Under the Polish management Ukrainian railways started going in the right direction

The first three months since the selection of the Pole Wojciech Balczun as a head of the Ukrainian State Railways "Ukrzaliznytsia" were full of interesting events.

The strengthening of European contacts, the arrests of corrupt company managers, the abduction of one of the directors, significant salary hikes for rank and file employees ‒ these are just some of things done by Balczun.

This year’s first financial results of Ukrzaliznytsia were summarized in July. In the H1’16 the company recorded a profit  of UAH1.5bn and its revenues in the same period reached UAH31.1bn. These figures provide hope that the final result will be significantly better than the last year.

One of the main problems of the company is the outdated rolling stock – there are not enough new trains to carry people and goods. Some 80 per cent of the electric locomotives and 88 per cent of the diesel locomotives are more than 30 years old and should now be scrapped. The age of 74 per cent of the carriages has also passed the prescribed period of permissible use.

However, a full replacement of the recapitalized rolling stock is impossible – the estimated cost of such an operation is USD10bn. Ukrzaliznytsia has set the goal of obtaining USD1bn for new rolling stock within the next 2-3 years, which will allow only for the ad hoc patching of holes.

Meanwhile, huge amounts of money which under normal conditions would be used for modernization, are currently leaking from Ukrzaliznytsia. In a presentation prepared for the Ministry of Infrastructure, Wojciech Balczun (read the interview with Wojciech Balczun here) identified five major corruption streams:

  1. purchases made at inflated prices;
  2. theft of fuel;
  3. reduced tariffs on freight transport for selected companies;
  4. bribes in the ticket distribution system; and
  5. non-transparent relations with the business clients.

According to the new management, stemming these streams would give the company UAH7bn in savings per year.

“These funds will be enough to renovate 60,000 carriages per year,” said the Polish head of Ukrainian Railways in an interview with the weekly “Novoye Vremya”.

Long list of changes

On July, Balczun sent to the Ministry of Infrastructure the plan of reform of the Ukrzaliznytsia which consists several hundred different activities. As he said, the priority over the next six months will be the fight against pervasive corruption – the assumption is that during this time 90 per cent of such phenomena would be eliminated, mainly through the introduction of a transparent purchasing policy.

The Ukrainian oligarchs are also supposed to get a slap on the wrists ‒ they will have to deal with an automated system for the allocation of carriages and a uniform tariff policy. This is a sphere where there are currently enormous opportunities for corruption, followed by huge losses for Ukrzaliznytsia. According to the estimates presented at the end of last year by Mikheil Saakashvili, the former President of Georgia, currently serving as the governor of the Odessa Oblast, the railway company’s losses resulting from the lower transport tariffs paid by companies owned by the Donetsk oligarch Rinat Akhmetov reach USD2bn a year.

One of the priorities will be the establishment of a level playing field for all business clients of Ukrzaliznytsia ‒ the introduction of a uniform tariff and the withdrawal of a 2012 regulation of the Ukrainian government, adopted during the reign of Viktor Yanukovych, which grants preferences to companies of the oligarchs associated with the authorities. This will give an additional income of UAH1bn per year.

Plans to enter the international rail freight market

In mid-July, Ukrzaliznytsia signed a memorandum on cooperation in the production of a new generation of locomotives with the Canadian company Bombardier. Almost at the same time, Ukrainian Railways also signed a memorandum on cooperation with General Electric, according to which the American company will provide UZ with technical information and services for the modernization of the existing locomotives and the construction of new locomotives. The freight locomotive TE33A produced by General Electric was tested on Ukrainian tracks in August. The American government announced financial support for the plans of modernization of the Ukrainian railways.

“There is one more goal behind all these meetings and memoranda. The more bilateral contacts Balczun establishes and the more documents on Ukrzaliznytsia’s international cooperation he signs, the lower the chances that the “internal opposition” from the old management (which is strong in many structures of Ukrzaliznytsia) will sabotage the reforms and force the resignation of the company’s new boss,” assessed the weekly “Komentarii”.

