UKRAINIAN INFRASTRUCTURE BECOMING a PART of the WESTERN WORLD Eastern Mind Western Values UKRAINIAN INFRASTRUCTURE BECOMING a PART of the WESTERN WORLD

eastern mind western values Strategeast

UKRAINIAN INFRASTRUCTURE BECOMING A PART OF THE WESTERN WORLD eastern mind western values UKRAINIAN INFRASTRUCTURE BECOMING A PART OF THE WESTERN WORLD

5 EXECUTIVE SUMMARY

7 INTRODUCTION

8 INFRASTRUCTURE: KEY POINTS

10 ADVANTAGES

12 MAIN CHALLENGES

14 RAILWAYS

16 ROADS

18 PORTS

20 AIR TRANSPORTATION

22 POST OFFICE

24 INTERNATIONAL COMPETITIVENESS OF THE UKRAINIAN INFRASTRUCTURE

24 UKRAINE’S TRANSIT ABILITIES

28 FINANCING AND INVESTMENTS INTO THE INFRASTRUCTURE eastern mind western values Released by Strategeast StrategEast is a strategic center for political and diplomatic 28 STATE-PRIVATE PARTNERSHIPS solutions whose goal is to reorient the elites of these nations that broke away after the dissolution of the Soviet Union and to guide and assist them into closer working relationships 29 UKRAINE AND THE WEST: with the USA and Western Europe.

© 2017 Strategeast Center. All rights reserved. No part of this publication MOVING TOWARDS EACH OTHER may be reproduced or transmitted in any form or by any means without per- mission in writing from Strategeast, except in the case of brief quotations in the media. Please direct inquiries to: [email protected] 30 LIST OF SOURCES

2 STRATEGEAST EXECUTIVE SUMMARY

Last year, the Ukrainian Government prepared Ukraine is very important to the European Un- what is in essence a revolutionary project to ion as one of the key countries involved in bring changes to Ukraine’s infrastructure. The transportation to and from the EU. However, scale of the project is comparable only with the Ukraine’s excellent transit capabilities have not integration of East European countries into the been yielding a positive result in the 21st cen- European Union’s infrastructure in the 1990’s tury; it is estimated that the country’s transit po- and 2000’s. The project, which the Ministry tential utilization rate is currently only 25-30%. of Infrastructure of Ukraine has already begun implementing, embraces all the key areas of Insufficient anti-corruption legislation and- im the country’s infrastructure - airports, road- plementation, lack of funding, absence of ways, railroads, sea and river ports, and the control mechanisms, and ineffective regula- postal service: tion and tax system are the main challenges that the Ukrainian infrastructure needs to over- • In 2017 the process of turning Ukrainian come in the foreseeable future. Railways into a corporation should be completed Each of the parties involved – the Ukrainian • Approximately 1,000 km kilometers of government, the Western establishment and roadways have been repaired in 2016, and organizations, and the Western business – more than 2,000 km are to be completed need to take a series of steps in order to se- in 2017, improving the transportation infra- cure Ukraine’s fast and efficient transition into structure the world of modern infrastructure. • A number of investment and development agreements were signed in 2016. The package of planned reforms is beneficial Those agreements were aimed at competi- and valuable not only to residents of Ukraine, tion development, logistical independence, but also to the entire Western society. These and infrastructure modernization reforms will deal a major blow to corruption in • Leading low cost airline companies intend Ukraine and decisively re-orient the Ukrainian to start operating flights to Ukraine in the economy, trade, and people away from the nearest future, increasing the tourist stream destructive way – which they have been drawn and reducing ticket prices to because of historical factors – and towards • In April 2017 the process of turning West Europe and the USA. Implementation of the Ukrainian Postal Service from a state these reforms will also strengthen the Ukrain- owned company into a public corporation ian security system, which in the future may was completed, paving the way towards merge into the global common system of se- transparency and implementation of West- curity aimed at protecting the entire civilized ern corporate culture world from the global threats.

4 STRATEGEAST eastern mind western values 5 INTRODUCTION

The reform of Ukrainian infrastructure is in its in particular, ones that possess global experi- very first stages. During the 25 years of inde- ence and the most cutting edge technologies, pendence, over the course of which constant- believe in the future of Ukraine and come to ly changing governments did not define their manage Ukrainian ports, build toll freeways, geopolitical choice, the Ukrainian roads have and fly Ukrainians in their planes around the come into disrepair and need an almost com- world. We believe that Western companies will plete overhaul, the rolling stock of the railroad be able to bring with them the newest, most ad- is 90% worn out, the ports have lost a major vanced standards of management to Ukraine, share of strategic cargo, only 5% of the coun- teach Ukrainian workers, grow a generation of try’s population use air transportation, and 80% competitive managers, bringing them up us- of post offices do not have computers. ing Western standards of labor culture. Those are the people who will build the new Ukraine, The scope of activity is vast, and one should modern and European. admit that Ukraine is unable to carry out the tremendous efforts to reform the industry on We believe that only the unification of Ukraine its own. Ukraine needs the support of Western with the Western world by means of mod- partners – political, technological, managerial, ern infrastructure – roads, airplanes, railroads, legal, and financial. ports, postal service – will allow the Ukrainian residents to become Europeans. It will bestow Three years ago Ukraine made its geopolitical upon them the feeling of having been accept- choice having paid for it with the lives of Maid- ed into the European family of peoples. In June an revolutionaries and continuing to pay for 2017 the European Union will be visa-free for that choice every day with the lives of soldiers Ukrainian residents to travel. The goal of the and citizens lost in the war with Russia and the Ukrainian government infrastructure projects separatists supported by her. We believe that is to provide Ukrainians with the opportunity to there is no way back for Ukraine – no return to utilize this chance – to see Europe and to cre- totalitarianism, back to USSR. Now our West- ate business and cultural contacts there. ern partners should also believe in the finality of this choice. We call upon the West to believe in Ukraine, invest into Ukraine, assist Ukraine, and to help Believe in it and start aggressively investing into her make it along the tough journey of transi- Ukraine. It is important that Western companies tioning from the East to the West.

