Ukraine - Transport sector review (Vol. 3 of 3) : Annexes and statistical appendix

Report No. 18636-UA Republic of Ukraine Transport Sector Review (In Three Volumes) Volume III: Annexes and Statistical Appendix November 30, 1998 Infrastructure Unit Expertise Services Europe and Central Asia DGI Worlcl Bank European Comnmission Document of the World Bank  CURRENCY UNITS and EQUIVALENTS US$1 = Hrv 2.0 lHrv = 100 Kopeck US$1 = USc 100 WEIGHTS, MEASURES and OTHER UNITS Bln Billion Inh Inhabitant Kg Kilogram Km Kilometer Mln Million Pass Passenger pkm passenger kilometer sq kIn, km2 Square kilometer T Ton (meteric, 1,000 kg) Th Thousand tkm ton kilometer Toe Ton oil equivalent Vpd Vehicles per day CONVERSION FACTORS 1 mile = 1.609 meters 1 kg= 2.205 lbs 1 US gallon = 3.785 liters 1 sq km = 0.386 square miles CHEMICAL COMPOUNDS C.Hy, HC Hydrocarbons CO Carbon Monoxide CO2 Carbon Dioxide NO. Nitrogen Oxides SO2 Sulfur Dioxide FISCAL YEAR January 1 - December 31 Vice President: Johannes Linn, ECAVP Country Director: Paul Siegelbaum, ECC 1I Infrastructure Director Ricardo Halperin, ECS1N Sector Leader Eva Molnar, ECSIN Task Team Leader: Pedro Taborga, ECSIN  GLOSSARY OF ACRONYMS AND ABBREVIATIONS ADW Ave. Dead Weight ATC Air Traffic Control CAA Civil Aviation Administration CIF Cost-Insurance-Freight CIS Commonwealth of Independent States CMEA Council for Mutual Economic Assistance COTIF Bern Convention of May 9, 1980 EBRD European Bank for Reconstruction and Development ECAC European Civil Aviation Conference EDI Electronic Data Interchanges EIA Environmental Impact Assessment EU European Union FIATA Federation Internationale des Associations des Transitaires et Assimiles FOB Free-On-Board FSU Former Soviet Union GATT General Agreement on Tariffs and Trade GDI Gross Domestic Investment GDP Gross Domestic Product GNP Gross National Product IATA International Air Transport Association ICAO International Civil Aviation Organization IMF International Monetary Fund IRI International Roughness Index MOT Ministry of Transport OECD Organization for Economic Cooperation and Development PA Per Annum PIP Public Investment Plan SAC Structural Adjustment Credit SMGS USSR Rail Waybill SOE State Organizations and Enterprises TACIS Technical Assistance for Commonwealth of Independent States TIR International Road Transport UZ Ukrzaliznytsia (Railway Administration) VAT Value Added Tax WTO World Trade Organization  U ACKNOWLEDGEMENTS The Review is based on findings of a World Bank mission, which visited Ukraine in May/June 1998, and a Transport Policy Workshop which followed it on June 29 - July 3, 1998. The members of the mission were P. N. Taborga (mission leader); Robert Bonney (Highway Specialist); Jean-Paul Desgranges (Aviation Specialist); Jan-Coen van Elbuwg (Environment Specialist); Parbo Juchnewitsch (Railway Reform Specialist); Rene Meeuws (Containerization Specialist); Philippe de Naurois (Senior Financial Analyst); Gerald Ollivier (Financial Analyst); Ovadia Salama (Transport and Trade Facilitation); Olev Schults (Railway Specialist); Carlos Silva anstitutional Reform Expert); and Eugene Vemnigora (Maritime and River Specialist). The Ministry of Transport and the Ukrainian National Agency for Development and Investment were the main counterparts of the mission on the Ukrainian side. The study has relied heavily on official sources of information and statistics as well as interviews and meetings with Government ministries and agencies. It also draws on on-going World Bank and IMF work on the macro-economic conditions of the country, other sector work, studies supported by EU, EU- TACIS and EBRD, cross country comparisons and other sectors benchmarks. The mission gratefully acknowledges the suggestions received from Ms. Jann Masterson and Mr. Mark Davis, and the final updating of the report by Ms. Shobha Subramanian. Major sources of qualitative information were also obtained from the commercial services of France, the United Kingdom and the United States (Business Information Services for the NIS), located in Ukraine. The mission wishes to thank the EU - Expertise Service for its support, which financed consultant time, travel and subsistence, and some of the administrative costs of this work Without this support, the work presented in this report would have not been possible.  UKRAINE TRANSPORT SECTOR REVIEW Table of Contents 3 TRANSPORT SECTOR: ISSUES AND STRATEGY 3 1 Accounting and Financial Management Information Systems 4 TRANSPORT DEMAND AND FUTURE SCENARIOS 4 1 Container Growth Potential 4 2 Detailed Scenarii by Sub-sector 5 THE NEW ROLE OF THE GOVERNMENT 5 1 Advisory Unit Functions 6 TRANSPORT AND TRADE FACLUTATION 6 1 Customs, Border Crossing and Documentation 6 2 Infrastructure and Service Quality Barriers 6 3 Multimodal Transport Measures 6 4 Corrective Measures and Related Costs for Modal Inefficiencies 6 5 Security and Insurance Issues 7 ROAD INFRASTRUCTURE SECTOR 7 1 Road Infrastructure-Cost Recovery Analysis 7 2 1 Forecasted Statistics 7 2 2 Proforma Sources & Uses of Funds 7 2 3 Main Financial Indicators (Graph) 7 2 1 Forecasted Statistics 7 2 2 Proforma Sources & Uses of Funds 7 2 3 Main Financial Indicators (Graph) 8 RAILWAYS 8 1 UZ Organization Chart 8 2 UZ Assets 8 3 UZ Traffic Levels and Importance in the Economy 8 4 Regional Railways' Description 8 5 Financial Performances and Issues 8 1 1 Railway System-Map 8 1 2 Railway Corridor Map 8 1 3 Traffic Analysis (Railways Historical Data) 8 1 4 Graph: Indexed Traffic (Trends Base 100=1990) 8 1 6 Regional Railways Traffic and Financial Highlights 1996 8 1 7 Financial Highlights 8 1 8 1997- Balance Sheet -Railways  8 2 1 Traffic Estimates 8 2 2 Forecasted Statistics 8 2 3 ProForma Income Statements 8 2 4 Proforma Sources & Uses of Funds 8 2 5 ProForma Balance Sheets 8 2 6 ProForma Ratio Analysis 8 2 7 Main Financial Indicators (Graph) 8 2 1 Traffic Estimtes 8 2 2 Forecasted Statistics 8 2 3 ProForma Income Statements 8 2 4 Proforma Sources & Uses of Funds 8 2 5 ProForma Balance Sheets 8 2 6 ProForma Ratio Analysis 8 2 7 Main Financial Indicators (Graph) 8 2 8 Gross Operating Result (Graph) 8 2 9 Investment Financing Capacity (Graph) 9 SEA PORTS 9 1 The Main Seaports of Ukraine 9 2 Maritime Environment under FSU 9 1 1 Historical traffic per port- Export 9 1 2 Historical traffic per port- Import 9 1 3 Historical traffic per port- Transit 9 1 4 Historical traffic per port- Total 9 1 5 Traffic Analysis 