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25-27 October 2017

Kyiv, IEC, 15, Brovarskyi Ave.

News

A Review of 2016 in the Transport Industry

 

“It was a Madhouse!” Infrastructure Minister Volodymyr Omelian said, describing the outgoing year. "I feel most pain for the [maritime industry] and, of course, the railway industry. It was a knife in the back because I did not expect it."
The market also did not expect the year to be that chaotic and to be virtually the most challenging year in the transport sector in the past twenty years. Primarily, this applies to the railway industry. "I do not want to be the first minister under which the railway industry grinds to a halt," Omelian said in the autumn. His fears were justified – shortages of fuel, railcars, and locomotives threatened to prevent key shippers from fulfilling their export obligations and put a spoke in the wheel of the entire economy of the country. The conflict between Omelian and the Ukrainian Railways public joint-stock company’s head Wojciech Balczun added fuel to the fire. It gives the impression that the Infrastructure Ministry and the railway industry are playing a zero-sum game, which cannot yield a positive outcome.
There was also a storm in the maritime industry in 2016, with the law enforcement officials raiding ports with unprecedented enthusiasm, which does not help to attract investors, to put it mildly.
However, the aviation industry is gradually emerging from its crisis, with the passenger volumes of airlines and airports increasing. Regional airports are coming alive, rumors suggest that the Ryanair airline is coming to Ukraine, and the Wizz Air airline, which is a catalyst for the relative stabilization of the situation in the country, is increasing the number of its flights and destinations in Europe. According to the minister, things also "more or less worked out" in the road sector in 2016, but this is due more to the fact that the current government wants the electorate to remember it for smooth roads, at least.
The year 2016 in single phrases, according to the minister
Failures of the year: the Open Skies agreement and the Ukrainian Port Authority
Achievement of the year: the transparent appointments of efficient effective managers and roads
Appointment of the year: Slawomir Nowak
Disappointment of the year: Wojciech Balczun
The worst conversation of the year: there were so many...
Who or what inspired you: the CFTS
Discoveries of the year: Hutchison Ports and DP World
The year 2016 in one sentence: a madhouse
What the president told you at the last meeting: he said that he supported me, and that was nice

 

“It was a Madhouse!” Infrastructure Minister Volodymyr Omelian said, describing the outgoing year. "I feel most pain for the [maritime industry] and, of course, the railway industry. It was a knife in the back because I did not expect it."

The market also did not expect the year to be that chaotic and to be virtually the most challenging year in the transport sector in the past twenty years. Primarily, this applies to the railway industry. "I do not want to be the first minister under which the railway industry grinds to a halt," Omelian said in the autumn. His fears were justified – shortages of fuel, railcars, and locomotives threatened to prevent key shippers from fulfilling their export obligations and put a spoke in the wheel of the entire economy of the country. The conflict between Omelian and the Ukrainian Railways public joint-stock company’s head Wojciech Balczun added fuel to the fire. It gives the impression that the Infrastructure Ministry and the railway industry are playing a zero-sum game, which cannot yield a positive outcome.

There was also a storm in the maritime industry in 2016, with the law enforcement officials raiding ports with unprecedented enthusiasm, which does not help to attract investors, to put it mildly.

However, the aviation industry is gradually emerging from its crisis, with the passenger volumes of airlines and airports increasing. Regional airports are coming alive, rumors suggest that the Ryanair airline is coming to Ukraine, and the Wizz Air airline, which is a catalyst for the relative stabilization of the situation in the country, is increasing the number of its flights and destinations in Europe. According to the minister, things also "more or less worked out" in the road sector in 2016, but this is due more to the fact that the current government wants the electorate to remember it for smooth roads, at least.

The year 2016 in single phrases, according to the minister

Failures of the year: the Open Skies agreement and the Ukrainian Port Authority

Achievement of the year: the transparent appointments of efficient effective managers and roads

Appointment of the year: Slawomir Nowak

Disappointment of the year: Wojciech Balczun

The worst conversation of the year: there were so many...

Who or what inspired you: the CFTS

Discoveries of the year: Hutchison Ports and DP World

The year 2016 in one sentence: a madhouse

What the president told you at the last meeting: he said that he supported me, and that was nice

Railway

The railway industry is in crisis. It is a fact that is difficult to dispute. The situation was particularly severe in 2016, where there was a catastrophic shortage of wagons, locomotives, and fuel. Everyone is waiting for the Polish management team at Ukrzaliznytsia to produce results, but the initial charm of European-style management has faded away, criticism is growing, demand for results is becoming more persistent. The railway industry was on the verge of grinding to a halt several times but, according to Balczun, this was avoided thanks to the work of the Polish management team.

