REVIEW OF THE SECTORS TRANSPORT, INFRASTRUCTURE AND COMMUNICATIONS IN UKRAINE

MAIN REPORT

(D20010457\23021)

Submitted to:Senter Internationaal

Submitted by:NEA Transport research and training

Rijswijk, The Netherlands, May 2001

1

D20010457.doc

May 2001

CONTENTS

page

1executive summary......

1.1Transport, infrastructure, communications......

1.2Donors and financing......

1.3Business opportunities for Dutch enterprises......

2general introduction and background......

2.1Objectives of the study......

2.2Purposes of the study......

2.3Results of the project......

2.4Activities......

2.5Methodology and Approach......

2.5.1Desk research......

2.5.2Field research......

2.6Organisation of a seminar......

2.7Project Team......

3General dAta on ukraine......

4transport, infrastructure and communications......

4.1The transport and infrastructure sector......

4.2Shipbuilding, aircraft and automotive industry......

4.3Communications......

5priorities for investment by the ukrainian authorities......

5.1Priorities in 1998......

5.1.1Transport......

5.1.2Aircraft, automotive, shipbuilding & railways......

5.1.3Communications......

5.2Investment priorities in 2000-2001......

5.2.1State Administration of the Railway Transport of Ukraine......

5.2.2Ukrainian State Road Corporation......

5.2.3State Department of Air Transport of Ukraine......

5.2.4State Department of Sea and River Transport of Ukraine......

5.2.5Ukrainian State Enterprise "UA Service"......

6existing donor activities in ukraine......

6.1Bilateral donor activities......

6.2Multilateral donor activities......

7Market opportunities per sub sector......

8dutch business opportunities in ukraine......

9conclusions......

9.1Transport, infrastructure and communications......

9.2Business opportunities for Dutch enterprises......

1executive summary

The Programme for Co-operation with Countries in Central and Eastern Europe (PSO) aims at supporting the transition of Central and Eastern European countries to a market-oriented and sustainable economy. Under this programme, the Netherlands government funds projects, assigned to enterprises in The Netherlands, for the transfer of knowledge and expertise, which should lead to sustainable investment and/or trade relations on a business to business basis.

It was decided to carry out a Transport Sector study for Bulgaria, Romania and Ukraine in order to develop a framework for the development of new transport projects in these countries within the PSO framework.

The main findings for Ukraine are:

  • Ukraine has a well-educated, highly skilled labour force. Agriculture accounts for a large percentage of GDP, due to the country’s rich soil. Ukraine has a fairly well developed infrastructure that provides a good basis for growth.
  • Ukraine’s GDP has fallen more than 60% since 1991. However this figure does not include the expanding informal economy, estimated at 60% of total GDP.
  • Ukraine’s economy started to show signs of a new recovery in late 1999 and 2000, buoyed by a significant real devaluation of the Hryvnia, expansionary economic policies and improved external environment.
  • Government recognises that far more dramatic fiscal reform, as well as a program of broad and deep structural reforms is needed in order to deal with the immediate budgetary problems.
  • Privatisation has been proceeding well. By 2000, over 67,000 enterprises had been privatised. Small-scale enterprise privatisation has been virtually completed. Banking sector reforms have also been undertaken, a new accounting system compatible with international standards, as well as new prudential regulations have been introduced.
  • Despite substantial changes in government policy favouring privatisation of industry and services, there are still considerable barriers to investment in Ukraine. A report from the European Business Association titled “Barriers to Investments in Ukraine” highlights the fact government intervention in the operation of private business should further be decreased and that simultaneously consistency, stability and uniform application of legislation should be increased.