9 1 6 Indexed Traffic (Trends Base 100=1990) 9 1 7 Total Sea Ports Traffic 1997 (Graph) 9 1 8 Financial Analysis Odessa-Ilyichevsk 1997 9 2 1 Traffic Statistics 9 2 2 Forecasted Statistics 9 2 3 ProForna Income Statements 9 2 4 Proforma Sources & Uses of Funds 9 2 5 ProForma Balance Sheets 9 2 6 ProForma Ratio Analysis 9 2 7 Main Financial Indicators (Graph) 9 21 Traffic Estimates 9 2 2 Forecasted Statistics 9 2 3 ProForma Income Statements 9 2 4 Proforma Sources & Uses of Funds 9 2 5 ProForma Balance Sheets 9 2 6 ProForma Ratio Analysis 9 2 7 Main Financial Indicators (Graph) 9 2 8 Gross Operating Result (Graph) 9 2 9 Investment Financing Capacity (Graph)  10 CIVIL AVIATION 10 1 Air Ukraine 10 2 Condition of Main Airports 10 3 Technical Assistance Program 10 11 Main Ukrainian Airlines 10 1 2 Main Ukrainian Airlines-Freight Traffic 10 1 3 Main Ukrainian Airlines-Passenger Traffic 10 1 4 Ukrainian Airports-Passenger Traffic 10 1 5 Ukrainian Airports-Traffic Analysis and Graphs 10 1 6 Airports-Financial Comparisons- 1995 10 1 7 Borispol International Airport- Financial Highlights: 1996-1997 10 1 8 Borispol International Airport- Income Statements and Cash Flow: 1996-1997 10 2 2 Forecasted Statistics 10 2 3 ProForma Income Statements 10 2 4 ProFomna Sources & Uses of Funds 10 2 5 ProForma Balance Sheets 10 2 6 ProForma Ration Analysis 10 2 7 Main Financial Indicators (Graph) 10 2 2 Forecasted Statistics 10 2 3 ProForma Income Statements 10 2 4 ProForma Sources & Uses of Funds 10 2 5 ProForma Balance Sheets 10 2 6 ProForma Ratio Analysis 10 2 7 'Main Financial Indicators (Graph) 10 2 8 Gross Operating Result (Graph) 10 2 9 Investment Financing Capacity (Graph) 12 TRANSPORT SECTOR 12 1 1 Traffic Estimates-All Scenarios 12 1 2 Public Surplus in Transport Sector-All Scenarios 12 1 3 Trade Facilitation Expected Gross Economic Benefits- All Scenarios 1r t a 12 2 21 Traffic Estimates all Modes 1 2 2 2 Traffic Estimates all Modes- Graphs 12 2 3 Gross operating Results 12 2 1 Traffic Estimates all Modes 12 2 2 Traffic Estimates all Modes-Graphs 12 2 3 Gross operating Results 1 2 Tf EsImateallMod 12 2 1 Traffic Estimates all Modes 12 2 2 Traffic Estimates all Modes- Graphs 12 2 3 Gross Operating Results  Annex 3.1 Annex 3.1. Accounting and Financial Management Information Systems 1. An adequate accounting and financial management framework for the transport sector has become an essential factor. It will support the sector to: (i) achieve good management performance; (ii) deliver efficient and financially sustainable transport services; (iii) mobilize resources and sustain operations in a market economy; and (iv) introduce private investment resources in the sector. Key aspects of an acceptable accounting and financial management framework for the sector, should be, as a minimum, the following: 2. Generalize Generally Accepted Accounting Principles (GAAP) or equivalent in the Sector. In 1997, Ukraine adopted the accrual basis principle. The transport sector should take the lead in generalizing professionally at least the other main principles such as continuity of operation (going concern assumption) or permanence of accounting methodologies (consistency principle). 3. Improve Accounting Systems and Standards. Sound and reliable accounting and reporting methodologies and systems in accordance with International Accounting Standards (IAS) taking into account national business practices will have to be introduced. 4. Introduce Audit Requirements and Improve Auditing Standards. Yearly financial audit should be generalized among the transport entities. Ukrainian auditing procedures and guidelines, when existing are currently oriented towards compliance with a statutory based system. It will need to be revised for compliance with the IAS. These auditing requirements and standards will become a priority in the transport sector with the introduction of private investment resources in the sector. 5. Adopt Financial Disclosure Requirements in Compliance with IAS. The inevitable privatization of transport operations will impose adoption of financial disclosure requirements in compliance with IAS to ensure transparency and availability of financial information. 6. Define and Introduce the Adequate Incentive for Decision-Makers and Managers in the Sector via Training and Accountability Policy. Once the institutional framework has been put in place and responsibilities clarified, it is a fundamental principle of law and administration that decision-makers should exercise their independent judgment. At the same time, those decision-makers and their organizations should be held strictly accountable for their decisions and general performance in the management of the matters, finances, manpower and assets entrusted to them. Continuous assessment of this performance, together with the right incentive measure will have to be organized and implemented. 7. Introduce Professional Valuation of Infrastructure Assets and Equipment and Define Adequate Amortization Policy. Although several revaluation of assets in the sector were implemented in 1995, 1996 and recently in 1997, it appears that a professional inventory, valuation of infrastructure assets, equipment and inventories and clear title establishment, will have to be performed, particularly, since privatization of productive operations would have to be envisaged. On another hand, government will have to ensure that periodic adjustments and appropriate depreciation and provisions policies are clearly defined and implemented to take into account economic and financial realities facing the sector.  Annex 4. 1. Annex 4.1. Container Growth Potential 1. More and more cargo will be transported in containers in the future as experienced worldwide. Table 1 shows the ratios of intermodal cargo potential for some selected commodity group. These ratios have been elaborated in different studies concerning the containerization potential for European harbors. Table I : Percentage of Intermodal Cargo Potential by Commodity Groups List of commodity groups Ratio of Intermodal Cargo Potential' 1 non ferrous ore, scrap 29% 2 iron, steel 22% 3 non ferrous metal 17% 4 food and beverages 81% 5 fresh fruit and vegetables 80% 6 chemicals 55% 7 vehicles and parts 50% 8 machines, electronic/electric goods 86% 9 leather and textile goods 92% 10 other manufactured goods 80% 11 pulp and waste paper 40% 12 wood 32% 13 grain and animal feed 4% 14 coal 0% 15 crude oil and oil products 2% 16 iron ore 0% 17 copper ore and bauxite 2% 18 building material 20% 19 fertilizer 4% ' Up to this percentage of the commodities could be transported in containers if container transport was taking place in normal conditions.  