A road to unity:

Why Ukraine should fo­cus on de­vel­op­ing its do­mes­tic trans­port in­fra­struc­ture

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

What Ukraine should pri­or­i­tize in de­vel­op­ing its do­mes­tic trans­port in­fra­struc­ture

His­tory of­fers many ex­am­ples of how dense net­works of good roads en­sured last­ing unity in very het­ero­ge­neous state for­ma­tions, such as the Ro­man or Inca Em­pires. In the re­cent his­tory, the con­struc­tion of rail­ways fol­lowed by au­to­mo­bile roads con­trib­uted to the con­sol­i­da­tion of the huge United States and the in­te­gra­tion of Ger­many hitherto di­vided for cen­turies. Mean­while, a lack of proper com­mu­ni­ca­tion in­fra­struc­ture ru­ined many states as their dif­fer­ent parts de­vel­oped as semi-iso­lated cor­ners of em­pires, alien­ated from the rest of the coun­try. Quite of­ten, these alien­ated cor­ners were bet­ter con­nected to the neigh­bor­ing coun­tries than their own state and drifted apart from it grad­u­ally but in­ex­orably, un­less they were re­con­nected by newer trans­port ar­ter­ies in the process of in­dus­trial up­heavals.

STITCH­ING THE FAB­RIC

To­day’s Ukraine is head­ing to a point where it has to choose the path it will take into the fu­ture. Tech­ni­cal degra­da­tion and ob­so­les­cence of its two ma­jor trans­port com­mu­ni­ca­tion sys­tems that used to con­nect dif­fer­ent parts of the coun­try has gained a dan­ger­ous pace in the past few decades, even by com­par­i­son to the poor sit­u­a­tion in which they had been in the late years of the soviet oc­cu­pa­tion.

Ukraine has nearly half a mil­lion kilo­me­ters of au­to­mo­bile roads. This in­cludes nearly 250,000km of ur­ban and ru­ral streets man­aged by lo­cal au­thor­i­ties. Some roads in Ukraine are pri­vately owned or are part of the ter­ri­tory of en­ter­prises. State roads of all cat­e­gories ac­count for 170,000km. On one hand, their den­sity is 6.6 times lower than in France, a coun­try com­pa­ra­ble to Ukraine size-wise. On the other hand, this amount of road sur­face cre­ates a big prob­lem of main­te­nance, let alone up­grade. Given the deficit of fund­ing, 91% of au­to­mo­bile roads in Ukraine have not been re­paired for the past 30 years. There­fore, 39.2% of them do not meet mod­ern stan­dards of strength, and 51.5% — of sur­face reg­u­lar­ity.

There are only a few hun­dred kilo­me­ters of high­ways in Ukraine com­pared to 12,500km of au­to­bahns in Ger­many which is 1.5 times smaller than Ukraine, and 7,100km in France. Also, Ukraine has a mere 2,200km or 1.3% of cat­e­gory I roads – these must have a di­vide line and two-four lanes in one di­rec­tion – and they are still far from Euro­pean stan­dards. As a re­sult, the av­er­age speed of move­ment on Ukrainian roads is 2-3 times lower than it is in West­ern Europe. This makes long dis­tances be­tween dif­fer­ent parts of the coun­try even longer. More­over, these roads are con­cen­trated un­evenly, mainly in Kyiv, Zhy­to­myr, Dnipro and Kharkiv oblasts, while a num­ber of other re­gions barely have any.

In the last decade, the amount of fund­ing for road con­struc­tion and re­pair never ex­ceed a third of what was min­i­mally needed to main­tain and fix Ukraine’s net­work of au­to­mo­bile roads. The fund­ing sit­u­a­tion for lo­cal roads has been even worse. Their grad­ual shift to be man­aged by lo­cal au­thor­i­ties and lo­cal com­mu­ni­ties fol­low­ing de­cen­tral­iza­tion will not nec­es­sar­ily im­prove the sit­u­a­tion. Prob­lem­atic and de­pressed re­gions may see con­tin­ued degra­da­tion while de­cen­tral­iza­tion of cor­rup­tion in road con­struc­tion can make strug­gle against it more dif­fi­cult by in­creas­ing the ranks of po­ten­tial kick­back re­ceivers. Stitch­ing the coun­try back to­gether and stim­u­lat­ing more equal eco­nomic de­vel­op­ment that could fully re­veal the po­ten­tial of the en­tire na­tion and all of its ter­ri­tory means that all au­to­mo­bile roads across the coun­try must be de­vel­oped, not just the most im­por­tant ones.