1.1Transport, infrastructure, communications

  • Generally, public investment in Ukraine is minimal and has fallen dramatically in recent years. The absence of private-sector investments aggravates the effect. Transport assets were used without being maintained. At central and local government level most of the investment were allocated to the road network. (However in 2000 less than 10% of the need could be covered).
  • The privatisation process in the transport and infrastructure sector is slowly progressing. The largest success was achieved in the road transport sector.
  • Much of Ukraine’s vast transport infrastructure and equipment is heavily under-utilised by world standards. Existing and forecast domestic demand is so low that it can be met with only part of the existing network. It is estimated that yearly public and private tonnage transported in the period 1997-2000 is no more than 15-20% of 1990 levels. Lost competitiveness is demonstrated by traffic diverting to other corridors, primarily due to difficulties and excess costs operators face daily.
  • A 1998 World Bank report summarises a number of issues preventing Ukraine from fully benefiting from its infrastructure and location and to develop an efficient market for transport services. These issues include legal and regulatory inefficiencies, state interference in transport operations, constraining macroeconomic framework, inappropriate financial management systems, erosion of asset base, new modal split.
  • The shipbuilding industry of Ukraine comprises nine major shipbuilding yards, which are being privatised according to a government decision. It is one of the priority branches of the national economy.
  • Aircraft design and manufacturing has been well developed in Ukraine. The industry incorporates 40 enterprises of various forms of ownership and specialisation.
  • The automotive industry comprises 70 enterprises and specialises in the production of cars, trucks, buses, trolley buses, truck loaders and electric loaders, motor cycles, bicycles, spare parts and components for the automobile industry.
  • In 1995 the communication sector was restructured and consists presently of two independent divisions: Ukrtelecom and Ukrposhta.

There are many other telecommunication operators on the Ukrainian market providing international and long-distance telephone services as well as cellular telephone services.

  • The Regional Business Assistance Centre in Ukraine produced a document “Ukraine. A look to the 21st Century”, which contains many investment projects and project ideas proposed by the Ukrainian authorities. Moreover the Ministry of Transport published a number of investment opportunities in a seminar in December last. (Both included in the report).

1.2Donors and financing

The USA, Canada, Japan, France, United Kingdom and the Netherlands are among the major donors in bilateral activities. The European Commission is the largest international donor to Ukraine through TACIS and TRACECA programmes, macro financial and humanitarian assistance.

The Ukrainian Action Programme 2000 has a budget of 38.5 million Euro. There are no specific programmes in the sectors transport, infrastructure and communications. The only transport related project financed under TACIS is the technical assistance to Ukravtodor.

The EBRD has participated in various projects in the sectors transport, infrastructure and communications. The World Bank is still not very active in these sectors in Ukraine.

1.3Business opportunities for Dutch enterprises

In spite of the fact that government influence and interference in the market economy is still substantial in Ukraine, the ongoing privatisation of the industrial sectors in combination with the huge market potential offers increasingly sound business opportunities. It is recognised that best opportunities currently exist in true niche markets. Patience and perseverance is required with regard to the business environment. The PSO programme for Ukraine is and will prove to be very effective in view of the stage of economic and institutional development of the country. The sectors transport, in particular road transport, road infrastructure as well as telecommunication offer many opportunities to Dutch enterprises.

The following table shows an assessment of the business opportunities in the different sub sectors for possible PSO+ projects. Sometimes the expression "no key area" has been used to indicate that the relevant sub sectors do not really qualify for PSO+ projects. This does not necessarily mean that there are no sound business opportunities in the mentioned sub sectors.

Sector / Goods / Freight / Passengers
Road transport
Supply industry / Good opportunities in distribution services, conditioned transport and
Heavy transport
Good opportunities, following economic development.
Repair and maintenance services and infrastructure for commercial vehicles. Private sector; opportunity area. / Bus operations (city and intercity): no key area.
International bus lines; no key area.
Repair and maintenance services for commercial vehicles
Supply of environmental friendly and energy conserving technologies in public transport. Heavy reliance on government budgets; no key area.
Transport by rail
Supply Industry / Opportunities for forwarders;
no key area
Substantial investments in e.g. rolling stock planned; no key area / Government controlled;
No key area
Substantial Investments in e.g. rolling stock planned; no key area
Inland water transport
Supply industry / Government controlled: no key area.
Opportunities: Privatisation of shipbuilding yards; no key area. / Not relevant
Sea transport and ports
Supply industry / Based on present performance; No key area.
Investments planned in shipbuilding and ports (Odessa); no key area
Air transport
Supply industry / Opportunities in forwarding and storage activities
Opportunity: regional airport development. No key area.
Public works & water management / Massive investments planned in road construction and maintenance; Opportunities in technological improvements (Quality / efficiency)
Various water supply and wastewater projects planned; no key area.
Telecommunication and ICT / Fast growing market and potential; various opportunities
Postal services / Opportunities in distribution

Key areas for PSO projects

Road cargo transport services and road transport equipment servicing infrastructure.