6 STRATEGEAST eastern mind western values 7 After the outbreak of conflict in eastern Ukraine km 22 000 mln In the last 10 years the amount of cargo carried Railroad which interact 300 21 Metric tons of loads Airports by Ukrainian transportation has dropped by with railroads of seven 40%. The greatest decrease happened after the neighboring countries carried annually outbreak of conflict in eastern Ukraine in 2014.

Prior to the warfare in the east of the country, six Ukrainian railroads generated $5 billion annually, provided 37% of all cargo transportation, and served as one of the most important channels for 30 the exportation of goods. International railroad gauge changeovers

170 000 km Automotive roadways 2 200 km Waterways

The geographic infrastructural potential utilization rate is only 25–30%

Development of the infrastructure requires 13 $8-10 bln USD of private investments Seaports annually over the course of 12-15 years.

On its own Ukraine is able to finance the infrastructure in the amount of $1.5 bln USD 11 annually. River terminals

8 STRATEGEAST eastern mind western values 9 Tallinn

Klaipeda

Minsk

Lviv Slawkow Kyiv

Matowce Chornomorsk Odesa Dostyk Aktau Poti Batumi Aljut Istambul Zonguldak Derinjy Samsun Turkmenbashi Astara Anzali

UKRAINE IS CONVENIENT TRANSPORT HUB BETWEEN EUROPE AND ASIA

Bander-Abbas

LOCATION+EDUCATION. TWO DEFINITE ADVANTAGES portation corridors. Priority financing will be al- THE LEVEL OF EDUCATION located to transportation corridors connecting FOR THE WESTWARD ADVANCEMENT the eastern and western parts of the EU. An Ukrainians have a historical predisposition to- accent has been made on the corridors being wards wanting to be educated people. Con- GEOGRAPHIC LOCATION have not been yielding a positive result in the multimodal – regardless of the direction, each tributing factors include the makeup of the 21st century. Various estimates put Ukraine’s transportation corridor should comprise at least population, the nation’s striving towards being The strategic location, whose potential is with- transit potential utilization at 25–30%, although three types of transport, connect three coun- educated and cultured, the western influence, out a doubt far from being utilized, can be a experts believe that Ukraine’s transit capabilities tries, and have two trans border sections. and the historic connection with the USSR – powerful catalyst for the development of the can exceed 200 million metric tons per year. nationwide enterprises, global thinking. country as well as for the West. A central axis passes through Ukraine; that axis Ukraine is very important for the European Un- defines the primary railroad and automobile LEVEL OF EDUCATION ion as one of the key countries for the transpor- Historically, over the course of many centuries, routes generally correlating to the directions of AMONG THE POPULATION Ukraine has been at the crossroads of world tation of goods to and from the EU, especially the new European TEN-T network transportation trade routes and a major stronghold on the way since the European Parliament approved the corridors. This includes the water axis, which 6% of the total employed population of Ukraine from Europe to Asia. new concept of transportation infrastructure connects the Black Sea area with the Mediter- – approximately 1 million persons – are work- International transportation corridors pass development and turning the national trans- ranean, Baltic, Barents, and Red Seas and the ing in the transportation infrastructure. Overall, through Ukraine, among them: pan-European portation systems of European countries into a Suez Canal, and incorporates inland waterways: the Ukrainian job market is noteworthy for its transport corridors, Organization for Coop- unified trans-European transportation network Belarus–Kiev (along the Dnipro) with access to high rate of highly qualified specialists. 76% eration of Railways corridors, and the Europe– (the TEN–T program) in 2013. The cost of the the Odessa and Chernomorsky ports. of the Ukrainian population have higher edu- Caucasus–Asia transportation corridor which project phase 1 is estimated to reach €250 bil- The Ministry of Infrastructure works closely with cation. Ukrainian universities annually confer connects Europe with Central Asia via the Black lion by the year 2020. Georgia, Azerbaijan, Kazakhstan, and China 350–400,000 bachelors and masters degrees. Sea, the Caucasus, and the Caspian Sea. on the launching of the South Silk Route which More than 70 institutions of higher education in As part of this development the key transpor- can become a competitive alternative to the Ukraine prepare specialists with technical ma- However, Ukraine’s excellent transit capabilities tation network will consist of nine main trans- Russian option. jors.

10 STRATEGEAST eastern mind western values 11 MAIN CHALLENGES 08. New roads to the West will have the ability to finally pull Ukraine out of the «post-So- 01. An imbalance exists between the geo- viet province» status and make irreversible graphic and logistical vectors of the transport the processes of integrating Ukraine into the infrastructure. Geographically Ukraine is much Western civilization. closer to the European Union. But logistically it is still drawn to the infrastructure network of General Problems of the Ukrainian Transporta- the former USSR. tion Infrastructure Requiring Solutions:

02. Integration of the Ukrainian transportation • Insufficient funding of state-owned entities infrastructure into the all-European transporta- in the transportation sector tion map will allow Ukraine to notably speed up its economic growth and get out of Rus- • Imperfect fiscal policy which results in sia’s sphere of political influence. outflow of funds from state-owned entities in the transportation industry segment and 03. Development of the transportation infra- does not facilitate growth of the segment structure using progressive policies and ap- proaches will also contribute to the decrease • Insufficient amount of private investments of general corruption risks inherent in Ukraine. into the transportation sector, limited choice of instruments of private investment 04. Development of the infrastructure requires into infrastructure facilities, low investment $8–10 billion of private investments annually attractiveness of transportation entities over the course of 12–15 years. • Ineffective statutory regulation on the is- 05. On its own Ukraine is able to finance the sues of state-private partnership. infrastructure in the amount of $1.5 billion annually. European financial institutions are also unable to fully satisfy the investment demands • Ambiguity in the procedure of securing of the Ukrainian transportation infrastructure. private capital for construction and reconstruction of roads 06. The new leadership of the Ukrainian Min- istry of Infrastructure has achieved notable • Absence of a control mechanism to gauge successes in reforming the industry segment the effectiveness of the use of funds al- and reducing the corruption risks in business located to repairs, reconstruction, and new operation. The worlds largest providers of port construction of road infrastructure business, container transportation, and passenger air transportation are already entering • Absence of an effective tax system mech- the Ukrainian market. anism to stimulate fleet renewal

07. For the successful implementation of re- • Absence of mechanisms for the repay- forms Ukrainian infrastructure needs to secure ment of investments made into strategic additional $20–25 billion by the year 2030. facilities of the port infrastructure

