"Ukrzaliznytsia is facing losses. Is there a way out of this vicious cycle?"

The state monopoly in the railway transport sector, which carries out significant social and equally important economic functions, suffers year after year from the same issue – billion-dollar losses. The management addresses this problem in a standard way – by raising freight tariffs, as this is the only area that generates profit. However, this is akin to cutting the branch on which the company sits. Is there another solution? More details in the article.

How much does UZ earn and where does it spend?

"Ukrzaliznytsia" is one of the largest companies in Ukraine, and therefore, its budget commands at least respect. According to last year's financial plan, UZ's revenue was projected to exceed 103 billion hryvnias, of which 98 billion was net income from the sale of works, goods, and services. The lion's share of this income comes from freight transport – this service was expected to bring in over 80 billion.

However, the company's expenses are significant as well – 116 billion UAH last year, with half of these funds going towards employee salaries. Additionally, it needs to purchase fuel, pay utility bills, invest in the repair of equipment and tracks, and cover numerous other costs that ensure the operation of this grand structure.

Of course, in an environment where everything is becoming more expensive, maintaining efficiency is increasingly challenging. This is precisely how "Ukrzaliznytsia" explained its decision to raise tariffs on its main source of income – freight transport – by a staggering 37%.

"Since the last tariff revision for freight transport, electricity prices have risen by 166%, diesel by 110%, spare parts for locomotives by 217%, spare parts for electric locomotives by 22%, bearings by 37%, solid wheels by 20%, etc.," said UZ.

They also noted that during the period when transport tariffs remained unchanged, the producer price index for industrial products increased to 176.4%. This means they can afford to pay more for transport.

A social explosion unavoidable?

Business representatives, as expected, opposed the tariff increase: even the European Business Association and the American Chamber of Commerce in Ukraine joined the criticism.

Business argues that "Ukrzaliznytsia's" reasoning is illogical – at the very beginning of the war, in 2022, the company simultaneously raised freight transport tariffs by a record 70%, while at that time industrial producers did not raise their prices. Moreover, often industrial indices even decrease – but history has yet to record a case where UZ lowered transport tariffs following such a decrease.

In addition to criticism, there are also specific forecasts from business community representatives. For example, the metallurgical enterprise with foreign investments "ArcelorMittal Kryvyi Rih" stated that if railway tariffs rise, it will be forced to cut production and lay off workers. According to CEO Mario Longobardo, this could lead to a social catastrophe and further migration of Ukrainians.

Agrarians, in turn, announced a further increase in prices for their products in the event of rising freight tariffs. Meanwhile, the construction association warned of rising costs for all building materials.

Is it possible not to raise tariffs?

Experts are convinced that it is possible. However, to achieve this, systemic problems within the company need to be resolved, with corruption being one of the most critical issues. In just the first half of last year, NABU and SAP seized about 350 million UAH from individuals suspected of corruption in "Ukrzaliznytsia."

The company even established a separate "anti-corruption office," but there is currently no report on the office's work. Meanwhile, according to law enforcement estimates, UZ loses billions of hryvnias annually just due to procurement fraud.

The second issue is the unprofitability of passenger transport: by 2025, these losses are projected to reach 20 billion hryvnias, which UZ will have to cover out of its own pocket. This means the state, which is supposed to regulate the company's activities and ensure its efficiency, is inadvertently driving UZ into losses by imposing the function of transporting privileged passenger categories. To address this issue, it is necessary at least to monetize benefits, as was done in the utility service market. At most, mechanisms for eliminating subsidies should be developed, as self-sufficiency is an important norm of European legislation that Ukraine is integrating into.

Another challenge for "Ukrzaliznytsia" is losing competition to road transport. Five years ago, "Ukrzaliznytsia" transported 60-70% of all Ukrainian cargo, but now its share has fallen to 40%. Meanwhile, the share of road freight transport has risen to 55%, according to the Federation of Transport Employers.

This is quite a worrying signal for "Ukrzaliznytsia," as further tariff increases could prompt an even greater number of shippers to switch to trucks. For UZ, this means losing its customer base and revenue. For Ukrainians, this means more potholes on the roads, as most trucks carry more cargo than permitted, violating regulations and damaging road surfaces.

This creates a vicious cycle: UZ raises tariffs, shippers refuse its services and turn to road transport, the volume of freight on the railway decreases, revenues drop, and the only option UZ resorts to each time is yet another tariff increase. Addressing corruption issues and ending cross-subsidization would allow the company to finally break this cycle.

Future prospects

According to European legislation, which our state has implemented, "Ukrzaliznytsia" must be reformed through unbundling. This means the unwieldy large structure will be divided into three companies, each of which will be effective in its own field: infrastructure, passenger, and freight.

A National Transport Regulation Commission, akin to NKREKU, should also be established to analyze the economic feasibility of transport tariffs in Ukraine.

However, this procedure has yet to begin. Currently, a draft law on railway transport from the Cabinet of Ministers has only been registered in the Verkhovna Rada, and an alternative draft from parliament members is also anticipated. It remains unclear when the vote will take place and which document will be adopted.

While new legislative norms are absent, business associations are persistently urging the Cabinet of Ministers to take control of "Ukrzaliznytsia" and ensure objective tariff regulation through discussions with businesses that are suffering significant losses due to the war. According to official data, the metallurgical and agricultural sectors have been most affected by military actions, minefields, and destruction. Coincidentally, these sectors provide "Ukrzaliznytsia" with nearly 80% of its revenue from transport: they now need support from the state and for railway tariffs to remain at the current level.