Annex 4.2 UKRAINE- TRANSPORT SECTOR REVIEW- RAIL SUBSECTOR SCENARIO I Exchange rate US$M/rv 2.00 FREIGHT 1999-01 2002-OS FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth (tkn) Annual tariff increase Pension & Benefits for Staff -10% 18% Ores 1% 1% Ores 7.5% 5% Average salary 25% 10% Coal & Coke -10% 2% Coal & Coke 7.5% 5% Staff right sizing -15% -5% Black Metals 1% 1% Black Metals 7.5% 5% Assets rationalization 0% 0% Construction Maerials 2% 3% Construction Maerials 7.5% 5% Productivity gaintMaterial -5% -3% Oil & Oil Products 1% 1% Oil & Oil Products 7.5% 5% Productivity gain on Op. Exp. -5% -3% Other 2% 3% Other 7.5% 5% Provision for Bad Debts 5% 3% PASSENGERS 1999-01 2002-05 PASSENGERS 1999-01 2002-05 Barter ratio decrease -10% -5% Traffic growth (pkm) Annual fare increase Macro conditions 1999-01 2002-05 International -5% -3% International 10% 5% Economy growth 3% 5% National -5% -5% National 7.5% 5% Severance payments 24.00 36.00 Suburban -20% -15% Suburban 50% 15% Proflt Taxes 30% 30% SCENARIO 2 Exchange rate USS/Hrv 2.00 FREIGHT 199941 2002-4 FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth (tkm) Annual tariff increase Pension & Benefits for Staff -5% 21% Ores 1% 1% Ores 5% 3% Average salary 15% 7% Coal & Coke -8% 2% Coal & Coke 5% 3% Staff right sizing -10% -5% Black Metals 1% 1% Black Metals 5% 3% Assets rationalization 0% 0% Construction Maerials 2% 3% Construction Maerials 5% 3% Productivity gain/Material -3% -2% Oil & Oil Products 1% 1% Oil & Oil Products 5% 3% Productivity gain on Op. Exp. -3% -2% Other 2% 3% Other 5% 3% Provision for Bad Debts 7% 4% PASSENGERS 1999-01 2002-05 PASSENGERS 1999-01 2002-05 Barter ratio decrease -5% -5% Traffic growth (pkm) Annual fare increase Macro conditions 1999-01 2002-05 International -5% -3% International 8% 3% Economy growth 1% 2% National -5% -5% National 5% 3% Severance payments 12.00 18.00 Suburban -20% -15% Suburban 30% 10% Profit Taxes 30% 30%  Annex 42 UKRAINE- TRANSPORT SECTOR REVIEW- RAIL SUBSECTOR SCENARIO 3 Exchange rate US$/Hrv 2.00 FREIGHT 1999-01 2002-05 FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth (tkm) Annual tariff increase Pension & Benefits for Staff 5% 43% Ores -5% 0% Ores 1% 2% Average salary 5% 5% Coal & Coke -2% -5% Coal & Coke 1% 2% Staff right sizing -1% -2% Black Metals 1% 1% Black Metals 1% 2% Assets rationalization 0% 0% Construction Maerials 1% 1% Construction Macrials 1% 2% Productivity gain/Material 0% 0% Oil & Oil Products 1% 1% Oil & Oil Products 1% 2% Productivity gain on Op. Exp. 0% 0% Other 1% 1% Other 1% 2% Provision for Bad Debts 10% 10% PASSENGERS 1999-01 2002-05 PASSENGERS 1999-01 2002-05 Barter ratio decrease 0% -5% Traffic growth (pkm) Annual fare increase Macro conditions 1999-01 22002-05 International -5% -5% Internationsl 0% 1% Economy growth 0% 1% National -5% -5% National 0% 1% Severance payments 0.00 0.00 Suburban -5% -5% Suburban 0% 1% Profit Taxes 30% 30%  Annex 4.2 UKRAINE- TRANSPORT SECTOR REVIEW- ROAD SUBSECTOR _ SCENARIO I Exchange rate US$/Hrv 2.00 INFRASTRUCTURE 1999-01 2002-05 USER CHARGES 1999-01 2002-05 INVESTMENT UNIT COST 1999-01 2002-05 1998 Road Network Length Routine Maintenance Highways 1% 1% Fuel Levy 4.50 6.00 Highways -7% 3% 2,400 Local roads 1% 1.5% Vehicle ownership charge 70.00 75.00 Local Roads -7% 2% 1,229 Turn over Tax -30.0% Periodic Maintenance Highways -7% 3% 8,570 Local Roads -7% 2% 3,960 Rehabilitation PASSENGERS 1999-01 2002-05 1999-01 2002-05 Highways 3% 2% 300,000 Traffic growth (pkm) Local Roads 3% 2% 150,000 Vehicles 1.0% 8% Road Administration 1% 2% 80.00 Fuel consumption 1.5% 10% Economy Growth 3% 5% SCENARIO 2 Exchange rate US5/Hrv 2.00 INFRASTRUCTURE 1999-01 2002-05 USER CHARGES 1999-01 2002-05 INVESTMENT UNIT COST 1999-01 2002-05 1998 Road Network Length 0 Routine Maintenance Highways 1% 1% Fuel Levy 4.00 4.50 Highways -5% 2% 2,400 Local roads 1% 1% Vehicle ownership charge 70.00 70.00 Local Roads -5% 2% 1,229 Turn over Tax -30% 0% Periodic Maintenance Highways -5% 4% 8,570 Local Roads -5% 3% 3,960 Rehabilitation PASSENGERS 1999-01 2002-05 0 1999-01 2002-05 Highways 3% 2% 300,000 Traffic growth (pkm) Local Roads 3% 2% 150,000 Vehicles 1% 5% Road Administration 1% 2% so Fuel consumption 2% 7% Economy Growth 3% 5% SCENARIO 3 Exchange rate USS/Hrv 2.00 INFRASTRUCTURE 1999-01 2002-05 USER CHARGES 1999-01 2002-05 INVESTMENT UNIT COST 1999-01 2002-05 1998 Road Network Length 0 Routine Maintenance Highways 0% 0% Fuel Levy Highways 1% 2% 2,400 Local roads 0% 0% Vehicle ownership charge Local Roads 0% 1% 1,229 Turn over Tax -10% -15% Periodic Maintenance Highways 1% 2% 8,570 Local Roads 0% 1% 3,960 Rehabilitation PASSENGERS 1999-01 2002-05 1999-01 2002-05 Highways 3% 2% 300,000 Traffic growth (pklo) Local Roads 3% 2% 150,000 Vehicles 1% 3% Road Administration 0% 1% 80 Fuel consumption 1% 5% Economy Growth 3%/ 5%  Annex 4.2 UKRAINE- TRANSPORT SECTOR REVIEW- AIRPORT SUBSECTOR SCENARIO 1 Exchange rate US$/Hrv 2.00 FREIGHT 1999-01 2002-05 FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth (ton) Annual tariff increase Pension & Benefits for Staff 35% 25% International 10% 5% International 7.5% 5% Average salary 20% 10% Domestic 10% 5% Domestic 7.5% 5% Staff right sizing -25% -5% PASSENGERS 1999401 2002-05 PASSENGERS 1999-01 2002-05 Assets rationalization 0% 0% Traffic growth (pas.) Annual fare increase Productivity gain/Material 3% 5% International-Borispol 10% 5% International-Borispol 10% 5% Productivity gain on Op. Exp. 3% 5% International 7% 5% International 10% 5% Provision for Bad Debts 5% 3% Domestic 10% 5% Domestic 7.5% 5% Barter ratio decrease input data input data Macro conditions 1999-01 2002-05 Economy growth 3% 5% Severance payments 24.00 36.00 Profit Taxes 30% 30% SCENARIO 2 Exchange rate US$/Hrv 2.00 FREIGHT 1999-01 2002-05 FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth (ton) Annual tariff increase Pension & Benefits for Staff 35% 30% International 6% 4% International 7.5% 5% Average salary 10% 7% Domestic 6% 4% Domestic 7.5% 5% Staff right sizing -15% -5% PASSENGERS 1999-01 2002-05 PASSENGERS 1999-01 2002-05 Assets rafionalization 0% 0% Traffic growth (pas.) Annual fare increase Productivity gaintMaterial 2% 3% International-Borispol 8% 3% International-Borispol 8.0% 3% Productivity gain on Op. Exp. 2% 3% International 5% 3% International 6.00% 3% Provision for Bad Debts 5% 5% Domestic 4% 3% Domestic 4.00% 3% Barter ratio decrease input data input data Macro conditions 1999-01 2002-05 Economy growth 1% 2% Severance payments 12.00 18.00 Profit Taxes 30% 30%  Annex 4.2 UKRAINE- TRANSPORT SECTOR REVIEW- AIRPORT SUBSECTOR SCENARIO 3 Exchange rate US$/Hrv 2.00 F REIGHT 1999-01 2002-05 FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth (ton) Annual tariff increase Pension & Benefits for Staff 35% 35% Internaffonal 5% 3% International 7.5% 5% Average salary 5% 5% Domestic 5% 3% Domestic 7.5%. 