12 STRATEGEAST eastern mind western values 13 RAILWAYS 2016

bln USD 12mln USD 262mln USD 14mln USD 3 bln USD bln USD 3Revenue Net profit National taxes Local taxes 4.2 7. 6 Total funds needed Total funds needed In 2017 the process of turning Ukrainian Railways to update the Ukrainian for the railroad into a corporation should be completed Railways rolling stock infrastructure

WHAT HAS BEEN DONE ufacture rolling stock. Westernization of the PERSPECTIVES • Updating the railroad rolling stock by Ukrainian industry, increasing the transporta- means of acquisition, modernization, and • In 2016 General Electric signed a Memo- tion reliability. • Launching a competitive railroad trans- major overhaul of locomotives, passen- randum of Cooperation with Ukrainian Rail- portation market. Implementation of uni- ger and cargo cars, electric and diesel rail ways. Westernization of Ukrainian industry. • Projects to electrify the primary sections of versal market rules for state and private buses. Collaborating with leading manu- Ukrainian railroads and bring the network of companies. facturers of rolling stock, such as Alstom, «This decision was not made at random; transportation up to Western standards have Bombardier, Siemens, General Electric, we evaluated the positions of all players in been planned: • Creation of a network of interconnected Newag, Pesa Bydgoszcz SA, CRRC Inter- the world market for a long time. We under- logistics centers and multimode terminals national Corp. LTD, and others. stand that GE is number one in the world Reconstruction of certain areas with the in the largest transportation hubs, state when it comes to manufacturing diesel loco- support of The European Investment Bank border checkpoints between Ukraine and • Fast speed rail connection between the motives,» said in this regard Minister of In- (EIB) and The European Bank for Recon- countries of the EU. city of Kyiv and the Boryspil International frastructure Volodymyr Omelian. According struction and Development (EBRD). Involv- airport. to him, the document signed with Ukrainian ing European financial institutions. • Design, financing, reconstruction of ex- Railways lays the legal foundation for the fur- isting railways, stations, pedestrian bridg- • Capitalizing on Ukraine’s transit potential. ther strategic collaboration to manufacture The construction of a new double-track rail- es, passenger platforms, and other railroad Implementation of new logistical solutions locomotives in Ukraine. road tunnel in the Carpathian mountains is facilities intended for passenger service on using the transportation infrastructure on nearing completion. It will increase the trans- state-private partnership basis. the EU-India and EU-China routes. • Also in 2016 Ukrainian Railways and Ca- portation by 50-60%. The new tunnel will • Construction of high-speed railroad cor- nadian machine building giant Bombardier connect Ukraine and the European Union. ridors to increase the economic efficiency signed a memorandum regarding the for- The total cost of construction will be ap- of passenger transportation. mation in Ukraine of a joint venture to man- proximately 85 mln USD. Euro-integration. *1 USD=26 UAH

14 STRATEGEAST eastern mind western values 15 ROADS 2016

2,7%

% 170km, 000total bln USD/yearly Category 1 corridors km, state | km, municipal 4.7 49 200 120 400 In order to bring roads into the ple of allowing access of businesses to proper state of repair, regular 2Approximately 1,000 km of roadways have been repaired the automobile transportation market. in 2016, more than 2,000 km to be accomplished in 2017 financing is necessary • Developing the electric automobile market in Ukraine: legislative initiatives will Nine out of ten Ukrainian roads are in especially on primary roads leading to the PERSPECTIVES reduce both the retail prices of electric poor condition. This is according to official Odessa area ports, since uncontrolled use cars (by 20%) and the cost of their man- Ukravtodor (Ukrainian State Automobile breaks down automobile roadways. Over- • Decentralization of the automotive road- ufacturing, providing special preferences Roadway Agency) statistics. In order to all, 80 dimension and weight complexes way management system: transition of for establishing production of electric ve- bring Ukrainian roads into the proper state will be acquired for Ukraine this year. Pro- municipal road administration into the ju- hicles in Ukraine. of repair, regular financing of $4,7 billion tection of road surfaces, implementation of risdiction of local executive governments USD per year is necessary. universal standards. and joint territorial community administra- • Creation of equal conditions for auto- tion units. motive transportation companies inter- WHAT HAS BEEN DONE • Approximately 1,000 km of roadways ested in entering the market of regular have been repaired in 2016, more then • Development of a standard form of passenger transportation. • The new Ministry of Infrastructure team has 2,000 km to be accomplished in 2017, agreement (contract) to maintain automo- put forth efforts to establish in November improving the transportation infrastructure. tive roadways on the basis of long term • Construction of new automotive road- 2016 the State Roadway Fund of Ukraine. (up to seven years) contracts. ways on concession basis and the The Fund will start operating full-scale on • Starting in 2017 Ukraine is implementing mechanism of state-private partnership. January 1, 2018. The Roadway Fund will re- independent roadway quality control. From • Implementation of the €200 million EIB ceive monies from fuel taxes, special dues, now on the technical oversight of road «State Public Transportation in Ukraine» • Management of automotive roadways and penalties. The planned saturation of the work performance will be carried out by an project to upgrade the rolling stock of state using geoinformational technologies. Fund is 40 billion Hryvnia per year. Transpar- engineer consultant (authorized by FIDIC). passenger transportation and provide for ent budgeting, effective planning. This approach will provide for high quality the safety of passenger transportation by • The most sophisticated road from of construction work and is currently being bus, streetcar, and electric trolley bus. Gdansk (Poland) to Odessa (Ukraine) is • Starting in 2016 the dimension and used by the majority of European coun- going to be constructed to connect Bal- weight enforcement has been increased, tries. Western approach to quality control. • Implementation of the European princi- tic and Black seas, starting 2018.