However, the minister has a different opinion on this matter: "The person responsible for freight transportation, repair, finance, strict control from morning to evening, inspection of stations should have been clearly identified. We started having problems because all these things were left to chance... I am deeply convinced that this could have been avoided."

Balczun says what he inherited was not the best and he is asking for time. Omelian, for his part, said, "So far, all we have are beautiful presentations."

"What I am seeing now is that there is no strategy, as such. There is no priority or a clear understanding of what we are concentrating on... There are also questions about the things that have already been promised – UAH 7 billion in savings, transparency, and flawless operations. We are not seeing any of these. According to some estimates, the losses this year (2016) are very large and the level of business dissatisfaction is huge..." Omelian said, commenting on the current situation in the railway industry. However, Balczun said Ukrzaliznytsia would become profitable in 2016.

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The misunderstanding between Omelian and Balczun is obvious. They do not hesitate to taunt each other publicly in social networks and the mass media. The minister is obviously dissatisfied with the work of the Polish the Polish management team and Balczun in particular: "I have people to compare with: Smelianskyi, Novak... The score is 2-1 against him." For his part, Balczun has repeatedly accused the ministry of preventing him from doing his job by blocking all the necessary appointments.

Reform of the railway industry is long overdue. Firstly, the huge machine that is built on Soviet principles has outlived its usefulness and, secondly, it is so riddled with problems that its reform can no longer wait. Ukrzaliznytsia was corporatized on 1 December 2015, when the minister of infrastructure was Andrii Pyvovarskyi. A detailed plan for further reform of Ukrzaliznytsia was also drafted at that time. The new board pf Ukrzaliznytsia was appointed after Omelian became the minister of infrastructure, but the feeling now is that the reform has stalled...

Asked about the current stage of the reform of Ukrzaliznytsia, the minister said, "At no stage... I always remind Balczun that he must keep to the reform timetable and that a vertical holding company should be created... I think that a passenger company should be registered in December and I am hoping that a freight company will be created in January. However, that will be only its registration as a legal entity and it not clear when it will begin actual operation because there are serious questions about that."

Summing up the year 2016, Omelian said, "There was a very threatening situation on the railroad in 2015 – there was no working capital and no diesel and Pyvovarskyi had to personally intervene in tenders. Factories worked one day per week... There was no crisis in 2016, although Balczun says otherwise. Unfortunately, it was a crisis of management and not a crisis within Ukrzaliznytsia itself. I had hoped that we would go up, but we went down."

Approval of Ukrzaliznytsia’s financial plan for 2017 still lies ahead. This has already become the subject of heated debates, but something tells us that the debates will get even hotter.

There is cautious optimism and a sense that the conditions for real reform of Ukrzaliznytsia are being created after our six months of hard work and struggle. I see that we have finally received the "green light" for the long-proposed and long-awaited personnel appointments... Real changes in the company are only just beginning.

    Wojciech Balczun, board chairman of PJSC Ukrzaliznytsia

The industry’s tasks for 2017:

    Create an efficient management system for the railway industry, regardless of personalities

    Solve the transit problem

    Start modernization of rolling stock

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Ports

There was also a storm in the maritime industry in 2016. Numerous raids on stevedoring companies, scandals involving dredging operations at the Yuzhny port and the Ukrainian Port Authority’s former head Andrii Amelin, and transfer of 75% of state stevedoring companies’ profit into the state budget. These were all destabilizing for the industry.

However, there were also positive moments, particularly the launch of new grain terminals (by Cofco, Bunge, and Risoil) and the start of construction of the MV Cargo terminal. EBRD funds were provided for the drafting of a new law on concessions and the PPP office that was opened is already drafting pilot concession projects. These include concession projects for the state-owned Kherson Commercial Seaport, the state-owned Olvia Stevedoring Company, and the state-owned Chornomorsk Commercial Seaport’s rail-ferry complex.

However, according to the presentations that were made, practical implementation of the first pilot concession project is expected only in the period of 2018-2019.

Asked why it will take so long to implement, the minister said: "The consultants involved in it worked to a very tight deadline. We are all shouting that we want to attract investment and that we are willing to work, but when it comes to specific projects, there is nothing. Not even a preliminary project. We need to prepare the documentation because we cannot just tell an investor, ‘Come, take a photo next to this beautiful seaport and give us your money immediately.’ Instead, we should have a normal dialogue between government and business. We are doing the same with Hutchison Ports and DP World. We are simply moving on parallel paths and working with them individually."

