Ukraine: Trade and Transit Facilitation Study prepared under the Netherlands financed World Bank executed Trust Fund “Ukraine: Support Competitiveness through Capital Budgeting, Public Financial Management and Trade and Transit Facilitation”

Kyiv, 2010

Table of Contents EXECUTIVE SUMMARY ................................................................................................ 6 1. UKRAINIAN TRADE AND TRANSPORT ENVIRONMENT ..................................... 11 A.

Content............................................................................................................................................................... 11

B. Country Background ............................................................................................................................................ 11 C. Transport and Logistics Infrastructure in Ukraine ........................................................................................... 17 Rail Infrastructure ................................................................................................................................................... 19 Road Infrastructure .................................................................................................................................................. 22 Seaports and Inland Waterways .............................................................................................................................. 23 Airports ................................................................................................................................................................... 25 Warehousing Capacity and Costs ............................................................................................................................ 26

2. TRADE COMPOSITION AND TRANSPORT PATTERN ....................................... 29 A. Trade Patterns by Region and by Commodity Group ...................................................................................... 29 B. Trade Patterns by Transport Modes and Countries .......................................................................................... 30 Trade by Rail ........................................................................................................................................................... 32 Trade by Road ......................................................................................................................................................... 33 Trade in Transport Services .................................................................................................................................... 34

3. TRADE LOGISTICS POLICY AND REGULATORY ISSUES .................................. 36 A. Transport Regulatory Issues ................................................................................................................................ 36 B. Ukraine‟s Record in Transport Safety ................................................................................................................ 39 C. Donors‟ Facilitation in the UkraineTransport Sector ....................................................................................... 42

4. BORDER-CROSSING AND CUSTOMS ISSUES .................................................. 46 A.

Operational Framework ................................................................................................................................... 46 Legislative Framework .......................................................................................................................................... 46 Efforts of Interagency Coordination ..................................................................................................................... 47 Organization ........................................................................................................................................................... 47 Revenue Targets .................................................................................................................................................... 48 Performance Indicators ........................................................................................................................................ 50 Border Operations ................................................................................................................................................. 52 Issues ...................................................................................................................................................................... 55

B.

Inland Clearance ............................................................................................................................................... 61 Clearance for Domestic Consumption .................................................................................................................. 61 Special and Temporary Procedures ..................................................................................................................... 63 Development of Risk Management ....................................................................................................................... 64 Issues with Clearance ............................................................................................................................................ 65

C.

Enforcement Perspective .................................................................................................................................. 65

D.

Proposal for a Streamlined Pilot Operation ................................................................................................... 66

5. STATUS OF TRANSPORT AND LOGISTICS SERVICE PROVISION .................. 68 A. Rail Transport ....................................................................................................................................................... 68 B. Wagon Reservation Procedure with UZ ............................................................................................................. 70 C. Road transport services ........................................................................................................................................ 71 Road Transport Cost Structure of Carriers .............................................................................................................. 72 Indicative Road Freight Levels ............................................................................................................................... 73 Competitive Position of Ukrainian Road Transport Firms in 2008 ......................................................................... 74 Supply of Consolidated (Groupage) Transport Services ......................................................................................... 75 D. Domestic Delivery Services by Road ................................................................................................................... 77 E. Shipping Services, Including Inland Waterways ............................................................................................... 78 Liner Shipping ......................................................................................................................................................... 78 Port and Terminal Handling of Containers ............................................................................................................. 79 F. Air Transport Services.......................................................................................................................................... 80 G. Freight-Forwarding Services and Multimodal Transport Operations ............................................................ 81 H. Ukrainian Postal Services .................................................................................................................................... 83

6 ASSESSING UKRAINE’S TRADE LOGISTICS COSTS ........................................... 85 A.

The assessment of “Total Logistics Costs of Trade” ...................................................................................... 86

B.

Assessing Avoidable Logistics Costs of Trade ................................................................................................ 86

7. UKRAINE’S POTENTIAL TO BECOME A REGIONAL LOGISTICS HUB ............ 88 ATTACHMENTS ........................................................................................................... 90 Attachment 1 Ukraine at a Glance 2009 .................................................................................................................. 90 Attachment 2. Indicators of the Business Environment in the BEEPS Study ...................................................... 92 Attachment 3 Selected Modal Split and Transport Intensity Graphs.................................................................. 93 Attachment 4 Main Airport Network in Ukraine, 2009 ......................................................................................... 94 Attachment 5 Ukraine‟s Imports by Country of Origin, 2001-09 ......................................................................... 95 Attachment 6 Ukraine‟s Exports by Country of Origin, 2001-09 ........................................................................ 96 Attachment 7 Ukraine‟s Imports by Commodities ,2001-09 .................................................................................. 97 Attachment 8 Ukraine‟s Exports by Commodities, 2001-09 ................................................................................. 98

Attachment 9 Ukraine‟s Imports by Country of Origin and Mode, 2008 ............................................................ 99 Attachment 10 Ukraine‟s Exports by Destination and Transport Mode, 2008 ................................................. 100 Attachment 11. Top 10 Commodity Groups in Ukraine‟s Transit, Export, and Import Movements by Volume (thousand tons), Total and by Rail, 2008. .............................................................................................................. 101 Attachment 12. Top 10 Commodity Groups in Ukraine‟s Transit, Export ,and Import Movements by Volume (thousand tons), Total and by Road, 2008. ............................................................................................................ 102 Attachment 13 Ukraine‟s Trade in Transport Services, 2006-09 ........................................................................ 103 Attachment 14. Ukraine‟s Trade Movements by Transport Mode, 2006-09 ..................................................... 104 Attachment 15 UNECE Transport Agreements and Conventions, Status at 31 December 2009 ..................... 105 Attachment 16 Number of TIR Carnets Issued by the International Road Union to local Associations of Selected Countries. .................................................................................................................................................. 106 Attachment 17. ECMT Multilateral QuotaCoefficients for 2007-10 Based on the Environmental Class of the Vehicles ..................................................................................................................................................................... 107 Attachment 18 Ukraine‟s Bilateral Road Transport Agreements ...................................................................... 108 Attachment 19. EU-Financed Projects in Transport Sector of Ukraine Since 2007 .......................................... 109 Attachment 20. EBRD Finance in Direct Investment in the Ukrainian Transport Sector, 1998-2008 ............ 110 Attachment 21 Performance Data Provided by the Ukrainian Customs, 2005-07. ........................................... 111 Attachment 22 WTO Accession Assues with Ukraine, Including Rail Transport ............................................ 112 Transit ................................................................................................................................................................... 112 Rail Transportation................................................................................................................................................ 113 Attachment 23

Average Waiting Time for Trucks at Selected Border-Crossing Points in Hours, 2008. . 115

Attachment 24 Liner Shipping Connectivity Index Ratings and Ranks of Selected Countries, 2004-08......... 116 Attachment 25 Estimate of Trade-Related Total Logistics Costs in Ukraine, 2008......................................... 117 Attachment 26 Assessment of Avoidable Trade Barrier Costs out of Total Trade Logistics Costs in Ukraine, 2008 ........................................................................................................................................................................... 118 Attachment 27

International Comparison of Macro Logistics Costs ............................................................... 119

Attachment 28. Some key terminology .................................................................................................................. 121 Attachment 29 An industry Highlight: Retail Trade ........................................................................................... 122 Attachment 30. Comments on the Fall 2008 Version of the Draft Customs Code ............................................. 124

PREFACE The Trade and Transit Facilitation Study (TTFS) has the objective of addressing key issues in trade, transport and logistics that face Ukraine today and recommending options for reform that would help Ukraine to fully realize its trade and transit potential. The TTFS covers the following selected areas and issues: (i) the identification of options for broadening the tax base and improving compliance to allow gradually reducing the tax burden; (ii) the identification of options for achieving expenditure savings in selected areas of the budget; (iii) the estimation of the likely fiscal impact of key reforms to the pension system; (iv) the identification of weaknesses in the process of capital budgeting and the provision of options for its strengthening; (v) the identification of weaknesses (and incomplete reforms) in the intergovernmental fiscal framework and of options for its improvement; (vi) the identification of options for achieving higher levels of efficiency in public spending on health and education; and (vii) the evaluation of the process of local capital budgeting. The main author of the report is Lauri Ojala, trade and transit part of the report was prepared by Lauri Ojala and Tetyana Dyachenko; the customs procedures part of the report was prepared by Michel Zharnowiecki and Oleksiy Balabusko. Organizational and research assistance was provided by Maria Koreniako and Tetyana Komashko. This report was financed under the Netherlands Financed Bank Executed Trust Fund.

Executive Summary 1. The Trade and Transit Facilitation Study is a diagnostics report that identifies the main regulatory and other barriers to trade, transport, and logistics and assesses those barriers in terms of costs for international trade and logistics. It was undertaken by the World Bank under the Dutch Grant for Supporting Competitiveness through Capital Budgeting, Public Financial Management and Trade and Transit Facilitation. To undertake such analysis, the report focuses on several areas:  Transport and logistics infrastructure in Ukraine  Markets for transport and logistics services in the country  Potential obstacles to their modernization and development  Customs procedures and regulations as well as cross-border points infrastructure and operations  Impact of transport and logistics barriers along the chain both in quantitative (time/money) and qualitative terms (for example, handling, packaging, break bulk), and differentiated by major product categories and major trading partners (Russia, EU, rest of the world). The data collection was undertaken primarily in 2008, before the world economic crisis started to materialize; however, the data were updated as they became available in the beginning of 2010. The findings and recommendations put forward here, which aim at lowering logistics costs and barriers for Ukraine’s trade and pertain to the longer-term competitiveness of the economy, became even more important under the current worsened conditions. 2. Ukraine, strategically located between Russia and the markets of Western Europe, is one of the most open economies in the world. It has access to the Black Sea and thus hosts one of the key east-west transport corridors between Asia and Europe. Ukraine experienced robust economic growth from 2000 up until 2008, with real GDP increasing at an average of some 7.5 percent a year, then a considerable decline of about 15 percent of GDP in 2009. The past upswing in GDP reflected strong growth of domestic demand, both consumption and fixed investment, as household real incomes rose steadily and exports grew rapidly. Output also grew, especially in the metallurgical, manufacturing, and construction industries. Transit trade and resulting service income increased as well, with transport service exports growing at 15.1 percent annually in 2004-06. Export development and diversification are crucial to Ukraine’s growth. Ukraine’s recent trade performance has been reasonably dynamic, with import growth averaging 28.3 percent annually from 2004 to2008; export growth was lower, but still reasonable at 24.4 percent. However, current trade performance has been driven by temporary market developments such as the hike in commodity prices, and may not be sustainable in the longer term. 3. The worldwide economic downturn in 2008 and 2009 has hit Ukraine hard. In November 2008, the monthly GDP was 14 percent lower than in 2007, and industrial production has fallen by twice as much (year-on-year). From September to December 2008, the Ukraine hryvnia (UAH) lost half its value against the dollar, then stabilized in 2009. Ukraine’s GDP fell by 15 per cent in 2009. 4. The value of exports and imports halved in 2009. The economic downturn cut the value of Ukraine’s foreign trade by half, which is one of the most severe cutbacks resulting from the crisis anywhere in the world. In 2008, exports amounted to $US67.0 billion and imports to $US85.5 billion, whereas the figures for the first 11 months in 2009 were $US35.6 billion and $US40.4 billion, respectively. However, the commodity structure and direction of trade remained by and large the same.

5. Ukraine‟s transit and trade potential are presently far from fully exploited. Ukraine’s goods exports remain highly concentrated on commodities, with a relatively low value added from processing, while exports of manufacturing goods are predominantly destined for the Russian market. A number of factors may account for this phenomenon1, however, it is in stark contrast to the experience of the new member states of the European Union. Transit routes are subject to intense competition, and while Ukraine has been able to cope with existing transit volumes reasonably well (except for recent gas conflicts with Russia) because it inherited a very generously designed Soviet infrastructure, particularly in railways and gas transportation, with rising demand there is a great need to modernize all modes of transport, integrate them better with each other, and thereby allow Ukraine to compete with alternative east-west routes through the Baltic countries, through Belarus and Poland, through the Black Sea and the Balkans, and through the Bosporus.2 6. Ukraine‟s current export base is narrow and requires diversification that can be achieved by lifting substantial trade-specific barriers that put a burden on current and potential exporters. The distortion of input costs has predictably led to an excessive trade concentration in energy-intensive commodities, in particular metallurgy. Export diversification is an urgent medium-term priority because Ukraine’s strong current comparative advantage in metallurgy, in particular, faces serious medium- to long-term threats related to outdated technology, low labor productivity, and declining global market conditions. Yet there are currently large obstacles to export expansion: according to the 2005 IFC Business Environment in Ukraine Report, 60 percent of exporters cited commercial or trade-specific factors, such as lack of funds for promotion overseas, as important obstacles to their growth. Hence, exporters are even more constrained than firms operating domestically. In addition to pursuing economy-wide reforms to accelerate structural adjustment and labor mobility, and sector-specific policies to exploit its comparative advantages more effectively, Ukraine needs urgently to address the severe trade-related obstacles that hinder expansion of export across all sectors.. 7. The obstacles Ukraine faces are also reflected in Ukraine‟s ranking in the major international indexes and benchmarking studies. In Doing Business 2010, Ukraine’s overall rank in ease of doing business is 142 out of 159 countries. It scores poorly in most subsectors of the Doing Business indicator, but has also shown some improvement in areas such as getting credit, paying taxes, and trading across borders. The EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) data provide a clear indicator of how the business environment has changed over time. Between 1999 and 2005, there were significant improvements in the business environment as perceived by a large sample of Ukrainian firms, with the largest improvements registered in taxation and infrastructure. By 2005, Ukrainian scores on the business environment were only slightly lower than for the Commonwealth of Independent States (CIS) countries as a whole. It is noteworthy that infrastructure gets the best rating of all the dimensions. Out of 118 countries, Ukraine ranks 68 in the Global Enabling Trade Index (GETI), which considers four main areas: market access, border administration, transport and communications infrastructure, and the business environment. Ukraine ranked 102nd in World Bank’s latest Logistics Performance Index (LPI 2010) out of 155 countries. In LPI 2007, Ukraine ranked 73th, with almost identical scores. This means that other countries’ performance was improving, whereas the

1 2

Recent trends and patterns in trade performance were analyzed in detail in the 2004 Trade Review, World Bank. The Bank analyzed the transport needs and likely prospects in the 2006 Transport Sector Strategy.

respondents saw little change in Ukraine. These rankings are based on assessments made by freightforwarding/logistics professionals outside Ukraine. The most cited problems include:  Unpredictability and corruption at borders, not only from custom agents but also from other technical regulators  Weaknesses in the business climate in general that prevent investment in the production of new goods  Absence of coherent policies to attract foreign direct investment (FDI)3  Inadequacies in the transport network, in particular connecting Ukraine to the European Union  Customs procedures and cumbersome border inspections that reduce the competitiveness of Ukrainian goods, especially those for which timely delivery is critical4  Network effects and linkages among industries inherited from Soviet times that are slow to be broken up  Specific regulations such as mandatory product standards that reinforce traditional linkages and prevent integration into new markets  The slow and costly process of VAT reimbursement to exporters (consistently the most cited obstacle in exporters’ surveys)  General complexity of regulations relating to exporting and their unfair enforcement, including numerous precustoms permits, registration licenses, technical regulations, and certification, and the related delays and high compliance costs. 8. Recently Ukraine‟s trade has gradually shifted toward the European Union and greater reliance on semi-finished and finished goods. Still, Ukraine’s economy uses up to 10 times more transport movements relative to its GDP than EU countries because of its heavy reliance on metals, basic industry, and agriculture. The economy is shifting to a greater reliance on semi-finished and finished products that have a higher value per ton. This increases the use of road transport and the associated use of containers and intermodal services. Bulk and basic metal products and heavy machinery dominate exports, while imports comprise mainly energy carriers, unitized manufactures, and consumables. Imbalances between export and import flows and transport modes are substantial. Export and transit rely on bulk shipping by rail and sea. Import comprises manufacturing goods transported primarily by road and in containers. It results in substantial inefficiencies, because transports run empty on return legs and possibilities for consolidating transport flows are limited. 9. Shippers and logistics providers are still dealing with rather basic infrastructure and transport capacity needs.5 Competitors in, for example, new EU countries have entered a much more sophisticated logistics environment. The level of transport infrastructure development is well below EU standards and does not meet reasonable safety conditions. A large part of road network is in poor condition, and financing for road construction and maintenance has so far been limited. The rail network has several bottlenecks in main junctions, and some congested sections require double tracks. A large part of of the Ukrainian Railways (UZ) rolling stock is obsolete or will be soon. A national port development strategy is needed urgently to coordinate the plans of individual ports. Key airports and terminal are in 3

For a recent update of the legal complications in FDI and Mergers and Acquisitions in Ukraine, see; http://www.chamber.ua/resource/documents/updoc/tax_legal/57/Mergers_and_Acquisitions_2008.pdf . 4 See Raballand, Gael, Antoine Kunth, and Richard Auty (2005). ―Central Asia’s Transport Cost Burden and Its Impact on Trade,‖ Economic Systems 29(1): 6-31, for an analysis how logistics costs can bias the structure of trade to low value goods in the context of Central Asia. 5 For example, roads’, ports’, and airports’ capacity and quality on the infrastructure side, and availability of rolling stock, modern trucks, and affordable warehousing space on the other side.

urgent need of enlargement, which is underway in part in anticipation of the Union of European Football Associations (UEFA) 2012 Football Cup, for example in. Kyiv, Kharkov, Lvov, and Donetsk. Ukraine’s development path in view of the transport and logistics environment for shippers is illustrated in figure 1.

Figure 1. Ukraine’s Position in Trade Logistics against Comparators ~1990 ~1995 ~2000 ~2005 Typical Highincome countries e.g. EU-10 EE

Logistics concepts

LV

SCM

LT

LV EE

LT

EE

LV

Key characteristics: • Advanced TPL solutions • Competitiveness of business environment • FDI decisions • Strategic level

LT

Advanced logistics services market Material flow

Transport market

New EU-members e.g. the Baltic States

• Basic TPL solutions • Competitiveness of TPL • Time and place • Business tactics level

UKRAINE 2008 • Capacity • Port connections • Frequencies • Transport unit level

Transport flow

Traffic market

Infrastructure

Stagnating economies e.g. in Central Asia

• Enabling but not sufficient factor • Access • Quality

Source: AdLog study; at. www.tedim.com.

10. The bottlenecks that economic agents face depend on their role in the trade and transit sectors of Ukraine. Large exporters of full units or bulk typically enjoy relatively low transport costs and relatively few border-crossing problems. Their main logistics problems are related to availability of rail and port capacity and nontransparent tariffs in rail and port operations. In metal manufacturing, firms have difficulties using their own rolling stock in rail transport. The inflexible wagon reservation practices also complicate exports and contribute to inefficient operations of UZ. For importers dealing with lessthan-full loads, the customs clearance and logistics operations are complicated and costly, which drive up end-user costs. Underdeveloped logistics service provision hamper the buildup of modern retail operations. Intermodal operations in general and container operations in particular are hampered by severe queues of containers and ships in major ports, especially in Odessa. These are caused mainly by the requirement for physical inspection of 100 percent of units combined with a high level of discretion of customs and other border agencies. Third-party logistics services as well as domestic parcel and pallet delivery services are gradually developing as demand for these services is growing. Ukrainian-based

transport freight forwarding firms are small and have weak resources to modernize assets (for example, outdated fleet, facilities, or IT systems). 11. The possibility for Ukraine to become a regional logistics hub within the next 5-10 years looks almost nonexistent. The main reasons that complicate development include: 

   

Complicated border crossing and customs clearance procedures for import and transit. (Customs and border agencies need to move from revenue collection to trade facilitation. Risk assessment methods need to be put in place instead of excessive and pervasive physical inspection) Unreliable logistics service Expensive and scarce warehousing capacity Legal uncertainty with land ownership and building permits High level of perceived corruption in logistics operations.

12. In international trade traffic to and from Ukraine, the Ukrainian road transport sector enjoys a comparative advantage. International logistics companies prefer to use Ukrainian trucks whenever possible in movements to and from EU. However, road carriers are constrained by the multilateral and bilateral quota system; visa problems for professional drivers within the EU; a weak financial position; and expensive finance, including nonstandard leasing arrangements. 13. Without any significant physical investment, but with improved border operations and avoidance of unofficial payments, indirect logistics costs could be reduced by $US5 billion, and direct logistics costs (such as freight) by $US1 billion. Ukraine’s total logistics costs of trade were estimated at $US23 billion, or 15.1 percent of total trade value, and 12.1 percent of GDP, in 2008. An estimated range of domestic logistics costs for Ukraine is 6‒8 percent of GDP. The overall logistics costs of Ukraine would be between 18 and 20 percent of GDP, which is not exceptionally high for a large country at the same level of development. The 1998 estimate of trade barrier costs was $US3 billion, or 10 percent of trade value. The absolute amount of the estimate for 2008 appears to be about twice as big, slightly over $US6 billion. Relative to the size of the economy, however, the estimate for 2008 would be about 4 percent of trade value, or 3 percent of GDP that year. 14. Transport sector policy making is seldom based on sound economic analysis. There seems to be limited understanding of business needs and the market environment among public sector decision makers in the transport sector. The current planning system applied in Ministry of Transport and Communications (MoTC) deals with sub-optimization and individual projects rather than overall system efficiency. One problem that stands out is poor project selection and evaluation processes. As a result, the governance structure in the transport sector is characterized by micromanagement of UZ, ports, and other state entities, including the Ukrainian postal services subordinated to the MoTC. This approach does not allow market-driven potential to develop, regardless of the form of ownership.