16 STRATEGEAST eastern mind western values 17 PORTS 2016

mln USD mln USD bln USD 23% 298Revenue 69Net profit 1.Total funds needed 2 for the (excl. operating expenses) port infrastructure

WHAT HAS BEEN DONE PERSPECTIVES entities into the strategic facilities of the Sea- • The Ukrainian Sea Ports Authority is plan- port infrastructure. • In 2016 P&O Maritime, subsidiary of the in- ning to begin the reconstruction of the berth • Raising more than 1.2 billion USD for the ternational seaport operator DP World (UAE) maritime hydraulics at the Mariupol port and implementation of investment projects in the • Securing investments into the modernization announced its plans to invest into the devel- the construction of an additional berth at the maritime industry sector. A number of projects of the Seaport infrastructure, increasing trans- opment of a towing fleet of the Odessa Yu- Mykolaiv port. Infrastructure modernization. to modernize and create port infrastructure loading capabilities, creation of specialized hi- zhny trade port. Development of competition, strategic facilities has already been launched, tech transloading terminals and increasing the improvement of technological capabilities. • A reduction of port dues in order to increase valued at 615 mln USD. ports’ overall operation effectiveness. cargo volume is planned. Increasing the ability • In December 2016 the Chernomorsk trad- to compete on the international market. • Creation of the State maritime and river trans- • A new legislative initiative has been drafted ing seaport signed an agreement with one of portation administration (Regulative agency). jointly with EBRD and Hogan Lovell the world’s largest seaport operators Hutchi- • For the first time, Ukraine’s ports are not only son Ports. The company should become an deepened but also developed; hydroplane • Re-organization of the port captains’ duties. • All commercial disputes will be resolved in operator at the Chernomorsk port in 2017. berths, hydro walls, and electric constructions international arbitration Development of competition, transparency. are being built in 4–5 ports. • Preparation for the mandatory audit by the International Maritime Organization in 2018. • In May 2017 the Ukrainian Government • Based on the Dutch and American experts’ • The new port dues calculation methods. approved the feasibility study for the project evaluations, in the next few years the Ukrainian • Creation of the legislative and judicial terms of reconstructing Berth number seven in the waterways may start carrying 35 million metric and conditions for the realization of the goals • Increasing the investments into the river Odessa trade seaport. The project provides for tons of cargo per year. With the help of Amer- to develop the country as a maritime state and business, modernization and upkeep of its in- the expansion of this berth’s capabilities and ican specialists all the locks along the Dnipro building up the Ukraine’s status as a member frastructure, increasing the fleet for river trans- creating the conditions for an obstacle-free have been inspected, and more than 110 mil- of International Maritime Organization. portation of cargo. access of oversize vessels by increasing the lion Hryvnia has been allocated for their repair. depth and re-designing the crane and gantry Infrastructure development. • Development of the Order and terms of the • Ratification of the revised version of the Mar- rails. Development of logistical independence. repayment of investments made by business itime Doctrine of Ukraine.

18 STRATEGEAST eastern mind western values 19 AIR TRANSPOTATION 2016

mln mln USD 33% 12Passengers 129Revenue of Boryspil The largest European low cost airline Ryanair announced that it would operate eleven new flights from Kiev and Lviv

WHAT HAS BEEN DONE by 1.37 million – up to 8.65 million people. demand for flights among Ukrainians, the airline airports into a consortium; the state is then pre- Boryspil may reach the 40 million passengers announced it would be pushing up some of pared to enter into a management agreement • The «Common Aviation Area» (open sky) per year mark by the early 2030s. In the near- the flights – for example from Lviv to Berlin – to with a major airport operator. Currently there is a agreement was it initialed by Ukraine and the est six years a doubling of the existing pas- September 2017. Development of competition, state program to develop 19 airports through the EU at the end of 2013 and may be signed senger traffic is expected. Just by the end of transparency. year 2023. this year. Ministry of Infrastructure of Ukraine the current year alone the airport may reach jointly with its State Aviation Administration 10 million passengers. • Minister of Infrastructure Volodymyr Omelian has created a working group with experts, has announced the creation of a new airline in representatives of airports and airlines, and • An open sky agreement has been signed Ukraine. Demonopolization. developed an action plan to prepare for the with the USA. implementation of the Common Aviation Area PERSPECTIVES for Ukraine and the European Union in 2017. • Ukraine is once again reemerging on the Deoligarchisation and reduction of prices for map of the world’s low cost airlines. In March • Signing of the Common Aviation Area agree- the population. the Hungarian economy carrier Wizz Air an- ment with the European Union. nounced their plans to launch four new flights • During 2016 the revenues of Boryspil Inter- in Ukraine this summer. Reduction of prices, • Bringing in a greater number of airlines, includ- national airport, a state corporation providing increase of passenger numbers. ing low-cost carriers. 68% of all air transportation in Ukraine, grew by 33% compared to 2015, up to 3.35 billion • In April the largest European low cost air- • Development of regional airports. 20 small re- Hryvnia. Increase of tourist stream, increase of line Ryanair announced that starting October gional airports are able to receive medium-range Minister of Infrastructure budget revenues. 30, 2017, it would operate eleven new flights aircraft. The airports belong to the cities, and the Volodymyr Omelyan and • The number of air passengers in 2016 grew from Kiev and Lviv. Then, due to a very high runways – to the state. The plan is to unify those David O’Brien, CEO of Ryanair

20 STRATEGEAST eastern mind western values 21 POST OFFICE 2016

mln USD mln 15% 173Revenue 240Pieces of mail early

Ukrposhta (Ukraine Post) is the national • In 2016 Ukrposhta sustained 6,2 mln product portfolio: it has relaunched the company and access of the population to postal service of the country and reports USD net loss, compared to 1,5 mln USD express delivery service, started work- modern financial services to the Ukrainian Ministry of Infrastructure: of net profit the year prior. Ukrposhta- re ing with corporate clients in the e-com- • More than 50 types of services ported this loss as a result of reappraising merce segment, launched new financial • Expanding the assortment of financial • More than 11,000 offices across of assets as part of the incorporation pro- products (e.g. transfers between cards services Ukraine cess and writeoff of insolvent banks’ debts. and online payment for services), and • Approximately 78,000 employees As a result of the reappraisal, the compa- increased the effectiveness of retail • Transformation of the logistical infrastruc- • Processes and delivers more than ny’s assets increased fourfold which led sales. ture 220 million pieces of mail to the growth of amortization deductions. It has also begun renewing its fleet of • 18 million packages and stated value Transparency, implementation of western vehicles, purchasing computers, con- • Thorough IT modernization: implementa- deliveries corporate culture. ducting automation of post offices, re- tion of modern customer service and mod- • 10 million transfers ducing mail delivery time. Bringing the ernization of the obsolete «paper-based» • Pays more than 70 million pensions • The company’s net income increased Postal Service up to world standards. internal processes. by 15% last year and totaled 4.5 billion WHAT HAS BEEN DONE Hryvnia. Increase of state budget reve- PERSPECTIVES • Establishing a postal bank for the pur- nues. pose of providing access to modern finan- • In April 2017 the process of turning • Increasing revenues to compensate for cial services to the absolute majority of the Ukrposhta from a state company into a • The company’s operating expenses the production of traditional postal ser- population of Ukraine. public corporation was completed; stock increased by 12%, mostly due to the in- vices: increasing the market share in the worth 6.5 billion Hryvnia was issued. crease of employee salaries. New employ- growing e-commerce segment from 10– Transparency, implementation of western ee relations standards. 15% to 30–40% corporate culture. • The company has been expanding its • Providing for the stable growth of the