At the same time, the reform of the Ukrainian Port Authority and the establishment of a Maritime Administration, which were among the Key Performance Indicators (KPI) set by the minister of infrastructure, have not yet been completed. According to Omelian, all the documents are ready and the Maritime Administration can start operation on 1 January 2017. However, that is hard to believe. "The Ukrainian Port Authority is more of a political factor than any other. I believe that the reform will start once we overcome the political obstacles... In principle, the solutions there are simple," Omelian said.

Summarizing the year 2016 in the port industry, the minister said, "The key goal – replacing the management of the Ukrainian Port Authority – was not achieved… I am still hoping. By and large, everything else is ready. Together with the IFC, we are completing the preparation of a new methodology that provides for lowering all types of charges in Ukrainian ports by 40-60%. Regarding the 75% [profit transfer] rate, mutual understanding has been reached at the level of the Cabinet of Ministers that the rate will be 50% from the second quarter.”

It has become much more difficult to work. I cannot remember when it was worse than it is now. It was easier under Pyvovarskyi. Now, law enforcement officials are excessively active, launching mass raids on ports. The personnel policy on ports and the Ukrainian Port Authority is also a failure.

    Shota Khajishvili, director of the Ukrainian office of Risoil S.A.

The industry’s tasks for 2017:

    Reform the Ukrainian Port Authority

    Adopt a new Tariff Book of Port Dues and Charges

    Solve the problem involving law enforcement officials in ports

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Roads

It could be said that some progress was made in the road sector in 2016. More money began to be allocated for financing maintenance work. According to the Cabinet of Ministers, about UAH 8 billion was allocated from the state budget to the road sector in 2016, thanks to which 816 kilometers of roads was repaired and protective coatings of asphalt were laid on 711 kilometers of road. The volume of "pothole" repairs was 9 million square meters.

The Law on the Road Fund and the Law on Decentralization of Road Management were also adopted. "We showed parliamentary deputies and businesses that it affects their voters and offers a positive image to everyone. It does not matter how it will be called – ‘Poroshenko autobahns,’ ‘Groysman highways,’ or ‘Dubnevych roads’ – people will remember that it was done when they were in power," said the minister.

However, the reform was initially presented to the public in a different form: liquidation of the Automobile Roads of Ukraine state company, which they have decided to abolish, was supposed to be part of the reform. Later, the role of this company was rethought and the plan to liquidate it abandoned because the previous decision was considered hasty and unjustified. In addition, the Road Fund will begin operation only in 2018 and not in 2017 as previously stated.

Here is how Omelian explains it: "The Ministry of Finance determined that there was insufficient budgetary reserve for fully fledged operation of the Road Fund even at 50% capacity in 2017. I believe that this is not quite the right approach, but the budget allocates UAH 29.2 billion for financing state and local roads in 2017 and the customs experiment (the experiment that involves spending 50% of surplus customs revenues on roads) has been extended to all regions. There is also an advantage in the fact that decentralization will come into effect only in 2018. We have one year to work on all the mechanisms and calmly prepare regions and the public for these innovations and decentralization of Ukravtodor. Otherwise, it would be very difficult because we would have to build roads with one hand and transfer them with the other hand."

In addition, the hiring of a new foreign manager, Slawomir Nowak, to manage the road sector can be positioned as an achievement. There are currently no tangible results of Nowak’s work, but at least he has not fallen out of favor. This is probably because he was the choice of Omelian (at least, that is what the minister says).

The tightening of control over the dimensions and weights of trucks on roads was another positive for the minister in 2016. However, the tighter weight controls on roads have resulted in large volumes of cargoes switching to the railway, for which the railway was not ready.

"Quality roads require weight control. The ideal formula for weight control is automatic truck scales mounted onto the road surface. For now, only some regions – the Kyiv and Mykolaiv regions – have agreed to such an experiment. A tender for supply of 78 portable truck scales should be completed in December, which means that we will already be able to qualitatively monitor the situation on the roads from next season," the minister said.

"Weight control has been a success and laws have been adopted. Of course, it would be desirable for them to go into effect in 2017, but 2018 is also OK. I am also happy that the head [of the road sector] has been appointed. Therefore, it seems to me that the issues in the road sector have more or less been resolved," the minister said, reviewing the year.

The new government made road construction one of its priorities and sought additional funds for financing repair and maintenance of the road network. However, only 30-40% the minimum amount required for operations of the road network was allocated. The increase in funding for the road sector resulted in a number of personnel changes in Ukravtodor, which unbalanced the road repair campaigns in several regions (particularly the Mykolaiv region) and slowed the pace of disbursement of funds for road projects by international financial organizations and preparation of new credit agreements

    Volodymyr Shemaev, head of the Odesa regional administration’s department for investment in the transport sector.