ON THE BAND­WAGON OF THE PAST

As au­to­mo­bile roads in Ukraine are of poorer qual­ity com­pared to roads in the EU and fewer peo­ple own cars, rail­ways still dom­i­nate the trans­port sec­tor. They carry 58-60% of freight and over 40% of pas­sen­gers. The ma­jor role of rail­ways in a na­tion’s trans­port sys­tem re­flects the po­ten­tial it had in a dis­tant past – cars re­placed rail­ways in freight and pas­sen­ger traf­fic in de­vel­oped coun­tries in the sec­ond half of the 20th cen­tury. Mean­while, the qual­ity of rail­way in­fra­struc­ture in Ukraine is mov­ing far­ther away from the needs of both the in­dus­try and the pas­sen­gers every year.

On one hand, Ukraine’s rail­way net­work is still un­par­al­leled in Europe (ex­clud­ing Rus­sia) in terms of rail freight traf­fic. With 340mn t in 2017, it car­ried over 25% more cargo than Deutsche Bahn, an­other ma­jor rail­way car­rier in Europe. Ex­ports, im­ports and tran­sit ac­count for most of this traf­fic but the share of do­mes­tic traf­fic is grow­ing slowly: it was hardly over 1/3 of UkrZal­iznyt­sia’s to­tal traf­fic sev­eral years ago and has climbed up to nearly 50% now. The rates for do­mes­tic trans­porta­tion within Ukraine are among the cheap­est in Europe and the world. Still, they gen­er­ate rev­enues for Ukraine’s rail­way op­er­a­tor. The main source of in­come, how­ever, is the down­play­ing of de­pre­ci­a­tion and in­vest­ment costs

UKRAINE IS HEAD­ING TO A POINT WHERE IT HAS TO CHOOSE THE PATH IT WILL TAKE INTO THE FU­TURE. TECH­NI­CAL DEGRA­DA­TION AND OB­SO­LES­CENCE OF ITS TWO MA­JOR TRANS­PORT COM­MU­NI­CA­TION SYS­TEMS THAT USED TO CON­NECT DIF­FER­ENT PARTS OF THE COUN­TRY HAS GAINED A DAN­GER­OUS PACE IN THE PAST FEW DECADES

which ham­pers the sec­tor’s mod­ern­iza­tion and de­vel­op­ment.

UkrZal­iznyt­sia’s pas­sen­ger traf­fic is 12 times lower than that of Deutsche Bahn. It has been re­port­ing losses con­sis­tently for many years. Ukraine’s pop­u­la­tion is half of that in Ger­many but the dis­tance be­tween dif­fer­ent parts of the coun­try is far longer. One would ex­pect this to en­cour­age peo­ple to travel in trains more. More­over, the state of roads and un­der­de­vel­oped air trans­port cre­ate far less com­pe­ti­tion to the rail­way trans­port in Ukraine com­pared to the wealth­ier Ger­many.

In fact, lower rail pas­sen­ger traf­fic in Ukraine re­flects the crit­i­cal state in which this trans­port sec­tor has found it­self. The key prob­lem is the in­suf­fi­cient use of rail­way po­ten­tial by Ukraini­ans. This is be­cause of the flaws of Ukraine’s train ser­vices, poor qual­ity of many pas­sen­ger trains and slow move­ment in most di­rec­tions. These as­pects are less im­por­tant in freight traf­fic but very im­por­tant for pas­sen­gers.

Given the scale of in­vest­ment in Ukrainian rail­way trans­port in 2017-2018, it is too op­ti­mistic too ex­pect the im­ple­men­ta­tion of even the mod­est plans to in­vest UAH 150bn (ap­prox. EUR 4.7bn) into its de­vel­op­ment over a five-year term by 2021. This is less than half of over EUR 10bn in­vested in Deutsche Bahn an­nu­ally. Ukraine’s in­vest­ment pro­gram of EUR 4.7bn al­lo­cates a mere EUR 0.9bn to buy new lo­co­mo­tives, EUR 300mn to mod­ern­ize and re­pair the avail­able ones, and less than that to buy 400 new pas­sen­ger cars. At this pace, new trains will not re­place the ve­hi­cles to be writ­ten off over this pe­riod, let alone the ob­so­lete trains. As a re­sult, the deficit of proper pas­sen­ger trains will in­crease.