22 STRATEGEAST eastern mind western values 23 INTERNATIONAL The improvement of the infrastructure com- List of Pan-European Transport Corridors COMPETITIVENESS OF petitiveness rating from 2008 to 2012 is quite notable. The most growth was exhib- THE UKRAINIAN INFRASTRUCTURE Corridor Route ited by the country in the «Quality of overall The Global Competitiveness Index (GCI) infrastructure» category – from 86th place it Helsinki – Tallinn – Riga – Kaunas/Klaipeda – Warsaw/Gdansk calculated by the World Economic Forum moved up to 56th. A number of Ukrainian Berlin – Poznan – Warsaw – Brest – Minsk – Smolensk – Moscow – Nizhny Novgorod (WFE) shows that on the general indicator specialists believe that this dynamic growth of competitiveness rating list, Ukraine has was the consequence of the country’s ex- Brussels – Aachen – Cologne – Dresden/Berlin – Wroclaw – Katowice – Kraków – Lviv – Kiev been mid-pack among the participating tensive efforts to improve the transportation countries over the course of many years. Dresden/Nuremberg – Prague – Vienna – Bratislava – Gyor – Budapest – Arad – Bucharest – infrastructure as part of the preparation for The infrastructure index for the period from Constanta/Craiova – Sofia – Thessaloniki – Plovdiv – Istanbul the 2012 European Football Championship. 2009 to 2017 exceeds the general GCI in- Venice – Trieste/Koper – Ljubljana – Maribor – Budapest – Uzhhorod – Lviv – Kiev dicators for Ukraine by 5–15%. Overall, about $5 billion was invested into the Euro 2012 infrastructure. Gdansk – Katowice – Zilina, western branch: Katowice – Brno Traditionally, the lowest ratings of compet- The Danube River (Austria, Hungary, Yugoslavia, Bulgaria, Romania, Moldova, Ukraine) itiveness in the transportation infrastruc- But that trend was not irreversible, and the ture belong to Ukrainian roads. In this area transportation infrastructure quality wors- Durres – Tirana – Skopje – Bitola – Sofia – Dimitrovgrad – Burgas – Varna Ukraine is among the ten countries at the ened between 2013 and 2016. bottom of the world ratings. Helsinki – Vyborg – St. Petersburg – Pskov – Moscow – Kaliningrad – Kiev – Liubashivka/Razdel- naya – Chishinau – Bucharest – Dimitrovgrad – Alexandroupolis UKRAINE’S TRANSIT ABILITIES However, the low quality of the roadway Salzburg – Ljubljana – Zagreb – Beograd – Nis – Skopje – Veles – Thessaloniki infrastructure is compensated by the high Historically, over the course of many centu- competitiveness of the Ukrainian railroads. ries, due to its geographic location Ukraine Here, Ukraine used to constantly place in has been at the crossroads of world trade the top 30, and only 2016–2017 saw it HOWEVER, UKRAINE’S EXCELLENT TRANSIT CAPABILITIES routes and a major stronghold on the way drop four points and occupy the 34th spot among 138 countries. Unfortunately, world from Europe to Asia. HAVE NOT BEEN YIELDING A POSITIVE RESULT IN THE competitiveness ratings of the Ukrainian International transportation corridors pass port and air transport infrastructures are not through Ukraine, connecting Western Eu- 21ST CENTURY. VARIOUS ESTIMATES PUT that much better than the automobile road rope with Central Asia via the Black Sea, UKRAINE’S TRANSIT POTENTIAL UTILIZATION AT 25–30% competitiveness index. the Caucasus, and the Caspian Sea.

Ukraine’s Transportation Infrastructure in the Global Competitiveness Index

2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 Total countries 134 133 139 142 144 148 144 140 138 Global Competitiveness Index 72 82 89 82 73 84 76 79 85 Infrastructure 79 78 68 71 65 68 68 69 75 Quality of overall infrastructure 86 79 70 71 56 70 75 82 88 Quality of roads 120 125 136 138 137 144 139 132 134 Quality of railroad infrastructure 30 30 25 27 24 25 25 28 34 Quality of port infrastructure 87 80 94 96 75 94 107 108 96 Quality of air transport infrastructure 105 101 110 101 85 105 99 97 103 Available airline seat kilometers millions/week 58 60 62 60 58 58 61 61 60