The industry’s tasks for 2017:

    Take weight control to a new level

    Attract foreign companies with good reputations to construct roads

    Prepare regional administrations for decentralization (the personnel issue)

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Aviation

The aviation industry began emerging from its crisis in 2016. The passenger volumes of airlines and airports are increasing and regional airports are coming alive. There is talk that Ryanair is coming to Ukraine while Wizz Air has already surpassed the pre-crisis period in terms of number of existing and advertised destinations. However, the Open Skies agreement between Ukraine and the European Union, which has been promised so many time, has still not been signed.

Omelian noted that there were many positives in the aviation industry in 2016: "The Boryspil airport is making good profits, and we plan to reach about UAH 1.2 billion, which will be an absolute record. For other airports, the dynamic is very good. We launched the Infrastructure Projects Agency and the first money from it will be used to restore the runway in Odesa. Distribution of air routes is taking place without scandals and the geography of flights from Ukraine is broadening."

Speaking of relations with Ukraine International Airlines (UIA), it is worth noting that conflicts like the ones that happened in 2015 did not happen in 2016. Some credit the Boryspil airport’s current head Yevhen Dykhne for this.

"It is a fact that Ukraine International Airlines has a certain dynamic. It has finally realized that business and competition mean additional money and not a threat and that it is good. It is taking a serious approach to the upgrade of its fleet of aircraft, and that is also important. In addition, the pressure or desire of a monopoly no longer exists," Omelian said.

The minister also noted the shortcomings during the year: "We already have small airlines, but I would very much like to see the emergence of a regional airline that would provide direct air links between Ukrainian cities. Of course, the issue of low-cost airlines was not finalized, but the dynamic of the negotiations with a Western city is very good and I think that it will delight us with a low-cost airline next year. There are still questions regarding Kyiv, but that is one of the KPI for the new general director of Boryspil."

The UIA remains the engine of growth. Demand for transportation from Ukraine is only beginning to recover. The policy of liberalization of air transport continues. However, the crisis at the UkSATSE air-traffic control enterprise continues and the aircraft manufacturing industry is in steep decline: not a single airplane was manufactured this year (2016).

    Andrii Yarmak, former head of the Ministry of Infrastructure’s aviation department

The industry’s tasks for 2017:

    Attract top low-cost airlines

    Sign the Open Skies agreement with the European Union

    Implement airport reform

KPI

The roadmap for the work of Omelian and his team was presented during a donor conference at the Ministry of Infrastructure in late May. It contained the ministry’s basic Key Performance Indicators (KPI) for six months (June-November).

Create a project office at the Ministry of Infrastructure

A technical office for supporting reform began operation in mid-October. Aleksandra Klitina heads the office.

Begin improving the National Transport Strategy

The first public debate of the National Transport Strategy, during which the direction of development of the transport industry were presented, took place in mid-November. The National Transport Strategy itself should be made public in 2017.

Create an anti-corruption department

Created.

 

Identify and eliminate bottlenecks in Ukrzaliznytsia

Everyone already knows about the problems at Ukrzaliznytsia. The problems are being addressed, but one cannot say that this KPI was achieved.

Reform of the State Road Transport Service

In the process of being achieved. Regulation of truck weights on roads, which is part of this reform, was introduced in 2016.

 

Corporatization of Ukrzaliznytsia and Ukrposhta

The creation of a public joint-stock company completed the corporatization of Ukrzaliznytsia, but a vertical holding entity has not yet been created. The corporatization of the Ukrposhta postal agency was originally supposed to be completed by the end of 2016, but this deadline has now been moved to the first quarter of 2017.

Reform of the Ukrainian Ports Authority

Reform of the Ukrainian Ports Authority involves consolidation of its branches, as well as their possible spinoff into separate legal entities. Work on this issue is underway. In addition, the Maritime Administration should be established on 1 January 2017.

Decentralization of Ukravtodor

The parliament supported decentralization of Ukravtodor not from 2017, as stated in the original version, but from 1 January 2018.

Implementation of PPP projects (the pilot project is a parking lot at the Boryspil airport)

A project office was established with the support of the Infrastructure Ministry, and the office is now just beginning the drafting of three PPP projects. Practical implementation of these projects is scheduled for between late 2018 and early 2019. The idea of granting an operating concession for parking lots at the Boryspil airport has been abandoned.

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