5% Staff right sizing -1% -2% PASSENGERS 1999-01 2002-05 PASSENGERS 1999-01 2002-05 Assets rationalization 0% 0% Trafflc growth (pas.) Annual fare increase Productivity gain/Material 2% 3% International-Borispol 5% 2% International-Borispol 5% 2% Productivity gain on Op. Exp. 2% 3% International 3% 2% International 3% 2% Provision for Bad Debts 7% 7% Domestic 3% 2% Domestic 2% 2% Barter ratio decrease input data input data Macro conditfons 1999-01 2002-05 Economy growth 0% 1% Severance payments 0.00 0.00 Profit Taxes 30% 30%  Annex 4.2 UKRAINE- TRANSPORT SECTOR REVIEW- PORT SUBSECTOR SCENARIO I Exchange rate USS/Hrv 2.00 FREIGHT 1999-01 2002-05 FREIGHIT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 TraMc growth Annual tariff increase Pension &*Benefits/Staff 35% 25% Liquid 10% 5% Port Dues (vessels) -10% 2% Average salary 20% 10% Bulk 3% 2% Port Dues (Goods) -5% 2% Staff right sizing -25% -5% General cargo 10% 10% Cargo handling -5% 2% Non permanent Staff % TRAFFIC STRUCTURE 1999-01 2002-05 VESSELS 1999-01 2002-05 Assets rationalization Export 3% 3% Traffic increase (%) Material 3% 5% Import 2% 2% Cat 1 10% 10% Op. Exp. 3% 5% Transit 10% 5% Cat 2 10% 110% Provision for bad debts 1% 1% TRAFFIC STRUCTURE 1999-01 2002-05 Cat 3 10% 10% Barter ratio decrease -25% -5% Annual tariff increase Macro conditions 1999-01 2002-05 Black Sea 4% 1% Cat 1 10% 10% Economy growth 3% SX% Azov sea -2% -1% Cat 2 10% 10% Severance payments 24 36 Danub Region -2% -1% Cat3 10% 10% Profit Taxes 30% 30% SCENARIO 2 Exchange rate USSMlrv 2.00 FREIGHT 1999-01 2002-05 FREIGHT 1999-01 2002-05 Operating Expenditures 1999-01 2002-05 Traffic growth Annual tariff increase Pensinn & BenefitalStaff 40% 30% Liquid 5% 3% Port Dues (vessels) -5% 2% Average salary 15% 5% Bulk 2% 1% Port Dues (Goods) -3% 2% Staff right sizing -10% -5% General cargo n.d n.d Cargo handling -3% 2% Non permanent Satff % TRAFFIC STRUCTURE 1999-01 2002-05 VESSELS 1999-01 2002-05 Assets rationalization Export 2% 1% Traffic increase (%) Material 1% 2% Import 2% 1% CatI 2% 1% Op. Exp. 1% 2% Transit 8% 5% Cat 2 8% 5% Provision for bad debts 2% 2% TRAFFIC STRUCTURE 1999-01 2002-05 Cat 3 S% 5% Barter ratio decrease n.d n.d Annual tariff increase Macro conditions 1999-01 2002-05 Black Sea 2% 1% Cat 1 2% 1% Economy growth 1% 2% Azov sea -1% -1% Cat2 -1% -1% Severance payments 24 36 Danub Region -1% -1% Cat 3 -1% -1% Profit Taxes 30% 30%  Annex 4.2 UKRAINE- TRANSPORT SECTOR REVIEW- PORT SUBSECTOR UKRAINE - TRANSPORT SECTOR REVIEW - PORT SUBSECTOR SCENARIO 3 Exchange rate US$/Hlrv 2.00 FREIGHT 1999-01 2002-05 FREIGHT 1999-01 2002-05 Operating-Expenditures 1999-01 2002-05 Traffic growth Annual tariff increase Pension & Benefits/Staff 40% 40% Liquid n.d3 n.d3 Port Dues (vessels) -1% -1% Average salary 1% 2% Bulk n.d3 n.d3 Port Dues (Goods) -1% -1% Staff right sizing -1% -1% General cargo n.d3 n.d3 Cargo handling -1% -1% Non permanent Satff % TRAFFIC STRUCTURE 1999-01 2002-05 VESSELS 1999-01 2002-05 Assets rationalization Export 1% 1% Traffic increase ('/) Material 1% 2% Import 2% 2% Cat 1 n.d3 n.d3 Op. Exp. 1% 2% Transit 5% 2% Cat2 n.d3 n.d3 Provision for bad debts 3% 3% TRAFFIC STRUCTURE 1999-01 2002-05 Cat 3 n.d3 n.d3 Barter ratio decrease n.d n.d Annual tariff increase Macro conditions 1999-01 2002-05 Black Sea 0% 0% Cat 1 n.d3 n.d3 Economy growth 1% 2% Azov sea 0% 0% Cat 2 n.d3 n.d3 Severance payments 0 0 Danub Region 0% 0% Cat 3 n.3 n.d3 Profit Taxes 30% 30%  Annex 5.1 Annex 5.1. Advisory Unit Functions 1. Three Advisory Units. Three advisory units would support the Minister's office in its daily activities: the Economic Unit, the Legal Unit and the International Unit. Each of these would have well defimed responsibilities as described below. The Economic Unit would notably assess and monitor the economic impact of policies or investments, define infrastructure needs, formulate the budget of the Ministry accordingly. The Legal Unit would prepare the legal framework for the transport sector and monitor its implementation. The International Unit would facilitate the international integration of Ukraine and its regional cooperation. 2. Economic Unit. The economic unit would have the following functions: (i) Participate in the formulation of policies, plans and strategies of the Government for the sector; (ii) Follow up on the implementation of these and report to the Minister; (iii) Carry out studies to evaluate the implementation of sector policies or play counterpart role in studies contracted with extemal companies; (iv) Evaluate the subsidy requests, if any, presented by the sub-sector Departments; (v) Support the monitoring by the Ministry of state transportation companies; (vi) Execute programs that exceed the exclusive scope of the sub-sector Departments of the Ministry; (vii) Identify and evaluate feasible projects in the sector and prepare the necessary documentation to obtain credits or contributions from intemational organizations, and regular reporting to the Minister; (viii) Administrate or delegate the administration of funds or credits granted by international organizations to the benefit of the Ministry and the sector; (ix) Assist in the formulation of the Ministry's budget, and represent the sector in the budgets analysis of state transportation companies with the Ministry of Finance; (x) Compile, process and publish sector statistics in coordination with sub-sector Departments; (xi) Define the transport infrastructure needs, according to sub-sector department requirements and (vii) above.  