Oleksii Balesta, Deputy Minister for Development of Communities and Territories of Ukraine
In 2026, Ukraine took a step that has long been standard practice across most European countries: for the first time, the state commissioned socially important passenger rail services. In effect, Ukraine launched a prototype of the European Public Service Obligation (PSO) model, but so far as a two-year experiment in long-distance and regional connections.
The next step is to adopt a dedicated law that will transform this pilot into a systematic, long-term programme based on European principles.
The Previous Model No Longer Works
For decades, passenger rail services in Ukraine were financed through freight revenues. Losses in the passenger segment were covered by income from freight transport, meaning that Ukrainian businesses ultimately bore the cost of maintaining passenger services.
This mechanism allowed the system to function for a time, but it also created a number of structural problems. In essence, it was like covering a hole in one pocket with money from another—the total amount of money never increased.
At the same time, such a system provides neither sufficient nor sustainable incentives for developing passenger services. When funding is disconnected from the actual transport service being provided, there is little basis for long-term planning, clear service quality requirements, or economic incentives to invest in modern rolling stock.
Why Suburban Trains Disappear
The shortcomings of the current model are most evident in suburban rail services — the least profitable segment of Ukrainian Railways.
Today, the railway operator faces a straightforward economic dilemma. Every trip on a socially necessary but unprofitable route increases financial losses. The natural response is to reduce such services or refrain from expanding them.
The problem is not the company's intentions. The problem lies in a system that makes development economically irrational.
What PSO Fundamentally Changes
In European practice, PSO is not a mechanism for subsidising railway operators. It is a mechanism for purchasing public transport services.
If a particular route is essential for people but cannot be sustained through ticket revenue alone, the state or a local authority commissions the service. It defines the routes, timetable, and service quality requirements, and transparently compensates the operator for the gap between operating costs and revenues.
In other words, what is compensated is not the operator's loss as such, but the cost of providing a specific public service. That distinction is fundamental.
The First Results Are Already Visible
The state budget allocated UAH 16 billion for the implementation of the public service contract mechanism in 2026. This marks the first time that the state has transparently compensated the cost of passenger rail services.
The impact of this decision can already be measured. According to our estimates, without introducing the public service mechanism and financing the procurement of new passenger coaches, the required increase in freight tariffs would have been approximately 115% rather than 30%.
Therefore, PSO is not only about supporting passenger transport. It is also a way to reduce the financial burden on Ukrainian manufacturers and exporters.
Why a Dedicated Law Is Needed
The current pilot is an important milestone, but it cannot provide long-term stability for the system. This is why the Ministry for Development has drafted a Law on Public Service Rail Transport, which is currently undergoing interagency approval. We hope it will receive broad support.
Let me be clear: adopting the law will not mean that brand-new trains appear on the tracks the very next day. What it will do is establish the foundations for sustainable development: long-term contracts between the contracting authority and the railway operator, a transparent methodology for calculating the cost of public transport services, separate accounting for revenues and expenses under PSO contracts, predictable financing, and clear rules for all market participants.
Long-term planning is one of the key pillars of the future system. Multi-year PSO contracts create predictable cash flows, making passenger rail services bankable and more attractive for both lenders and investors.
State and local government budgets will remain constrained for many years to come. Therefore, attracting external financing is, in practice, the only realistic way to renew rolling stock and prevent further deterioration of the sector.
The Next Stage: Suburban Rail Services
One of the most anticipated reforms will be the gradual extension of the PSO mechanism to suburban passenger services. The emphasis is on gradual implementation, taking into account the financial constraints and challenges that communities continue to face during wartime.
Today, local communities have very little influence over whether commuter trains serve their area. The new model changes that. Communities will no longer simply receive whatever service is provided; they will be able to commission a specific transport service, defining routes, service frequency, convenient schedules, and expected quality standards.
With greater influence will also come greater responsibility for co-financing these services.
At the same time, the draft law provides for a transitional period. Initially, participation by local communities will be voluntary, allowing them to gradually gain experience with the new mechanism without placing excessive pressure on local budgets.
In essence, this represents a shift from a highly centralised system — where decisions are made primarily by the railway operator — to a model in which the contracting authority, including even a small local community, has a genuine say in shaping the transport services it receives.
Instead of a Conclusion
Around the world, transport policy increasingly prioritises railways. Rail transport is safe, environmentally sustainable, comfortable, and capable of carrying large numbers of passengers efficiently. Ukraine's own experience during the war has also demonstrated that railways are among the most resilient modes of transport during crises and disruptions.
Ukraine has every opportunity to become part of this broader European trend. We operate one of the largest railway networks in Europe, and for millions of Ukrainians the train remains the preferred option for both intercity and suburban travel. That makes railway development a strategic necessity.
At the same time, we must acknowledge an economic reality: passenger rail services cannot remain both socially affordable and fully self-financing through ticket sales alone. This is not a uniquely Ukrainian challenge — it is the same reality faced by every European country.
That is precisely why socially important passenger services across Europe are financed through PSO mechanisms. National, regional, or local authorities openly commission transport services that society needs and compensate operators for the cost of providing them. This is the model that underpins passenger rail systems across the European Union.
Ukraine is moving in the same direction. Introducing the PSO model is essential for modernising passenger rail services, renewing rolling stock, improving service quality, and ensuring that rail transport remains accessible to everyone. Ultimately, this approach will allow Ukraine to strengthen its railway sector while supporting economic competitiveness and providing citizens with reliable, high-quality public transport.
