share of Ukrainian exports and transit of goods, as well as a huge market for companies producing for the railway industry. Germany may soon take it all over.
Ukraine cargo train

Ivano-Frankivsk, Ukraine (Schnitzel_bank, CC BY-ND 2.0)

Ivano-Frankivsk, Ukraine (Schnitzel_bank, CC BY-ND 2.0)

At the end of January 2020, during the World Economic Forum in Davos, a plan was announced to associate the Ukrainian state railway Ukrzaliznytsia (UZ) with the German state railway carrier, Deutsche Bahn (DB). The Ukrainian Minister of Infrastructure and a representative of the German company signed a memorandum concerning this case there. “This is how we want to entrust the management of the railway to the Germans for 10 years. This is a systemic decision which should show that Ukraine is open to investment. We will talk about the details, but the political decision has already been made,” announced Ukrainian Prime Minister, Oleksy Honcharuk.

As he informed, in the first stage Germany will analyze the state of Ukrzaliznytsia (UZ) and create a “road map of changes”. In the next step, from January 2021, Deutsche Bahn (DB) will support the management of the UZ in the areas of freight, passenger transport, infrastructure, services and maintenance.

Paradox on the tracks

The railway network in Ukraine is 19,700 km long, with 300 million tons of cargo and 150 million passengers transported annually. As Ukrainian railway industry experts note, unlike DB, UZ regularly makes a profit — it is not big, but still, compared to DB, subsidized by massive cash injections provided by the German government, it looks much better. This is due to the completely destroyed road network, which means the major share of freight transport, including almost all Ukrainian exports, is transported by rail, generated profits in the cargo segment successfully cover the company losses in passenger transport.

“Although UZ is one of the most technologically obsolete railway companies in Europe, it is at the same time one of the most prospective ones,” believes Vladimir Dacenko, an expert in the railway industry. “It remains a major player in the freight market of Ukraine at a time when other railways are struggling with a loss of market share in this segment,” he added.

In the EU, the share of cargo in total transport ranges from 15 to 25 per cent, while in Ukraine it is approx. 55 per cent, and nothing indicates that this will change. In practice, this means that whoever controls the Ukrainian railways controls the country’s trade.

According to information from the former head of UZ, Yevhen Kravkov (he was dismissed from his post in January 2020) Ukrainian railways, whose passenger transport generated USD200-500m losses every year, made an annual profit of about USD100-120m.

More questions than answers

“A memorandum of understanding was signed in Davos on the intention to continue cooperation. It will allow Deutsche Bahn, one of the largest railway operators in Europe, to share its technological and management experience, as well as purchasing and service procedures with UZ.

There is no question of transfer, concession, sale, or privatisation — it is only about transferring those expert opinions and studies which DB has and they are ready to share them with us, therefore we have established a strategic partnership,” argued the Ukrainian minister of infrastructure, Vladyslav Krykliy.

However, all this cannot in any way be described as an “operational board”, which the Ukrainian Prime Minister also announced.

As the business agency Liga.Biznes reports, in the original version of the memorandum, through its company DB Engineering and Consulting, DB was supposed to develop cargo and passenger transport excluding military transport, manage the infrastructure and supervise the operational activities of UZ.

At the first stage of cooperation, DB was to present a candidate for the head of the Ukrainian railways for approval by the government and the supervisory board and send at least 15 curators of the various directions of UZ activity to Ukraine. Indeed, all that would be left on the Ukrainian side would be to sign the documents presented by German “supervisors”. The duration of such “cooperation” is 10 years.

Finally, a softened version was released, according to which the parties will analyze the possibility of a strategic partnership between UZ and DB “in order to exchange experience and practices and increase the efficiency of carriages in Ukraine”, will assess the potential for cooperation for the implementation of European experience, the reforming of railway transport and adaptation of EU directives, and will foster mutual proposals for the development of railway infrastructure and warehouses taking into account environmental standards and innovation.

The Ukrainian economic expert, Volodymyr Larkav, points out that the supervisory board of UZ has for a long time comprised, among others, a former member of the DB Management Board, and according to information from the Ministry of Infrastructure, cooperation between UZ and DB has continued since 2014.

What would change then? In his opinion, the decision raises legal doubts, since according to the 2006 Act on the Management of State Property Facilities, the government cannot transfer companies of strategic importance that hold a monopoly position and with significance for defense and the economy to non-state legal entities, including foreign companies.

“Over the past few years, UZ was under the management of foreign managers. What are the results? Who was held accountable? And now the people who told us about the miracle that will happen when we put foreigners on the management board introduce them into supervisory boards, tell us how beautiful it will be when we entrust the management of entire sectors to foreigners,” commented Yuri Romanenko from the think-tank Ukrainian Institute of the Future.

Not aid, but fighting competition?

“For the Germans the benefit is obvious — they can take control of a large sector of the entire country’s economy. It will give the German freight operator DB Cargo an advantage over its competitors after liberalization and the opening up of the Ukrainian railway market,” said Professor Andrei Prokhorchenko from the Ukrainian Rail Transport University.

At the end of last year, the government approved a strategy to separate UZ into three operators: infrastructure, freight and passenger. Today’s takeover of UZ management by DB would give it a great deal of preference, allowing it to learn the details that are not available to others and create the conditions for DB to take over the Ukrainian railway virtually without competition when the government decides to do so.

According to experts in Ukraine, 98 per cent of locomotives, 93 per cent of passenger carriages, 70 per cent of freight wagons and 30 per cent of railway lines are already worn out and need either to be replaced with new ones or thoroughly modernized. At the same time, UZ is the owner of a very attractive assets — three factories capable of releasing a total of 5 thousand carriages per year.

The memorandum signed in Davos includes the provision that the parties will encourage mutual proposals for the development of railway infrastructure and warehouses, taking into account environmental and innovation standards. As assessed in Kiev, the latter is a loophole allowing the Germans to take over Ukrainian carriage factories or to close them and flood the Ukrainian market with “green and innovative” production from Germany.

The railway expert, Valery Tkachev, from the Logistics Development Centre, believes that for DB the benefit of the contract with the Ukrainian government is to gain influence on one of the largest railway markets in Europe, access to orders for its companies in the process of modernizing the Ukrainian railway infrastructure and control over transit streams.

Why not Poland?

The German management of the Ukrainian railways may affect Polish interests by, for example, closing the market to the supply of Polish rolling stock, and in Kiev they draw attention to the ignored position of Poland.

“The legitimate question is asked why a German company, rather than British, French or Polish which, like DB, is subsidized from the budget, was chosen for the transfer of the operational board. Where is the competition or at least an explanation from the government in this regard?” wonders Volodymyr Larkav.

This may indeed be surprising in the light of the Ukrzaliznytsia data showing that Polish railways are growing to become the main EU partner of UZ. Last year, UZ carried 942,000 passengers to and from EU countries — 14.9 per cent more than in 2018.

Connections with Poland are developing: the most popular international connection from Ukraine is the Kyiv-Przemyśl (southeastern Poland) route, with 482,000 passengers travelling both ways, the Kyiv-Warsaw route, with 61,000 passengers, and Odessa-Przemyśl, with 59,000.

Currently, Przemyśl is being transformed into a railway hub from which Ukrainians are starting their journey to European countries. However, in this situation we should not be surprised by Berlin’s counterattack, which in practice means that it is there, and not in Kiev, where decisions will soon be made as to whether to buy German or, for example, Polish trains, and whether to open new connections with Poland, and if so, under what conditions, or maybe liquidate the existing ones.


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