Road construction technologies (equipment and materials).

Telecommunication and ICT.

Business opportunities / project ideas identified for Dutch enterprises

Road transport (freight)

  • Improvement of repair and maintenance of particularly heavy commercial vehicles. Introduction of preventive vehicle maintenance.
  • Mobile towing and repair services.
  • Transport of locally produced beverages. Improvement of domestic transportation, in particular conditioned transport (convenience goods).
  • Improvement of heavy transport services (construction equipment and material, industrial equipment).
  • Installing a system for type approval and technical vehicle inspection for trucks, trailers and buses, including Euro 2, Euro 3 and ADR certificate).
  • Improvement of consignment storage.

Road transport (passengers)

  • Kiev Municipality; various projects to improve quality of public transport and reduce energy consumption and pollution from traffic.
  • Production of Buses in Kiev.

Rail transport

  • Supply of components for rolling stock.
  • Supply of communication infrastructure.

Sea and inland waterway transport

  • Infrastructure works.
  • Investments in shipbuilding.

Air transport

  • Investments and co-operation with Antonov owned airport in Kiev for cargo transport, storage and distribution.
  • Development of regional airports in co-operation with Oblast authorities (Lviv, Dnjepropretovsk, Odessa, etc).

Public works and water management

There are various opportunities for co-operation in the sector maintenance and construction of roads. There are business opportunities from design and engineering of roads and special constructions to the supply of road construction machinery and technologies and transport equipment. In particular quality of building materials (bitumen and granite) needs substantial improvement.

Establishment of joint ventures of Western and Ukrainian engineering companies operating between the clients (Oblasts) and the local contractors (in the stage of privatisation)

Investments in sewerage systems in various municipalities in combination with external funding

Telecommunication

  • Co-operation and investment in inter city optical fibre connection, possibly in co-operation with Ukrainian railways.

Postal services

  • Service company for the delivery of parcels.

1

D20010457.doc

May 2001

2general introduction and background

The Programme for Co-operation with Countries in Central and Eastern Europe (PSO) aims at supporting the transition of Central and Eastern European countries to a market-oriented and sustainable economy. Under this programme, the Netherlands government funds projects, assigned to enterprises in The Netherlands, for the transfer of knowledge and expertise, which should lead to sustainable investment and/or trade relations on a business to business basis.

Transport is one of the sectors within the PSO programme and covers a wide range of activities and encompasses the following sub sectors:

  • Freight transport.
  • Public transport.
  • Transport by mode; air, water, road, and rail.
  • Public works and water management.
  • Telecommunication and postal services.
  • Information and communication technology.

It was decided to carry out a Transport Sector study for Bulgaria, Romania and Ukraine in order to develop a framework for the development of new transport projects in these countries within the PSO framework. Emphasis should be put on business to business projects, however some institutional projects may be included to assist in the further development of a particular sub sector.

This document reports the main findings of the assignment. The level of development of the different sub sectors in the 3 countries varies, which is likely to have an impact on the opportunities for Dutch enterprises in the specific sectors in the different countries. Therefore a country by country approach, rather than a (sub) sector approach has been applied in this study.

Our approach has an entrepreneurial character. We have incorporate local expertise into the project by making use of the services of experts and facilitators in the 3 countries. This should give a structural support dimension during and after the execution of this study.

Expertise from private companies already established in the defined countries also have been used to explore complementary or spin-off activities, whilst making use of their assessment of their business environment.

2.1Objectives of the study

The 3 main objectives of this study, which should lead to an optimal allocation of the funds for the transport sector within the 2001-2003 PSO programme, are:

  1. Increasing Dutch investments in CEE countries and in particular in Bulgaria, Romania and Ukraine and develop sustainable bilateral trade relations.
  2. Assist in restructuring of the transport sector in Bulgaria, Romania and Ukraine.
  3. Increasing the business-to-business relations of enterprises from the Netherlands active in the transport sector with enterprises in Bulgaria, Romania and Ukraine.