1. Ukrainian Trade and Transport Environment A. Content 1.1. The Trade and Transit Facilitation Study is a diagnostics report that identifies the main regulatory and other barriers to trade, transport, and logistics and assesses those barriers in terms of costs for international trade and logistics. It was undertaken by the World Bank under the Dutch Grant for Supporting Competitiveness through Capital Budgeting, Public Financial Management and Trade and Transit Facilitation. The World Bank has recently undertaken a major effort to compare the cost of transport and trade across countries, based on recognition of the enormous role that transport and trade logistics play in national competitiveness. Trade and Transport Facilitation Diagnostics for Ukraine reviews the situation pertaining to international trade and transport in terms of transaction and transportation costs and efficiency of the related services and infrastructure. It aims to develop a prioritized and evidence-based reform roadmap to improve Ukraine’s trade performance. To undertake such analysis, the report focuses on:  Transport and logistics infrastructure in Ukraine  Markets for transport and logistics services in the country  Potential obstacles to their modernization and development  Custom procedures and regulation as well as cross-border points infrastructure and operations  Impact of transport and logistics barriers along the chain both in quantitative (time/money) and qualitative terms (handling, packaging, breakbulk), and differentiated by major product categories and major trading partners (Russia; EU, rest of the world). The data collection was undertaken in 2008 before the world economic crisis started to materialize and updated in the beginning of 2010. However, the findings and recommendations put forward here pertain to long-term competitiveness of the economy and thus became even more important under the current worsened conditions. 1.2. The report uses the methodology published by the World Bank under the umbrella of the Global Facilitation Partnership for Transportation and Trade and Logistics Performance Index 2007 (LPI) and covers the same dimensions. About 50 interviews with public sector stakeholders, logistics service providers, and authorities have been carried out, but the number of importers and exporters remained low. A target workshop was held at the World Bank Kyiv office on November 21, 2008, which gathered about 15 senior-level logistics and transport stakeholders from the public and the private sectors. The preliminary findings presented and discussed at that meeting also gave valuable feedback to the analysis. Several roundtables on simplification of the customs procedures were held. More than 30 interviews outside Ukraine with logistics service providers, manufacturers, and traders as well as some public sector stakeholders in the transport sector were also undertaken in 2008 and early 2009. These were necessary to assess the view from outside the country, especially in analyzing the business environment and development potential of logistics operations and markets in Ukraine

B. Country Background

1.3. Ukraine is one of the most open economies in the world, with a trade ratio to GDP of 101 percent in 2008. It is strategically located between Russia and the markets of Western Europe and has access to the Black Sea and thus represents one of the key east-west transport corridors between Asia and Europe. Export development and diversification are crucial to Ukraine’s growth. Ukraine’s recent trade performance has been reasonably dynamic, with import growth averaging 28.3 percent annually in 200408; export growth was lower, at 24.4 percent. However, current trade performance has been driven by temporary market developments, such as the hike in commodity prices, and may not be sustainable in the long term. Transit trade and resulting service income has also increased, with transport service exports growing at 15.1 percent annually in 2004-06 (Attachment 1). 1.4. Ukraine‟s transit and trade potential are presently far from fully exploited. Ukraine’s goods exports remain highly concentrated on commodities, with a relatively low processing content, and exports of manufactures are predominantly destined for the Russian market. A host of factors may account for the phenomenon,6 which is in stark contrast to the experience of the new member states of the European Union. Transit routes are subject to intense competition, and while Ukraine has been able to cope with existing transit volumes reasonably well because it inherited a very generously designed Soviet infrastructure, particularly in railways and gas transportation, with rising demand there is great need to modernize all different modes of transport, integrate them better with each other, and thereby allow Ukraine to compete with alternative east-west routes (for example, through the Baltic countries, through Belarus and Poland, through the Black Sea and the Balkans, and through the Bosporus).7 Ukraine’s current export base is relatively narrow and must be diversified by addressing the substantial tradespecific barriers that create obstacles for current and potential exporters. The distortion of input costs has predictably led to an excessive trade concentration in energy-intensive commodities, in particular metallurgy. Export diversification is an urgent medium-term priority because Ukraine’s strong current comparative advantage in metallurgy, in particular, faces serious medium- to long-term threats related to outdated technology, low labor productivity, and declining global market conditions.8 1.5. There are currently large obstacles to export expansion. According to the 2005 IFC Business Environment in Ukraine Report, 60 percent of exporters cited commercial or trade-specific factors, such as lack of funds for promotion overseas, as important obstacles to their growth. Hence, exporters are even more constrained than firms operating only domestically. In addition to pursuing economy-wide reforms to accelerate structural adjustment and labor mobility, and sector-specific policies to exploit its comparative advantages better, Ukraine needs urgently to address the severe trade-related obstacles that hinder the expansion of exports across all sectors (Correa 2007). 1.6. Internal factors, especially a burdensome regulatory environment for exporters, seem to be more important obstacles to trade than external factors. The World Bank Study on Ukraine’s Trade Policy (2004) and the IFC 2005 SME survey both argue, based on detailed firm-level data of the tradable sectors, that the main constraints on export expansion and diversification across all sectors are not

6

Recent trends and patterns in trade performance were analyzed in detail in the 2004 Trade Review. The Bank analyzed the transport needs and likely prospects in the 2006 Transport Sector Strategy. 8 Correa, Paulo. 2007. Ukraine Private Sector Development Strategy— Building the Microeconomic Foundations for Private Sector‒Led Growth. The World Bank. 7

primarily related to access to external markets but are of domestic nature, in particular a very cumbersome regulatory framework. The most cited problems include:  The unpredictability and corruption at borders, not only from custom agents but also from other technical regulators  Weaknesses in the business climate in general that prevent investment and innovation;  Absence of coherent policies to attract foreign direct investment (FDI)  Inadequacies in the transport network, in particular connecting Ukraine to the European Union  Customs procedures and cumbersome border inspections that reduce the competitiveness of Ukrainian goods, especially those for which timely delivery is critical9  Network effects and linkages among industries inherited from Soviet times that are slow to be broken up  Specific regulations such a mandatory product standards that reinforce traditional linkages and prevent the integration into new markets  The slow and costly process of VAT reimbursement to exporters (consistently the most cited obstacle in exporters’ surveys)  The general complexity of regulations relating to exporting and their unfair enforcement, including numerous precustoms permits, registration licenses, technical regulations, and certification, and the related delays and high compliance costs. These issues are also reflected in Ukraine’s ranking in the major international indexes and benchmarks such as Doing Business, Global Enabling Trade Index, Logistics Performance Index studies, and the EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) (Attachment 2). This study did not collect explicit empirical evidence across industries on these issues. However, the stakeholder interviews indicated that the problems listed in 2005 were valid also in 2008. Based on the data and evidence collected, the level of trade logistics costs in Ukraine in 2008 was estimated on a macro level. 1.7. In Doing Business 2009 , Ukraine‟s overall rank in ease of doing business is 145 out of 159 countries (figure 2). It scored poorly in most subsectors of the indicator, but has also shown some improvement in areas such as getting credit, paying taxes, and trading across borders. The Doing Business (DB) study collects a large amount of interview-based soft data and combines them with selected statistical hard data indicators. The EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) data provide a clear indicator of how the business environment has changed over time. Between 1999 and 2005, there were significant improvements in the business environment as perceived by a large sample of Ukrainian firms, with the largest improvements registered in taxation and infrastructure. By 2005, Ukrainian scores on the business environment are only slightly lower than for the Commonwealth of Independent States (CIS) countries as a whole. It is noteworthy that infrastructure gets the best rating of all the dimensions.

9

See Raballand, Gael, Antoine Kunth, and Richard Auty. 2005. ―Central Asia’s Transport Cost Burden and Its Impact on Trade,‖ Economic Systems 29(1): 6-31, for an analysis how logistics costs can bias the structure of trade to low-value goods in the context of Central Asia.

Figure 2. Doing Business 2009 Reforms: Ukraine

Source: Doing Business Ukraine, World Bank 2008.

1.8. Out of 118 countries, Ukraine ranks 68 in the Global Enabling Trade Main Index (GETI). This is a lower rank than that of Bulgaria (60) or Romania (57), and clearly lower than Poland’s (45). The GETI breaks the enablers into four overall issue areas, or subindices: market access, border administration, transport and communications infrastructure, and business environment (figure 3).

GETI rank among 118 countries

Figure 3. Rank of Ukraine, Romania, Bulgaria , and Poland in the Global Enabling Trade Index (main index and selected trade dimensions), 2008 Poland

120

107106

Romania 94

100

Bulgaria

81

80

68

Ukraine

73 61

57 60

60

57 46 49

45

54

37

40

61

59 42

56 39

20 0 GETI Main index

Business environment

Border administration

Transport and communications infrastructure

Market access

Source: World Economic Forum; www.weforum.org.

1.9. The World Bank‟s Logistics Performance Index (LPI) puts Ukraine in 102nd place in LPI 2010 overall index out of 155 countries (figure 4). This is a lower rank than all its neighbors in the region: rankings were, for example Poland (30), Romania (59), Bulgaria (63), and Russia (94). The ranks are based on assessments made by freight-forwarding/logistics professionals outside Ukraine and based on seven areas of performance: efficiency of the clearance process by customs and other border agencies; quality of transport and information technology infrastructure for logistics; ease and affordability of arranging international shipments; competence of the local logistics industry; ability to track and trace international shipments; timeliness of shipments in reaching destination; and domestic logistics costs.

Figure 4. Rank of Ukraine, Romania, Bulgaria , and Poland in Logistics Performance Index, 2010 LPI Rank among 155 countries

160

Poland Romania

135

140

Bulgaria

120

100

84

77 59

60

40

99

85

80 63

30

66 55

34

36

95

94 79

66

65

114

112

Ukraine

102

73

62

52 43 35 34

33

20 2

0 Overall rank

Customs and Logistics sector border competence agencies

Ease of Internat'l shipments

Tracking & tracing

Transport & telecomm. Inf rastructure

Timeliness of shipments

Source: World Bank ; data available at: www.worldbank.org/lpi.

1.10. Ukraine‟s score in LPI 2010 (2.57) was almost the same as in LPI 2007 (2.55), but the rank dropped from 73 to 102.10 This is explained by the overall improvement in many comparators’ scores. In other words, other countries improved their performance significantly, whereas respondents saw little improvement in Ukraine. 1.11. In the LPI 2010 subindices, the lowest ranking is in customs and border agencies, where Ukraine ranks 135 out of 155 countries. This is markedly lower than Poland (34), Bulgaria (65), Romania (85), and Russia (115). The gap to these comparators is wide also when the ability to track and trace shipments is assessed. Here, Ukraine’s rank is 112, while others rank 33 (Poland), 66 (Romania), and 97 (Russia). By contrast, Ukraine (79) ranks better than Romania (99) or Bulgaria (94) when the level of transport and telecommunications infrastructure and services is assessed.

C. Transport and Logistics Infrastructure in Ukraine 1.12. Ukraine has a highly transport-intensive economy, which requires almost 6 ton-km of freight transport for each U.S. dollar of GDP in 2005, compared to an average of 0.3 ton-km per U.S. dollar of GDP in the EU25 countries in 2003.11 This situation is caused by heavy reliance of the economy on minerals, basic industry, and agriculture, and is likely to continue through at least the next decade.

10

Countries were assessed on a scale from 1 (lowest) to 5 (best); LPI 2007 had 150 countries, whereas LPI 2010 had 155 countries. 11 See page 13 at: http://www.eea.europa.eu/publications/eea_report_2006_3 ; transport intensity in the Baltic States was on average 5 ton-km per one USD of GDP; and figure C. in Attachment 21 for Ukraine.

1.13. Both freight and passenger transportation have been growing since 2001. Freight traffic movements in Ukraine grew in line with GDP as well as in Eastern European, Caucasus, and Central Asian (EECCA) countries in 1998-2005.12 Emphasis, however, is gradually shifting from bulk transportation of raw materials to general cargo, for example, semi-finished and finished products that have a higher value per ton. This has important implications for the preferred mode of freight transport, with an increasing preference for road transport and associated use of containers and intermodal services (figures A to C in Attachment 3 for Ukraine and its comparators in EECCA). Passenger travel in Ukraine halved in the decade leading up to 2000, as incomes went down and prices went up. However, it is now recovering, albeit at a rate slower than GDP growth, averaging about 3 percent per year, measured in passenger-kilometers. Such changes are also reflected in Ukraine’s trade orientation, which is increasingly toward the EU rather than the Russian Federation. That said, Russia has remained Ukraine’s major trade partner, and is likely to remain so for at least the next few years. 1.14. The year 2009 was the first out of the last 10 years during which both freight and passenger transportation went down for all modes of transport. The reduction started gradually in the summer of 2008, but the most significant impact materialized in 2009 (figure 5).

Figure 5. Cargo Flows Performance, 2009 Cargo flows by all modes of transport (in % to the relevant period of the previous year)

120

%

100

107.7 109.5 103.2

107.8 107

105.4

101.7

108.3 108.1

106.1 104.4 99.4 80 67.7 69.1 66.7 65.2 62.1 62.6 61.7 63.4 77.5 70.8 72.4 75.4 60 40

2008

20

2009

0

1.15. Ukraine‟s strategic geographic location puts it on the main routes of international cargo traffic, leading to significant EU interest in Ukrainian transit and transport potential. Four out of ten pan-European corridors (figure 6) that the EU has committed to promote (see TEN-T map) cross the territory of Ukraine. These corridors, according to the EU classification, are: Corridor III: Corridor V: Corridor VII Corridor IX:

12

Berlin-Wroclaw-Lviv-Kyiv Trieste-Ljubljana-Budapest-Lviv Rhine-Main-Danube Helsinki-Kyiv-Odessa-Kyshyniv-Bucharest-Plovdiv-Alexandropolis.

See:http://www.unece.org/env/europe/monitoring/EECCA_CSI/EECCA%20CSI%20_Eng/EECCA%20CSI%203 0_freight%20transport%20demand_eng.doc.

Figure 6. Pan-European Corridors

 When the Danube was reopened for navigation in 2005, Ukraine gained access to Western Europe through the Danube-Main waterway. These corridors13 offer significant development opportunities, as they constitute the shortest land bridge between Europe and Central Asia and the Far East, and provide a strategic alternative corridor to Russian export of oil and gas to the EU market. Moreover, since its enlargement in 2004, the EU and Ukraine share a common border. The EU High-Level Group on the Extension of Trans- European Transport Networks (TEN-T) to Neighboring Countries established five main transport axes that play a strategic role in the region. The transport network of Ukraine is part of the central and southeast axes.

Rail Infrastructure 1.16. Rail transport carries over 80 percent of Ukraine‟s freight traffic and around 60 percent of long-distance passenger traffic. Ukraine’s railways, with a 21891.4-km network, are the second biggest system in Europe after Russian railways (figure 7), but they have been losing market share to road transport. This is occurring despite the country’s large area and the extent to which its economy relies on heavy industry; both factors suggest that railways should continue to play an important role in transportation services. Railroad electrification gained mass scale in the 1960s and 1970s. The operational length of electrified railroads is about 50 percent of the total length of Ukraine railways. Remaining rail infrastructure is operating on diesel supply. In 2008, electrified railroad sections accounted for about 85.1 percent of railroad traffic. The biggest part of rail traffic is operated by half of the existing infrastructure. The 95.6 percent of railway operational length is automatic or semiautomatic block equipped.

13

The land corridors refer, in most cases, to both road and rail transport.

Figure 7. Main Rail Network in Ukraine, 2007

1.17. The railway infrastructure in Ukraine has a mixed-use structure; the same tracks are used for passenger and cargo transportation, which creates difficulties for the Railway Administration of Ukraine (Ukrzaliznitsya) in scheduling and planning as well as for railway users with respect of access to rail infrastructure. While the rail network density (in terms of route-kms/square kms) is around 20 percent less than that of the EU; its rail network utilization, in terms of traffic-kms/route-kms, is nearly three times higher than in the EU. Nevertheless, the existing railways infrastructure includes a number of tracks and stations that are underutilized or even not operated at all. At the same time, about 30 percent of the railway routes are totally congested. Ukrzaliznitsya has a plan to separate the rail track infrastructure for passenger and cargo transportation, but this will be done only on the most crowded section of rail, for example from northeast border of Ukraine down to the Crimea. In an order to the State Program on High-Speed Rail Connection Development in Ukraine, separation is to be completed on rail lines beetween the main cities of Ukraine; however, this will require significant investment to optimize the time for trip and number of stops sometimes even in prejudice of cargo transportation 1.18. Ukraine faces serious bottlenecks in the quality and capacity of its rail infrastructure and rolling stock assets such as unbalanced track infrastructure, and an unclear and ineffective tariffs system, including cross-subsidization of passenger transportation by cargo transportation. However, passenger transportation is losing market share to other modes because passenger rail services have not been able to offer the same frequency or speed as road transport. The shift of traffic to roads implies higher transport costs, higher energy consumption and emissions, and more accidents. This loss of market share appears to be the result of the railways’ failure to move away from the rigid institutional setup and management and toward a more commercial, market-oriented form of organization. 1.19. The government of Ukraine holds a monopoly on railway transport services. The current practice of cross-subsidization of unprofitable passenger transportation leads to unreasonable tariff increases. In addition to asset modernization, there is a need to reform Ukraine’s railway sector

governance. Therefore, in December 2006, the government of Ukraine adopted the State Concept of the Program for Railroad Transport Reform for 2007-2015. Two years ago, Cabinet of Ministers of Ukraine (CMU) finally adopted (Decision of CMU on 16.12.2009) a program with an action plan. Program

implementation is carried out in three stages. 



Elaboration and adoption of legislative and regulatory and legal acts needed for realization of the program’s first stage Creation of state economic association of railways and other railway transport enterprises in the form of a state business concern Elaboration and introduction of economic mechanisms that provide transfer to the extended recreation of production assets based on innovative development model. .The second stage (2011–12) envisages elaboration and practical verification of economic, legal,



and technical mechanisms of railway transport development and functioning in terms of transition to a vertically integrated management structure and establishment of a state economic association of main railway transport. The last stage will focus on liquidation of the cross-subsidizing of passenger traffic at the

 

expense of freight by introduction of a financial support mechanism for passenger traffic, increasing the number of private companies that own the passenger carriage fleet and motor coach rolling stock; creating regional railway companies that own infrastructure and rolling stock on the basis of industrial railway transport subdivisions and inactive and narrow-gauge areas; and subsequently developing competition by increasing performance efficiency and service quality not related to transportation. 1.20. Rail restructuring is, however, a problematic process, and the program‟s performance is still far from optimal. The railways sector has also suffered from the vicious cycle to which railways are subject almost everywhere: the government has held down passenger tariffs, especially on social grounds, but has not provided adequate compensation. As a result, the quality of service has deteriorated as a result of lack of renewal and modernization of assets. The two current critical issues for the railways are:  How best to restructure its organization and management systems to create incentives for offering a more market-friendly set of services  How to raise financing to renew its aging infrastructure and rolling stock. 1.21. For the last 10 years, only 25 to 30 percent of the financing requirements for railways maintenance and development have been satisfied. As a result, the principle of simple renewal of capital goods has been violated. Depreciation increased from 38 to 78 percent (84.4 percent of the active assets), which may result in loss of technological stability of the sector. Almost entirely depreciated second-generation rolling equipment (fourth generation in European countries) is being exploited in Ukraine, which increases exploitation expenditures up to UAH1.5 billion per year, and increases consumption of materials and energy for transportation and rolling equipment repair. Total annual additional losses resulting from using outdated equipment and servicing of noneconomic infrastructure amount to UAH 2.5–3 billion per year, according to the Ukrzaliznitsya assessment. In order to maintain and develop the rail infrastructure as well as support rail operational facilities, the 2007 capital budget of Ukrzaliznitsya was UAH321,640 million for investments into operations, UAH745,325 million for track facilities, and UAH2460,480 million for rolling stock.

Road Infrastructure 1.22. Existing road infrastructure has been adequate during the 10-year transition period, but now quality and capacity of certain sections of roads hinder efficient movement of goods and people.14 A map of the current main road network is shown in Attachment 5. The road network of kraine covers 169,400 kilometers, or 281 kilometers per 1,000 sq km (figure 8);. 76.7 percent of roads are paved (ferroconcrete, bituminous concrete, asphalt), with the remainder having other surfacing (gravel, paving blocks, and so forth). At the same time, there are only 280 kilometers of road network that comply with EU TEN standards; 16,100 bridges with a total length of over 379 kilometers span the motor roads, and close to 63 percent of them are built according to obsolete engineering standards. In 2008, more than 500 bridges failed to meet adequate safety standards. In recent years, the vehicle fleet has increased by 5 percent and the traffic volume on highways by 20 percent per year.

Figure 8. Road Transport Network in Ukraine

1.23. The road network includes the roads of national significance and local roads. The road network management has vertical tree format and carried out by the State Road Service of Ukraine (Ukravtodor). The road maintenance and services is also a subject of state monopoly and carrying out by the state joint-stock company, Motor Roads of Ukraine. Roads maintenance and development as well as budget allocations are based on the principle of priority ranking of local and national roads usage. This type of governance structure leads to the ineffective use of limited financial resources. The local authorities and bodies of local self-governance do not have sufficient resources for budget allocations for the local road maintenance and are not responsible for the technical condition of roads. In order to move

14

Recent surveys show that most of the state road network is still in reasonable condition: the International

Roughness Index (IRI) is usually less than about 5.00.

away from this system, the Concept on Reform of the Road Management was approved by the government in 2008. 1.24. The main principle of the road sector reform is to divide the network responsibilities between the state and regions. The reform strategy followed since June 2008 is to place the national highway system under MoTC and its agency Ukravtodor. The remaining 150,000 km will be allocated to regional governments. The resources for maintaining the 150,000 km of local roads need to be clearly defined if these roads are not to fall into disrepair. At the same time, under the government program on development of motor roads of common usage for 2007-11, technical and safety improvements represent the largest share. The government strategy aims to achieve the following: (a) provide a high-quality transport network and services that satisfy the country’s economic growth; (b) ensure that citizens have access to quality transport services; (c) raise domestic transport system competitiveness, allowing Ukraine to integrate with Europe and participate in the World Trade Organization (WTO); and (d) improve safety and stabilize transport system development. 1.25. The Reform of the Road Management in Ukraine is targeted to be realized in a period of three years. The government of Ukraine made a commitment to amend the laws of Ukraine pertaining to roads, state and local administrations, and sources of financing for the road network and to transfer administration of local public roads and enterprises responsible for their maintenance and services to local administrations. 1.26. In response to the increasing demand for road network maintenance, Ukravtodor budget resources increased from UAH466 million in 2004 to 1.9 billion in 2007. According to a World Bank assessment in early 2008,15 the total budget expenditures were reasonable (albeit short of covering all necessary maintenance demands), but needs are likely to increase as a result of the aging of the network. Some economically strategic sections of the network are not only in poor condition but also functioning at peak capacity because of steadily increasing commercial traffic and annual passenger traffic that has been growing on average at 11 percent per annum over the last three-four years, with an accelerating trend. Furthermore, substantial portions of the core network still need to be upgraded to European technical and safety standards. The government proposed to include financing of road construction, repair, and reconstruction in Ukraine in the 2009 national budget at a level of UAH14.9 billion, which is a 50.5 percent increase in financing from 2008. Of this, UAH8.65 billion is to pay off loans received under the guarantee of the government. At the same time, average funding over the last five years for the national roads has been low, at about 0.5 percent of GDP. Expenditures just on road maintenance in most countries are about three times this level. Underfunding is economically inefficient as the deterioration of road surface quality accelerates over time.