Opening to Poland, that is, to Europe

Ukrzaliznytsia wants to take over the lion’s share of the cargo transported on the land route from China to Europe. At the end of July, the management of Ukrainian Railways held a series of talks on cooperation in this matter with Polish companies: Centre for Metallurgy Supply, Euroterminal Sławków and PKP Broad Gauge Metallurgy Line. The transshipment capacity of the Sławków terminal is currently 3.5 million tons per year – 285,000 containers.

“We have started working on the creation of a business concept which will allow Ukraine to become an important link in the East-West chain and significantly increase transport on this route. We are building an alternative route for cargo from the Far East through Ukraine to the EU,” said Wojciech Balczun.

Talks with PKP LHS concerned the possibility of launching new train connections on the New Silk Road (read more) and the electrification of the Kovel-Izov-Hrubieszów line which would allow for a reduction in the cost of transport and thus raise the economic efficiency of the project.

The Ukrainians have already prepared the technical documentation of the project. If the Polish side joined the project, then it would no longer be necessary to change the locomotives half-way on the route, which is used for the transport of 90 per cent of the rail freight between Poland and Ukraine.

The potential for fraud

Ukrzaliznytsia closed 2015 with a loss of UAH16.8bn, and that is despite the fact that its revenue increased by nearly 22 per cent compared with 2014 and reached UAH60bn, that is approx. USD2.4bn. As much as UAH14bn were losses resulting from exchange rate differences associated with the devaluation of the Ukrainian currency. According to the estimates of the EY (Ernst & Young) the value of Ukrzaliznytsia is currently UAH274bn, that is, USD11bn.

On July, the National Anti-Corruption Bureau informed of the detention of the Deputy Director and the head of one of the departments of Ukrzaliznytsia’s subsidiary company Ukrzaliznychpostach, involved in the organization of purchases for the railways. The arrested officials, who were members of a tender committee, are suspected of embezzlement of tens of millions of hryvnia.

As revealed by the investigators, in one case alone the price of the purchased equipment was artificially inflated by UAH20m, and instead of UAH35m the railways had to pay UAH55m.

A week later the head of Ukrzaliznytsia’s Power Supply Department, Valeriy Liudmyrskyi, was kidnapped in Kiev. Masked gunmen shot and killed his dog, pulled the owner into the car and drove away in an unknown direction.

“We are tentatively linking this abduction with his professional activity. The supply of the Ukrzaliznytsia with electricity means multi-million dollar contracts which are often the object of interest of companies that have links with criminal circles,” informed the company’s spokesman Danylo Vakhovskyi. In comments for Ukrainian media, the Minister of Infrastructure Volodymyr Omelian was also convinced that the abduction was linked with interests related to Ukrzaliznytsia.

The media reported that Liudmyrskyi’s deputy died several days before the kidnapping (he was electrocuted by a lawnmower). That was when the later-abducted boss sent his family abroad.

Meanwhile, journalists of the TV station “1+1” revealed that in the previous year Liudmyrskyi had been mentioned in the materials of a prosecutor’s office investigation concerning the purchase of electricity. He was accused that instead of buying electricity directly from manufacturers, Ukrzaliznytsia purchased it at a much higher price from intermediary companies.

To break the resistance

For the time being, resistance to change is very strong. The new management board of the railways was only appointed at the end of July. Personnel changes alone will do little in the long run. Ukrainian Railways needs to be modernized, or, looking at their technical condition, built up from scratch.

“Four hundred criminal proceedings have already been initiated against managers of various levels,” reported Volodymyr Omelian, at the end of July in an interview with the television station Hromadske.

“But the whole system cannot depend on one man ‒ especially since we are talking about established groups of influence that we want to stop. We also have to deal with external pressure and influence,” he commented.

The counterweight to the corrupt old management of Ukrzaliznytsia could be provided by its regular employees. Even before officially assuming his post, Balczun spoke of plans to include them in the process of change, referring to his experience with PKP Cargo.

Perhaps this will not be all that difficult, especially since the rail workers just received some motivation. At the beginning of June, the Ukrzaliznytsia trade union demanded a 20-percent wage increase. They ultimately received more than they expected. At the end of July, all railway employees whose work is directly linked with services in the field of passenger and freight transport, renovation and technical servicing and maintenance of the rolling stock and infrastructure, received a 25 per cent salary rise.

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