Ukraine launches long-awaited reform of railways

By bne IntelliNews February 24, 2012

Graham Stack in Kyiv -

Ukraine's parliament passed legislation on February 23 launching reform of the country's massive and strategically vital railways. The long-awaited move should free up access to funding for the country's decrepit rail network, however, privatization is still not on the cards.

In a rare example of meaningful reform in Ukraine under any government, Ukraine is now set to embark on reform of its Soviet-era railway system, the preferred means of transport both for industrial and agricultural freight, as well as millions of passengers, thanks to Tsarist and Soviet traditions and continued huge state subsidies.

The two laws passed by parliament in a second reading pave the way for the corporatization of the railroads, and the separation of the regulatory and business functions. The legislation however largely excludes any privatization of the sector, and includes no timetable for an end to cross-subsidisation.

Rather, it aims to create a national corporation - OJSC Ukrainian Railways - which will unite the country's six regional railroad administrations, as well as state holdings in associated engineering and repair companies, according to Kommersant Ukraine.

"The change of ownership form will accelerate the implementation of Ukrzaliznytsia's own investment programs and allow the attraction of financing for infrastructure modernization," CEO Volodymyr Kozak told Interfax Ukraine. "The company will also be able to attract foreign investors and establish joint ventures. In particular, the railways will be able to attract funding from the European Union issued for structural reforms in Ukraine," he added.

Analysts and investors agree that easier and cheaper access to credit - which will help with the massive and urgent task of upgrading the railways - will be one of the main immediate advantages.

"The legislation is aimed at improving efficiency of the domestic railway sector, increasing its investment attractiveness and accelerating modernization of its fixed assets," Dragon Capital analysts wrote in a note. "It signals a positive long-term trigger for the domestic railway sector, potentially helping to accelerate large-scale renovation of domestic railcar and locomotive fleets currently almost 80% worn out."

Andre Kuusvek of the European Bank of Reconstruction and Development illustrated the point, by announcing the bank will lend Ukrainian Railways $62.5m in 2012 for purchasing new rolling stock. "Over the last few years we almost lost all hope of reform of the sector, but last year some important steps were taken and we now see ourselves able to continue funding the sector," he said.

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