Seaports and Inland Waterways 1.27. Ukraine‟s maritime economy features a sophisticated structure made up of commercial sea ports, shipping companies, organizations ensuring control and supervision of navigation safety, ship repair yards, navigation safety providers, and scientific institutions. Ukraine has almost 20 seaports along the Black Sea and Azov Sea coast as well as a number of river ports on Dnieper and

15

Project Information Document (PID; P100580; Report No.:AB 3477), on a $US400 million loan by the World Bank to Ukravtodor, approved by the Bank Board March 20, 2008.

Danube. Most of the ports deal with bulk transportation; only three have significant container operations. Passenger and roro vessels in the Black Sea are operated mainly in the Odessa and Yalta regions.

Figure 9. Ukrainian Main Seaports and Inland Waterway Ports

Source: http://ukrport.org.ua/index-e.htm.

1.28. The seaports are all state owned, including most of the stevedoring facilities. The port tariffs are set by the MoTC, but the ports have some freedom to give discount to clients. All sea and major inland waterway ports were governed by the Ministry of Transport and Communications, via the Ukrainian State Seaports’ Association, Ukrmorport. At the end of 2008, Ukrmorport was dissolved and the ports remain under the ministry’s governance. In 2004, the ministry was considering privatizing Ukrmorport. Then the ministry applied to the Anti-Monopoly Committee of Ukraine (AMCU) to allow Ukrmorport to continue its activities until its eventual reorganization into a private firm. Ukrmorport was originally given a one-year mandate by the AMCU and this was later extended, but AMCU pointed out a range of defects in its work, in particular with regard to appropriation of economic activities in port areas. To avoid this complicated management structure, a Ukrainian Maritime and River Transport Administration was established in 2009 by combining State department for maritime and river transport and Ukrrmorport 1.29. The administration of the ports is placed under the authority of a General Manager appointed by the Ministry of Transport and Communications. Contrary to universal practice, the port management does not include a Board of Directors and the General Manager is invested with all powers to administer the port. Following a period when ports’ activities were provided through joint port-private sector ventures, all cargo-handling operations are now provided by nine private stevedoring companies through 10-year lease agreements. This allows the port to benefit from private sector efficiency, but the current organization does not allow for real specialization in port operations according to the best international practices. To illustrate the inconvenience resulting from the current organizational framework, the recent decrease in activities of the stevedoring companies handling metal products (scraps) results in a shift in the nature of their operations toward containerized cargo, with a loss of efficiency resulting from the mix of activities. Furthermore, the absence of updated port master plans

does not allow for optimization in use of the scarce space available within the port area, which is so congested t that the efficiency of cargo-handling operations is severely constrained. 1.30. There is an urgent need to review the current institutional setup of the port organization in Ukraine. Despite the ministry’s pivotal role in port issues, no development strategy for the country’s port sector has been formulated to date. The Concept Note for Port Development in Ukraine, approved by the Cabinet of Ministers in the middle of 2008, does not reflect the current situation in this sector. At the same time, each port authority is, at least in principle, required to get the ministry’s approval even for the smallest investments. Ports are operated by port authorities, which are formally under the ministry. However, many port authorities, especially in the large ports, have actively prepared port development and investment plans independently. Some of these―especially those in Odessa, Illichevsk, and Yuzhny―have substantial capital requirements. This refers in particular to container berth and handling capacity increases. These plans have been prepared either by the ports themselves, or through the stateowned transport planning entity (Chernomorprojekt). No major international consultancies in port or transport development were used by the ports in their overall long-term planning. Even more important is coordination among ports, inland transport modes, and customs/border agencies. 1.31. Taking into account rail and road transport tariffs for cargo transportation, the river transport has a good opportunity to take over a share of cargo traffic flows from the north to to Black Sea region from the road and railway transport system. More effective Ukrainian inland waterways can be used to support short-distance river-based container traffic and sea-river traffic. There are two main waterways in Ukraine, the Dnipro and the Danube. Apart from this, the Desna, Pripyat, Yuzhniy Bug, and Dniester rivers are open for transportation. There are eight navigation locks on the Dnipro and one on the Desna. Five river ports along the Dnipro River have traffic of 1 million tons a year. The Danube international transport flows usually get to the Black Sea through the Romanian part of the river using the existing, well-developed facilities. The Black Sea can also be reached by canal directly from Ukrainian waters, and Ukraine has an ambitious plan to develop the Ukrainian part of Black Sea canal and receive benefits from it in the near future. A number of steps has been taking by the government in this regard, and a targeted state program has been adopted. At the same time, estimates show that Romanian Danube ports have some unused capacity and the international traffic flow is not likely to increase rapidly on the Ukrainian side. Taking into account the cost of the Ukrainian plan for channel dredging and development of port facilities as well as the current level of competitiveness of Ukrainian ports, it seems Ukraine will not be able to reach its expectation on Danube usage.

Airports 1.32. The airports of Ukraine that handle most air passenger traffic include Boryspil, Dnipropetrovsk, Donetsk, Kyiv (Zhuliany), Lviv, Odessa, Simferopol, Kharkiv, and Zaporizhia. In 2009 they handled 95 percent of the total passenger operations in the country. There are also 22 other airports that do not play a key role. (Attachment 4) Boryspil Airport is the only economically selfsufficient airport to date; in 2009 it handled 67 percent of all passengers in Ukraine. The majority of the airfields, facilities, and equipment do not meet the modern requirements for servicing air flights. The passenger terminals and infrastructure of the airports are in bad shape, and large imbalances in the level of infrastructure exist between the regional airports.

1.33. Air traffic control functions were separated in 1993, and the Transport Law of 1994 provided for establishment of the State Air Transport Department under the Ministry of Transport. In 1998 the department was transformed into a Civil Aviation Department (Derzhavialuzhba), which has gone through several reorganizations. At present, the majority of Ukraine’s airports are in municipal ownership. The ones in state ownership are located at Boryspil, Dnipropetrovsk, Zaporizhia, and Lviv. In order to raise the efficiency of airports management, the MoTC proposed that the airports be returned to state ownership with financing from the state budget. However, the mechanisms were not clearly defined and it was not implemented. The lack of both local budget funds and coordination of the airports in municipal (collective) ownership hinders the provision of quality air services. Overall, the lack of capacity of terminals and adjacent facilities in major airports creates a bottleneck. A new air passenger terminal is being opened in Dnepropetrovsk in 2009, as well as in some other major cities. The long overdue expansion of the Boryspil terminal, including parking and service areas, will take place in the next few years. New construction of airports is being facilitated by the UEFA Football Championships in 2012, but it concerns only airports that will be used during Euro 2012. The State Program for EURO2012 Preparation in Ukraine envisages the modernization of main airports. It is expected that largest part of these investments will come from the private sector, but in the present economic climate it seems unlikely that the private sector will be able to finance these anticipated airport investments in time for Euro 2012. Warehousing Capacity and Costs 1.34. Having adequate storage and warehousing space available is essential for effective logistics operations. In Ukraine, the use of outside storage/warehousing service providers is considerably less frequent than in EU countries, and many Ukrainian firms operate their own warehouses. The markets for warehousing and related third-Party logistics services are not well developed, and the main users tend to be large international firms, especially in the retail business. These include the Germanbased METRO Cash & Carry, which has used Schenker and Raben as its logistics service providers. In December 2008, the Polish-based Raben group announced that it had secured a three-year contract for METRO’s warehousing and logistics operations in Ukraine. Another large user of similar arrangements is IKEA, which has invested more than €200 million in its operations in Ukraine. 1.35. The supply of such warehousing capacity has been much smaller than the demand, especially in Kyiv and to a lesser extent in other large cities. This has pushed the warehousing prices to levels equal to those found in high-cost regions in Europe, and in the main cities in Russia, where the situation has been even worse than in Kyiv (figure 10) .This unmet demand has been noticed by property developers and, as described below, the situation has rapidly changed to substantial oversupply of high-quality warehouse space. 1.36. The problem is aggravated by the slow and often unpredictable process of building new capacity. Here, problems start with securing land ownership, and continue with getting a valid construction permit and the lack of reasonably priced materials and skilled construction capacity. Unofficial payments are reportedly a serious problem. Anecdotal evidence from a warehousing planning agency noted that land prices in mid-2008 within a 20-km radius of Odessa were $US50-150 per m2. Furthermore, transferring land from one use to another is difficult, in part because of the presidential moratorium on such changes that was implemented in 2007. If, for example, available agricultural land is transferred to warehousing usage, it is a very high-risk operation for the new landowner. In Doing

Business 2009, Ukraine ranked 179, just before Russia (180), out of 181 countries in the complexity of dealing with construction permits. 1.37. The imbalance between supply and demand is even greater in temperature-controlled warehousing capacity. This has also hampered the handling of products that require an uninterrupted cold chain from processing to storage. Construction of temperature-controlled storage space also requires special expertise in planning and execution, which has been in short supply. According to industry sources providing equipment to cold storage outfits, some recent large projects with temperaturecontrolled storage space have faced technical problems. The demand for new refrigerating equipment in Ukraine in 2008 was also much smaller than what the industry had expected, which indicates that temperature-controlled storage capacity will not increase significantly in the short term.

Figure 10. Rental Band for Logistics Property > 5,000 m2 in Selected Metropolitan Areas, 2007

Source: Real Estate Publishers, 2007-2008.

Figure 11. Prime Base Rents ($US/sqm/year) and Vacancy Rates of Class A Warehouses in Kyiv, Q3/2007-Q4/2009

Source: Kyiv City Profile, February 2010, Jones Lang LaSalle.

1.38. The available Class A and B space in Kyiv more than doubled during 2008; with the economic crisis, this resulted in substantial overcapacity, and by end-2009, prime rents had fallen by over 40 percent and the vacancy rate was over 25 percent. During 2008, more than 360,000 sqm of Class A and B warehouse space was completed, followed by an additional 150,000 sqm in 2009, over 80 percent of which were Class A warehouses. Combined with the impact of the economic crisis, these partly speculative warehouse completions have reduced warehouse prime rents substantially. Starting in the fourth quarter of 2008, the vacancy rate of warehousing space rose rapidly and remained between 25 to 30 percent during 2009 (figure 11) Even so, there is still demand for high-quality temperaturecontrolled storage.16

16

See: Market reports by e.g. Colliers; and Jones Land LaSalle at: http://www.colliers.com/Content/Repositories/Base/Markets/Ukraine/English/Market_Report/PDFs/Colliers_Semi_Annual_Repo rt_H1_2009_engl_security.pdf

and

http://www.joneslanglasalle.ua/ResearchLevel1/JLL_Ukraine_Kiev-City-Profile-Feb_2010.pdf.

2. Trade Composition and Transport Patterns

2.1. Ukraine‟s merchandise trade in U.S. dollar terms has grown rapidly since 2001. In current prices, imports quadrupled and exports tripled from 2001 to 2008. Export of goods in 2008 rose by 35.9 percent, to $US67.0 billion, while imports of goods grew by 41.1 percent, to $US85.5 billion. Exports of goods and services grew by 34.9 percent in 2008 to $US78.7 billion, while imports grew by 40.5 percent, to $US92.2 billion. In 2008, the trade deficit reached $US13.5 billion in 2008 according to official data released on February 15, 2009. The deficit in 2007 was $US7.2 billion. The worldwide economic downturn has severely affected Ukraine’s exports, which are based mainly in metals and to a lesser extent in minerals and chemicals. In 2009, Ukrainian exports came down to 43.4 percent from the level of 2008, and imports dropped to 48.9 percent. This section summarizes key findings on trade composition and patterns. Trade statistics with a higher level of detail are shown in Attachments 5-14.

A. Trade Patterns by Region and Commodity Group 2.2. In 2009, 3 percent of Ukraine‟s imports and 34 percent of exports were with CIS countries. Russia and EU countries are by far the single most important trading partners; 28 percent of imports and 21.1 percent of exports in 2009 were with Russia. The EU share of Ukrainian exports was 23.8 percent, and the share of imports was 34.1 percent in 2009. The main European export destinations were Turkey, Italy, and Poland. The main European countries of origin for imports were Germany, Poland, and Italy. During 2001-08, the top 10 countries’ share of all imports was over 70 percent. Exports have been less concentrated: the share of the 10 most important countries varied between 46 percent in 2002 and 67 percent in 2008, indicating a trend towards a higher concentration (Attachment 5 and 6). The financial crisis has not changed the geographic structure of Ukrainian trade significantly. Trading volumes of both exports and imports have decreased with all Ukraine’s main trade partners except for China.

Figure 12 Trade Decomposition by Region, 200 9

Foreign trade 2009 - export

Foreign trade 2009 - import

Russia 21% Other 40%

Russia 28%

Turkey 5% Other 57%

China 4% Kazakhsta n 4%

Germany 8% Byelorussia China 4% Uzbekistan Poland Kazakhstan 6% 4% 5% 5%

Byeloruss ia 3% Poland 3%

Source: SSCU data. 2.3. Trade patterns by commodity group are even more concentrated than the geographical pattern. The most important export commodity group at 2-level classification, ferrous metals, accounted for 26 percent of total exports, and the top five commodities at 2-level classification were a total of 52 percent in 2009. In imports, the most important commodity group at the 2-level―energy, petroleum, and related products―accounted for 32 percent, and the top five commodities at the 2-level a total of 56 percent ( Attachments 7 and 8). Diversification of especially the export base would be crucially important for Ukraine. The current pattern leaves it highly vulnerable to outside economic and even political shocks, as has been demonstrated since the end of 2008.

B. Trade Patterns by Transport Modes and Countries 2.4. Russia dominates Ukrainian imports, and in exports, Russia is by far the dominant destination. The breakdown by countries is presented in two separate graphs to improve readability because of the large difference in volumes, especially in imports. The breakdown of foreign trade and transit movements by transport mode is shown in Attachments 9, 10, and 14. Approximately 80 percent of Russian gas exports to Europe go through Ukraine. At year end 2006, and by the end of 2008 and early 2009, Ukraine and Russia had a deep disagreement on the terms of gas trade and transit, which severely disrupted gas deliveries to many European countries. The sizeable transit of gas also dominates (Attachment 14). This report is, however, not concerned with pipeline transport, so the gas trade and transit are not discussed in detail. Russia also dominates the imports; the former is almost entirely gas by pipeline, whereas imports from Russia are mostly by rail and pipeline. In exports, Russia is by far the largest destination, with rail accounting for over 90 percent of volume, followed by Turkey, where maritime transport dominates.

Germany 3%

Figure 13. Ukraine’s Two Largest Trading Partners Measured by Transported Volumes of Exporst and Imports, by Mode of Transport in 2008, ‘000 tons

30000 25000

other (incl. pipe) Sea

20000

Rail

1849.12

8663.71

Road

15000

24456.76 23040.71

18106.96

10000

Export

5000 0

Import

7290.57

1561.77

1767.09 132.28

1271.18

Russian Federation

Turkey

Russian Federation

23.56 0.12 Turkmenistan

Source: Ukrainian Customs . Note: group ―Other‖ is almost exclusively pipeline transport.

Figure 14. Ukraine’s Imports to Main Trading Partners (excl. Turkmenistan and Russia) Measured by Transported volume, by Mode of Transport in the Customs Declaration in 2008, ‘000 tons 3500 3000 2500 2000 1500 1000 500 0

Source: Ukrainian Customs.

Sea

Rail

Road

Figure 15. Ukraine’s Exports to Main Trading Partners (excl. Russia and Turkey) Measured by Transported volume, by Mode of Transport in the Customs Declaration in 2008, ‘000 tons 9000 8000 7000 6000 5000

other

Sea

Rail

Road

4000 3000 2000 1000 0

Source: Ukrainian Customs.

Trade by Rail 2.5. The cargo composition is highly concentrated. The top 10 commodities constituted 99 percent of transit, import, and export flows by rail in 2008. About 48 percent of all export and 35 percent of imports by volume were carried by rail in 2008 (Attachments 11, 12). Russia is the overwhelmingly largest partner, followed by Poland and the Czech Republic. Of the 20 largest rail-based partners, Kazakhstan, Belarus, and Poland are the only countries from which there is notable import by rail (figure 11).

Figure 16. Ukraine’s Exports and Imports by Rail to 20 Largest Export Countries in 1,000 tons, 2008

Total exports by rail in 2008 - 66.3 million tons Total imports by rail in 2008 - 33.2 million tons Import Export

Source: Ukrainian Customs.

Trade by Road 2.6. The cargo composition is also concentrated. The top 10 commodities make up between 75 and 82 percent of the road-based transport flows. Of total volume (including other modes), road transport share was very small in transit (2 percent) and export (4 percent) in 2008. When trade by road and country are considered, the volumes are dramatically lower than by rail and the country distribution is much more even. Here, too, Russia is the largest partner, followed by Germany and Poland. Annually, there seem to be relatively balanced figures for imports and exports. In reality, however, it is difficult to match the available capacity of an empty truck to a particular shipper’s transport need (Attachments 11, 12).

Figure 17. Ukraine’s Exports and Imports by Road to 20 Largest Trading Partners in 1,000 tons, 2008 Total imports by road in 2008 - 10.2 million tons Total exports by road in 2008 - 5.4 million tons

Import Export

Source: Ukrainian Customs.

Trade in Transport Services 2.7. Ukraine‟s positive balance in trade of services was about $US5 billion in 2008. However, the main component was trade in transport services: its trade balance exceeded $US5.95 billion. This statistics include payments to other countries and income from abroad for all types of transport and cargohandling services, including infrastructure charges paid by or to foreign operators. Whether a particular payment is an international or domestic transaction could be assessed based on the registry of the vehicle or vessel (aircraft). The data are not necessary related to Ukraine’s merchandise trade, or activities taking place within Ukraine’s borders. For example, Ukraine-registered heavy-lift aircraft earn a significant export income when operating in relief operations between third countries. The income of these aircraft (through Ukraine-based firms) should be registered as services export. Likewise, payments for transport services that these firms make in third countries (such as landing fees or overflight charges) should be registered as transport service imports by Ukrainian operators. 2.8. Ukraine‟s trade balance in transport services is exceptional in the sense that it is a net exporter of all types of transport services: road, air, rail, sea, and pipeline. The transport services trade is dominated by pipeline transport. In 2008, pipeline transit services generated almost $US2.56 billion in export earnings, as imports of pipeline transport services were insignificant. While a positive trade balance is often a positive thing for the national economy, it may also reflect a one-sided structure

of the country’s transport sector. This is largely the case with Ukraine. Majority of Ukraine’s commodity exports are sold as Free on Board, Delivered at (Ukrainian) Frontier, or similar terms, where the buyer of the goods takes care of the transport arrangements from the country’s border. In addition, the majority of imports are delivered with clauses, where the seller takes care of the transport to the Ukrainian port, or in the case of road-based transport, often to a destination inside Ukraine.

Figure 18. Ukraine’s Trade in Transport and Other Services, 2001-08: Trade Balance by Mode of Transportation, in $US million 7000 6000 5000 4000

road transport and other (logistics) services Air transport incl airlines, airports, airspace charges  Rail transport Sea transport incl ports services Pipelines

3000 2000 1000 0 2001

2002

2003

2004

2005

2006

2007

2008

Source: Ukrainian Transport Statistics.

2.9. Ukraine‟s positive net balance in transport services is therefore derived from service charges and fees paid by foreign carriers and other logistics operators. This is especially true for pipeline and rail transit fees. Very little – or none - of the positive net balance in maritime or rail transport is produced by competitive Ukrainian transport companies selling their services to foreign shippers or passengers engaged in either Ukraine’s own merchandise trade or international passenger transport. In the case of rail and pipeline, it is transit over Ukrainian territory that generates the revenue. In maritime transport, the Ukrainian merchant fleet is small and largely outdated, with little earning capability in international shipping. Only in international road transport and heavy air cargo operations do Ukrainian firms genuinely generate income from outside Ukraine. Detailed transport services trade statistics are shown in Attachment 13. 2.10. Based on preliminary data for 2009 (January-November), Ukraine has remained a substantial net exporter of transport services. According to the official statistics, the largest drop since 2008 has been noted in pipeline service trade balance ($US1,151 million), but the reduction of trade balance has been more modest in other freight transport sectors, even if the actual trade volume dropped substantially; for example, rail transport exported more than $US1,636 million in 2008, but exports in

Jan-Nov 2009 amounted to only$US915 million. During the same period, rail transport imports diminished from $US653 million to $US303 million.