Over the years of in­de­pen­dence, state rail trans­port in Ukraine has been a donor for pri­vate and mostly oli­garch-owned busi­ness, al­low­ing it to save on freight rates. Its rep­re­sen­ta­tives in­sist that their busi­ness will start hav­ing losses if the rates are raised. Also, they claim that the cur­rent freight traf­fic is highly prof­itable, although they speak of the purely op­er­a­tional part with­out men­tion­ing in­vest­ment into the up­grade of rail­ways and trains. Un­til re­cently, Ukraine had a deficit of freight train cars. It of­ten un­der­mined out­put and ex­port plans of agri­cul­ture and steel­work busi­nesses.

The pur­chase of new train cars – by UkrZal­iznyt­sia and pri­vate freight own­ers that use them – has some­what shifted the prob­lem in the past years to­wards the deficit of lo­co­mo­tives. Mean­while, the ma­jor clients of rail freight traf­fic are proac­tively el­bow­ing UkrZal­iznyt­sia out of the freight traf­fic sec­tor by us­ing their own train cars and lo­co­mo­tives.

Ac­cess of more pri­vate play­ers to rail trans­porta­tion can en­cour­age com­pe­ti­tion in this in­dus­try and spur busi­ness de­vel­op­ment in Ukraine. Still, such steps must be fit­ted to the wider strat­egy for de­vel­op­ing rail trans­port in Ukraine. One thing that needs to be done is a rad­i­cal change of the share of funds al­lo­cated for the de­vel­op­ment, up­grade and elec­tri­fi­ca­tion of rail­ways at the ex­pense of the com­pa­nies that want to work on them. The

old pol­icy al­low­ing them to do cherry pick­ing while not in­vest­ing in long-term de­vel­op­ment of Ukraine’s trans­port po­ten­tial has been a key fac­tor of the past 25 years that de­liv­ered wind­fall prof­its to off­shore shell com­pa­nies owned by oli­garch busi­nesses as the rail­way sys­tem de­graded at the same pace.

An­other prac­tice to be stopped is the sub­si­diz­ing of pas­sen­ger traf­fic by rail­way com­pa­nies. This so­cial func­tion should be ful­filled by the na­tional and lo­cal bud­gets, while ticket prices – es­pe­cially for lo­cal traf­fic – should be raised to a level where they will fund the de­vel­op­ment of qual­ity pas­sen­ger ser­vices. Stop­ping cross sub­si­diza­tion and shift­ing rev­enues from freight traf­fic to in­vest­ment can cre­ate con­di­tions for Ukraine’s rail­way sys­tem to turn into a mod­ern and ef­fec­tive in­stru­ment for bring­ing dif­fer­ent parts of the coun­try closer to­gether, and spur eco­nomic de­vel­op­ment. More in­vest­ment can also cre­ate more do­mes­tic de­mand for ma­te­ri­als and equip­ment nec­es­sary to meet this grow­ing de­mand.

THE RE­AL­IS­TIC SCALE

This high­lights yet an­other prob­lem that stands in the way of rail growth in Ukraine. The po­lit­i­cal lead­er­ship and com­pa­nies re­spon­si­ble for shap­ing the de­mand for its ser­vices have a very short­sighted vi­sion of how this trans­port can de­velop in Ukraine. The de­vel­op­ment of both rail­ways and roads should be ac­com­pa­nied by a dy­namic growth of small and medium-sized busi­nesses that will ser­vice these rail­ways and roads, the flow of freight and pas­sen­gers, as well as the con­struc­tion and main­te­nance of roads and ve­hi­cles. A trend whereby a lion’s share of in­vest­ment in the trans­port in­fra­struc­ture flows out of Ukraine to im­port com­po­nents, main­te­nance or in­stal­la­tion ser­vices, is un­ac­cept­able.

This does not mean that Ukraine can do with­out pur­chas­ing for­eign-de­vel­oped de­signs, tech­nol­ogy or com­po­nents. For now, Ukrainian com­pa­nies are of­ten un­able to of­fer a com­pet­i­tive prod­uct that meets the best stan­dards. Still, im­ported tech­nolo­gies should be bought in­di­rectly via Ukrainian busi­ness. Ukraine can­not af­ford to just re­ject an op­por­tu­nity to pro­duce most com­po­nents needed to main­tain its roads and rail­ways do­mes­ti­cally.