24 STRATEGEAST eastern mind western values 25 Black Sea area with the Mediterranean, Baltic, Overall, to dare passenger railroad service has UKRAINE IS VERY IMPORTANT FOR THE EUROPEAN Barents, and Red Seas, and the Suez Canal, been established between Ukraine and Slova- and incorporates inland waterways: Belarus–Kiev kia, the Czech Republic, Hungary, Romania, UNION AS ONE OF THE KEY COUNTRIES FOR THE (along the Dnipro) with access to the Odessa and Bulgaria, and Poland. TRANSPORTATION OF GOODS TO AND FROM THE EU. Chernomorsky ports. The Ministry of Infrastructure is also working Europe’s new transportation network reaches the closely with Georgia, Azerbaijan, Kazakhstan, Government representatives believe that the of goods to and from the EU, especially since the Ukrainian borders. However, EU officials believe and China on the launching of the South Silk competitiveness of the transportation sphere is European Parliament approved the new concept that in order to successfully integrate into that net- Route which can become a competitive alter- negatively affected by the low level of transpor- of transportation infrastructure development and work, Ukraine must modernize her infrastructure, native to the Russian option (through Ukraine - tation and logistics technologies and multimode turning the national transportation systems of Eu- actualize regulatory documents, improve flow and Baltic states - Scandinavia). transportation. For example, during 11 months ropean countries into a unified trans-European mobility of the transportation system. The EU will of 2016 the amount of transit cargo carried by transportation network (the TEN–T program) in support Ukraine and her entrance into new mar- Ukrainian Railways as well as the maritime indus- railroad totaled 15.5 million metric tons which is 2013. The cost of the project phase 1 is estimat- kets, as well as her integration into the new trans- try, offer individual clients and businesses flat rates 30.8% less than during the same period of 2015. ed to reach €250 billion by the year 2020. portation system; however, without any doubt, on the route Kazakhstan - Azerbaijan - Georgia - As part of this development the key transporta- Ukraine must put forth major efforts as well. Ukraine, - the lowest in the region. Transshipment of transit cargo by sea ports of tion network will consist of nine main transporta- Ukraine in 2016 was 10.3 million metric tons, tion corridors: Baltic – Adriatic, North Sea – Baltic, In 2013 EU delegate Walter Tretton, head of To develop the capabilities of Ukraine’s transpor- which is 35.1% – or 5.6 million metric tons – less Mediterranean, Orient/East-Med, Scandinavian the “Energy, Transport, and Environment” assis- tation industry and to utilize her transit potential compared to 2015. The transit volumes have – Mediterranean, Rhine – Alpine, Atlantic, North tance program section, noted that this is a major Ministry of Infrastructure has initiated the creation dropped threefold since 2005, although experts Sea – Mediterranean, and Rhine – Danube. They chance for Ukraine. “If Ukraine can utilize it and of an inter-agency consulting body – the Transit believe that Ukraine’s transit capabilities can ex- will connect 94 European ports, 38 airports tied ‘merge’ into the transportation arteries that reach Council. It will include representatives of minis- ceed 200 million metric tons per year. into the largest cities, 15,000 km of high-speed the Ukrainian borders (which includes the Medi- tries of Infrastructure, Economic Development, roadways, and 35 transborder projects. terranean and Danube transportation corridors), Finances, Foreign Affairs, Internal Affairs, Justice, World Bank specialists also see other reasons for she will gain multiple factors that will promote ex- and the State Border Guard Service. Ukraine’s low success rate on the world logistics Priority financing will be allocated to transporta- port, business, and the transportation abilities of market. In World Bank’s 2016 Logistics Perfor- tion corridors connecting the eastern and west- Ukraine and Ukrainian providers,” noted Tretton. Ministry of Infrastructure of Ukraine has also pre- mance Index (LPI) ratings Ukraine took the 80th ern parts of the EU. An accent has been made Today Ministry of Infrastructure of Ukraine is work- sented its initiative to implement a multipurpose place among more than 150 countries. World on the corridors being multimodal – regardless of ing towards the goal of utilizing this potential and project entitled “Three Seas – Hundred Roads.” Bank’s LPI ratings have been conducted biannu- the direction, each transportation corridor should turning Ukraine into the main transit country of the It has to do with the organization of multimodal ally since 2007 by means of surveying carriers comprise at least three types of transport, con- Eurasian continent providing comfortable condi- transportation between the Baltic, Black, and around the world. Six criteria are being judged: nect three countries, and have two transborder tions for transportation between Europe and Asia Caspian Sea regions. efficiency of the customs procedures, quality of sections. and a dependable international partner, supplier the infrastructure, simplicity and affordability of in- of the best logistics services on the continent. Furthermore, Ukraine has initiated the develop- ternational deliveries, ability to track loads during A central axis passes through Ukraine; that axis ment of a multilateral inter-government agreement their movement, and timeliness of delivery. In lo- defines the primary railroad and automobile Significant growth has already been noted: for setting forth the transportation policy for the orga- gistics performance Ukraine notably loses out to routes generally correlating to the directions of the the period spanning January-March 2017 pas- nization of transportation between Baltic, Black, its neighbors – Poland and Romania. new European TEN-T network transportation cor- senger transportation by Ukrainian railroad into and Caspian Sea regions. Its draft has been sent ridors. countries of the European Union have increased for review to 18 partner countries. Ukraine is very important for the European Union almost sevenfold compared with the same peri- as one of the key countries for the transportation This includes the water axis, which connects the od last year, up to 34,500 passengers.