3. Trade Logistics Policy and Regulatory Issues 3.1. The key objectives for transport sector development were laid out by the Ministry of Transport and Communication of Ukraine for 2009 as follows:  Attracting nongovernmental investments and finance to develop the road infrastructure  Starting implementation of highway engineering projects on concession terms  Harmonization of national aviation rules to meet ICAO requirements  Regulatory and legal provisions for using electronic traffic documents in Ukraine  Defining boundaries for future airport development, as well as ensuring the intended use of land for further development of airports and building their infrastructure  Restructuring the passenger operations of the Ukrainian Railway  Ensuring adoption of the Law of Ukrainian Seaports and carrying out market reforms at commercial seaports. These objectives are in line with the recommendations put forward in the World Bank’s Transport Sector Strategy for Ukraine in 2006, and they are endorsed by the EBRD. At the same time, there is no transport strategy that creates a framework for mid- or long-term development of the sector and no cross-sector cooperation, for example with the Custom Service. Ukraine still has a lot to do in adhering to the existing international regulatory framework in the transport sector. Implementation and enforcement of many of the conventions and agreements that Ukraine has entered into are far from satisfactory. Frequent changes of power in the sector have created permanent difficulties at the management level, and political instability has led to the situation whereby the Ministry of Transport and Communications has been operating without a minister since the last half of 2009. The international framework in relation to trade logistics is analyzed in this chapter. Emphasis is placed on road and maritime transport and some key customs issues. A recurring feature in this chapter is Ukraine’s dismal performance in safety issues with regard to road, maritime, and air transport

A. Transport Regulatory Issues

3.2. Ukraine has been dragging its feet in ratifying a large number of the transport and border crossing agreements in Europe maintained by the United Nations Economic Commission for Europe (UNECE). When compared with Southeastern Europe (SEE) countries, for example, the extent to which Ukraine has ratified the agreements is very low (Attachment 15). Actions taken to improve the situation include the EU-funded Ukrainian-European Policy and Legal Advice Centre (http://www.ueplac.kiev.ua/en/ ) and TACIS project, ―Accession and Implementation by Ukraine of International Agreement and Conventions on Transport.‖ 3.3. The issue for Ukraine is how application of the Convention Concerning International Carriage by Rail (COTIF) could be made easier, if such is dictated by the needs of the market. As part of the CIS countries’ railway network, Ukraine is a member of the Organization for Railway

Cooperation (OSJD), which is its main international reference group in rail transport. OSJD is also the network within which the transit tariff negotiations over that railway network are conducted.17 Ukraine is in a transit position between Europe and Central Asia, and has to comply with both European international rail transport law (COTIF, of which Ukraine is not a member) and the law predominating in Eastern Europe and Central Asia (SMGS/SMPS). Work is currently ongoing to increase the legal interoperability of documents used in the European CIM Convention system (related to COTIF) with those used in the SMGS.18 The first phase of this work under the UNECE umbrella is to define a common CIM/SMGS consignment note. The government of Ukraine on December 16, 2009, adopted a new Decision of the CMU # 1391 for the implementation of the CIM/SMGS system on international rail transportation. 3.4. The Convention on International Transport of Goods under Cover of TIR Carnets (TIR Convention) remains an important document for Ukrainian carriers, as the road transit system is going to be useful for non-EU countries in the foreseeable future. TIR statistics reveal that with 345,000 TIR Carnets, Ukrainian road haulers are the third largest users among the 56 countries in the UNECE list. Only Turkish and Russian road carriers use more of this transit document. The 11.2 percent share of all TIR Carnets issued in 2007 is also an indication of the large fleet and operations of Ukrainian carriers (Attachment 16). The Ukrainian Association of International Road Carriers (ASMAP) is the local association issuing the documents, for which the operation is a source of revenue. ASMAP’s service fee is UAH8 per carnet, which costs typically $US40; the cost depends on the length of the trip and the Carnet, for example, four or six sheets. In Ukraine, the upper limit of TIR guarantee is $US50,000. 3.5. The share of EURO IV or EURO V class trucks in the fleet of Ukrainian carriers is still small (fewer than 1,000 trucks, or 5 percent of the international fleet). The European Conference of Ministers of Transport (ECMT), an organization under the OECD umbrella, was in 2007-08 the International Transport Forum (ITF; http://www.internationaltransportforum.org/), but the multilateral quotas are still associated with the acronym ECMT. An agreement in November 2006 set out the terms of development of the ECMT multilateral quota until the year 2010. ECMT member countries have agreed on conversion rates and bonuses to be applied to the various categories of vehicles implied in the ECMT Multilateral Quota System (Attachment 17). The EURO classes refer to trucks’ emission levels: the higher the class, the lower the emissions. The coefficients mean that carriers in international traffic in the EU need to invest in more modern trucks in order to be allowed to continue operations. Carriers in western Ukraine are more likely to have newer equipment than those in the eastern part. One concern raised during the interviews was that the Ukrainian institutes issuing EURO certificates for heavy road vehicles in large numbers may not have the capacity to perform the technical inspections properly. In addition, there is a concrete incentive to issue a higher certificate than what the test results would imply. 3.6. According to the International Road Transport Union (IRU) database, Ukraine has concluded bilateral road transport agreements with 33 countries in Europe and Central Asia (including Mongolia). These agreements came into force mostly in the mid-1990s (Attachment 18). Ukrainian carriers need bilateral transport permits to carry goods to and from t other countries. The permits are important for this type of traffic, as they complement the ECMT Multilateral Quotas, which 17 18

See ,e.g., http://osjd.plaske.ua/en/index.php. See, e.g., http://www.unece.org/trans/wp24/wp24-presentations/documents/pres08-13.pdf .

enable traffic in the entire ECMT region. As freight costs for Ukrainian trucks are lower than those for trucks from all EU countries (and also lower than some other non-EU countries), the bilateral permits available to Ukrainian carriers are typically used first. Toward the end of the year, there is pressure to get more bilateral permits from the main trading partners, but these are often difficult to obtain, as the other countries want to secure traffic for their fleet. In 2008, the need for additional bilateral permits was the highest for Poland, Austria, and Germany. Transit restrictions in Italy and Austria were also cited in the interviews as a problem in this context. 3.7. Ukraine, together with Russia and Belarus, also has difficulty in complying with rules regarding drivers‟ resting hours and related multi-manning conditions (the Convention on the Taxation of Road Vehicles for Private Use in International Traffic [AETR Convention]) and meeting the June 2010 deadline of implementing the Digital Tachograph.19 For now, Ukraine plans to implement the Digital Tachograph in several steps: in 2010, implement it for international buses; in 2011, for international freight transport and intercity buses; and in 2012, for other intercity buses, domestic buses, and domestic trucks and for light trucks (from 3.5 to 11 tons). However, because of the lack of financing, there is a risk that Ukrainian international carriers will be stopped at the EU border beginning July 16, 2010. 3.8. In vehicle inspection and licensing, there are conflicting interests among competent authorities. The unusual arrangement in Ukraine is that goods vehicles and buses need two separate licenses, one from the State Enterprise International Road Transport Service of the Ministry of Transport and Communications, and the other one from Department of the State Traffic Inspection of the Ministry of Internal Affairs. The latter is also the competent authority on vehicle weights and dimensions. 3.9. This dual process has been in force for more than six years, making it virtually impossible to maintain an up-to-date vehicle register and statistics. Furthermore, the system is nontransparent and potentially prone to soliciting informal payments. The arrangement is a politicized issue and an important source of income for both authorities, and therefore difficult to alter. According to ASMAP, the Ministry of Internal Affairs issues national rules in Ukraine related to the European Agreement Concerning the International Carriage of Dangerous Goods by Road (ADR Convention) The ADR Convention is not adopted into the national legislation. ASMAP maintains that Ministry of the Interior also charges (in 2008 UAH500 or about $US100) for Dangerous Goods (DG) transport permits from Ukrainian carriers; foreign carriers are exempt from this charge. This was also one of the topics in the protest issued by ASMAP in June 2008. According to ITF (ECMT) and IRU,20 however, the competent authority for transport of DG control by road is the Ministry of Transport and Communications and its subordinate units (see footnote). In an international context, it would be unusual for transport of DG issues not to be under the Ministry of Transport, or equivalent. 3.10. It is highly recommended that vehicle registration and licensing as well as issues pertaining to transport of DG be unified under one ministry because of the significant public interest in the matter. Internationally, this function is almost invariably subordinated to the MoTC, or equivalent.

19 20

www.unece.org/trans/doc/2008/sc1/ECE-TRANS-SC1-383e.doc. See also: http://www.internationaltransportforum.org/europe/road/ctrlbodies/rdukraine.pdf.

3.11. The government has three remaining roles to play in relation to air transport: (i) to ensure equitable and open competition among airlines; (ii) to facilitate efficient expansion of airport capacity, avoiding either congestion or overcapacity; and (iii) to ensure the safety of air transport operations. Ukraine has shown a strong commitment to all three objectives. Progress has been good in (i), but less so in (ii) and (iii). Ukraine is a member of International Civil Aviation Organization (ICAO) and Eurocontrol and a candidate member of the Joint Aviation Authorities (JAA) in Europe). Ukraine is also a member of the European Civil Aviation Conference (ECAC), which represents the civil aviation regulatory authorities of a number of European states that have agreed to cooperate in developing and implementing common safety regulatory standards and procedures. JAA is an associated body of ECAC. 3.12. The government of Ukraine is committed to complying with EU air transport regulations and standards. Adopting JAA rules and standards and Eurocontrol regulations in Ukrainian legislation is also a government objective.21 However, the concrete work of implementing and enforcing the regulations and standards in the aviation sector remains to be done. The new Air Code is expected to provide a basis for implementation of principles of aviation legislation that are in line with EU air laws. Moreover, the negotiations on a Common Aviation Area Agreement were initiated between Ukraine and the EU in December 2007. Initially, plans were to complete the negotiations and sign the agreement in mid- 2009, but the issue has not been resolved. The Ukraine aviation authority will soon face a new strict European Common Aviation Area (ECAA) requirement on separation of regulatory and operational functions and establishment of an independent accident investigation body. These entities will need to be autonomous and financially self-sustainable through the introduction of user charges and from commercial revenues.

B. Ukraine’s Record in Transport Safety 3.13. Ukraine‟s performance in transport safety in road, maritime, and air transport is dismal. Data on rail safety were not available for this study. In summary:  9,481 people died in road accidents in 2007, 38.1 percent more than in 2006.  The number of road fatalities is among the highest in the world, and more than four times as many as in Japan, The Netherlands, Norway, or the UK.  Ukraine is among the few countries on the International Maritime Organization’s Black List (Paris Memorandum of Understanding on State Port Control).  Three Ukrainian air carriers are the only European carriers currently blacklisted by EU aviation authorities (November 2008).  All Ukrainian air carriers were banned by the U.S. Federal Aviation Authority in 2006. The record displays a recurring pattern across transport sectors, which means that the problems are not only large but systemic. The Ukrainian government and nongovernmental bodies need to address these issues in a much more profound way than has been done. This is also an area where international agencies and international finance institutions need to direct efforts more than before. 3.14. The responsibility and accountability of transport safety authorities in Ukraine are diluted, and their professional capacity and enforcement capabilities are limited. The financial basis of 21

See also: http://ec.europa.eu/transport/air/international_aviation/country_index/ukraine_en.htm .

safety-related control and licensing is weak, which creates ample possibilities for fraud and corruption. Furthermore, transport safety authorities are under close political and ministerial control. This calls for a profound rearrangement of their organization, responsibilities, enforcement capabilities, and, last but not least, building up integrity and independence from service provision and political meddling. This applies to all transport modes. While these are difficult tasks to do, useful models can be found in the way transport safety agencies are being transformed in several EU countries. The trend is toward larger transport safety agencies or authorities covering all transport modes, where the integrity and independence can be combined with high standards of safety. For example the Swedish Transport Agency started as a new authority on January 1, 2009, combining a broad range of authority and safety work in rail, aviation, maritime, and road transport into one organization (http://www.transportstyrelsen.se/en/ ). In Finland, the safety-related parts of rail, maritime, and aviation agencies and vehicle inspectorate will be reorganized into one safety agency from January 1, 2010. The infrastructure of road, rail, and maritime transport will be the responsibility of another state agency. 3.15. The number of traffic accidents in absolute terms has almost doubled since 2001, and depending on the assessment methodology used, the cost of road accidents is estimated to be between 1.5 and 3.5 percent of GDP, most of which is to the result of steadily increasing vehicle ownership and use. Deaths per 10,000 registered vehicles were 8.0 in 2005, similar to many Eastern European countries such as the Russian Federation, but much higher than many EU countries (between three and four times higher in 2006). In 2007, a total of 9,481 people lost their lives in road accidents, 38.1 percent more than in 2006. This is the single highest figure after Russia (33,308 fatalities) recorded by the ITF in European and Central Asian countries in 2007. Indeed, it is one of the highest figures in the world. 22 Slightly more than 200 people per million inhabitants lost their lives in road traffic in 2007. This figure was higher only in Lithuania (about 220) and Russia (about 240). In Japan, The Netherlands, Norway, and the UK, the figure was under 50 fatalities per million population in 2007.

22

See: http://www.internationaltransportforum.org/Press/PDFs/2008-11-20.pdf .

Figure 19. Ukraine’s Road Traffic Accidents and Fatalities 63.6 50.9

51.3

49.5 43.1

42.4 37

33.3

9.6

1990

7.5

1995

5.2

2000

7.1

2003

7.6

2006

9.6

2007

7.7

2008

5.3

2009

number of road accidents number of fatalities

Source: Ministry of Internal Affairs data 3.16. The traffic safety situation in Ukraine is one of the poorest in Europe. The issue has been included in the government’s transport sector policy work, but a significantly more coordinated effort across authorities as well as civil society stakeholders is needed to improve the traffic safety environment, vehicle inspections and stock, and driver and pedestrian behavior, including the driving culture. Measures already taken include the (practically) zero tolerance for speeding and drunk driving, enacted in November 2008, and the regulation requiring passengers to wear safety belts in cars. However, enforcement of these regulations is weak, and the procedures may actually encourage enforcement officers to solicit informal payments more than before enactment of the regulations. A small step toward improving the road safety situation is the joint project between Ukraine and EU Support to Strengthening of Road Freight and Passenger Transport Safety in Ukraine (budget 1 million euro).23 3.17. The catastrophic situation with regard to road fatalities and injuries needs urgent action by the government to ensure that the adopted policies are actually enforced. Ukraine should urgently make preparations to sign and thereupon ratify the key traffic safety agreements, implement them in national legislation, and ensure proper enforcement. 3.18. Implementation of maritime safety and inspection conventions is not satisfactory in Ukraine. This is especially true in the case of inspections of Ukrainian flagged ships by the Shipping Register of Ukraine, but also in the case of the ability to conduct so-called Port State Control inspections for vessels entering Ukrainian ports. Ukraine’s position in the latest available ―Black-Grey-White list‖ of the Paris Memorandum of Understanding dealing with Port State Control of ships under the IMO actually deteriorated from ―Grey‖ in 2004-06 to ―Black‖ in 2005-07.24 The Black List is further divided into four 23

http://www.center.gov.ua/en/news/detail/942.htm ; Status of twinning projects in 2009, see: http://www.center.gov.ua/data/upload/publication/main/ua/571/TWG_Projects_Database_as_of_28-02-09.xls . 24 http://www.parismou.org/upload/pdf/PMoU%20Target%20lists%202005-2007.pdf.

subgroups. In 2005-07, there were five countries in the ―Very High-Risk‖ category (including Albania, DPR Korea, and Slovakia) and countries in its lowest ―Medium-Risk‖ category (including Egypt, Panama, and Ukraine). This means that Ukrainian-flagged vessels will be subjected to particular scrutiny in the world’s seaports and by the maritime community in general. A major concern is that there is no separate maritime administration in Ukraine; rather, maritime safety issues are handled by a department of the Ministry of Transport and Communications. This means that there is no independent or at least separate authority to oversee ship registry issues or the quality of work and training of maritime inspectors in Ukrainian ports. 3.19. The latest EU Black List (11 November, 2008) contains three Ukrainian air carriers: (i) Ukraine Cargo Airways, (ii) Ukrainian Mediterranean Airlines, and (iii) Volare Aviation Enterprise. The list names more than 150 air carriers, but no others are from Europe. The countries represented in the list include Democratic Republic of Congo, Kyrgyz Republic, Indonesia, Angola, Gabon, and Sierra Leone. The EU maintains a so-called Black List of air carriers for which all operations are subject to a ban within the community.25 The list is not exhaustive and definitive: civil aviation authorities of member states of the European Community only inspect aircraft of airlines that operate flights to and from EC airports. In view of the random nature of such inspections, it is not possible to check all aircraft that land at each EC airport. An airline that is included on the EC list deems itself to be in conformity with the necessary technical elements and requirements prescribed by the applicable international safety standards and may request the EC to commence the procedure for its removal from the list. 3.20. The U.S. Federal Aviation Administration had banned all Ukrainian air carriers as recently as January 2006, along with carriers of 21 other countries. The FAA ban was based on an assessment of the country's civil aviation authority (CAA) that found that it is not providing oversight of its air carrier operators in accordance with the minimum safety standards established by the International Civil Aviation Organization (ICAO).26 The aviation authorities did take some steps to improve air safety. A draft program of flight safety improvement measures to be taken during 2009–15 has been prepared but still is not adopted. The very fact that air carriers that are allowed to operate under Ukrainian aviation registry and standards are blacklisted by the EU and have been recently banned by the U.S. FAA is an indication of the poor level of aviation safety control in Ukraine.

C. Donors’ Facilitation in Ukraine’s Transport Sector

25

26

The latest from 11 Nov. 2008 at: http://ec.europa.eu/transport/air-ban/pdf/list_en.pdf.

Applied if one or more of the following deficiencies are identified: (i) The country lacks laws or regulations necessary to support the certification and oversight of air carriers in accordance with minimum international standards, (ii) the national CAA lacks the technical expertise, resources, and organization to license or oversee air carrier operations, (iii) the CAA does not have adequately trained and qualified technical personnel, (iv) the CAA does not provide adequate inspector guidance to ensure enforcement of, and compliance with, minimum international standards, and (v) the CAA has insufficient documentation and records of certification and inadequate continuing oversight and surveillance of air carrier operations.

3.21. Transport is a key policy area for EU cooperation with Ukraine. There is a pledge in the EUUkraine Action Plan to elaborate a concept for a national sustainable transport policy for the development of all transport modes, consistent with the EU’s White Paper on Transport. The Action Plan also commits the EU and Ukraine to work in partnership on measures and reforms in the road, railway, aviation, and maritime and inland waterway transport sectors. The EU and Ukraine are now engaged in detailed discussions on how to develop transport cooperation in view of the High-Level Group’s Report on the Extension of Trans-European Transport Networks (TEN-T) to neighboring countries. The development of transport infrastructure will be a key element in the preparations for hosting the EURO 2012 football championships. Adherence to the Interbus Agreement remains a priority for Ukraine. In the aviation sector, negotiations on a comprehensive EU-Ukraine aviation agreement started in December 2007. Ukraine also benefits also from the EU Technical Aid to the Commonwealth of Independent States (TACIS) program. TACIS projects will continue to operate until the end of year 2010. In 2007, TACIS was replaced by the European Neighborhood and Partnership Instrument, which supports the European Neighborhood Policy. 3.22. Since the inception of the ENPI, Ukraine has undergone a major shift in aid modality, moving toward sector budget support (SBS) in order to enhance policy dialogue and increase government ownership of operations. Identification of SBS programs is based upon a Sector Readiness Assessment covering seven main criteria, of which three are considered eligibility criteria (existence of a sector strategy; sound macroeconomic framework; sound public finance management system). If one or more of the three criteria is missing, preconditions for SBS are considered not to have been met. Over the period 2007-09, approx. 72 percent of the total annual allocations were devoted to SBS operations. In 2008, a first partial tranche of €23 million was disbursed under the 2007 Energy Sector Policy Support Program as budget support. The Action Program 2008 for Ukraine includes an additional €70 million to support energy efficiency in Ukraine, including €63 million to be disbursed as budget support over a three-year period. The Action Program 2008 also includes the €45 million Sector Policy Support Program (SPSP) to promote mutual trade by removing technical barriers to trade between Ukraine and the European Union, comprising €39 million budget support, to be disbursed in four tranches, and €6 million for technical assistance. In order to help the government of Ukraine integrate better with EU transport systems, seven projects with a total value of €13 million are currently being implemented in this area. The project activities will be continued and extended under the Annual Action Plan 2009 through transport sector budget support (of approximately €65 million for the period 2010-13). In addition, the EU has provided Ukraine with technical assistance and twinning projects. These projects in 2007-10 amount to less than €15 million ($US20 million).27 The status of these projects in summer 2008 is shown in Attachment 19 At that time, it was already known that the tendering process of some projects would take longer than anticipated and that some projects might start later than envisaged. Technical assistance projects usually comprise services provided in such fields as policy analysis and development, various studies and assessments, and draft legal acts and recommendations. Twinning projects bring together public sector expertise from EU member states and beneficiary countries with the aim of enhancing cooperative activities. Twinning projects are built around the secondment of at least one full-time member state expert, who then goes to work in a beneficiary country administration, and may include a number of other actions such as workshops, training sessions, expert missions, and counseling. Ukraine is also benefiting from the TRACECA (Transport Corridor Europe-Caucasus-Asia) interstate program aimed at supporting political and economic development in the Black Sea Region, Caucasus, and Central Asia by 27

See more at: Delegation of the European Commission to Ukraine, http://www.delukr.ec.europa.eu/

means of improvement of international transport. The program in itself is a self-sustainable tool in trade facilitation and the integration of the economies of the TRACECA member states into the world markets. 3.23. EBRD is the largest IFI that finances transport sector projects in Ukraine. In 1998-2008, the total EBRD finance in direct investment type of projects amounts to $US965 million. Railway projects account for 52.0 percent and road projects 38.8 percent of these. The total project value of these is over $US1,880 million (Attachment 20). According to EBRD’s country strategy for Ukraine, as approved by the Board of Directors on 18 September 2007, EBRD will continue to play a crucial role in developing the transport infrastructure of Ukraine, and will take appropriate account of the recommendations of the High-Level Group on the extension of the main trans-European transport axes to neighboring countries as well as of the Long-Term TRACECA Strategy. A key strategic change will be the gradual move to nonsovereign financing in the transport sector: for example, for Ukrainian Railways, the air navigation authority, and possibly the Ukraine Postal Service. Preparations for the finals of the European Football Championship in 2012 are expected to become a powerful catalyst for investment by public and private sources in order to upgrade Ukraine’s transport infrastructure in a sustainable fashion to meet the requirements of this event.

Box 1. EBRD Transition Goals in the Transport Sector of Ukraine • Complete the process of corporatization the UZ and continue reforms in the railway sector, including

enhanced access of private operators. •Adopt modern road concessions legislation enabling investments in the road sector through PPP schemes. • Develop sector strategies for Ukraine’s regional airports and maritime and river ports in order to remove bottlenecks, increase efficiency of passenger and freight operations, improve air navigation safety, and help realize more fully the transit potential of Ukraine in line with the recommendations of the Baku working groups, the TRACECA long-term strategies, and the recommendations of the High-Level Group.

• starting negotiations on a Common Aviation Area with the aim to fully integrate Ukraine into the EU single aviation market and into European aviation structures. Ukraine will take over the EU aviation legislation and the relevant standards for example in the field of safety or air traffic management

4. Border-Crossing and Customs Issues 4.1. There are four types of border crossings: airports, seaports, road crossings, and rail crossings. In principle, the border operations and clearance processes at all four types are similar. Generally, border operations focus on authoritarian control and revenue generation, rather than trade facilitation as promoted by international conventions and rules. Consultations with stakeholders, being the users of borders, show that they are not yet perceived as full partners by the authorities in the progression toward more user-friendly and efficient border operations.

