Ukraine cabinet initiates pilot project for private rail locomotives

Ukraine’s Cabinet of Ministers approved on Dec. 4 a resolution
to start a pilot project for the use of private locomotives on selected railway
routes, the Infrastructure Ministry reported the same day. The project will
enable partially reducing a deficit of locomotives in Ukraine and testing new
rules and opportunities of the railway transportation market. According to the
ministry, several private companies are interested in participating in the
pilot project.

The ministry will determine the project’s conditions,
as well as the routes on which the project will be implemented. Local media
earlier reported that subsidiaries of Ferrexpo (FXPO LN) and the SCM holding
firm of Rinat Akhmetov are ready to participate in a pilot project with their
locomotives.

Currently, private companies are not allowed to use
their own locomotives on the mainline railways of Ukraine. While use of private
railcars is allowed, all the railway infrastructure and mainline locomotives
are controlled by state company Ukrainian Railways (RAILUA).

Alexander Paraschiy: It might
take a couple of years for this pilot project to reach a full liberalization of
the locomotive market. Such liberalization could bring some positives for
Ukrainian Railways in the short term, but will definitely be risky for the
company in the long term. If the locomotive market is liberalized, Ukrainian
Railways will be able to insist on deregulating locomotive rates, which is
likely to lead to rate hikes to the benefit of the state company (which
happened after railcar rates were deregulated in 2018).

However, with full liberalization of the locomotive
market, Ukrainian Railways will lose a significant portion of this market, or
at least 40% (which is the share of SCM and Ferrexpo in total railway cargo
turnover in Ukraine). Such liberalization should follow the resolving of the
issue of loss-making passenger railway transportation – if so, the overall
effect of the reform on Ukrainian Railways won’t be very painful. Keeping in
mind that long-term risks are rising for Ukrainian Railways, we are keeping our
neutral view on RAILUA bonds.