Annex 5.1 3. Legal Unit. The legal unit would perfonn the following functions: (i) Provide legal advice to the Minister and sub-sector Departments; (ii) Review legality of draft laws, draft international agreements, supreme decrees and ministerial resolutions; (iii) Maintain and publish legislation related to transport; (iv) Monitor compliance with international agreements and national laws in coordination with the sub-sector Departments (v) Examine the legality of applicable sanctions, suspension, application of fines and service cancellations. (vi) Advise the Minister in the relationships with the Parliament related to the presentation and examination of draft legislation; (vii) Elaborate the legal framework of the transport sector. 4. International Unit. The international unit would perform the following functions: (i) Advise the Minister and the sub-sector Departments of transportation, on international matters especially in European Union; (ii) Prepare texts, with the help of staff from the Legal Unit and Ministry of Foreign Affairs, related to international transport agreements; (iii) Organize international transportation meetings, and advise the official representations of the Ministry on their interactions with International Transport Organizations.  Annex 6.1 Annex 6.1. Customs, Border Crossing and Documentation Corrective Actions 1. The type of actions required to reduce the difficulties at border crossing have been increasingly applied worldwide with some successful example of countries and group of countries where procedure and documentation streamlining now allows real time clearance of shipments or free circulation of goods through the borders (EU). In the case of Ukraine, a number of measures could be taken to streamline and reform import and export procedures and documentation to conform to regional and international standards. It would remove a substantial part of the excess cost linked to trade for a rather modest cost. The measures' are presented below in three categories: (i) Customs and cargo inspection procedures; (ii) documentation, freight forwarding and transport conventions; and (iii) border crossing improvements. Customs and Cargo Inspection Procedures (a) Streamline and harmonize Customs and other Ministries clearance procedures to international standards; Instruct Customs authorities to focus and limit their activity to their basic duties and areas of expertise, and remove from their responsibility additional tasks, such as collecting road taxes. (b) Standardize nationwide the application of customs regulations; organize information channels about existing rules and forthcoming changes. (c) Stimulate intensive national and regional co-operation in border crossing and customs procedures. (d) Replace procedures involving 100% examination of imports and exports by more cost- effective methods, involving risk analysis, according to the EU Rationalized Examination Procedures. Use new computer systems to effectively target potential vehicles for inspection. Extensive checks on high-risk trucks should be substituted to superficial checks on all vehicles. (e) Create simplified border crossing procedures for reliable companies (respecting TIR Camet convention) and adopt pre-entry clearance and pre-shipment inspection procedures. (f) Establish a computerized information system at the border-crossing checkpoints and inland customs enabling an electronic transfer of trade related data. This effort should be conducted in close regional partnership so as to integrate the different computer systems used by neighbouring countries and define a regional IT strategy (CEK Siemens in Poland, Sofix in Czech Republic, Asycuda 3+- in Hungary, Asycuda in Slovakia and in Ukraine, and Bespoke in Slovenia).  Annex 6.1 (g) Inform, instruct and control customs officers about the application of changed regulations and new conventions. (h) Develop Memoranda of Understanding between customs and trade organizations to ensure the introduction of control measures common to all neighboring countries and the European Union. (i) Facilitate fast processing for transit traffic by reducing transit traffic inspection requirement and by introducing the EU Community Transit (CT) system in order to improve the present transit guarantee system. (j) Provide Customs clearance facilities at approved inland container terminals and at established enterprises. Containers to and from these places should allowed to be moved by both road and rail with a minimum of restrictions in the form of guarantees andlor deposits. Customs have to lay down clear instructions for the inland movement, handling, stuffing /de-stuffing of containers. The private sector should be allowed and stimulated to set-up and operate container terminals as common user facilities. (k) Introduce measures to address poor morale of under-trained and underpaid officers and set their salaries at market rate (as applied in forwarding agencies): establish regular training programs to support a professional Customs service. (1) Provide Customs with commercial information for checking guarantors at the time of final clearance of goods, away from the borders and in advance of consignments. Documentation, Freight Forwarding and Transport Conventions Tfhe international legal and regulatory framework for Trade and Transport existing in Ukraine should be supplemented to accommodate the following features: (a) Introduce in cooperation with main commercial partners and neighboring states one single multimodal transport document in line with intemational standards. (b) Replace the TIR Carnet, by an alternative type of transit system namely the Community Transit (CT) system (used in the EU), which consists of a five part Cargo Declaration, plus a Transit Advice Notice, which can be used as the control document without modification. (c) Generalize the use of UN aligned commercial documentation and have them adopted by all Trade Associations. (d) Ratify and implement the following conventions: -CMR Convention (which imposes substantial liabilities on road hauliers which cannot be avoided or reduced by private contract), -FIATA Convention (covering combined transport shipments), -COTIF Convention (covering goods shipped internationally by rail);  Annex 6.1 -Customs Convention on Containers (1972); -Customs Convention on the International Transport of Goods under cover of TIR Carnets (TIR Convention) (1975); -International Convention on the Harmonization of the Frontier Control of Goods (1982); -Convention on the Liability of International Terminal Operators (1991); and -Convention on customs treatment of pool containers used in international transport of 1994 (e) Generalize the following documents for Transport and Trade: -Negotiable FIATA Combined Transport Bill of Lading (specifically used when more than one mode of transport is used), -Dangerous Goods Note (usually required to be produced both by Customs and Police during international transits), -Aligned Export Cargo Shipping Instructions (which provides the freight forwarder with all information needed to effect a shipment), -FIATA Forwarders Certificate of Receipt (signifying that the forwarders obligations and responsibilities apply from this point on until fulfilment of the contract in terms of the movement of the goods), and -Standard Shipping Note (containing information about the shipment). (f) Generalize the following banking and insurance documents: -Aligned Bank Collection Form (instructing the buyer's bank on how to process a documentary collection), -Bill of Exchange (instructions from the purchaser to a third party to pay the seller an agreed amount at a specific time), and -Certificate of Insurance (providing evidence that an export shipment has been insured and the- goods covered during transit). AU key international documentation should be in both Russian and English. (g) Establish better relationships between Customs Officers, Customs clearance Agents, freight forwarders and the private sector. Closer working relationships should focus on common data collection, the use of intelligence, and the introduction of Memoranda of understanding between customs and trade organisations to apply common control measures in a climate of mutual trust. Border Crossing Physical Improvements 2. A high priority is to improve border-crossing points by providing the most critical ones reviewed with infrastructure equipment, access roads and personnel. The Korczowa project of new border crossing facility seems justified but small-scale improvements of the Dorohursk crossing  Annex 6.1 should also be introduced. The major bottlenecks at the Vysne Nemecke and Zahony border crossing could be easily overcome with small investment. A TACIS study of border posts will give a more detailed set of recommendations and cost estimate on this topic.  Annex 6.2 Annex 6.2. Infrastructure and Service Quality Barriers Infrastructure 1. Poor Road Condition. Ukrainian roads are in disrepair, with unmarked potholes and a lack of systematic lane delimitation. Separated highways are scarce. The best stretches are those linking Lviv to Kiev and Kiev to Odessa, but smaller roads are not within European norms. FSU- made vehicles, which for the most part do not fulfill the norms required for being driven in Europe, are more robust and adapted to these roads than European made trucks, which are more technologically sensitive and wear out more quickly on bad roads. 2. Inefficient Gauge Transfer. Much of the excess railway infrastructure capacity is obsolete. Particular shortfalls are noted in connection with border crossings and the shortage of specialized wagons. The different gauge system used in Europe (1.43 m) and the CIS (1.51 m) results in labor intensive activity and delays while simple mechanical technology for adjusting bogie gauges exists. Traffic capacity and facilities on the busy railways routes of Chop-Kiev-Moscow and Ilychevsk-Bryansk-Moscow need upgrading, along with railway outlets from the Chop and Mostiska border stations and approaches to Far Eastern seaports. 3. Poor Condition of Waterways. Obsolete infrastructure, handling, storage and pickup/delivery facilities constitute serious handicaps for taking advantage of waterway transport potential. Little maintenance has been carried out in recent years. Dredging is not up to requirements. Lock gates do not always properly operate. Service Quality 4. Cost of Services. Overall the cost of international transport services via Ukraine is high, especially in the port and railway sector when considering the transfer from one mode to another and hidden costs. This applies specially to container transport and high value goods for which substantial non-transport transit costs are charged to shippers 5. Road Transport Services. Truck drivers and mechanics in Ukraine have a poor image (alcoholism, theft, and personal commerce). Service quality is poor, with delays and delivery errors detrimental to the customer. Small clients have even more difficulty obtaining the service quality they expect. Some drivers are reported as conducting parallel and non-transparent activities. Competition by European carriers is substantial. Foreign companies find it difficult to obtain from local manpower to give priority to the company's interest over their own. Growth ancd profit are not perceived as valid objectives. Low skilled employees prefer to take advantage of short-term gain opportunities and disregard long term future consequences. Simultaneously foreign companies attempt to link remuneration to results, by paying higher wages and prohibiting activity external to that of the company. Ukrainian companies encounter more difficulty in managing their personnel and having it focus on company operations. 6. Trucking Documentation. Since Ukraine has not fully adhered to the CMR convention, CMR documents routinely used by carriers often do not conform to international law. As a result, the carrier rarely reimburses the shipper in case of damage or loss as required by the Convention under international law. The increasing difficulties of the International Road Union (IRU), the  Annex 6.2 national guaranteeing association and the international insurance pool, as well as national customs authorities has prompted the Council of the European Union to seek radical changes in the system, still under review. At present, the system is causing serious difficulties at the borders. 