4.2. In Ukraine, the Customs Service is an independent government body. The work of the Customs Service is coordinated by the Minister of Finance. The head of the Customs Service is nominated by the Minister of Finance and appointed by the Cabinet of Ministers. The Custom Service has been a member of the World Customs Organization since 1992. Currently, there are 218 border crossing points as well as numerous inland customs clearance locations. In 1996, the Academy of the State Customs Service was created by the Decree of the President of Ukraine #412/96. It is the main source of human resources for the Customs Service, with more than 250 graduates per year. There are three departments in the academy that train specialists in the areas of law, economics/commerce, and IT. 4.3. The Customs Service ensures the major revenue flow in the country. In 2007, revenues collected constituted 7.6 percent of GDP; in 2008, this share increased to approximately 10 percent, which added up to more than a quarter of the consolidated budget of Ukraine

A. Operational Framework Legislative Framework 4.4. The legislative environment is often quoted by importers as being at the root of most problems. There is an urgent need for new customs legislation, as all provisions of the old Customs code became obsolete when Ukraine joined the World Trade Organization in May 2008 and the ensuing vacuum created severe confusion: For example, no new customs brokers were licensed, and it was not clear if previously licensed companies would be allowed to operate (with an annual registration renewal fee of $US1,500) beyond the limit of the current validity of their existing license. Similarly, two current laws on temporary imports and passenger clearance have become obsolete. Some legislative provisions are inapplicable in the absence of sublegislation (for example, re-export). 4.5. The Customs Service has prepared a draft new code, which is a step forward; however, has several drawbacks (Attachment 30). According to the Customs Service, this draft is largely compatible with international standards and the new EU customs code, but there have been some concerns from the private sector that it is not a major improvement over the previous code: Although the draft code is largely consistent with EU, WTO, and revised Kyoto Convention principles, its implementation may not be; for example, little will be changed for the determination of values or classification, which remains largely a discretionary prerogative of customs. The draft also contradicts the Ukrainian system of law (notably regarding presumption of innocence), it is even longer and more complicated than the old one,

and it may encourage corruption. In some cases, it adds a new burden on the clearing agents, who formerly needed to submit only four documents, but who will now have to produce eight different documents to obtain a license. It ignores essential modern operations, includes several inconsistencies (see below), and will require extensive sublegislation to become operational, while there is a risk that some restrictive interpretation may limit the benefits of new procedures. There are also overlaps resulting from inconsistent legislation and existing regulations that are not necessarily due to customs. For example, the law on safety and quality of food products, which was drafted with the help of WTO experts, does not mention certification of food products, which should be eliminated, but is still required.28 Veterinary inspection is in theory limited to intermediate products, but even end products are subject to a veterinary inspection. There are also inconsistencies between this law and the harmonized system classification used by customs, because subheadings do not match, thus preventing automatic selection of relevant products. Efforts of Interagency Coordination 4.6. A number of MoUs have been signed between the Customs Service and the Ministries of Economy, Health, and Interior to streamline and harmonize clearance procedures and data exchange. Data will be shared with the State Border Service (in charge of immigration and border guards) on vehicles, persons, and goods through a computerized link currently under testing. Ultimately, all law enforcement agencies will have access to the system, which will also include a database on violations. Since 2007, customs officials have been delegated as environmental control officers. On an operational level, the Customs Service carries out joint controls with the tax administration, based on a mutually agreed-on quarterly schedule, and informal interagency communication is said to be good. Organization 4.7. The structure of the Customs Service is based on a highly centralized organization with field offices. Although there is a form of regional structure between headquarters and the field offices, the regional office does not appear to be a specific echelon in the chain of command, but rather a functional level in charge of certain policy matters, with field office managers reporting more or less directly to national headquarters.29 The debate on an intermediary level between national and ground level has been ongoing for several years. The Customs Service would prefer to eliminate, in most cases, the regional office level. The risk if this is introduced is that headquarters is likely be flooded with requests and applications from the field, or each field office will become a regional headquarter office, in addition to performing operational tasks. 4.8. There is an ongoing debate regarding the necessity of having a middle regional level of customs offices. Some border commanders argue that they would have more direct access to their counterparts in the adjacent country, whereas now they have limited possibilities or initiatives in terms of cross-border contacts. However, opposite countries often have a regional headquarters structure, so it is not obvious that contacts would be facilitated. It was also observed that all international discussions are 28

More generally, goods manufactured in Europe need new certification, although it is alleged that in fact there is no testing, but simply the collection of a fee. 29 Senior customs management, however, believes that a regional echelon creates an unnecessary additional level, generating confusion, and is of the view that management over operations should be extremely centralized.

held at the national level, to the extent that Customs Service local border staff is not even involved in them. Some activities, such as audit and control, are better managed more remotely. In Western countries, it is the regional headquarters office supported by border station expertise that holds all operational cross-border discussions, with national headquarters involved only in major policy decisions. Furthermore, a regional echelon also allows flexible management of resources (for example, shifting staff from one station to another within the same region, to respond to peak traffic, or to destabilize fraud or corruption patterns), and drives inland and post-release control activities. Last, in a country the size of Ukraine, it is almost impossible to centralize, irrespective of modern communication technology (should it be available), activities such as training, enforcement, immediate audit, and professional relations with local traders. Revenue Targets 4.9. The Customs Service is under government pressure to meet revenue targets assigned to customs and tax services, which has negative implications for trade facilitation and the efficiency of customs control. While revenue projections are important, the way in which revenue targets are internalized in the Customs Service makes them the main, if not sole, indicator of departmental performance. In an effort to monitor and achieve the targets, the Customs Service has distributed the overall objective for revenue collection among all customs houses, and collection figures are closely monitored monthly by headquarters. This can have several perverse effects. 4.10. Client capture. Both importers and clearing agents are basically assigned to a specific customs house, based on their place of registration.30 If an agent wants to clear at another location, he must file an application, and can obtain an authorization that is valid for one month only to clear at another customs house. This prevents flexibility in responding to a request by a new importer. Importers who want to clear elsewhere must obtain a ―Coordinated Decision,‖ with permission from the office of registration, which takes two weeks to obtain. These restrictions prevent groupage or consolidated imports. (For example, there are nine different customs houses in Kyiv, but agents or transporters are limited to one only, and cannot transfer goods to the office of clearance, which would be the most convenient for an importer.) The draft new customs code should, however, follow the recommendations of the Kyoto Convention, which provides for clearance anywhere, at the choice of importers. 4.11. Valuation. Valuation is the area where the pressure on revenue maximization is the highest. Although Ukraine has adhered to the WTO agreement on customs valuation, which is based on transaction values (essentially the invoice value), the Customs Service quasi-systematically challenges values declared by importers and reverts to the sixth method of valuation.31 Although the WTO agreement specifically excludes minimum price lists for establishing the value of imports, these are widely in use in customs.32 In some cases, customs uses an average value per kilo as a baseline for valuation. Another source of data for customs valuation is the use of internet prices for similar or identical goods. According to Decision 1766 on valuation by the Customs Service, customs can require 30

Exporters are allowed to clear at the place where their business is performed. Known as the ―fallback method,‖ this approach to valuation under Article 7 of the GATT agreement can lead to highly discretionary decisions by customs, especially when, as is the case in Ukraine, it is not backed by proper appeals mechanisms. 32 The Customs Service uses reference prices computed by the Ministries of Economy and Industry as a benchmark for all transactions. 31

supporting documentation (which is an internationally accepted procedure), but also often require additional confidential commercial information, and the Decision has a provision for the submission of ―any other‖(that is, unspecified) documents, which opens the way for arbitrary decisions. Overall, these could intrinsically be acceptable solutions, as long as they do not lead to the imposition of arbitrary values, which is the case in Ukraine. When there is a valuation dispute, importers have the choice between accepting the value determined by the Customs Service, or, if they choose to dispute them, they need to follow a complicated procedure that involves lodging a temporary declaration, paying the full amount of duty as assessed by customs, then applying for a refund should the valuation appeal be accepted. The entire process should not take more than a month, with a possible extension of 15 days, but in reality valuation disputes take three to four months to be settled. 4.12. Unlike in other countries, there is no conditional release (that is, when importers are allowed to remove the goods pending a valuation ruling, and subject to the submission of a guarantee to cover the potentially unpaid duty). This is envisaged under the new code, but, in the absence of a guarantee mechanism, is not implementable. 4.13. However, this negative assessment needs to be balanced against the fact that Ukrainian importers may not yet have attained the level of professionalism of their EU counterparts, and that declared values are often under-reported (also partly because, knowing they will be disputed, importers want to set as low as possible the bargaining base for subsequent valuation adjustments). Unlike in EU countries, there is no comprehensive audit trail, of well-established computerized link with the tax administration or the banking sector, and the ability to detect fraud after clearance and release of goods is more limited. For these reasons, customs cannot be solely blamed for the lack of confidence displayed toward the private sector. At the same time, the solution is not to reinforce these controls, but to put in place the mechanisms used in EU countries. 4.14. Discretionary decisions. Other areas where customs allegedly misuses discretionary powers are (i) classification of goods, where customs is blamed for systematically selecting the tariff heading with the highest duty rate, and (ii) origin, for which certificates are often resent to countries where they were issued to be checked; the subsequent verification process can take up to nine months. 4.15. Petty checks. The focus on revenue leads the Customs Service to an increasingly overzealous interpretation of the law. For example, there is a penalty of $US200-300 for cleared shipments that are not removed from warehouses immediately after clearance. Long shipments (that is, an excess over the manifested number of goods) are systematically fined; so are lorries with even a minor delay for reporting at the end of a transit. (When a lorry in transit is late at the point of destination for whatever reason, the importer cannot clear the goods and has to request a special permission from the customs delivery control and antismuggling departments. There is an administrative penalty that is a multiple of $US100, and if the importer chooses to dispute it in court, the fine can reach a multiple of $US1,000.) In that context, customs has no real interest in simplification. There are no provisions under the customs code for ―bill of sight‖ procedures,33 and improperly declared goods are then fined or seized. When free samples are imported by express courier, their value must be certified by customs headquarters, a procedure that delays release by three to four days. Many checks are pure formalities, or do not take place, but a fee is charged (this is essentially the case for SPS or certification). As for radiological control, a fee is charged, 33

The right for the importer to inspect an arriving shipment before making a declaration.

but there is usually no testing equipment. This generates a mindset in customs of an excessive focus on maximizing collections to the detriment of facilitation. The Customs Service is reluctant to implement modern customs principles (for example, the free choice of place of clearance) or to properly enforce internationally agreed-on procedures (such as the WTO valuation agreement). While the draft customs code will introduce modern provisions and principles, many importers fear that these shall not be implemented by the Customs Service, or that sublegislation will strip them of any significance. Performance Indicators 4.16. A review of overall performance indicators of the Customs Service shows an improvement over recent years in terms of productivity, revenue performance, and cost-effectiveness (Attachment 21). In 2007, the average value of goods per import declaration was $US53.556 and per export declaration, $US66.388. The corresponding figures for 2005 were $US39.915 and $US56.522, respectively. In 2007, the total staff of 18,322 processed 3.3 million customs declarations. This is, on average, 180 declarations per year, or slightly more than one per working day. Even when the operational staff actually handling the declaration is only a part of the total staff, the efficiency rate is very low (and below the SEE average of more than 340). The salary cost is also high (nearly $US700 per month per officer an average, compared to $US450 in SEE countries), and allegations of corruption in the Customs Service are numerous, showing that higher salaries do not automatically lead to a lowering of unethical practices.34 4.17. However, these indicators globally show a slight improvement since 2005, indicating that some reforms are under way and may show positive results. Junior staff are more motivated and senior headquarters management have adopted a voluntaristic approach toward modernization, including (i) the new customs code, (ii) new transit procedures, (iii) infrastructure development, and (iv) introduction of risk management.

34

The salary cost includes social benefits and pension contributions, and is not the actual salary collected by Customs officers.

Table 4.1. Overall Performance of the SCS 2004

2005

2006

2007

05/06

06/07

6,139

8,153

10,717

32.81%

31.44%

170

242

261

41.93%

7.86%

18,322

18,322

18,322

0.00%

0.00%

108

150

154

38.41%

2.47%

1,288,385

1,474,429

1,686,207

1,877,960

14.36%

11.37%

Import

698,579

869,074

1,034,207

1,135,929

19.00%

9.84%

Export

589,806

605,355

652,000

742,031

7.71%

13.81%

Imports (US$ million)

28,450

35,554

43,232

60,836

21.60%

40.72%

Exports (US$ mmllion)

32,672

34,216

38,422

49,262

12.29%

28.21%

Total (US$ Million)

61,122

69,770

81,654

110,098

17.03%

34.83%

335,051

444,995

584,909

32.81%

31.44%

Total Customs Cost/Revenue Collected

2.77%

2.96%

2.43%

6.86%

-17.94%

Salaries/Revenue Collected

1.76%

1.84%

1.43%

4.21%

-22.04%

3,807,990

4,456,610

6,009,060

17.03%

34.83%

80.47

92.03

102.50

14.36%

11.37%

Economic cost per Declaration

115.50

143.34

138.82

24.10%

-3.15%

Average Monthly Salary Cost

492.58

681.79

698.61

38.41%

2.47%

7,063.61

7,883.53

9,434.30

11.61%

19.67%

40,910.21

41,802.08

53,556.16

2.18%

28.12%

17.27%

18.86%

17.62%

9.23%

-6.59%

Total Customs Revenue (US$ million) Total Customs Cost (US$ million) Total Customs Staff Total Customs Salaries (US$ million) Annual Number of Declarations

Revenue Collected/Customs Staff

Trade Volume/Staff (USD) Declarations/Staff

Average Revenue per Declaration Average Value per Declaration Ratio (effective rate)

40,725.39

4.18. Overall, the customs administration is doing its best to achieve results, which can be put to the credit of staff and management; however, customs functions are still very much obsolete. This is widely reflected in an analysis of field operations

Border Operations 4.19. Border crossing times, while they could be significantly reduced, are not unusually or unacceptably long by regional standards. While border procedures could definitely be streamlined and simplified, they are not solely responsible for long waiting times. To some extent, they arise from the spillover effect of bottlenecks in adjacent EU countries that was seen during several field visits undertaken for the report preparation. Also, there are seven different border clearance organizations, including customs, phytosanitary, sanitary, radiological, veterinary, road administration, and border guards. It is necessary to obtain clearance stamps from each of these organizations before customs clearance. Here, the problem is that documents are required by law to be presented to each of these organizations irrespective of whether the documents are relevant to the competence of a particular organization. 4.20. There is heavy traffic on Ukraine‟s western borders, which often exceeds the planned capacity of the border facilities, and traffic volumes are increasing. Uzhgorod was designed to handle 60 lorries per customs shift, and now has to cope with between 110 and 120, with an average load of 500 lorries per day. Krakowiec had a design capacity of 400 lorries per day, but handles well over 600. Plans for future development are based on an extension of the number of lanes, with additional equipment, although little consideration is given to streamlining of existing procedures, which are the main reason for congestion. In particular, border operations are characterized by frequent duplication of controls between different agencies, and occasionally within customs 4.21. Entry into Ukraine involves complicated documentary processes and traffic flows that would need to be streamlined. In a recent measure intended to facilitate cross-border movements and reduce delays, the Customs Service introduced a preliminary notification scheme. It is intended to match the new EU advance notification and be used as a preliminary control document for risk management and to facilitate initial entry processing. All importers (except for some TIR shipments) must lodge the preliminary notification (which is established on a specific form) before incoming lorries reach the border. This document covers imports, but is not used for transit (except with Moldova). When reaching the border, all entering lorries first stop at the station gate, which is kept by State Border Service Border Guards, where all vehicles are logged in and drivers obtain a control slip on which all the different control steps are listed. This control slip is subsequently collected at the exit gate. Lorries then drive on a weighbridge operated by the Ministry of Transport; sometimes the same lorry is later reweighed by customs on the same bridge.35 The passport control booth is located next, but although processing takes place in the lanes, drivers usually have to exit their vehicles because the passport booths are not elevated at the lorry cabin level. Lorries then park for the duration of documentary processing, which takes place in the administrative building. At Uzhgorod, there are monitor screens in the public area informing drivers and agents of the status of the shipment, and of potential difficulties (for example, overloads, missing documents or preliminary notification, offense procedure).

35

There are plans to establish specific weighbridges for customs, which would practically result in systematically double-weighing every lorry.

Box 2. Border Processing Delays The benchmark in the Customs Service is a two-minute delay maximum to release a private car (unless there is a difficulty). At Chop border station, the average waiting time for a car is 10 minutes, and 5 minutes at Krakowiec. However, observations on the ground significantly contradict these figures. First, they do not take into account waiting times and the amplification of the queue effect (when the entire line moves at the pace of the vehicle longest to process). Second, these delays do not take into account other agencies than customs. With immigration and taking into account queues, a private car needs more than 30 minutes and often up to 50 minutes to clear the border. During peak periods, car drivers have to wait between three and four hours. There is a similar discrepancy for commercial traffic. The overall time for releasing a lorry is said to be between 20 and 60 minutes at Uzhgorod, 40 minutes at Chop, and less than two hours at Krakowiec. However, most importers or freight forwarders mention delays between five hours and one day to enter Ukraine. Some of the delays are to the result of exit procedures in adjacent countries. Poland sends outgoing lorries in batches of 20 to 30, thus immediately creating a bottleneck. Entry delays in the EU also can have an overspill effect on the Ukrainian side, especially when, on weekends, outgoing lorries have to wait to enter the EU because of traffic restrictions on goods vehicles

4.22. Single window operation is far from efficient. Processing takes place at two distinct locations within the same building:  

A ―single window‖ includes representatives of SPS, sanitary, environment, radiological administrations, and (when customs requires it) SMAP and roads administration. The customs window is in charge of all customs border procedures.

When the driver arrives, he should know the number of the preliminary notification for his vehicle, which is then retrieved by customs, which matches the transport documentation with the preliminary notification. The data are entered in the customs computer system, with the CMR number. Customs then prints the computer screen, keeping one copy and giving the other to the driver. Customs claims there are no cases where the preliminary notification is not available, but the driver must wait while customs confirms the arrival of the goods with the consignee. At the single window, the driver and/or agent must hand in the vehicle registration certificate, entry control slip, invoice, authority from the importer, CMR, export document, foreign weight certificate, and copies. Staff from each agency stamp the documents and record them in separate manual registers. The lorries are then inspected, based on risk management in principle, but systematically in effect. Physical inspection is done jointly by State Borderguard Service (SBS) and the Customs Service. After

satisfactory completion, drivers are allowed to leave the border station, and they hand in the control slip, which is simply filed. At Jagodin, customs has an additional checkpoint at the exit of the facility, where vehicles are reinspected

4.23. Exit procedures are somewhat simpler. Lorries drive through an entry gate into the facility, collect a control slip, and are usually weighed by the roads administration.36 The characteristics of the lorry are entered into the roads administration’s computer system, and some form of targeting takes place. The roads administration also checks the vehicle’s accompanying documents, including those related to freight. They are then processed by the border guards (passport control), and a customs dispatcher, who decides whether a lorry should be inspected or not. In both cases, the driver needs to produce the export declaration, which is checked against the record in the computer system. The control slip is then handed in and the driver is allowed to proceed outward. 4.24. The main transit system is TIR for shipments into or through Ukraine. Internal transit is also technically possible, but not very much used, because of technical difficulties. It requires a specific declaration, and special types of guarantees depending on the categories of goods, which can consist of a cash deposit, bank guarantee, convoy/escort (essentially for cars), or the use of a bonded licensed carrier. Goods must be represented before 10 days maximum for road transport (28 days for rail), but any customs house can in theory extend the delay if justified. The average delay allowed for Kyiv is five days from entering the western border. The major difficulty for domestic transit is that there is in practice only one guaranteeing entity. It makes it impracticable as a regular service offered by freight forwarders. This particularly affects transport of alcohol and tobacco, which cannot be covered under the TIR system. However, the government has recently approved several institutions for providing guarantees, and a transit system according to international standards could thus be re-established. 4.25. The control mechanisms applied to transit appear excessive and may lead to abuse, although this is not attributable to customs: 



 

Seals are regularly broken by the border guards on TIR lorries, especially Russian ones, or ones originating from Russia, on security grounds. This is against the TIR Convention, which allows customs to break seals only in the case of suspected fraud, or other law enforcement agencies only in emergencies. Transit lorries must follow delivery times are set by customs according to official guidelines.37 When the drivers exceed these times, they can be fined. The road police (GAI) can stop transit lorries and may ask for all shipment documents, but cannot break the seals. The GAI must in theory provide a statement if they delay the vehicle. Similarly, in the case of a breakdown, the drivers must report to an approved repair station; if the driver repairs himself, he is accountable for the delay. As mentioned in Section 1, overtime shipments must be discharged by the antismuggling and delivery control departments of the Customs Service.

As a result, the rate of regular discharge is very high (with a 0.004 rate of unreported cargo), but this should be measured against the relatively low usage of transit. 36 37

Occasionally including empty vehicles. On average, five days from the western borders to Kyiv.

4.26. The more documents required, the greater the risk of problems in correlation between the documents, particularly as they generally have to be obtained from different sources. Many of the original documents are in English and some need to be translated. Indications are that the error rate in declarations and support documents is considered to be relatively high. This results in clearance delays while adjustments are made to the documentation and fines are levied, many of which are for relatively minor infringements such as typing errors. The large volumes of documents required are demonstrated in Table 3.2, which shows the documentation instructions issued by one of the major carriers.

Table 4.2. Documents Required for Presentation to Carrier and Customs For Receipt of Cargo

Original Commercial Invoice (with translation) Copy of Commercial Contract Copy of Accreditation Card (appointing clearing agent) Letter of Authorization of Clearing Agent (if necessary) Original Certificate of Origin Quality Certificate(if necessary) Packing List (if the invoice does not contain the number of cases) Conformity Certificate (if necessary) Sanitary Certificate (if necessary) Veterinary Certificate (if necessary)

For Customs Clearance at the Bill of Lading (or equivalent) Port/Border

For Customs Clearance at Local Clearance Office

Bill of Lading (or equivalent)

Commercial Invoice

Foreign Economic Contract (or commission agreement)

Certificate of Origin

Foreign Economic Contract Registration Card or Accreditation Card

Consignee Accreditation Card in the Customs Office of Destination

Commercial Invoice

Copy of Advance Notice and Sight Entry

Confirmation of Goods Price (to be issued by a relevant body)

Conformity Certificate (if necessary)

Certificate of Origin

Sanitary Certificate (if necessary)

Letter Authorizing Clearing Agent

Veterinary necessary

Certificate

(if

Currency Declaration Conformity Certificate (if necessary) Sanitary Certificate (if necessary) Veterinary Certificate (if necessary

Source: Maersk line instructions to customers.

Issues 4.27. The organization of processes tends to generate congestion. Even though overall border delays are not excessive compared to some other countries, they could be considerably shortened. 4.28.

