The purpose of this study is to analyze whether Ukraine’s state railway monopoly Ukrzaliznytsia (UZ) will be able to cope with the growing demand for grain transportation through 2023 and the percent of UZ’s locomotive power deficit could arise owing to failure to further reform UZ and stoppage of the current UZ reform program to purchase new locomotives. In addition, the study looks at potential consequences the deficit of locomotive capacity could have on Ukraine’s economy. Special attention is paid to current logistical problems of Ukraine’s Agricultural Industrial Complex (AIC).
Despite significant interruptions, Ukrzaliznytsia (UZ) in 2017 managed to meet 97% of demand for freight rail transportation. The shortfall of 3%, or 10.5 million tons, of cargo turnover was compensated by agrarians, who were forced to transport their grain by more expensive means. According to our estimates, the negative effect on agriculture from the need to replace railway transport by road transport amounted to $321 million.
According to the forecasts of the AIC representatives confirmed by our calculations, by the year 2022 the volume of grain production in Ukraine could grow from the current 62 to 80 (+33%), or 100 (+67%) million tons, depending on the intensity of use of chemical fertilizers. Obviously, due to the limited internal market, the entire crop increase will be exported.
At the same time, the demand for rail transportation already in 2018 will also increase from metallurgists and other heavy industry enterprises, which use coal and oil products as their main source of energy, as well as manufacturers of mineral building materials and a number of other industries.
According to our forecast, the potential demand for rail transport, depending on the scenario of yield growth and the reduction of GDP energy intensity, may grow from the current 339.5 to 393-456 million tons over the next five years. But UZ’s capacity volume in terms of cargo turnover is currently diminishing. Despite the existing number of problems with the deterioration of wagons, the main reason for the potential shortage of transportation capacity is the state of UZ’s locomotive fleet.
So, even with the already signed contract for the supply of the first 30 locomotives of General Electric, the total number of UZ’s thermal and electric locomotives intended for freight traffic is currently only 579 units and is annually diminishing by an average of 4.4%, or 25 locomotives. While maintaining current performance and dropout rates, by 2022 UZ will have only 504 locomotives capable of transporting 0.58 million tons per year. That is, the total volume of annual capacity of UZ for cargo turnover will amount to 291 million tons per year.
The resulting shortage of capacities for relatively cheap freight traffic will lead to the fact that such industries as metallurgy, agro-industrial complex and production of building materials will be forced to reduce production volumes. The transit of goods through Ukraine will be reduced forcibly. As for energy, the potential shortage of coal and oil products to heavy industry can be replaced with natural gas without significant losses. The higher profitability in other industries, representing the demand for rail transportation today, though it will allow them not to reduce production volumes, but, due to the forced transition to more expensive vehicles, will be substantially reduced.
According to our calculations, if government steps back from the current program for updating and modernizing UZ’s locomotive fleet, the average annual loss for the economy, depending on the scenario, will be from 4.8% to 7.1% of GDP per year. Cumulatively over five years, that equals from $27.8 to $41.3 billion in 2017 prices. The current program for renewing UZ’s locomotive fleet provides for purchasing 262 critically-needed locomotives for only $1 billion.
Our work is not intended to protect the expediency of choosing a particular contractor for the production or purchase of locomotives and is only an econometric calculation of the potential losses for Ukraine’s economy from the shortage of locomotive capacities of the railway and the absence of a single potentially permissible tool for servicing a variety of industries.