7. Railway Transport Services. The organizational set up of the railway result in political and non-commercially sound decisions in terms of tariffs leading to cross subsidies between services. Ukrainian Railways - UKRZALISNITSA - fall under the authority of the Ministry of Transport and the Deputy Minister for Railways. The state has so far refused to let tariffs evolve in a market economy, on the ground that Ukrainian manufacturers would not be in position to absorb the resulting transport cost increases. Yet, shipping tariffs for containers are set too high at the level of truck services despite the much slower service offered. Several maritime operators (CMN, CMA, MAERSK and SEALAND) protested officially against high rates quoted for carrying transit containers by train. Transit containers appear as subsidizing lower tariffs applied to ores, coal and steel products. None of these tariffs reflects market conditions, and they rather represent a subsidy for low productivity producers, particularly penalizing the development of the waterway mode. 21 days on average of delay for rail traffic 8. Air Transport Services. Kiev-Borispil is the only airport set to international standards, both in terms of infrastructure and services. Delays and inefficiencies are observed in the other airports. Overall transport chain dependability can only be guaranteed by international messenger companies, such as UPS or DHL. Transfers from terminals to town present the risk of partial or total shipment theft. Only the use of large and well-known companies prevents this risk but it comes at a high premium. 9. Current Intermodal Operations. Customers in Ukraine still have to rely mainly on their own transport to transport their freight from the port or railway terminal to the destination point, using their own trucks or those of a trucking company they selected and paid. Unloading of containers is mostly based on transshipment via the storage area. Container terminal operations are time consuming. International intermodal rail transport to and from Ukraine is in the present circumstances not competitive with road transport, timewise and qualitywise. The railways are still using the single-wagon railway transport system; no block trains, no train shuttles, although efforts are made in that direction. 1O. Staff Issues. Management and administrative staff in larger Ukrainian transport companies, was found lacking training and familiarity with international conditions and practices, particularly in matters of international law, modern technology and even geography. Due to the lack of personnel trained abroad to apply modern western approaches to international freight hauling, the emergence of private or quasi-private companies did not result in replacing upper management and administrative staff. This staff is admittedly familiar with its client network, but unable to run the company in a market open to competition. Small companies are better adapted but client follow-up leaves to be desired. Low-paid labor lacks training, motivation and dependability. Truck drivers constitute a strong and cohesive group. They are reported to pay an "entry fee" in order to be recruited in international transport enterprises, as travel offers them additional personal business and income opportunities. Although most of them have mechanical knowledge, they cannot be expected to use their ability in this domain. A few foreign companies have recently provided training to improve their staffs performance, particularly for staff operating in ports. Such training needs to be expanded and generalized.  Annex 6.2 11. Overall Service Quality Shortfalls. Logistics in Ukraine is still considered exogenous to transport activities and given little attention, although its impact on transport demand is significant, notably in the agricultural sector. Communications between carriers and shippers is minimal so that it is difficult to get information on the implementation status of the transport contract. Ukrainian companies logistic facilities are substandard: telephone and fax lines, computers and software (email), handling equipment, Global Positioning System for vehicle tracking, storage organization are generally under used and under performing. Often, the carrier will misinform the client rather than admit negligence, error or incompetence. Small shippers receive little attention. Training lacks in the areas of inventory management, quick location and delivery of the goods, and overall logistic activities are considered exogenous to the hauling activity. Satisfactory service can only be found in reputable foreign enterprises. As a result, considerable delays can be observed if goods must be forwarded or re-expedited. Packaging andL handling methods (loading, unloading and reloading) are obsolete and inadequate except, to some extent, in major ports where loading and transshipment are mechanized.  Annex 6.3 Annex 6.3. Multimodal Transport Measures 1. The development of multimodal transport comes from the optimal integration of various mode within a policy framework fostering competition. A series of measures pertaining to the legal framework and physical handling capacity would enable the successful development of multimodal transport: Formulate policy fostering the regional and international integration of Ukraine: -Harmonize fundamental transport legislation with EU; -Develop block trains and shuttle services along major corridors; -Develop a uniformn policy to integrate Ukrainian infrastructure in Trans-European Transport Network; -Build European standard gauge lines for connection to the Transport European Networks; -Participate actively in the Black Sea Economic Cooperation (BSEC) -Adhere, ratify and implement the following conventions: (a) International Convention on the Contract for the International Carriage of Goods by Road (CMR) (b) Customs Convention on Containers (1972) (c) Customs Convention on the International Transport of Goods under cover of TIR Carnets (TIR Convention) of 1975 (d) International Convention on the Harmonization of the Frontier Control of Goods (1982) (e) Convention on the Liability of International Terminal Operators 1991 (f) Convention on customs treatment of pool containers used in international transport of 1994 Formulate policy fostering multimodal development (door to door transport chain): -Develop framework for the optimal integration of different mode including for their infrastructure development plans; -Stimulate cooperation between public and private parties involved in distribution; -Provide Customs clearance facilities at approved inland container terminals and at established enterprises. Containers to and from these places should allowed to be moved by both road and rail with a minimum of restrictions in the form of guarantees and/or deposits. -Prepare clear instructions for customs to act on the inland movement, handling, stuffing/de-stuffing of containers. -Create a suitable transport insurance system for containerized cargo (identifying clearly liabilities in accordance with international standards) using the draft handbook for Multimodal Transport for Officials and Practitioners (UNCTAD, Geneva, 1995) -Simplify Border Crossing (Annex 6.1)  Annex 6.3 Improve container handling capacity -Modernize existing terninal and plan new terminals -Develop container handling facilities in sea and river ports and inland terminals Stimulate private participation in infrastructure -Stimulate set up and operation of container terminals as multi-user facilities by the private sector.  