Duplication actions are often performed, including:  Weighing. Lorries are often weighed twice, once by the roads administration, and once by customs. There are plans to establish specific weighbridges for customs, which would practically result in systematically double-weighing every lorry. In addition, lorries are also weighed in the country of exit. Not only is it a waste of resources and equipment, but also it generates bottlenecks and overall congestion at the facility. In some cases (Jagodin on the Polish border), the Polish exit weight ticket is used by the Ukrainian authorities, but at other locations customs consider that foreign documents do not have sufficient legal standing to be







used in Ukraine.38 Weighing of commercial vehicles is also a major rent-seeking opportunity. Preliminary notification. While the EU advance notification system only envisages a few data elements to be sufficient to carry out a risk assessment, the Customs Service insists on a full set of data, which is approximately the same as what the importer will have to declare for final clearance. Not only is the preliminary notification over-comprehensive, but it is not used to automatically prepare the final clearance declaration and not the basis for any risk management. In addition, the matching process between the vehicle and the preliminary notification is awkward, as drivers do not always know its number, and it is alleged that some customs officers ask for a bribe for simply retrieving it from the archives. Unnecessary physical checks. The same vehicle is checked by customs and border guards, albeit for different purposes, but this rapidly leads to a 100 percent examination policy. Although the Customs Service is trying to put in place a computerized risk management system, local staff does not use any targeting or other selectivity techniques. In addition, these checks usually take place in the lanes, thus further delaying upstream traffic. SMAP control the technical characteristics of lorries and driving times, but in effect review all documents relating to the import. SMAP officials have some targeting information on vehicles, which they share with customs, but customs performs practically the same checks as SMAP a second time

4.29. The mandate of control agencies is unclear and efficiency losses from overlapping roles and responsibilities exist.  Customs and border guards. The government has made efforts to clarify roles and responsibilities of border control agencies, in particular between customs and the border guards. Order No. 505/642 of 11 June 2008 sets down the principles of border control, but essentially encourages joint inspections, with no real specialization of each agency. However, the Order explicitly states the need for exchanges of information between the two administrations, and this may solve the problem mentioned by drivers who complain about excessive requests from the border guards for data that are normally required only by customs. 

Delegation of controls. In some cases, there has been delegation of authority. Since 2007, customs has been delegated responsibility for environmental control, but this has not been extended to other types of control that customs could easily carry out on behalf of others (for example, road vehicle checks on behalf of the Ministry of Transport). As an example, there was an Order of June 2008 on joint weighing (although the sharing of the weight certificate should be sufficient).39

4.30. The so-called single window is totally different from the international standards established by United Nations (UN-CEFACT); it merely consists of a single office at border stations where most agencies are located in one room. The procedure consists for drivers or their agents to lodge the entire set of documents with one agency, which then passes them on to all the other administrations present in the room. As a result, each agency scrutinizes every document, even those that are totally irrelevant, and logs them in manual registers.40 This is a waste of time, even more so because every agency insists on 38

While this is a valid point, nothing would prevent customs from using a foreign weight ticket as a preliminary indication, and weighing entering vehicles only in case of a suspected violation, rather than systematically. 39 The order was subsequently withdrawn, and is now in the Ministry of Justice for an additional review of its legality. 40 It is characteristic that the agencies simply check the presence of documents and certificates, but never inspect the goods. The documentary checks themselves could easily be done by customs only, given adequate training.

receiving copies of all documents. The system would be far more effective if customs simply notified relevant agencies as needed when a particular import was made. 4.31. Infrastructure is considered to be a major problem. The EU is completing a €10 million program destined to upgrade and equip border facilities. A new cargo terminal was built at Uzhgorod, and a new passenger facility is now planned. An upgrade is also planned at Chop, with new lanes, and a scanner and a weighbridge. Krakowiec has plans for a cargo clearance terminal, and there is a €9 million estimate for the upgrade of Rava Ruska. At Jagodin, a new facility is under construction. EU funding nonetheless implies long implementation delays. 4.32. While scanners play a major role in detecting some forms of contraband, they should not be considered as a substitute for adequate and risk-based examinations; systematic 100 percent scans, as practiced in other countries, have proved countereffective, and have increased delays. Thus, the plans for scanners to be installed at the border would need to be carefully evaluated.

Box 3. Scanners: Policies and Issues Scanners appeared in customs operations because they allowed nonintrusive inspections and were much faster than traditional manual examinations. They were also considered to be more reliable than human verifications because they left a record, somehow delocated the search (there was less interface between the importer and the examining officer), and granted easy access to areas in a vehicle or consignment that would otherwise have been difficult to inspect. However, scanners are expensive to acquire and maintain, and their effective use requires special skills and an adequate organization. Furthermore, while they are effective for detecting obvious smuggling (as evidenced by the pictures provided by all manufacturers of scanners), their efficiency in terms of revenue reassessment (a frequently invoked excuse by customs to justify the acquisition of scanners) is not demonstrated. 1. Scans are inspections. Although there is no manipulation of goods, scans serve the same purpose as a physical examination: to detect illegal or misdeclared items. However, a scan is not a substitute for a physical check resulting in the seizure of smuggled goods. It simply represents the identification phase of an inspection, which is naturally followed by the actual interception of contraband. Therefore, scans should be considered as part of the examination process and not as an excuse to reduce inspections. 2. Scans should be selective. One hundred percent screening is largely ineffective, as shown by airport security checks. At the best, 100 percent scanning can have a deterrent effect, as long as every scan is thoroughly analyzed, which is practically never the case (with the possible exception of detecting bottles of alcohol in some countries). Scans should normally be decided on the same way a physical examination is, based on potential risk. As with physical examinations, 100 percent control is largely ineffective (officers lose focus unless they know they should be looking for something specific). 3. Scanners should be mutualized, that is, shared between agencies. Obviously, customs is the most important user, but customs can either perform scans on behalf of other agencies, or give access to scanned images and scanner displays to other administrations, even across the border (as is the case at Ras-Jedir between Tunisia and Libya, or as was envisaged at Nujaamaa between Finland and Russia). An MoU with a cost-recovery arrangement is normally sufficient to establish this kind of arrangement. 4. Scanned images can be useful. Many countries append a scanned image to the transit declaration and forward it electronically to the point of destination. The idea, which is conceptually good, is that a destination scan would reveal any illicit handling of goods. However, there have not been any reported cases of illegal unloading en route, which is interpreted by customs as an indication of the deterrent effect of this procedure, but it is more likely that corrupt practices, or skillful removal of smuggled goods, explain this. In any case, this should not be a justification for 100 percent scanning. 5. Scanning takes time. Even though running a lorry through the scanner tunnel only takes a minute or so, the analysis can take up to 15 minutes if it is done seriously (as in Jakarta port). Access to the scanner generates long queues, as was the case in Sihanoukville in 2004, and still is the case at most seaports. This also encourages a selective approach. 6. The debate on outsourcing is open. There are many cases where private companies install and operate, against a transaction fee, scanners that countries otherwise would not have been able to afford. This leads to extensive scanning, as the operator wants to maximize his profit. Despite claims to the contrary, these scans are expensive for the importers, do not lead to any significant detection, and are seen as major impediments to trade (for example, the Port of Maputo in Mozambique).

4.33. The traffic layout should be reorganized. Processing of vehicles at border stations in Ukraine generates bottlenecks, as it does in many adjacent countries, partly because the successive control steps are arranged in a linear fashion. As the different steps do not take all the same time, there is an accordion effect when a vehicle is released at one position but has to join the queue for a longer process at the next position. The accordion effect then overspills upstream, blocking earlier control positions that are temporarily unemployed. There are three options to avoid this:  Create buffer zones that absorb traffic without fouling earlier positions; this requires space that is not always available.  Create as many bypass lanes as possible to avoid congested positions when not all vehicles need to proceed through them (for example, when there is selective examination, upstream vehicles should not have to wait when they are not identified for a physical check).  Carry out off-lane checks, so that if a check is longer than the average, it does not penalize vehicles waiting behind that might undergo a quicker verification. 4.34. Observations on the ground show that these principles are seldom if ever applied. When there are several lanes, they are not always open. Dedicated lanes (green lanes for private vehicles, specialized lanes for international transit or TIR) are often closed, or just as jammed because processing takes the same time. Despite efforts of the border guards to keep the traffic flowing, the topography and layout of most border stations do not lend themselves to dynamic queue management. Weighbridges are usually placed immediately after the borderline, automatically generating a queue that spills over into the country of exit. There is not enough distance between the access (usually a bridge spanning the border river, with a limited number of lanes) and the facility. The overall design is based on a fanning-out layout, whereas modern border stations are more elongated, with escape lanes and off-lane control positions. 4.35. The second reason for bottlenecks is the length of the processes. When most routine verifications could take place rapidly, they are delayed because drivers need to park their vehicles, and walk into and queue up in an administrative building. When processes are carried out in the lanes, drivers still have to leave their vehicles, because the booths are either not at cab level, or, as at Jagodin, they are placed on the wrong side of the lane. All routine verifications (such as passport control or logging of transit documentation) should take place in the lane, without the driver having to alight. Fast lanes for expedited traffic (such as TIR) should be established, with minimal stops, and an off-lane control bay when there is an anomaly that needs to be investigated. The control slip procedure, essentially used to ensure that all legal procedures have been accomplished, is redundant and time consuming, and it generates, however swiftly it is dealt with, additional queues. It could easily be replaced by a smart card swiped at every control position (as in Poland or Finland). 4.36. Third, the control by default approach is wrong, and the concept of “visual inspection” introduced in Order 505/642 reintroduces the concept that everything should be examined. There is no such thing as a visual inspection as opposed to a physical inspection. An inspection is whenever a vehicle is stopped because an official wants to have a look at it. The notion of visual control should be replaced by targeting, and in any case when a vehicle is stopped, it should be taken out of the lane to allow other vehicles to proceed. In that sense, the restriction of customs control to a narrowly defined ―customs control zone‖ is wrong. Customs should have the right to inspect vehicles anywhere within the

border facility, notwithstanding that, in many countries other than Ukraine, customs has powers of control throughout the customs territory. 4.37. There is not sufficient synergy among the different agencies. The single window does not bring any significant benefit that better interagency cooperation or delegation could not provide. Even when control booths are unified, there is a total separation between customs and border guards, where in other countries both often sit side by side (which creates the necessary conditions for better personal relations, leading to closer cooperation). The government is aware of the issue, and has envisaged removing all but customs and border guards from the border facilities (although recent examples in Russia show that there is strong resistance to this, and in the Kyrgyz Republic when such a measure was introduced, the ousted agencies immediately reestablished themselves a few hundred meters down the road). 4.38.  

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Cross-border cooperation is an essential element of facilitation. This can take the form of: Cross-border coordination. A local border commission was established between Ukraine and Poland on May 1, 2008. It is essential that local managers participate in this commission, which should not be limited to general policy matters dealt with by national headquarters. Sharing of information. This includes linking Ukraine to the NCTS, automatically exchanging risk management data (there are plans with Slovakia at Uzhgorod, using a fiberoptic line under installation, but they depend of a favorable decision by the European Commission). Sharing commercial information is more problematic, as it raises issues of confidentiality, but the preliminary notification is used in exchanges with Moldova. In addition, advance notification of arriving lorries would be an important aspect of information sharing. Mutual recognition or use of findings. While there are legal restrictions to using information provided by the authorities of another country, data such as the weight of a lorry could be used for targeting purposes. A mutual border agreement between the Ukraine and adjacent countries could also allow the use of foreign weight tickets. In addition, Ukraine could use the provisions of the 1982 Geneva Harmonization Convention on border controls,41 which introduced an international weight certificate. This would eliminate the need for repeated weighing. Co-location of border facilities. There are plans for co-location between Ukraine and Slovakia, with a joint facility planned on Slovakian territory.

When significant aid budget is planned for the reconstruction of several major border stations on the Western borders, these principles should be taken into consideration for future design options (or the modernization of existing facilities)

41

International Convention on the Harmonisation of Frontier Controls of Goods (UNECE, Geneva, 21 October 1982).

Box 4. Railway Operations The rapidly growing railway traffic (10 percent growth per year over last three years) is cleared very much in the same way as road traffic, with some exceptions. Immediately after crossing the border, goods trains are stopped at a ―block post,‖ where manifests and documents are lodged and passports (those of the driver and guard) are checked. This process, which lasts one hour on average is destined to prevent smuggling of goods, which would be thrown out of the train while it is driving to the nearest station, although the way that is enforced is not altogether logical. The train is inspected from the track by customs and border guards, but this is no guarantee that the doors of the goods carriage will not be opened from inside once the train is moving again (supposing there is a smuggler or stowaway hidden). When the train starts moving again toward the first main station in Ukraine, it is not supposed to drive at less than 40 km per hour, which is deemed sufficient to deter smugglers from throwing parcels out of the train. The second stop is inside Ukraine, at the nearest railway junction, where the train is cleared. Some trains go to private transloading facilities, where standard (European) gauge carriages are trans-shipped back-to-back into widegauge Russian carriages. Entire trains are cleared at the same time, and there is no possibility of clearing individual carriages.

B. Inland Clearance 4.39. Problems occur mostly at the point of destination. A major issue is a default approach, with a permanent suspicion of smuggling. Foreign shippers are not always aware of Ukrainian procedures. Clearance for Domestic Consumption 4.40. The Ukrainian transit delivery control system reportedly works well, with an insignificant level of nondischarged transit operations. TIR Carnets or inland transit documents are registered at the border and entered in the transit module linked to the customs computer system. The delay for transit and delivery is determined at the border by the customs officer who opened the preliminary notification. Data are then sent to a regional center, but the border station of departure is administratively in charge of follow-up. The customs house of destination is not automatically informed, but can interrogate the system, which is done systematically. The reason for this is that the customs house may forget to enter a message, so discharge from the point of departure is preferable (and in line with international practice). On arrival, the officer enters the registration number of the vehicle in the system. If no discharge message from the point of destination has arrived five days after the expected termination of transit, the office of departure sends a query to the office of destination, and then tries to locate the vehicle. If this is unsuccessful, an infraction report is filed. Failure to report is covered under Article 38 of the TIR Convention and Article 37 of the Ukrainian law on external economic activities. Fines are applicable, but although they are high should the delay be to the result of simple negligence, they are too low to act as a deterrent for large-scale smuggling operations. 4.41. Ideally, international transit should be discharged using the same procedure and informing customs in the office and country of departure. To operate with the EU, the Ukrainian system would

need to be compatible with the EU’s National Car Testing Service (NCTS), which is currently not the case, although EU technical assistance is working on solving it.42 In addition, Ukraine uses the Safe-TIR procedure to confirm delivery of lorries traveling under the TIR system. 4.42. Clearance must take place at the point of destination, in the customs house for which the importer is accredited, for revenue target reasons and as a tax requirement. Customs brokers must be registered, tested by the Customs Service, and pay a license fee $US1,000, with a $US1,500 renewal fee. There are 1,863 licensed brokers operating as companies or individuals. As discussed above, no new licenses have been issued in the vacuum between the old and the new customs code, but the association of clearing agents and a majority of importers and freight forwarders believe there should be new entrants to create more competition.43 Brokerage fees are not set, and vary from one clearing agent to another. They represent on average $US250 per declaration in the Kyiv region, and $US100 in the provinces. The annual testing of brokers, which was excessive, no longer takes place. Unlike in Western European countries, brokers do not need to provide a bank guarantee, but duties and taxes must be credited before declarations are lodged. 4.43. The clearance process is based on the international Single Administrative Document (SAD), and is still largely manual. The procedure consists of: 

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42

Arrival of goods. When lorries enter the customs area, a broker collects the transport documents from the driver, prepares a declaration, saves it on a floppy disk, and reports to customs with the hard copy and supporting documents (CMR, the invoice [which until the new draft code had to be translated], contract, packing list, and, if necessary, relevant certificates and permits).44 The agent makes an appointment with a customs inspector for clearance. Declaration lodging. The chief of the customs house receives all declarations (in five copies, plus the floppy disk), and assigns them to an inspector. The hard copies are stamped. The data on the diskette are compared with the hard copies of the declarations, and a general consistency check takes place. The transit procedure is discharged (a message must be sent to the office of departure within four hours). Declaration data are entered at the local statistical division in the customs computer system through the floppy disk, and the hard copy of the declaration is stamped by customs. Declaration review. The declarations are reviewed by the inspector and checked against the accompanying documents for valuation and classification. According to importers, there are numerous disputes at this stage. Examination. The broker returns to the chief of the customs office, who assigns an inspector for the physical examination of the goods. According to some importers, all declarations lead to a physical inspection (but only 20 percent according to express courier companies), which is

An option envisaged by the EU is to extend its NCTS to Ukraine in the same way as it was extended to Kaliningrad. 43 According to some importers, there are brokers who charge very high fees (up to five times the average), but have discreet ways of avoiding difficulties with customs. 44 The fee for brokerage is not set; it varies from one clearing agent to another, but is on average $US250 in the Kyiv region, and $US100 in the provinces. [[This was explained almost verbatim in text. Do you want it there or here in a footnote?]]

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carried out by an inspector and staff from the customs antismuggling department.45 The declaration is passed on to the quarantine, phytosanitary, and radiological control officials. Payment and release. After satisfactory examinations, the broker proceeds to the payment section, which checks the duties and warehousing fees, when applicable, and verifies that payment was made (generally through a bank), and the goods are released.

4.44. The draft customs code established a benchmark of one day for the clearance of goods assuming everything is in order. Many of the other agencies involved in clearance objected to this, so the provision was removed, and replaced it with a breakdown of maximum times according to different functions (sampling, checking of the certificate of origin, valuation difficulties, and other cases when additional information is requested). According to a majority of importers, clearance is not possible in less than two to three days, including at seaports, except occasionally when there is no valuation difficulty. Special and Temporary Procedures 4.45. Some express courier operators complain that there are no specific procedures for dealing with their traffic. Because of value thresholds, most parcels need to be cleared as commercial imports. Although there is a simplified declaration, advance clearance or predeclaration is not possible under the current code because there is no functioning guarantee system. Auxiliary requirements (such as certificates of quality or origin) are imposed irrespective of the value of the shipments. Samples need to be assessed by Customs Service headquarters. Practically every shipment is physically inspected by customs. As a result, clearance takes between two and three days, and in the case of DHL, two-thirds of all shipments on hold in Europe are in Ukraine. In the absence of modern and flexible procedures, clearance is sometimes impossible, and nearly one-third of shipments are returned to the sender. 4.46. Freight forwarders may open their warehouses for customs clearance. Even with low volumes of traffic (one freight forwarder lodges only five declarations per day), the Customs Service allows clearance on the premises. The time for clearance has dropped to one day for full- container Loads (FCLs), and 48 hours for consolidated cargo. This is a major facilitation initiative, but it has a high cost in terms of customs operations. There is, however, limited consolidation of freight, as freight forwarders need to clear an entire lorry before it is released. When lorries reach the freight forwarders’ premises, a declaration for warehousing must be lodged before unloading is permitted (Article 74 of the previous code). Goods cannot be re-forwarded under a domestic transit system to other warehouses or customs houses elsewhere in Ukraine until final clearance has been granted (according to Decree 260). It is checked by customs, and there can be a physical examination. This prevents a full consolidation chain, as operators need to use different lorries to further dispatch the goods, and these lorries have to be sealed by customs at every step. The extra cost involved is considered a counterincentive. 4.47.   

45

There are only limited temporary import regimes. Drawback applies only to gas transactions. ATA Carnets were introduced in March 2008. Temporary imports requires a conditional duty waiver (Article 206 of the previous code), and apply only to exhibition items, commercial events, or the repair of ships). The condition is that

An earlier system of more selective examinations was based on a White List principle, but was abandoned because it was not practical. To qualify for the White List, importers had to have a track record of full compliance for five years, which is unrealistic, even by Western European standards.

goods should not change their properties and not create any revenue. This prevents the development of value-added services, such as inward processing, which are in place in other countries. Guarantees for temporary imports are provided through promissory notes, which are discharged when goods are re-exported (within 30 days). As there is no clearly defined re-export procedure in the customs law, temporary import regimes cannot be used to their full potential. Development of Risk Management 4.48. Although risk analysis with specified risk criteria is used by customs to define riskier cargos for inspection, physical inspection rates continue to be very high. According to ASMAP estimates, the rate of physical inspections for automobiles transport reaches 60 percent. As for the sea ports, interviews with several logistics service providers and business associations and visits to ports suggest that physical inspections reach levels close to 100 percent. Whereas in Western Europe the physical inspection rate is usually below 20 percent, the developing countries might aim for higher rates of inspections because of lower voluntary compliance. However, these rates rarely exceed 50 percent and are far below Ukrainian ones. 4.49. In 2009, Ukrainian customs introduced a new risk management system, adopted by Custom Services‟ Order in August. The risk management system focuses on creation of White and Green Lists of companies according to different criteria. If the company was listed, it became the subject of simplified custom procedures. About 170 companies were included on the lists on December 2009. The concept of risk management appears to be well understood by customs, but its actual application is proving more difficult. It is acknowledged that the lack of an effective national customs IT system covering all borders severely restricts the ability to implement risk management in an effective, consistent nationwide manner. 4.50. The system, which is already partly in place, is managed centrally by the Department for Analytical Work and Information, using risk profiles designed and tested by an eight-member commission chaired by the deputy chairman of the Customs Service and comprising all areas of customs activities. The commission prepares profiles, taking into account local-level risk criteria; it meets once or twice per month and is responsible for updating risk profiles in real time. The methodology is based on statistical simulations that enable calculation of the efficiency of profiles, using case detection feedback. The identified level of risk determines documentary or mandatory physical examination. When the system is fully operational, it is expected to select 13 to 15 percent of all declarations for Yellow- or Redchannel processing, with the remainder immediately released under the Green channel. 4.51. However, the Customs Service has geared its risk management system toward revenue maximization (with a strong focus on valuation, classification, and VAT refunds) rather than the detection of nontariff violations, such as inter alia smuggling of drugs and weapons. This may affect the law enforcement credibility of the Customs Service at a time when it is seeking to develop its activities in that field.

Issues with Clearance 4.52. A Cabinet decision (1730) established a postrelease control unit three years ago. The approach to this type of verification is still relatively new, with no clear separation yet among deferred checks, desk verifications, and field audits. 4.53. Physical examinations are currently countereffective. Although physical inspections are expected to decline with the full introduction of computerized risk management, there is still a risk of a lingering 100 percent examination syndrome, largely because of the focus on revenue targets and the pretext of fighting smuggling.46 A culture of release by default, backed by good risk analysis (which is not only computer-based) should be developed and supported by Customs Service senior management. 4.54. Risk management does not use all possible resources, and procedures are unpredictable. For example, the preliminary notification contains data that could help identify suspicious suppliers or commercial transactions. However, although it is matched for consistency with the final declaration (which it is very similar to), there is no advance analysis of the information regarding expected shipments. This could be done more easily if the preliminary declaration data could be transmitted electronically from the border to the office of arrival. Evaluation methods are arbitrary and can lead to unethical behaviors. Although for SPS control, the rates of fees differ unexplainably, and up to 45 days delays for clearance are reported, there are arrangements for accelerating the process. Matching the customs declaration with the transit arrival notice or the preliminary notification is said to involve an unofficial payment of $US20. Whenever there is a clearance problem and goods cannot be released immediately, the only option for the importer or freight forwarder is to unload the lorry so that it can be released. This implies a warehousing declaration and subsequent warehousing fees. 4.55. The absence of an electronic signature system prevents full deployment of automatic clearance, with no interface between customs officials and importers. Despite the efforts of the Customs Service, an electronic signature cannot be implemented, as there is no intergovernmental system to support it. 4.56. Control steps could be streamlined. First, the different procedural steps for lodging a declaration should be significantly reduced. Second, the practice of checking floppy disks against a hard copy, which is itself a printout of that same floppy disk, is ineffective.

