Ukrzaliznytsia sets liberalized rates for railcar rent

Ukrainian Railway (Ukrzaliznytsia, RAILUA) approved on
Jan. 17 a new pricing methodology for freight railcar use, according to the
company’s press release issued the same day. Earlier, prices for railcar use
were regulated and far below those offered by private railcar providers, the
company said, stressing that the resulting arbitrage generated shadow incomes
for intermediaries and corrupt officials of up to UAH 5 bln p.a. More adequate
pricing of railcar rent will liquidate the artificial deficit of railcars,
Ukrzaliznytsia’s CEO said.

At the first stage, the company will set railcar rates
on the asset base principle (accounting for costs of railcar purchases and
servicing and allowing for a 10% margin for UZ). Later on, the company will use
the market mechanism to price railcars, in which rates will be defined by
electronic auctions. The company also announced preliminary prices for railcars
that will be valid as of Feb. 19: prices for gondola cars will be UAH 542/day,
and grain hoppers will be UAH 655/day, or about 2.5-3.5 times higher than the
regulated rates.

Alexander Paraschiy: Earlier, the company estimated the economic effect from the
liberalization of railcar rent of at least UAH 1.0 bln, while more precise estimates were UAH 1.5-4.0 bln p.a. We believe the
new rates of railcar rent will allow Ukrzaliznytsia to generate additional
revenue close to UAH 3.5 bln in 2018. That will also allow the company to
invest in the purchase and modernization of new freight railcars, thus
improving the company’s positions on the freight railcar market. While we can
expect some opposition to new pricing from the company’s key clients, it looks
like the liberalization has low chances of being reversed. We retain our neutral
view on RAILUA bonds.