26 STRATEGEAST eastern mind western values 27 FINANCING AND INVESTMENTS INTO gotiations with the German government to se- UKRAINE AND THE WEST: THE INFRASTRUCTURE cure €100 million to purchase 10–15 new sub- urban trains. MOVING TOWARDS EACH OTHER The Ukrainian infrastructure is suffering from chronic underfunding. For example, state funding NECESSARY ACTIONS FOR EACH OF THE PARTIES of updates and maintenance of public automobile STATE-PRIVATE PARTNERSHIPS roadways covers only 16.5% of the total needs. In 2017 the State Automobile Roadway Agency The state-private partnership model is highly sa- THE UKRAINIAN GOVERNMENT (Ukravtodor) can receive from the state budget lient for Ukraine as it allows to operate within the 1,5 billion USD; however, that is insufficient. concession framework. A private investor/con- • Development of competitiveness in infrastructural segments where monopolies have cessionaire provides higher effectiveness and historically been formed Similarly insufficient is the assistance from interna- efficient management of projects, and the state • Improvement of corporate law including the protection of minority shareholders rights tional financial institutions. In the period spanning can rely on receiving fixed payments. • Liberalization of currency regulation for foreign investors 1994–2016 eight projects using financing from • Recognition of western certificates and licenses for the implementation of infrastructure the EBRD, EIB, and IBRD were carried out. Their Ukraine has passed four laws in this area of projects total cost was €1.37 billion, of which €1.024 bil- regulation. However, experts believe that those • Conducting mandatory independent international evaluation and monitoring during tenders lion was financed. Currently, five joint projects laws are obsolete and do not correspond to the on major infrastructure projects with EBRD, EIB, and IBRD are being carried out, spirit of the time or the demands of the domes- • Open governance is a key to reforms. Ukraine has improved its performance and entered where €2.48 billion are loans, €948.6 million are tic infrastructure development. Drafting a new the TOP 30 countries in Global Open Data Index ranking. Though there's still much to be internal funds, and €250 million are state budget concession bill is underway; the new law should done funds. satisfy the interests of business and state and be in harmony with other Ukrainian laws. THE WESTERN GOVERNMENT AND NON-GOVERNMENTAL ORGANIZATIONS According to Ministry of Infrastructure calcula- tions, the Ukrainian transportation infrastructure Nevertheless, even under the existing legal • It is necessary to take advantage of the historical opportunity to make Ukraine a part of will require more than €30 billion of investments guidelines, Ministry of Infrastructure is caring the Western world not only in terms of values but also physically, by interconnecting the out concession projects. The Ministry has ex- through 2030 in order to provide effectiveness infrastructures of Ukraine and Western Europe and safety and to satisfy the growing demand for pressed its readiness to offer for concession • With its 45 million population, Ukraine is a massive consumer and job market, and the transportation services. two ports and a ferry terminal, specifically the development of Ukraine’s infrastructure will aid in the integration of Ukraine into the European Kherson and Olviya ports and the Chernomorsk production and consumption cycle «More than €30 billion needs to be invested into ferry. The preliminary feasibility study has been • Improvement of the Ukrainian infrastructure system will facilitate the development and the infrastructure by 2030. Besides, €8–10 bil- completed. The investment need for these sites strengthening of the international system of common security lion of private investments need to be secured is $350 million for modernization alone. • Integration of the Ukrainian transportation system into the West European system will allow every year,» said Oleksandra Klitina, Ministry of for the diversification of risks for European manufacturers and suppliers of goods Infrastructure Design Office Head. Experts believe that overall, concession of ports can provide Ukraine with investments into con- Minister of Infrastructure Volodymyr Omelian struction and modernization of transshipping THE WESTERN BUSINESS has been successful in attracting foreign in- facilities and auxiliary roads, the target number vestments into infrastructure projects. This is being $300 million to $1 billion. • Due to various circumstances, today’s Ukraine is, for the most part, an underestimated in reference to the interest of world port opera- growing market, and investments into the Ukrainian economy made today are capable of tors Hutchison Ports and DP World in Ukrainian Expansion of the Ukrainian transit capacity, in- providing significant growth in the very nearest future ports and container transportation, as well as crease of cargo flow, sales, jobs, and develop- • Mechanisms of battling corruption created in the recent years have already proven their the project involving General Electric and Bom- ment of the service infrastructure can also be effectiveness and, along with the pro-West orientation of Ukraine, are capable of providing bardier to create joint ventures with Siemens to counted upon. This is a point of motivation for the security of western investments in the country manufacture electric and diesel locomotives for any concessionaire. Development of transship- • International financial institutions, such as the World Bank and the EBRD, are interested Ukrainian Railways. ping capabilities in ports will lead to the reformat- in and ready to finance infrastructure projects in Ukraine, while the utilization of Western ting of the transshipping market and reduction of technologies will facilitate implementation of those projects and allow for then to be carried Ministry of Infrastructure of Ukraine is also in ne- its costs, making Ukraine more competitive. out transparently

