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Expert: Technological backwardness of Ukrzaliznytsia will cost business UAH 36 billion a year

The technological backwardness of Ukrzaliznytsia undermines the efficiency of all Ukrainian producers dependent on railroad logistics and will cost businesses up to UAH 36 billion in additional costs after the tariff increase.

This amount consists of UAH 26 billion in direct tariff increases to compensate for the monopoly’s operating costs, and an additional UAH 10 billion that businesses will have to spend on interacting with UZ’s outdated business model.

This opinion is expressed by Yuriy Shchuklin, a logistics market expert, advisor to the presidium of the Ukrainian Agribusiness Club (UCAB) and chairman of the Digital Freedom Ways Association, Komersant ukrainskyi reports.

The technological backwardness of Ukrzaliznytsia is manifested in the use of outdated methods of organizing freight transportation: when there is no quality planning, and transportation is managed manually through phone calls, data is recorded and transmitted on paper, and decisions are made slowly at long meetings, instead of using modern digital algorithms that automate primitive processes and increase the efficiency of rolling stock and personnel.

It is the preservation of outdated methods that causes UZ’s costs to rise and, as a result, its need to raise freight tariffs, the expert notes.

“Business is discussing tariff increases. But the problem is not in the increase, but in the technological backwardness of Ukrzaliznytsia. More than half of the cost of UZ services is personnel costs, which are growing faster than labor productivity, indicating insufficient automation. Freight transportation, which is the only source of positive margins for Ukrzaliznytsia, is carried out using technologies of the last century. For example, the location of cars on the tracks is still determined manually: employees put chalk marks on the cars, transfer the data to paper, and then manually enter it into their closed automated system. For every one employee who works directly with the cargo, there are several others who generate decisions, others give commands via phone, and many others process data manually and on paper, and this labor could have been replaced by machine labor long ago. But instead of improving and digitalizing processes, Ukrzaliznytsia is asking to be allowed to raise the tariff because it lacks the funds to maintain this outdated business model,” explains Yuriy Shchuklin.

The expert states that the organization of all rail transportation in Ukraine is based on Ukrzaliznytsia’s regulations, which were created on Soviet principles for a single monopoly carrier that is not used to counting money and has no incentives to do so. Therefore, even companies with implemented digital systems such as SAP or big data analytics are forced to adapt to manual management of wagons and flows, paper processes, and phone calls, as UZ does not integrate modern technologies and methods, such as APIs, for online interaction. These business costs of interacting with UZ’s archaic business model amount to 10 billion hryvnias per year.

“All integrated production chains and private logistics infrastructures (elevators, ports, etc.) cannot bypass UZ and are forced to follow its mechanics and procedures because there are simply no other options. Therefore, even those businesses that have optimized their processes through digital tools are still forced to spend resources on maintaining a staff of employees for “personal” interaction with UZ officials and employees, or to use the services of intermediaries who provide such interaction with UZ. In addition to paying more expensive tariffs, businesses are forced to use UZ “technologies” in their relations and communication, when they need to attend a meeting and resolve issues in the office, transfer data from their systems to paper and vice versa, and spend their irreplaceable resource – time – in addition to money. And all because UZ is a monopoly and a key mode of transportation for many industries, so businesses have to pay this “backwardness tax,”” admits Yuriy Shchuklin.

Even if a business has automated its own business processes, 80% of the time its cars or cargo are idle due to delays in waiting for decisions, meetings, or manual distribution of infrastructure bottlenecks. This slows down the turnover of funds and offsets the benefits of high technology in other parts of the logistics chain, the expert argues.

He proposes a solution – the digital evolution of rail freight transportation, which is already being implemented around the world. As an example, Yuriy Shchuklin cites the American Norfolk Southern Railway, where automated station management and artificial intelligence for locomotive allocation reduced railcar downtime by 40%.

According to the expert, businesses should consolidate their efforts to initiate the digitalization of freight transportation and strongly recommend that Ukrzaliznytsia start with the following steps

• revision of rules and regulations and abolition of norms that artificially complicate the use of railways and hinder their development;
• introducing means of tracking freight cars;
• automation of transportation management;
• implementation of interaction via API.

“IoT trackers for railcars are not futuristic in 2024. It is necessary to automate transportation management – without functionaries who distribute or make decisions “manually” and for personal gain.

“We need to integrate APIs so that businesses can interact with each other and with the railroad online, 24/7, so that manufacturers can use the railroad’s services without intermediaries,” says Yuriy Shchuklin, “Such a solution implemented by Ukrzaliznytsia will reduce transportation costs by 10% in the first year. It will reduce the share of manual labor, and provide transparency and predictability that Ukrainian exporters lack. This solution does not cost 26 billion! It only requires the digital literacy of Ukrzaliznytsia’s management.”