Annex 6.4 Annex 6.4 Corrective Measures and Related Cost for Modal Inefficiencies 1. Road. Driver and transportation personnel training activities are estimated at US$1 million (short term, for 50 professionals to be trained as trainers and managers) and US$2 million (medium term, for 200 professionals, over 3 years, to be trained as international class truckers- mechanics with basic trade documentation knowledge), on the all inclusive basis of US$ 10,000 per month of training abroad. 2. RaiL At present, the magnitude of the improvements is such that US$ 10 million (short term) is estimated to be a minimum required amount. Restructuring and adapting the rolling stock for container transport is estimated to cost US$ 2 million, on the short term. Assisting in moving toward creating a competitive environment between transport modes and within the terminal operations of the rail sector itself requires technical assistance estitmated at US$ 300,000. 3. Air. The improvement of air transport competitive position for small volumes of high value freight, with respect to other modes, would be achievable by reducing tariffs and taxes. Such a measure can be achieved following a technical assistance expertise by a management consultant firn, for an estimated amount of US$ 200,000 (short term), inclusive of expatriate manpower cost. Its implementation would result in increased revenues from increased freight throughput. 4. Maritime Transport. These measures developed in Chapter 9 will require substantial technical assistance in addition to equipment costs. Technical assistance covering all the ports is estimated at 60 man-months or US$ 1 million (short term). It consists of management review, staff training, and policy analysis assistance to the MOT. This figure excludes the cost of equipment requirements for which use of leasing could be more appropriate. 5. River Transport. These measures developed in Chapter 9 would require technical assistance in the form of policy advice and program development, estimated at 30 man-months or US$ 500,000. In-depth studies should indeed be conducted to analyze competition between and within modes, and to remove preferential tariffs and other subsidies and distortions in investments, all of which prevent this particular mode to become viable and to yield benefits to users. 6. Logistic and Management. Corrective training activities are similar to those discussed under general trucking, but do not duplicate them. They are estimated to US$ 1 million in the short term, and US$ 2 million in the medium term. Other corrective measures pertain to government general economic policy making. Their scope and complexity nevertheless require technical assistance, which in this case is estimated at US$ 2 million (short term). Total funding required thus amounts to US$ 3 million in the short term and US$ 2 million in the medium term.  Annex 6.5 Annex 6.5 Security and Insurance Issues 1. Quality and quantity export certification procedures conducted by SGS and Veritas are costly and require advance notice. These procedures are not always followed by shippers of small consignments, leading to complications and delays at borders. Large foreign shippers use their services more systematically, as their expertise is usually a deciding factor in cases of litigation. It is estimated that 10 percent of their activity is devoted to quantity certification, while 90 percent is devoted to quality control, particularly as far as oils, cereals, sugar and dairy products are concerned. During import expertise, it is not unusual to observe losses and thefts amounting to 15 percent of the shipment. 2. Goods' Security. Theft and pilferage constitute a reality, and this problem must be accounted for. It is seldom possible to sue the Ukrainian carrier in case of bad faith. Risk of cargo theft cannot be excluded, although gunpoint attacks, as those occurring in other countries, have not recently been reported. For sensitive goods liable to excise taxes, such as alcohol, tobacco and automotive vehicles, armed escort is recommended. This service is costly and amounts to about one US$ per km, that is, US$ 500 from Kiev to the border. Conversely, insurance rates are reduced for such escorted convoys. 3. Insurance. Fragmented insurance transaction with mandatory use of local insurer increase substantially insurance cost. There are about 230 licensed insurance companies. The quality of service and the financial health of most of these companies are reportedly poor, except for a handful of them, with which reputable foreign companies are willing to work with. International insurance of both hull and shipment is costly, due to the mandatory use of Ukrainian insurance companies intermediary, which given their under-capitalization, can only retain part of the transaction, while re-insuring abroad its largest fraction. This two tier system, besides being expensive in itself, leaves the door open to fixing insurance premiums in a fashion that is arbitrary and variable from insurer to insurer and from a transaction to another. Indeed, there is no way to know beforehand how many intermediaries will be involved and how much commission they will ask for. Foreign companies are also submitted to this process, as the transaction must be fragmented. It often is decided that the foreign company will insure for the full amount so that the "fraction" conceded to the local company represents a necessary excess-cost not likely to be associated with an actual service.  Total carm Cnbus l Truck 2 azks Trck 3 aks Tracek + Traile Articulated Truck Annual Annua Annua Annua Aen'ua mul Ann ual Annea Annual Ananal An ual Annua l Anna -nual Annual Annual Annual Avsege Avera 2001 Average 1998- Av-e Average Avege Average Average Ave Averag Avenge Averge Average Average Aveage Average 1998-2000 2005 2000 2001-2005 1998-2000 2001-2005 1990 2000 2001-2005 1998.2000 2001-2005 1990-2000 2001-2005 199S-2000 2001-2005 1998-2000 2001-2005 ESAL.kmn(millionl) 6,655 7,947 _ A _ i.