28 STRATEGEAST eastern mind western values 29 34. Ukrzalyznitsya ends 2016 with a 303 million profit. Business Censor. LIST OF SOURCES http://biz.censor.net.ua/events/3018687/34ukrzaliznytsya34_zakonchi- la_2016_god_s_pribylyu_303_milliona 35. Omelian hopes to complete the incorporation of Ukrzalyznitsya this 1. Ministry of Infrastructure of Ukraine. Official website. http://www.mtu.gov. year. RBC–Ukraine. https://www.rbc.ua/rus/news/omelyan-nadeetsya- ua/content/investoru.html etom-godu-zavershit-korporatizatsiyu-1493213827.html 2. Ukrainian State Statistics Service. Official website. http://ukrstat.gov.ua/ 36. The gates into Europe: full-scale operation of trains in the Beskyd tunnel 3. A successful country. Infrastructure. The Business newspaper. https:// will begin in a year. Unian. https://economics.unian.net/transport/1895514- www.business.ua/gazeta/2015/1/175069/ vorota-v-evropu-polnotsennoe-dvijenie-poezdov-po-beskidskomu-tonne- 4. Coverage of the population of Ukraine with higher educa- lyu-nachnetsya-cherez-god.html tion is 76%. The Demographics Institute. Unian. https://www.unian. 37. Ukrzalyznitsya and Bombardier have signed a memorandum to create net/society/1023768-ohvat-naseleniya-ukrainyi-vyisshim-obrazo- a JV. Liga Business. http://biz.liga.net/keysy/transport/novosti/3431469- vaniem-sostavlyaet-76-institut-demografii.html ukrzaliznytsya-i-bombardier-podpisali-memorandum-o-sozdanii-sp.htm 5-13. The Global Competitiveness Report 2008-2009. World economic 38. General Electric have signed memorandums of cooperation with An- forum tonov SE and Ukrzalyznitsya. Interfax Ukraine. http://interfax.com.ua/news/ 14. Transit Potential of Ukraine: Modern Situation and Prospects of Devel- economic/358975.html opment. Komchatnykh O.V., National Transport University, Kyiv, Ukraine 39. Dubnevich: The Road fund will allow spending up to 40 billion Hryvnia Redko N.A., National Transport University, Kyiv, Ukraine. http://publications. per year on roads. Capital. http://www.capital.ua/ru/news/74589- ntu.edu.ua/eut/2016-03/148-153.pdf dubnevich-dorozhnyy-fond-pozvolit-tratit-na-dorogi-do-40-mlrd-grn-v- 15. The national transportation strategy of Ukraine for the period through god#ixzz4h8VLJNun year 2030. Project. 40. Ministry of Infrastructure intends to purchase 80 dimensions and weight 16. LPI index. The World Bank. http://lpi.worldbank.org/international/score- complexes this year using EU funding. Unian. https://www.unian.net/ card/radar/254/C/UKR/2016/C/ROM/2016/C/POL/2016/C/DEU/2016 eurobusiness/1508854-mininfrastrukturyi-namereno-zakupit-v-tekuschem- 17. Europe goes building: where will the new quarter trillion euro transpor- godu-80-gabaritno-vesovyih-kompleksov-za-schet-sredstv-es.html tation corridors pass. Center for Transportation Strategies. http://cfts.org. 41. End-of-year press conference of the Ukrainian Minister of Infrastructure ua/articles/evropa_idet_na_stroyku_gde_proydut_novye_transportnye_kori- Volodymyr Omelian. dory_za_chetvert_trilliona_evro_494 42. The Ukrainian Cabinet of Ministers has decided to implement inde- 18. The international vector of Ukraine as a transit country. “Transportation” pendent roadwork quality control. Interfax Ukraine. http://interfax.com.ua/ magazine. http://transport-journal.com/komentarii-obzori/mezhdunarodnyij- news/economic/406333.html vektor-ukraynyi-kak-tranzytnoj-stranyi/ 43. Infrastructure Forum. Ukrainian transportation market development 19. Railroad transportation from Ukraine into the EU countries has grown trends are being discussed in Kiev. Center for Transportation Strategies. almost seven-fold. Unian. https://economics.unian.net/transport/1917898- http://cfts.org.ua/articles/spetstema_infrastrukturnyy_forum_v_kieve_obsu- jeleznodorojnyie-perevozki-iz-ukrainyi-v-stranyi-es-uvelichilis-pochti-v-7-raz. zhdayut_trendy_razvitiya_transportnogo_rynka_ukrainy_1207 html 44. In 2016 AMPU increased its net profit by 1%. Ports of Ukraine. http:// 20. Omelian is certain that the Southern Silk Route will soon start working. ports.com.ua/news/v-2016-g-ampu-uvelichila-chistuyu-pribyl-na-1 UkrInform. https://www.ukrinform.ru/rubric-economix/2214501-omelan- 45. The Emirates’ DP World’s subsidiary intends to invest in Odessa uveren-cto-uznyj-selkovyj-put-vskore-zarabotaet.html seaport tugboats. Unian. https://economics.unian.net/transport/1553677- 21. China plans to invest in the creation of the new «Silk Route» $124 dochka-arabskoy-dp-world-namerena-investirovat-v-buksiryi-odesskogo- billion. RBC–Ukraine. https://www.rbc.ua/rus/news/kitay-planiruet-vlozhit- morporta.html sozdanie-novogo-shelkovogo-1494732623.html 46. Omelian: DP World is set to enter Yuzhny by the end of the year. Ports 22. In the year 2017 roads will get a lot of money: where will it be spent. of Ukraine. http://ports.com.ua/news/dp-world-zaydet-v-port-yuzhnyy-do- The DELO website. https://delo.ua/business/dorogam-dadut-bespricident- kontsa-goda-omelyan nuju-summu-326472 47. Minister of Infrastructure expect the arrival of Hutchinson Ports in the 23. Ukraine’s national transportation strategy. Round table number two. Chernomorsky port in June / July. http://interfax.com.ua/news/econom- Center for Transportation Strategies. http://cfts.org.ua/articles/natsional- ic/400185.html naya_transportnaya_strategiya_ukrainy_kruglyy_stol_2_1212/ 48. The Cabinet of Ministers has approved the feasibility study for berth 24. Port of Felixstowe owner Hutchison Ports agrees deal with Ukraine reconstruction project in the Odessa seaport. Unian–Business. https:// to develop Black Sea port of Chornomorsk. Ipswich Star. http://www. subscribe.unian.net/online ipswichstar.co.uk/news/port-of-felixstowe-owner-hutchison-ports-agrees- 49. Almost 1 billion Hryvnia is earmarked for the development of Ukraine’s deal-with-ukraine-to-develop-black-sea-port-of-chornomorsk-1-4821465 berth infrastructure. RBC–Ukraine. https://www.rbc.ua/rus/news/ampu- 25. DP World signs ports agreement with Ukraine. Arabian Business. sobiraetsya-napravit-966-mln-griven-1491311826.html http://www.arabianbusiness.com/dp-world-signs-ports-agreement-with- 50. Ukrposhta ends up with 188 million net loss in 2016. Unian–Business. ukraine-649538.html https://subscribe.unian.net/online 26. UAE: DP World signs MoU with Ukraine government/ Construction- 51. 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Minister of infrastructure discusses which world companies are 54. This summer wizz air is launching four new flights in ukraine. The LET- prepared to invest into Ukraine. The “Focus” magazine. https://focus.ua/ TERS Website. https://bykvu.com/bukvy/60408-letom-wizz-air-zapuskaet- money/367806/ chetyre-novykh-aviarejsa-v-ukraine 30. Ukraine asks Germany for €100 million for 15 electric trains. Unian. 55. Ryanair to launch Kiev routes. Business Traveller. https://www. https://economics.unian.net/transport/1919354-ukraina-prosit-u-germanii- businesstraveller.com/business-travel/2017/03/17/ryanair-launches-kiev- 100-millionov-evro-na-15-elektrichek.html routes/ 31. What about the concession law? Interview with the bill’s co-author. 56. Great demand forces Ryanair to move flights from Ukraine to Lon- Center for Transportation Strategies. http://cfts.org.ua/articles/chto_s_ don. 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30 STRATEGEAST eastern mind western values 31 In the 20th century new roads saved the USA from the Great Depression. Today they can also save Ukraine – not only from economic destruction, but also from the dependence on economic and geopolitical appetites of Russia and the reincarnation of the USSR.

New, high-quality roads are capable of connecting Ukraine with the civilized world. Development of the transportation infrastructure in Ukraine, considering her geographic situation and proximity to the European Union, is able to play the decisive role in the final definition of the pro-western direction of development for Ukraine.

Development of the transportation infrastructure is capable of increasing the reputation of Ukraine as a dependable business partner in the world arena. It is a reliable way to improve the state of affairs in many sectors of the Ukrainian economy. A high-quality infrastructure, transparent fees for its services, and scrupulous state-private partnerships in infrastructure projects are all positive factors in lowering the corruption risks for potential investors.

The Ukrainian transportation infrastructure needs investments; however, it has an extraordinary background and a high potential for development. The time has come to pave the way from Ukraine to the West.

32 STRATEGEAST