Liberalization of the railway market in Ukraine. Lessons learned from the EU countries

Railway liberalization 12VI2019 Download Railway liberalization 12VI2019 (825.71 KB)

Liberalization of railway transportation in Ukraine will be implemented according to the European model of railway restructuring. In accordance with the Association Agreement with the European Union, Ukraine has undertaken the responsibility to open the railway transportation market on the principle of vertical separation of the railway monopoly and to give private operators open access to the railway infrastructure.[1]

This implies a transition to common principles for the functioning of the railway transportation market, including the availability of independent:

  • railway infrastructure operator, who will be responsible for the quality of the rail network and the track capacity (ie the number of trains that can run the tracks);
  • introduction of competition into the market of rail freight and passenger transportation;
  • Railway Regulator, which will approve the tariff for access to the infrastructure, ensure equal access to it for all railway operators;
  • Railway Safety Authority, which will determine the requirements for the carriers, check their compliance and issue licenses for the carriage.

If the expected opening of the rail transportation market is carried out without well-planned systematic measures, there are risks to the uninterrupted transport logistics for the Ukrainian economy. Therefore, we have drawn the following conclusions based on the research and experience of European countries:

  1. Prior to opening of the rail transportation market, the Government must take steps to ensure that the financing of the future infrastructure operator is sufficient to maintain the railway network of Ukraine in working order.
  2. Ukrzaliznytsia must ensure a clear separation of accounting (and business activities) of infrastructure management from other services – passenger and freight transportation, as well as independent management of each company.
  3. According to the strategy of state-owned companies demonopolisation, the Government should make a decision about the form of separation of Ukrzaliznytsia into vertically integrated holding with separate subsidiaries (infrastructure and transportation operators) or apply the model of full separation of infrastructure and transportation operators.
  4. Before market opening, transportation tariffs must be reviewed and a methodology for calculating the access to infrastructure charges should be prepared. The infrastructure access chsrges should at least cover the direct costs of the infrastructure operator.
  5. Prior to the market opening Government should take measures to abolish cross-subsidization of passenger transportation by freight transportation and, therefore, to consider following: (i) a mechanism for financing passenger services, (ii) to separate passenger service into commercial and socially important one and to deregulate tariffs for the first category.
  6. It is necessary to create National Railway Regulatory Commission and to pass tariff regulations to it from the Ministry of Infrastructure of Ukraine, as well as railway transport safety authority, which will determine the requirements for the carriers, check their compliance and issue licenses for transportations.

[1]There are different approaches to restructuring of railway sector in the world that relate to a set of factors such as market structure, regulation, and type of ownership. Among the most conventional approaches to railway management, there are two: the European model, which involves separation of the functions of infrastructure and railway operator while maintaining the state-owned infrastructure operator, and the American model, which, unlike the European one, is built on the basis of vertical integration when the functions of infrastructure operator and the carrier is operated by the same (including private) companies. The purpose of this study is not to compare the advantages of the US or European model, but the main task is to study the experience of European countries in the implementation of the transport section of the Association Agreement between Ukraine and the European Union.

The study was conducted as a part of the Joint Research Project in the Area of Public Policy with the Goal of Establishing Partnership with the EU Analytical Center, supported by the International Renaissance Foundation in partnership with the Open Society Initiative (OSIFE) and funded by the Swedish Embassy in Ukraine.