2.2Purposes of the study

In order to achieve the objectives mentioned above the following purposes have been listed:

  1. Present a clear survey on the current situation in the transport sector in Bulgaria, Romania and Ukraine.
  2. Identify sub sectors with market opportunities, in particular considering Dutch potential.
  3. Indicate possible PSO project ideas in these sub sectors, preferably with an indication of potential recipients.
  4. Indicate possible web-sites where the studies can be published.
  5. Organise a seminar in the Netherlands for presenting the results of the study.

2.3Results of the project

The following products and services are being delivered in order to achieve the purposes of the project:

  1. A separate report per country, delivered in hard copy and electronically, covering the transport sector in respectively Bulgaria, Romania and Ukraine.
  2. A list of at least two concrete market opportunities in every promising sub sector, per country.
  3. A seminar organised for Dutch companies to present and distribute the final reports.

2.4Activities

For realising the first result, the following activities have been carried out:

  1. Collection and analysis of available information to make a survey of the transport sector in Bulgaria, Romania and Ukraine, with emphasis on opportunities for business-to-business relations.
  2. Provision of a description of the activities of multilateral donors in the field of transport in Bulgaria, Romania and Ukraine. Special attention will be paid to the EU/ISPA programme, the World Bank (IBRD and IFC), the EBRD and the EIB. The study must include an analysis of the possibilities to integrate PSO projects into these multilateral activities. PSO projects should, however, always be stand-alone projects with a separate budget.

For realising the second result, a list of at least 2 concrete market opportunities in every promising sub sector per country has been elaborated carrying out the following activities:

  1. Provision of an inventory of international Dutch companies active in the transport sector and companies in Bulgaria, Romania and Ukraine. The list also contains companies in Bulgaria, Romania and Ukraine in the transport sector having ties with Dutch enterprises. Also Dutch companies planning or considering activities in the field of transport in (one of) these countries have been mentioned.
  2. Survey and detailed description of the sub sectors with market opportunities for Dutch companies.
  3. Identification and description of concrete market opportunities in every promising sub sector.

For realising the third result, organising a seminar, the following activities have been carried out:

1)Identification of Dutch companies in the transport sector

2)Organisation of the seminar and presenting the study on the Internet.

2.5Methodology and Approach

2.5.1Desk research

The project team has identified and listed Dutch companies active in the transport sectors per Country (Bulgaria, Romania and Ukraine). This information has been obtained from, among others:

  • The Associations for transport (in the Netherlands and the three countries) and their publications.
  • The Chambers of Commerce in the Netherlands and the three countries.
  • The Departments of International Co-operation in the three countries, responsible for the co-ordination of bilateral or multilateral co-operation or investment programmes.
  • Ministry of Transport, Public Works and Water Management and Ministry of Economic Affairs.
  • Senter.
  • The Dutch Embassies in the three countries.
  • The Embassies of Bulgaria, Romania and Ukraine in the Netherlands.
  • Individual companies active in the transport sector.
  • The NCH (Nederlands Centrum voor Handelsbevordering).
  • The EVD.
  • The Association of Dutch Exporters: Fenedex.

Also, an inventory and analysis on the transport sector data available for the 3 countries have been carried out. Information has been drawn from studies performed by NEA as well as from reports produced and published by the Ministries and International Finance Institutions.

Local experts have assisted in obtaining the relevant market data and making it accessible.

2.5.2Field research

In each country a field research programme has been carried out, assisted by local experts.

  • Interviews and discussions with key persons and staff of the Ministry of Transport, identifying relevant transport policy lines and measures per sector, priorities, constraints and opportunities have been carried out. In this context the presence and effectiveness of the institutional framework relevant to the sub sectors has been assessed.
  • The Dutch Embassy has been an important source of information for identification of possible general opportunities in the transport market, for the assessment of the local transport policies in relation to Dutch interests and the identification/contacting of key persons in the different sub sectors.
  • Many private and publicly owned enterprises have been interviewed, which are leading in or representative for the sub sector. Foreign owned or subsidiary companies deliberately been included. The output from these interviews has been used to draw conclusions on segment attractiveness for investments. Opportunities, spin-off and synergies have thus become visible.

2.6Organisation of a seminar

A seminar has been organised in the Netherlands to present the results of the study to a wider audience of interested Dutch companies active in the studied sub sectors.