C. Enforcement Perspective 4.57. Although antismuggling is an EU priority, and the Customs Service aware that it is an essential component of customs activity, it is neither organized nor empowered to carry out adequate antismuggling activities. It is hoped that the new customs code will provide a better framework for customs enforcement, as the specialized Parliamentary Committee on these matters shows a real understanding of the issue.

46

As experience all over the world shows, smuggling is never detected through 100 percent checks―on the contrary.

4.58. Customs is not allowed to conduct intelligence activities and is restricted to a limited zone of competence. Law on intelligence activities defines the bodies authorized to hire informants or use sources of intelligence, and the Customs Service is not part of them. When customs obtains first-hand intelligence on any type of smuggling activity, it must pass it on to internal security. Customs officers can perform their checks only within a limited ―customs control area‖ at border stations, which prevents officers from doing spot checks on vehicles parked elsewhere. They have practically no powers of control inside the territory, although this is where customs checks could best detect undeclared goods. In the few cases where customs officials operate outside, it is under joint operations of the customs guard unit with the border guards, or with the traffic police on the motorways. Although customs has the right to initiate such checks and prepare a joint plan of action, it has no autonomous powers of action should a case require an immediate response. 4.59. The focus on revenue targets inhibits other antismuggling activities. All over the world, customs is the main detecting agency for smuggled drugs. While recognizing that smuggling is an issue, the Customs Service devotes its resources to revenue-raising activities, neglecting the link between economic and criminal fraud. At the same time, the Customs Service considers that cigarette smuggling is more a tax-related activity, and does not pay much attention to that type of contraband.

D. Proposal for a Streamlined Pilot Operation 4.60. Current customs operations are characterized by repetitive routine checks and lead to significant delays. Routine checks are effective in so far as they provide the clearance of the paperwork, and may give the impression that they secure revenue collection objectives, but they also either lead to significant clearance delays, or allow discretionary decisions, that can result in allegations of corrupt practices from the trade. In addition, it is not clear that they achieve the required level of compliance, and even if they do, the marginal cost of compliance becomes very high, for both the administration and the business community. At the same time, the Customs Service has undertaken vast measures to modernize and streamline its operations, but most often this has taken the form of streamlining or attempting to improve existing practices rather introducing modern standards based on international best practice.47 4.61. It is therefore suggested that the Customs Service pilot-test new standards and procedures based on international best practice, at two selected locations, one a border station and the other an inland clearance terminal. The postulate would be that, during the trial period, no revenue target would be set, and the objective would be to drastically reduce times for clearance.48 In the event of a revenue shortfall, a standby facility would be put in place to guarantee continued revenue performance. The stepwise approach is described below. 1. Initial approach  Select a border and a related inland clearance location handling substantial traffic.  Carry out a brief survey of current clearance times at both locations.

47

An example is the newly introduced advance declaration, which essentially results in lodging three times the same information, a far cry from the EU’s advance declaration information requirements. 48 According to a survey carried out in spring 2007, times were 24 hours on average, with a minimum time of 130 minutes and a maximum 63 hours. On average, over 80 percent of the trucks were examined.

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Assess the effectiveness of the current control policy by measuring at the pilot inland clearance location, over one year, the total number of declarations lodged, the total number of inspections, the total amount of revenue declared, the total number of noncompliant declarations, and the total revenue reassessed and fines and penalties incurred.49 Carry out the same assessment at the selected pilot border location, measuring number of trucks, number of seals broken, and results of inspections (including border guard inspections). Compare past year’s monthly revenue collections against specific revenue targets, and assess current revenue expectations.

2. Preliminary inland procedures  Eliminate the preliminary notifications for all TIR shipments, as they already offer a guarantee of delivery. 3. Border procedures    

Institute the EU-recommended one-hour advance notification, using fax or e-mail messages, and fast-track vehicles with evidence of that notification. Do not break intact seals unless there is a targeted check for contraband. Do not establish duplicate transit document if there is already a TIR Carnet. Notify office of destination by e-mail or fax.

4. Inland procedure (this will require some reorganization of customs station work positions)            

49

Require advance notification according to EU advance information standards, and assess risk. Check seals and TIR Carnet if applicable, and notify border station of the arrival. Accept declaration in any electronic format, and, assuming that the hard copy will correspond to the diskette provided, register it immediately with no check other than computerized acceptability. Establish a daily management meeting setting risk profiles for the day and maximum rates of (i) documentary control, and (ii) physical examination. Perform a detailed documentary check, and decide if any of the daily risk profile elements are contained in the declaration. If this is not the case, release the declaration after payment. If there is a risk profile, defer the declaration to physical examination (this may also include antinarcotics investigations and joint inspections). Similarly, refer the declaration to other agencies’ control. Based on the results, update the local risk profile list. Review all declarations after release for consistency. In the event of subsequent detection of anomaly, refer to postclearance unit and update local risk profile unit. Assess daily collections and reassessments subsequent to documentary or physical checks and evaluate against past revenue targets.

It is important not to focus on the actual amount actually collected, as the adjudication process may take several years.

5. Status of Transport and Logistics Service Provision 5.1. Overall, Ukraine‟s trade connectivity in terms of transport connections is fairly good and has improved during the past few years thanks to the increased frequency of services by sea and air transport services, and by road services. The Ukrainian transport infrastructure and related operations have been designed for large industrial shippers. Much of the nominal rail, road, and port capacity, for example, was built before independence in 1991. In general, the largest shippers in the metal, minerals, and chemical industries dealing with full wagonloads or shipments involving whole vessels have had access to relatively affordable transport, even though the rising demand in 2007 and early 2008 created an unprecedented lack of capacity in rail services (wagons) and created also severe port congestion, especially in container operations. 5.2. SMEs are particularly vulnerable to the weaknesses in Ukrainian transport and logistics markets; they cannot upgrade capacity because of the prohibitive cost of capital and their lack of knowledge about market channels and transport networks. Going forward, the Ukrainian government must prioritize the improvement in the border practices of customs officials and other technical regulators, with an emphasis on reducing inspection delays and documentation requirements, improving the interaction of customs officials with freight-forwarding companies, and, more broadly, limiting the power of border officials to arbitrarily block trade. Furthermore, the government must urgently begin working on identifying and investing in the weak links of the national physical transport infrastructure. Complementary policies to enhance the capabilities of SMEs to participate in regional and global supply chains, for example by strengthening their capacity to comply with nontariff trade barriers, would also be useful. 5.3. As Ukraine moves up the value chain to gain market share in Europe and other developed markets, its economy‟s transport intensity will gradually shift toward road transport. At present, the modal split of cargo transport remains typical of a pre-independence economy—road transport contributes relatively little. Official statistics show that only 5 percent of freight turnover (in ton kilometers) is road transport, while rail and pipelines account almost equally for most freight volume. However, road transport dominates short-distance transport of goods, accounting for close to 60 percent of the gross freight tonnage, and this trend seems to be growing.

A. Rail Transport 5.4. Because of a common rail gauge, direct railway connections are limited to the CIS rail network. CIS rail operations have traditionally been developed for full-wagonload traffic of bulk materials between industrial sites and ports. This type of traffic requires little or no intermodal connections that is, trans-shipments or coordination with other modes of transport. The rail processes, including capacity reservation systems, are ill-suited for intermodal operations such as container movements. LISKI, the container operation arm of UZ, has a rather modest capacity of 5,000 wagons and apparently limited commercial incentive―or mandate―to develop this line of business.

5.5. At the western rail borders, cargo may need to be trans-shipped because the rail gauges are different in the CIS and EU. Theoretically, eastbound cargo is trans-shipped on the Ukrainian side and westbound on the EU side. However, in practice, importers prefer trans-shipment in the EU because goods are transferred to road transport and brought in through the road border for final delivery. The Ukrainian transfer activity is perceived as less reliable and efficient than the EU. 5.6. So-called piggyback operations (trucks on rail wagons) are practically nonexistent in Ukraine, despite the relatively long distances that could render such combined transports profitable in other countries. One factor that undermines the profitability of piggyback operations is the oversupply of (often substandard) road transport capacity. Domestic operations, especially, were available at very competitive rates by mid-2008. The oversupply in 2009 grew even larger as a result of rapidly declining demand. The UZ is not providing less-than-wagonload services, and there are no plans to diversify services in this direction. Rail connections have been affected by the lack of rolling stock and cumbersome operations practices in international traffic. In short, the UZ freight operations are for full wagonload of bulk, but intermodal operations are underdeveloped and are likely to remain so in the near future.

5.7. UZ is part of the CIS countries‟ international freight tariff system and wagon pool. Domestic freights are set by UZ and approved by the Ministry of Transport and Communications. UZ’s freight operations―especially that of transit―are profitable, but passenger operations have been suffering heavy losses. There is a strong need to cross-subsidize passenger and other operations of UZ with profits generated from freight. In domestic operations, the legal possibilities for cross-subsidization depend on the government and Parliament. In international operations, the CIS rail community negotiations and coordination of tariffs are essential. International competition issues and WTO rules also need to be considered (Attachment 22) where rail transport pricing for imports, exports, and transit were among issues negotiated before the WTO membership. Ukraine became WTO’s 152nd member in May 2008. The attachment also includes a list of current legal acts that governed rail freight in Ukraine in early 2008. 5.8. Industry sources cite that unofficial payments are seldom solicited in connection to rail tariffs. However, stealing of cargo is reported; anecdotal evidence suggests that it occurs in fewer than 5 percent of shipments. Also, when individual parts weigh less than 100kg and the goods are such that there are second-hand markets, armed guards are often used. Stealing typically occurs with part of a shipment. When there are irregularities, the shippers are likely to get a refund, if a formal protocol report of the incident is made between the UZ and the shipper and the transport documents and procedures were otherwise done properly. But producing such a protocol is not always easy.

UZ Freight Tariffs 5.9. UZ freight tariffs are based on transport distance (UAH/km) and vary by cargo and wagon type. Freight setting by transport performance (UAH per ton-km) is not used. Between March-April 2007 and September 2008, the UZ rail tariff increased by 80 percent. Another tariff rise of 9 percent was planned to take effect on October 1, 2008, but it was revoked. Nominal rail freights in international traffic are low in relation to road transport freights. For example, the rail tariff for containers between Klaipeda (Lithuania) and Kyiv in 2008 was $US0.16 per km. According to Liski, UZ’s container operating arm, total transport cost for the 1,733-km route between Klaipeda and Illichevsk would amount to $US300.00

one way, including customs declaration, taxes, and charges. However, actual freight levels may be significantly higher. 5.10. UZ freight tariffs have risen very fast since 2007. The increases came in irregular intervals, with little time for adjustment. This was a concern for shippers using rail transport, but the way in which UZ as a monopolist raised the tariffs was particularly annoying. This was seen in marked contrast to the Russian rail operators RZD. It had increased tariffs by 12-18 percent per year in 2007-08, in two steps: once in spring and the second time in autumn, and the increases were announced almost a year in advance. Another feature irking large shippers is that there is no volume rebate in UZ tariffs, unlike in RZD, for example. The freight rate is per one wagon and per kilometer, no matter how many wagons one ships over a period of time. 5.11. To make tariff system more transparent, UZ agreed in CMU Decision #1392 dated December, 16, 2009, to provide freight rail tariff indexation only once per year and complete it before the new fiscal year started. 5.12. The actual freight levels vary by commodity and are based on distance; short distances are relatively more expensive than longer distances. Inside Ukraine, the average length of haul is about 500 km, and the average rail freight was $US 93.00 per ton for steel (including loading and wagon rent) in autumn 2008. This would correspond to about 10-20 percent of goods value, depending of the quality and timing.50 In Russia, by contrast, a large steel mill could pay a rail tariff at $US92.00 per ton for finished goods over a distance of 1,500 km. For some higher-valued goods, typical rail freight in autumn 2008 was $US45.00 to $US50.00 per ton for 100km, excluding loading and unloading and wagon rent. For shorter distances, such as 250km to Mariupol port, the rail tariff in November 2008 was $US25.00 per ton. On an 800-km route to Illichevsk, the rail tariff would be about $US40.00 per ton, also excluding handling and wagon rent. In fall 2008, rail transport costs (including handling and wagon rent) for lowervalued commodities and raw materials amounted to one-third of the value of the goods.

B. Wagon Reservation Procedure with UZ 5.13. As the UZ operates only with full wagons, the reservation of wagons is an essential part of the transport arrangement. The procedure is as follows:  First, the shipper announces its delivery schedule for the next full calendar month by the 15th of the previous month, which is a strict deadline. This announcement includes the dates, point of origin and destination, type and amount of cargo, and type of wagon requested. It is submitted in a letter, not through any online or offline electronic version. This is the case even when the shipper has its own wagons.  Second, UZ notifies the shipper of wagon availability by the end of the month, and preassigns wagons according to it, if possible. This is the phase during which UZ prepares its operational planning and plans full train production, which is a demanding task when the volumes and the network are so large.  However, UZ notification comes very late in view of shipments that need to be dispatched during the first days of the month. This creates a situation in which shippers may turn to 50

The commodity price of, for example, pig iron was between $US270.00 per ton in January 2007 and almost $US700.00 per ton in November 2008; standard steel qualities experienced a similar price fluctuation. See e.g. http://www.steelonthenet.com/files/pig_iron.html .



game playing, and reserve more capacity than is actually needed. While this comes at the cost of a penalty fee for unused capacity, this penalty is often much smaller than the economic value at stake to secure transport capacity. As a consequence, this affects UZ production planning, and lowers the utilization rate of rolling stock. Penalties for keeping empty wagons increase exponentially the more days the wagon is kept by the shipper.

5.14. At the end of 2008, when the demand for rail transport already had dramatically fallen, UZ refused to allow shippers‟ own wagons to be used. It based this decision on a contract clause stating ―the railways may approve an additional capacity [shippers’ own wagons] if UZ has own capacity…‖ Toward the end of year 2008, UZ had plenty of idle capacity, and used this clause to force its own rolling stock to be used, even knowing shippers’ own rolling stock would remain idle. The largest shippers that have their own rolling stock and transport metals and ores can get up to a 17 percent rebate on UZ tariffs when they use their own wagons. Of the entire wagon rolling stock of semiwagons, about 38,000 are owned by UZ and 30,000 to 40,000 owned by private or industrial firms. Shippers that own wagons complain that UZ tariffs are ―absolutely nontransparent.‖ A typical claim was that it is impossible to break down the tariff into cost elements for, say, infrastructure usage, transport operation, and other services. Therefore, it is also impossible to calculate the economic rationale of investing in own rolling stock. The main reason many large shippers have done so was the chronic shortage of capacity up until mid-2008. 5.15. It is suggested that the UZ urgently review it booking procedures, so that the (i) lead time between requesting the wagon requests and announcing the availability can be shortened, (ii) the pricing scheme encourages early bookings, but allows late reservation at a premium cost; (iii) wagon reservation systems are made online, where changes are possible against payments, which would also facilitate UZ production planning, (iv) volume rebates are considered; (v) tariff planning and decision making is more predictable, and (vi) information to shippers and stakeholders is improved.51

C. Road Transport Services 5.16. In 2008 and 2009, about 25 percent of transport volume in Ukraine (170 and 140 million tons, respectively) was carried by road. When measured in transport performance, the corresponding share was 5-6 percent (25 and 30 billion ton-kilometers, respectively); 4.4 billion passengers used road transport carriers, which was 4.7 percent more than in 2007. The EU TACIS project on International Transport Conventions and Agreements (presentation by Scott Wilson Ltd.) estimated that 16,000 firms offered road transport services, of which 3,500 were engaged in international road haulage in 2007. Out of the total domestic fleet of 8 million vehicles in 2007, about 1 million (13 percent) were trucks and vans over 3.5 tons. An estimated 100,000 of these were trucks over 10 tons. 5.17. According to the State Road Transport Research Institute, about 80-90 percent of road haulage firms are firms with fewer than 10 trucks. For comparison, the average size of road haulage firms in the EU is fewer than five trucks per firm. One incentive to keep firms size small―or even to split larger legal entities into smaller ones―is the single tax law adopted in 1995-96. According to it, firms 51

An anecdotal notion is that UZ, with a staff of over 400,000, does not have a Web site in English.

with a turnover less than UAH 1 million (about $US200,000) pay significantly lower taxes than firms over that threshold. 5.18. The fleet of trucks in international road transport in 2007 was about 23,300 vehicles (TACIS programme). In June 2008, ASMAP i had about 2,500 members with about 27,000 vehicles, some of which were used in domestic transport.52 ASMAP estimated that about 50 percent of trucks in international traffic were in the EURO I and II classes, which are in traffic between CIS countries. The rest (50 percent or about 10,000-11,000 vehicles) were in EURO III to V classes. However, the number of EURO class IV and V trucks that are most suitable in EU traffic is possibly fewer than 2,000 vehicles. To give an indication of the number of vehicles in classes IV and V, 1,454 Ukrainian trucks had an On Board Unit (OBU) required by the German toll road system at the end of 2007.53 A similar number (between 1,400 and 1,600) of OBUs were also in trucks registered in Estonia, Belorussia, or Russia. The number of OBUs in Lithuanian, Hungarian, or Slovakian trucks was between 8,000 and 10,000; in Poland the device was in more than 50,000 trucks. 5.19. Industry sources cited that (for example, Polish) trucks with EURO Class 0 and I were used in 2008 between Ukraine and some of its EU neighbours, even though this category of vehicles is not permitted to enter EU countries. Ukrainian carriers, however, are requested to have either an ECMT quota certificate for EURO III vehicle, or operate with EURO IV or V equipment. Similar information was also cited in Albania in spring 2008: trucks in EURO 0 and I categories were reportedly used in traffic between Albania, Greece, and Italy. This indicates that the control of vehicles and documents may be rather lax in EU countries bordering Ukraine.

Road Transport Cost Structure of Carriers 5.20. In domestic road transport, fuel and lubricants make up the largest cost share for carriers, accounting for 50-60 percent of costs. Driver wages account for about 20 percent, and technical maintenance staff for another 5 percent of costs in a road haulage firm in domestic operation. In international operations, the carriers’ cost structure in 2008 was estimated by ASMAP as similar, with fuel costs being 40 percent, wages 20-25 percent, and all other costs 35-40 percent of total costs of the road haulage firm. Capital costs are high because of high interest rates and unfavorable financing terms (including leasing). In Russia and Belorussia, carriers are now exempt from vehicle tax and VAT on purchased vehicles. This means that they can purchase (new) equipment at 30 percent lower cost than Ukrainian carriers. 5.21. While Ukrainian unit costs are lower compared to, for example, Polish carriers, the cost advantage is undermined by delays in issuance of visas, traffic licenses, and so forth. According to ASMAP, a Polish vehicle in international traffic makes on average 120,000 km per year, whereas a Ukrainian one typically makes 70,000-80,000 km per year. Driver wages, especially on international routes, are high compared to wage levels in general, so there has been no immediate shortage of drivers. However, Ukrainian drivers have also been hired by firms in, for example, Russia and the Baltic States. In domestic, short-haul traffic, the wage levels are not always attractive, and especially outside the capital region, driver unemployment is common, even high. 52

The largest members include firms based in Kyiv: Rapid, BM-Trans and Orlan Trans; in Lugansk: Laatrans; in Lviv: Ukrzakhidtrans; and in the Transcarpathian region: Autoplus and Autolux. 53 http://www.asecap.com/english/documents/AlainEstiotTollCollect.pdf .

5.22. Ukrainian carriers‟ competitiveness seems to have sustained the economic crisis relatively well. There is a paucity of comparative data on international road transport markets,54 but the number of TIR Carnets issued to national road haulage associations provides an indirect way to estimate which nonEU carriers have increased their market share. Between 2008 and 2009, Ukrainian ASMAP’s share of all TIR’s issued increased from 9.7 percent (317,000 TIRs issued) to 13.1 percent (297,000 TIRs issued). This means that Ukrainian carriers’ market share in this type of transit traffic has increased in most countries. The total number of TIRs issued by IRU diminished substantially, from 3,253,800 in 2008 to 2,230,400 in 2009, or by 31.4 percent. Indicative Road Freight Levels 5.23. In domestic road transport, typical freights paid by large shippers for full truckloads of commodities (such as metal products) were in the range of $US0.5-0.7 per kilometer for a 20-ton truck in 2008. This is equivalent to $US0.025-0.03 per ton-km, which is low; inin EU countries similar freight would be at least three times , possibly even four-five times higher (at around $US0.1-0.15 per ton-km). The availability of road transport capacity for domestic routes is good, as the fleet of especially older vehicles is large and underused. There are also large differences in capacity by region. In the eastern regions, where there is much overcapacity, road freights tend to be 30-40 percent lower than in western or southern regions. 5.24. The existing imbalance between Ukraine‟s exports and imports is clearly reflected in road transport costs. On average, import transports are two-three times more expensive than export transports, though the distance and lead time can be the same. The less this imbalance is, the less is the price difference between export and import shipments. Some indicative FTL freights at the end of 2008 are shown in figure 20. In high seasons like the end of the year, import prices tend to go up and carriers prefer to do empty runs to Western European countries just to collect goods there and bring them back to Ukraine. As a result, they save time they could lose for loading, driving, or standing in queues on the Ukraine-Poland or Ukraine-Hungary border. In Ukraine, it takes at least two working days to load the goods and organize customs clearance. In this way, haulers earn more, because instead of 1.5-2 round trips per month with cargo both ways they can do 3 or 4 by leaving Ukraine empty.

Figure 20. Indicative Road Freights for Full-Truckload (FTL) Shipments to and from Selected Sountries, 2008 54

For example, ITF’s quarterly road freight transport data are not available for Ukraine (and for a number of other comparators) for 2008 or 2009; see: http://www.internationaltransportforum.org/shorttermtrends/.

