Yuri Shchuklin, logistics market expert, adviser to the “Ukrzaliznytsya” Head of Board   

Why pin-pointed changes in principles of distribution of railway grain carriers will not solve problems of the market of railway shipping

Six weeks ago, topic No.1 for Ukrainian agrarians, grain market manufacturers, was the sharp rise in prices for railway shipping. Now, we can say that the signals, appeals, and proposals, put forward by the market stakeholders then, were heard by the state shipping company, “Ukrzaliznytsya”, and this has yielded results. It became possible to stop the sharp rise of prices for renting grain-carrying railway cars. The state shipper had, for the first time, opened an opportunity for cargo owners to plan their shipments for a wider horizon, having put, in November, the rental of grain-carrying railway cars for the entire December on the “Prozorro. Sales” system. As soon as fear had gone away from the market and laws of economics have begun to work, this has directed the price trend to the economically substantiated level.  

When the joint effort of the market stakeholders and “Ukrzaliznytsya” had quenched the price spike, the logical step has to be the crisis analysis and removal of systemic prerequisites of it happening again in the future. The necessary steps were named by the business as required by the market: open data, mutual responsibility of participants in logistics projects, early planning of shipments.

The uncontrolled rise in prices has made urgent the issue of creation of an open digital platform where the state-owned shipper, private railway car stocks, and owners of agricultural cargos could exchange data in real time. This platform would also take into account the load on infrastructure and document obligations of participants in the logistics chain. At present, Ukrainian cargo owners and traders plan their shipments without knowledge of the carrying capacity of railways and without knowledge whether there is a physical capacity to transport their cargo. This problem’s solution is in creating, with the help of automated systems, of an absolutely new platform where all the participants in the logistics chain, while signing forwarding contracts for delivery of cargo, could document their mutual obligations: the obligation by a port to accept the cargo; the obligation by “Ukrzaliznytsya” to transport it; and the obligation by the railway car owner (state-owned or private) to provide the railway car stock.  However, this solution is impossible to implement if guided by the current legal norms written for “Ukrzaliznytsya” in the past century. Changes in the regulations of the organization of shipping (the Rules of equal access to the strategic infrastructure, the Statute of Ukraine’s railways, the Rules of shipping) is a lengthy and complicated path. This could have been the reason why, instead of a full-scale reform of the market of railway shipping, the management of the cargo sector of “Ukrzaliznytsya” have opted for a simpler and more accessible path of compromise half-measures.  

On 6 December, during the meeting of managers of “Ukrzaliznytsya” with representatives of the grain market, with more than 20 representatives of agrarian companies, traders, and associations participating, “Ukrzaliznytsya” had presented its initiative: auctions for selling grain-carrying railway cars of “Ukrzaliznytsya” with the horizon of 5 months (January-May 2022). 

Despite a number of obvious positive moments, this solution contains prerequisites for three negative scenarios which are highly probable to materialize in the future. 

First, these auctions do not cover the real need of the market. Cargo owners’ need is not to pay for railway cars but to buy the responsibility of participants in the shipping process and do this at the time of concluding forwarding contracts. Who would need a railway car if there are no mechanisms for loading, a free thread of timetable, and no place for unloading?  While buying a railway car now, the cargo owner does not thus buy a “ticket” to the port where unloading to sea-going vessels takes place. Broadening the horizon of auctions to the end of May will not remove the risks of future price spikes which, as a rule, happen in the autumn, during the first months of active sales of the new crops.

Second, the suggested mechanism of purchasing and renting the railway cars of “Ukrzaliznytsya” replicates the 2019 model of long-term contracts which had not worked, as it had not taken into account the market’s reaction to changes in demand and supply which then led to defaults where contracts were concerned while the state shipper had lost some of its cargo base. At the time, “Ukrzaliznytsya” offered not the service of responsible delivery of cargo within the stipulated time but railway cars. As a result, these railway cars were taken by freight forwarders who had no cargo of their own but offered the cargo owners the service which “Ukrzaliznytsya” had not wanted to offer: real responsibility for the cargo, time frame of delivery, and services.  Instead of directly servicing agrarians and traders, “Ukrzaliznytsya” had in fact given this market, as a gift, to freight forwarders who started to compete with “Ukrzaliznytsya”. The current model of grain carriers’ distribution, too, has the same “hole” which allows freight forwarders to buy railway cars and then compete with “Ukrzaliznytsya” for cargo.   

Third, the introduction of pin-pointed measures instead of the reform of the market threatens the state-owned shipper with the loss of trust from cargo owners and participants in Ukraine’s railway logistics, and with the loss of initiative. It is at the hands of the competitors of “Ukrzaliznytsya” that the ideas of early responsible planning of shipments will soon find their implementation, and there is a risk that they will possess the initiative while the state-owned shipper will lose its chance to become the leader of the reform. 

The meeting of the management of “Ukrzaliznytsya” with the market has shown the existence of two groups of stakeholders. There is the stand of agrarians and traders whereby the country needs not the pin-pointed changes but a competitive market with understandable rules where cargo owners can choose shippers on their own. This idea is not shared by part of the team of “Ukrzaliznytsya”, formed when there was no competition for cargo and railway cars.   

In order for the reform of the logistics market to happen and provide opportunities for strengthening Ukraine’s position on the world market of agricultural produce, business needs to clearly state its goals, and these are the possibility, yet at the stage of drawing contracts, to clearly plan the time terms and costs of all the stages of fulfilling contracts: storage, loading, shipping, and delivery of cargo to the buyer according to contractual clauses.  Any system can and must be changed if this brings benefit to the market and the country. For this, it is necessary to even now form, among agrarians and traders, a group of support for the initiatives of liberalization of the railway logistics market.   

If the active stakeholders of the agrarian market consolidate their competences and start to jointly influence the part of the “Ukrzaliznytsya” management who are resisting change, the reform of the market will be implemented.