This re­quires a state strat­egy aimed at re­plac­ing own­ers and man­agers at the cur­rent en­ter­prises un­less they can adapt to the needs of the present day, or at cre­at­ing new fa­cil­i­ties where there aren’t any. The share of lo­cal­iza­tion in the pro­duc­tion linked to the con­struc­tion of roads and any­thing else it takes to carry and ser­vice freight and pas­sen­gers should be 50% at the very least. An im­port-ori­ented model should not be the goal. Trans­port net­work de­vel­op­ment should be­come one of the key in­stru­ments in up­grad­ing and im­prov­ing the coun­try’s econ­omy.

The choice to­day is not just be­tween trig­ger­ing an ac­tive de­vel­op­ment of roads and rail­ways or let­ting them de­grade fur­ther. It is also be­tween let­ting Ukraine de­velop in a colo­nial or neo-colo­nial vec­tor – when a hand­ful of cross­bor­der tran­sit ar­ter­ies de­vel­ops while do­mes­tic in­fra­struc­ture slips into fur­ther degra­da­tion and the al­ready weak net­work of do­mes­tic con­nec­tion gets even looser – or turn­ing the de­vel­op­ment and re­con­struc­tion of the road net­work into a pri­or­ity, putting an accent on strength­en­ing links be­tween dif­fer­ent parts of the coun­try and mak­ing in­tense move­ment of pas­sen­gers and goods be­tween the coun­try’s cen­ter and re­mote parts more ac­ces­si­ble. In the lat­ter case, Ukraine’s tran­sit po­ten­tial and com­mu­ni­ca­tion with the world – an un­de­ni­able cru­cial com­po­nent as well – will be the con­tin­u­a­tion and re­sult of a wide­spread and qual­ity sys­tem of trans­port chan­nels cre­ated with an ini­tial fo­cus on do­mes­tic de­vel­op­ment.

Oth­er­wise, Ukraine risks ag­gra­vat­ing a sit­u­a­tion where it is eas­ier to travel or carry goods be­tween some parts of the coun­try than be­tween its re­mote ar­eas and the cen­ter. That could lead to a sit­u­a­tion where Ukraine or some of its re­gions turn into a sup­ple­ment for the trans­port sys­tems of other coun­tries.

While in the soviet time all of Ukraine’s roads led to Moscow or from Moscow to the key points at the bor­ders or in sea­ports, the past few decades have seen in­vest­ment into the con­struc­tion and main­te­nance of roads and rail­ways for in­ter­na­tional tran­sit cor­ri­dors, even if this fund­ing comes from for­eign loans guar­an­teed by the Ukrainian gov­ern­ment. In­ter­nal fi­nan­cial re­sources of UkrAvtoDor [Ukrainian Road Op­er­a­tor] and UkrZal­is­nyt­sia are also chan­neled for these pur­poses. These trans­port cor­ri­dors are in­deed very im­por­tant for Ukraine and its eco­nomic de­vel­op­ment. Yet, as the do­mes­tic net­work of roads is de­te­ri­o­rat­ing, the gap deep­ens. It should be over­come by cut­ting in­vest­ment into in­ter­na­tional trans­port cor­ri­dors while main­tain­ing or in­creas­ing in­vest­ment into the de­vel­op­ment of the do­mes­tic trans­port in­fra­struc­ture.

THE DE­VEL­OP­MENT OF BOTH RAIL­WAYS AND ROADS SHOULD BE AC­COM­PA­NIED BY A DY­NAMIC GROWTH OF SMALL AND MEDIUM-SIZED BUSI­NESSES THAT WILL SER­VICE THESE RAIL­WAYS AND ROADS, THE FLOW OF FREIGHT AND PAS­SEN­GERS, AS WELL AS THE CON­STRUC­TION AND MAIN­TE­NANCE OF ROADS AND VE­HI­CLES

Sources: Deutsche Bahn, UIC Syn­op­sis-2016, Min­istry of In­fra­struc­ture of Ukraine, State Sta­tis­tics Bu­reau

As­sess­ments cover the ter­ri­tory un­der Kyiv’s con­trol. It does not in­clude Crimea and parts of Donetsk and Luhansk oblasts oc­cu­pied by Rus­sia

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