1600 900

Russia

Poland

Sweden

700

1600

1700 2400

2800

To From

900

Germany

3000

3000 1500

Denmark

Belgium

France

Italy

0

1000

3200

1000

Netherlands

1100

1050

3600

3900

4000

2000

1200

3000

2600

4000

Spain

Euros per FTL (Full truck load)

5000

Source: Compiled from industry sources.

5.25. Government regulations and economic relations between countries influence prices for export and import transports as well. For example, when metal was exported in big quantities from Ukraine to Western Europe (mostly Germany), the prices for export and import were almost equal. In the case of milk products exported from Ukraine to Russia, the prices for export and import tend to be almost the same as well. Also, when there were no limits for export of wood from Ukraine, prices for export were higher than at end-2008, when the Ukrainian government decided to slow down wood exports. The lack of bilateral permits to certain countries influences rates as well. Every year there are problems, especially with Hungarian and Italian permits, which increase market prices for these destinations.

Competitive Position of Ukrainian Road Transport Firms in 2008 5.26. In international traffic, Ukrainian road transport firms seem to enjoy a competitive advantage, as international logistics companies prefer to use Ukrainian trucks whenever possible in movements to and from EU. This advantage is in part because Ukrainian trucks are generally lower cost than, for example, Polish or Lithuanian trucks. In movements to and from CIS, Russian and Belarussian trucks enjoy both cost and operational advantages against Ukrainian ones: they can purchase trucks without VAT, and the operational costs are often lower, especially for Belarussian carriers. 5.27. The truck fleet size is constrained by (i) the multilateral quota system, which effectively limits the number of existing Ukrainian trucks on European roads; (ii) bilateral quotas with main trading partners such as Poland, Austria, and Germany; (iii) visa problems for professional drivers in EU countries; and (iii) a weak financial position together with expensive finance, including high interest rates and on the lack of standard leasing finance. The current fleet in international traffic is dominated by EURO II and III type of trucks. As for the multilateral quota, which is in force till 2011, Ukrainian operators could alleviate the situation by investing in equipment in the EURO IV or EURO V classes, either second-hand or new, but this is often difficult because of carriers’ weak financial position. The

situation is even more difficult because leasing legislation in Ukraine does not offer the same treatment of leasing fees as is available in practically all competing countries, including Russia. 5.28. The waiting time for trucks at Ukrainian border-crossing points (BCPs) is long, typically 1216 hours when entering and 2-8 hours when exiting Ukraine in 2008, which is long compared to waiting times at other BCPs in the region (Attachment 23). Seasonal variations can be quite substantial. In January-March 2008, long waiting times were caused mainly by a strike of customs officers. Capacity at the BCPs has not been sufficient, and more efficient organization of work of border guards and customs offices is needed, as well as improved cooperation among Polish, Ukrainian, Belarussian and Russian authorities. For example, at Dorohusk/Jagodin, Polish authorities can clear 300 trucks during one 12-hour working shift; the Ukrainian side is much less productive. At the Polish-Ukrainian border, waiting times practically vanished in November-December 2008; this, however, reflected the dramatic reduction in traffic rather than significantly improved conditions at the BCPs. 5.29. According to ASMAP, the difficulties and recommended improvements at Ukrainian borders are the following (IRU 2009):    





Available border-crossing throughput capacities are underutilized at certain posts on the Ukrainian side; a fully functioning border post should be ensured. Lack of joint border controls with neighboring countries; joint controls should be introduced. Nine different control services involved in checking vehicles and cargo on the Ukrainian side; the number of controlling services should be significantly reduced. Full or quasi-full customs and other controls conducted by Ukrainian customs officers at borders despite an earlier Ukrainian government resolution (No. 269, dated 13 April 2005) requiring only preliminary document control at borders and full controls at customs points within the country[[recommendation?]]. Separation of traffic by types of cargo by the Russian Federation customs authorities at the Ukraine-Russia border, and by the Ukraine customs authorities at the Ukraine-Poland borders, causing significant detours for vehicles; review and eliminate traffic separation by cargo types as much as possible, and/or introduce separate traffic lanes for empty vehicles. Access roads to borders are in a poor state, terminal and throughput capacities of control points are insufficient; roads and control points should be repaired/extended/newly built (for example, between Rava-Ruska and Yagodin on the Ukraine-Poland border) in accordance with the government resolution (No. 831, dated 13 January 2007).

Supply of Consolidated (Groupage) Transport Services 5.30. Consolidated or “groupage” cargo transport services are produced by major road haulagebased operators or container shipping lines, which maintain regular and/or scheduled services. Consolidated services may also be provided by freight forwarders, which reserve cargo space from road haulage or container shipping operators, and sell it in ―retail‖ to small shippers.55 These services are commonly used in developed markets. It is a process of consolidating cargo from several shippers, each having insufficient cargo for a full container load or full truckload. In either case, the final part of the actual delivery is almost always by road transport. This process is considerably more complex than transport of FCLs or FTLs. These services consolidate Less Than Container/Trailer Loads or (LCL/LTL). In brief, the process includes: 55

Such operators , which sell cargo services to all eligible shippers but do not have transport capacity of their own, are also called non-vehicle operating common carriers, or NVOCCs.

        

Collection of shipment in the country of export using the domestic transport system Unloading the shipment into exporting customs terminal Export clearance and consolidation with other shipments for international transport Loading the shipment into an international transport unit (container or road trailer) International transport of this consolidated unit to the country of import Unloading shipments from the unit into importing customs terminal Deconsolidation of the shipments and import clearance by importer Unloading shipment from the customs warehouse Delivery of the shipment in the country of import.

Consolidated groupage services enable shippers to choose the most favorable shipment size and frequency to optimize their logistics costs and service level. Groupage services are especially important for small and medium-size firms, and with manufactured goods the unit value (or value-added content) of which is high. Consolidated transport services are typically used for international shipments weighing less than 2,500 kilos. For very small parcels (typically less than 20 kilos), either mail or express freight (courier) services offer a better cost-service ratio for the shippers. Larger shipments are typically transported directly, without unloading cargo to terminals. 5.31. The supply of scheduled groupage services in Ukraine has been limited until very recently. Despite a slight increase in supply in the past years, few of the largest operators offer scheduled groupage routes to or from destinations in the EU or Western Europe. Scheduled groupage services to and from CIS are still rare. Customs requirements for cargo release are the main reason for the limited supply of import groupage services. A truck with LTL parcels has shipments destined to numerous consignees, often in different parts of the country. In Ukraine since end-2007 or early 2008, customs regions have (again) started to insist that customs clearance for each parcel be made in the territory where that consignee is located. Furthermore, the goods need to be physically transported in the same vehicle and trailer that brings the goods into Ukraine. The purpose is to maximize the revenue from fees that the customs region or local customs house is collecting. This practice is not mandated by legislation, but rather is the interpretation of Ukrainian customs. 5.32. The process described above for LTL goods increases unit prices for those goods. The order of magnitude of unnecessary extra freight cost for importers incurred by LTL customs complication was $US500 million-1,000 million in 2007. The standard practice was that the goods were collected in a customs-bonded warehouse (for example, in Kyiv), from which they were delivered domestically after having cleared customs or sent by so-called customs transit to the customs house, where the final clearance was made. This procedure dramatically increased unit prices for imported LTL shipments, and has been particularly detrimental to manufacturing and trading firms in regions where the level of economic activity is low that do not generate large or regular cargo flows. More than two or three times more transport capacity is tied to operations than in, for example, Poland or Romania. This means that unit freight costs for LTL imports to Ukraine are perhaps twice what they need to be. The distribution inside Ukraine of imported LTL goods takes at least three-four days longer than, for example, in Poland. This means that importers (and ultimately consumers) loose approximately $US10-20 million per year in capital costs in unnecessary waiting time that logistics operators could eliminate immediately. Delays at border crossings and in customs clearance in general mean that the process takes at least 3-10 days longer than, for example, in Poland. This extra delay adds another $US10-60 million in capital costs alone for

importers of LTL goods.56 Elimination of this slack will require far more efficient customs and border processes, and will therefore be difficult to achieve quickly.

D. Domestic Delivery Services by Road 5.33. Some large international logistics firms have developed scheduled domestic delivery services between main cities in Ukraine. For example, Schenker has set up a distribution network for LTL general cargo among 13 cities. Each of them is served daily with a semitrailer truck that can carry 33 standard pallets. Capacity on a particular route can be increased as needed. With Schenker, booking for domestic delivery is done on Day 1, and the cargo has to be delivered to a Schenker terminal by 1 p.m. on Day 2. Transport takes place overnight, and the goods can be collected on Day 3; or they can be delivered to the customer’s door on Day 3 or Day 4. The pricing of the service is based on pallets, that is, the volume capacity of the cargo in standard pallet terms. 5.34. There are also several operators that deliver small parcels by road between selected main cities or regions, and competition is intensifying.57 Autolux is the only private firm that can also carry mail (letters over 20 grams) and cargo. Country-wide services are not offered by others than by the Ukrainian postal service. A very well-developed service network of small parcel delivery is maintained by Autolux. Its delivery system relies partly on its regular bus services, but it has also developed a vanbased service network that in effect enables country-wide distribution. Today, about two-thirds of its operations are cargo delivery and one-third is bus operations. With about 2,500 staff, it operates 170 small trucks (Turkish-made TEMSA and five- to 6-ton Mitsubishi Canters), and a fleet of 55 modern longdistance buses. Autolux’s distribution center is a 2,000m2 facility in Buyerka close to Kyiv on a 3-ha plant, where it also has its major vehicle depot and repair shop. Autolux does not operate bus stations, but it has delivery centers in Odessa, Charkiv and Lugansk. It has scheduled services to 70 cities, in some of which there is more than one bus terminal. At the moment it does not engage in import or export shipments or with customs clearance, but it has plans to expand operations to nearby CIS countries, and possibly also to Bulgaria and Romania. Autolux handles about 6,000-7,000 parcels a day. Typical cargoes are spare parts, drugs, apparel, small perishable goods, and small construction items. Only special types of pharmaceuticals need delivery permission. No refrigerated capacity was available in 2008, but there are plans to invest in such equipment. About 80 percent of the parcels are between households (consumer-toconsumer). This is an indication of the unreliable or poor service of Ukrposhta. Only 20-25 percent of parcels are business-to-business, and less than 10 percent is business-ro-consumer or consumer-tobusiness. Practically all shipments handled by Autolux are terminal-to-terminal; only about 1 percent is delivered to the customer/consumer door. Many of the international express couriers (UPS, DHL, FedEx, Pony Express) rely on Autolux services for domestic delivery.

56

The estimates are as follows. In 2007, 1,135, 929 import customs declarations were processed, with an average value of $US53,556.00 per declaration. A very conservative estimate is that half, or about 570,000 of these involved a LTL or LCL shipment. These are typically manufactured goods with a unit value of about $US5-10 per kilo, or $US10,000 -20,000 per declaration. A typical LTL freight cost to Ukraine is around 10 per cent of goods value, or about $US1,000-2,000 per shipment. This value multiplied by the estimated number of LTL import declarations (570,000) is $US500-1,000 million. 57 Such as Nocgnoi Express (Night Express), In-Time, Euroexpress, SAT, Delivery, Gunsel (bus and parcels), Sheriff tours (bus and parcels), and Nova Poshta (New Post); in 2008, a Canadian –Ukrainian firm MEEST in Lviv also applied for the license to carry mail.

5.35. The supply of domestic delivery services both for pallet-based LTL services for firms (such as Schenker and its competitors) and small parcels used extensively also by consumers (such as Autolux and its competitors) has increased rapidly during the past three-five years. Also the demand has grown fast. Service is provided by the private sector, and competition is intensifying. The emergence of truly door-to-door services is yet to come. The cost of the domestic services is low in international comparison, but may be assessed as costly in Ukraine, especially by consumers.

E. Shipping Services, Including Inland Waterways 5.36. The data on shipping services in Ukraine are mixed. In 2008, the Ukrainian maritime and inland waterway fleet transported 19.5 million tons, which was 19.6 percent less than in 2007, and in 2009 only 9.3 million tons, which was 50 percent less than in 2008 Of this, inland waterway volumes decreased by 25.5 percent and those of the merchant marine by 9.8 percent. 5.37. The volume of cargo processed at ports increased by 4.4 percent to 184.2 million tons from 2007 to 2008 (including commercial, industrial and fishing seaports and river ports) and decreased by 12 percent in 2009 to 161.9 million tons. . In 2008, export cargoes handled increased by 17.9 percent, and imports by 12.2 percent. Domestic cargos decreased by 17.6 percent, and transit cargoes by 4.1 percent. The number of processed vessels, both foreign and in-freight, increased by 7.2 percent to 21,300 units. In 2009, export cargo handled increased by 14 percent; import and transit decreased by 41 and 21 percent, respectively. Most Ukrainian ports deal mainly with bulk shipping. Because of the small size of the Ukrainian merchant fleet, most vessels calling at Ukrainian ports are foreign-flagged. Chartering operations are mostly managed by foreign brokers and shipping agencies.

Liner Shipping 5.38. Liner shipping by freight and passenger roll-on‒roll-off (roro) and ferries is available in the Black Sea region, with regular routes to Bulgaria, Romania, Turkey, and Georgia. The lines are served by several international shipping lines, mainly from countries around the Black Sea. The main Ukrainian ferry operator is Ukrferry, with rail ferry services between Varna, Illiychevsk, and Poti in Georgia. In January 2009, timetables to Batumi were no longer available at the firm’s Web site (www.ukrferry.com). Ukrferry also maintains a rail/roro ferry service to Derince in Turkey, as well as container feeder operations with small ships, and a passenger ferry service between Istanbul and Odessa. 5.39. Several container feeder routes link Ukraine to transoceanic hubs in the Mediterranean and in the Hamburg-Le Havre range. These provide feeder access with vessels ranging from 500 20foot-equivalent units (TEUs) to 1,500 TEUs to and by a number of shipping lines such as Maersk (with Safmarine), CMA/CGM, COSCO, MSC, and Hapag-Lloyd. These firms offer practically daily departures to most major hub ports in Europe and Asia via trans-shipment. In Ukrainian container ports (mostly Odessa and Illichevsk), the vessels typically unload 50-200 containers, and load 40-100 mostly empty containers per port call. In early 2008, approximately 80 percent of the imported containerized cargo originated in East Asia, notably in China. Since 2007, direct transoceanic container services with ship sizes exceeding 5,000 TEUs between Europe and East Asia have started to call at Ukrainian ports. Until recently, they have been uneconomical for entering the Black Sea. In spring and summer 2008, the extremely slow throughput times resulted in long waiting times and congestion in ports, especially in

Odessa. This made it difficult for shipping lines to increase their services to Ukrainian ports, despite reportedly significant transport demand. At the end of 2008, the container shipping business has been profoundly hit by the plummeting transport demand and freight levels. As a consequence, shipping lines have dramatically reduced their capacity worldwide. Its impact on service to Ukraine remains to be seen. 5.40. Ukraine‟s liner shipping connections have improved significantly over the past years, as reflected in the improved ranking in UNCTAD‟s Liner Shipping Connectivity Index (LSCI). In 2008, Ukraine had climbed to 42th position among 162 coastal countries covered in the LSCI. LSCI is calculated based on four components: number of ships, the container carrying capacity, the number of container shipping-related services, and the maximum ship size, always referring to the ships that are deployed to provide liner shipping services to countries’ ports. The underlying data are derived from Containerisation International On-line, a trade journal database (Attachment 24).

Port and Terminal Handling of Containers 5.41. In the main container ports, the transport pattern of container movements measured in TEUs in 2008 was heavily unbalanced. This is illustrated by the following statistics on container movements. 

65 % imports, of which o 80% Ukrainian imports o 20 % in transit to Lithuania, Russia, Belarus, Moldova, Kazakhstan  10 % exports, of which o 70 % Ukraine’s own exports o 30 % in transit mainly from Russia, Belarus, Moldova, Kazakhstan  25 % empty containers in export Container handling in ports is done by private companies. This is mostly the case with other stevedoring work in main ports. 5.42. About 90 percent of pre- and on-carriage of containers is done by road transport. The most important reason for this is the flexibility. Indicative road freights paid by shipping lines from Odessa in 2008 with a 40-foot container on a trailer are as follows (using container chassis trucks would cost approximately 40 percent more): Odessa- Kyiv Odessa – Moscow Odessa – Vienna

USD 1,300 – 1,500 USD 4,500 – 5,000 USD 3,300 – 3,500

roundtrip roundtrip one way with a tarpaulin truck

Roundtrip Odessa- Kyiv took on average seven-eight days in summer 2008 because of extensive waiting and processing times at the port. This meant that a truck could make about 4,000 to 4,500 km per month, which is too little to allow for fleet renewal. In Romania, for example, a comparable truck would drive three-four times more kilometers per month, which generates a much higher income for the road carrier. 5.43. As indicated by one major shipping line, the standard waiting time to move a container from shipside to port gate in Odessa was 10-11 days in summer 2008. In Rotterdam or Le Havre, the same operation takes 24 to 36 hours, or 1 to 1.5 days.

5.44. Rail transport share is low because of lack of capacity, inflexible connections, long transit times, and low level of service (mainly by UZ’s subsidiary Liski, which handles only full units). This is despite rather low tariffs, reportedly at $US900 both ways, including all handling charges for a 40-foot container between Ukraine and Poland. The rail tariff for containers between Klaipeda (Lithuania) and Kyiv in 2008 was $US0.16 per km. The route between Klaipeda and Illichevsk is 1,733 km, with a transit time on average of 57 hours by rail. According to Liski, the total transport cost would amount to $US300 one way, including customs declaration, taxes, and charges. In 2008, the balance of traffic on this ―Viking‖ train connection was 10:1 from Illichevsk to Klaipeda. However, industry sources cited rail freights for a standard 40-ton wagon from Odessa to Moscow at $US2,500 for a 1,200- to 1,300- km distance. On the same route, the rail freight for a 40-foot container on a container platform wagon was $US3,100-3,200 in summer 2008. In rail tariffs, unofficial payments occur rarely. 5.45. Costs for handling containers in ports vary from port to port. Over 90 percent of all container movements in 2008 were through the ports of Odessa and Illichevsk, so their cost indications in June 2008 are representative. An increase in total handling costs of $US60.00 took effect in July 2008, but some costs were also reduced at end-2008. Indicative container handling costs from shipside to port gate in June 2008 (including frequently solicited unofficial payments) were as follows.

Container handling costs from shipside to port gate, June 2008 20„ container

40‟ container

Odessa

USD 500

USD 600

Illichevsk

USD 560

USD 660

The unofficial payments are solicited frequently in a number of stages, but their level varies case by case. A total of UAH 400 (about $US50.00) was cited as a typical level to expedite the process through the port and/or avoid physical inspection of a container. It is not uncommon for unofficial costs to exceed $US100.00 per container. 5.46. Container handling costs in Ukrainian ports are high in international comparison even without unofficial payments, and the service performance measured in typical throughput times is poor. This is a significant cost and time barrier for Ukraine’s trade, with severe indirect consequences for importers, exporters, and the transport sector. Increases in port capacity (such as those in Yuzhny, and those planned in Odessa and Illichevsk) are small compared to the need. The major bottleneck is not the lack of physical port capacity, but the customs, border, and port agency procedures.

F. Air Transport Services 5.47. International air traffic has developed rapidly during the past few years, and several new destinations have been opened. Boryspil, the main international airport in Kyiv, offered scheduled flights to more than 72 destinations in 2009 by more than 25 international airlines and the two main Ukrainian operators, Ukraine International Airlines and AeroSvit, which are privately owned. The government-owned Ukrainian Airlines, has a limited capacity compared to the two others. Domestic

scheduled services are still underdeveloped, and most domestic traffic still goes through Boryspil airport, as direct domestic connections between regional cities are scarce. 5.48. In 2008, 101,400 tons of cargo were carried by air transport, which is 2.6 percent less than in 2007. Air transport performance was 378.4 million ton-kilometers, which is 2.6 percent less than in 2007. In 2009, air freight volumes decreased by 17 percent to the 2008 level. Apart from some regular courier and express freight flights with limited capacity, there are no dedicated scheduled air cargo connections to or from Ukraine. The still rather small air freight volume―about 140,000 tons in 2007―is mainly carried as so-called belly air freight, that is, in cargo holds of regular passenger lines. 5.49. Ukraine‟s fleet of large cargo aircraft is mainly used in international airlift operations, for example, in relief or peacekeeping operations. Regular passenger services have developed rapidly with an expanded service network and operator range, but the capacity at airports is a serious bottleneck. There is a large Ukrainian-registered fleet of heavy-lift cargo aircraft. These are mostly of Antonov type, which are manufactured in Ukraine, or Soviet/Russian-built aircraft. This fleet has a rather high average age (around 20 or more) and is operated by a number of separate carriers. Little of this capacity is used to carry cargo inside, to, or from Ukraine. Some Ukrainian aircraft, especially in the 1990s, were linked to illicit arms operations. 5.50. Air freight accounts for less than a 0.5 per mille of Ukraine‟s trade by volume58 (weight), but its importance is gradually growing. While Ukraine has a large fleet of aircraft dedicated for air cargo, these are mostly employed between third countries. These are also used mostly for irregular and oversized shipments. Majority of regular air freight uses the cargo holds’ capacity of scheduled passenger flights as so-called belly cargo. Air freight quotations for these follow the international industry tariffs by IATA, which is a reference base used in most parts of the world. In end-2008, a typical freight from Kyiv to the East Coast, of the United States, for example, was $US2.5-3.00 per kilo, which is at par with air freight from most nonhub airports in Europe. Air freight can be transported at similar costs, especially from Kyiv, as from similar European airports. In imports of air freight, the customs procedures have also been faster than with, for example, road-based imports.

G. Freight-Forwarding Services and Multimodal Transport Operations 5.51. Freight-forwarding operations are provided almost entirely by private sector operators. The Law of Ukraine in Forwarding Activity of 01.07.2004 N 1955-IV formalized the industry, and the national association now offers diploma courses. Two professional associations exist in Ukraine: Ukrzovnishtrans, the Association of Transport and Freight-Forwarding Organizations of Ukraine (UZT) and the Association of International Freight Forwarders of Ukraine (AIFFU), which are briefly described below. According to (UZT),59 there are about 300-400 ―serious‖ firms in the business. By comparison, 1,561 freight forwarder licenses were issued in Belarus according to UZT. UZT, which is a member of International Federation of Freight Forwarders Associations (FIATA) and European Association for Forwarding, Transport, Logistic and Customs Services (CLECAT), had 36 members in March 2009. About half of these had their own 5.52.

58 59

At 0.1 million tons, air cargo is