Ukraine’s railways monopoly Ukrzaliznytsia keeps the trains running on time, but has been bled dry through endless corruption schemes.
With more than 270,000 employees and 21,000 kilometers of track, acting CEO Yevgen Kravtsov describes the company “as spread like bread on butter over Ukraine.”
Ukraine’s national rail operator is one of the cheapest passenger train companies in the world. It’s all part of a mammoth organization, with gross revenue equal to 4 percent of the nation’s $100 billion gross domestic product. It carried passengers more than 1 billion kilometers in 2017.
Kravtsov, a 31-year old attorney who took over for Polish Wojciech Balczun in August, joined Ukrzaliznytsia’s supervisory board in 2015, answering to the Cabinet of Ministers, not the Infrastructure Ministry.
In an interview with the Kyiv Post, he said his focus is on changing the company’s internal procedures rather than holding anyone accountable for wrongdoing.
One such change will be how and what Ukrzalizyntsia purchases.
On Feb. 14, the government approved $1 billion in capital expenditures aimed at modernizing the company’s fleet while adding new international routes to the Baltic states and Hungary.
But, as Kravtsov said, “I see my role as the CEO and head of the company in order to change the system within the organization, not to let bad things which happened before happen again.”
Polish rocker’s legacy
Kravtsov took over from Balczun, a Polish rock star with a bumpy one-year tenure before quitting the $18,000 a month job.
Balczun clashed frequently with Infrastructure Minister Volodymyr Omelyan. Kravtsov, another former enemy of Omelyan, has since mended fences with the minister.
Kravtsov’s mission is a challenge: how to modernize and make the company profitable, while purging Ukrzaliznytsia of corruption schemes that have allowed powerful oligarchs to enrich themselves with the help of cheap rates on cargo transportation as state officials routinely took kickbacks on overvalued equipment purchases.
Balczun’s tenure saw the company make a $4.5 million profit in the first half of 2017, compared to more than $140 million in losses during the same period in 2016. Cargo transport increased by 6.1 percent overall. But the issue of low tariffs to politically influential companies remained.
Another issue is that of the company’s workforce — successive managers have failed to reduce the company’s 270,000 people, while Kravtsov sounded neither optimistic nor motivated about the idea of firing the company’s employees.
“We should stop thinking about making Ukrzaliznytsia a place for social programs. It’s a place for business,” he said.
Destroying black market
Another Kravtsov aim is to destroy the black market for railway wagons. Under that scheme, the government forced the railway company to rent out wagons for $2.90 per day, about 10 percent of the market rate.
“It was either given to our clients who were using these wagons, or to intermediary companies,” Kravtsov said, estimating that $223 million was lost to the scheme annually. “This money was not invested into Ukrzaliznytsia.”
But under government deregulation, Ukrzaliznytsia will begin to charge market rates for the wagons starting Feb. 19, destroying the black market, if all goes according to plan.
Another front of Kravtsov’s offensive has been streamlining procurement.
Though Ukrzaliznytsia conducts purchases through Prozorro, Ukraine’s online public procurement platform, the system remains vulnerable to rigging through tender contracts written so specifically that they can only be fulfilled by a pre-set supplier. Kravtsov wants to establish auditing and compliance committees to ensure that procurement procedures remain transparent.
“My goal here in procurement is to change the systems, protocols, and procedures,” he said. “If you have a system with reporting and transparency, oriented on there being no manipulation, the system will work properly.”
Kravtsov has also attempted to make Ukrzaliznytsia, the country’s largest fuel purchaser, buy diesel on contracts that float with international rates, as opposed to fixed-price contracts which would allow suppliers to overcharge the company.
Suppliers that operated under the old system included WOG, Oko, SOCAR and Trade Commodity, an offshore firm at the center of multiple corruption scandals.
“We were procuring (above) market rates,” Kravtsov said, adding that the new practice — implemented on 60 percent of the company’s diesel purchases — could save up to $7.4 million.
Other positive indicators include a recent contract with General Electric, which will see the U.S. conglomerate deliver 30 locomotives to the Ukrainian monopoly to alleviate a critical shortage.
Genie in a bottle
Arguably the biggest area of waste at Ukrzaliznytsia is in tariff pricing.
Roughly 80 percent of the company’s revenue comes from cargo transport, while coal producers like billionaire oligarch Rinat Akhmetov’s System Capital Management have been able to receive discounted tariffs on transport.
Kravtsov called the practice “destructive for the economy and for us,” but added that “it should be as transparent and open as possible.”
“If there is a position of the state that certain industries should be in a better condition than others, it should be openly stated, grounded and taken on the governmental level,” he said. “We are not the only state where there could be a system of stimulation of certain industries.”
Kravtsov said that tariffs on cargo should be the same, regardless of what is being transported. But he called himself “realistic about what can be done,” saying that an “open discussion of Ukrzaliznytsia’s tariff policy” would cause troubles.
Tariffs on passenger tickets are scheduled to increase this year. Kravtsov said that prices will go up 10 percent, and then 12 percent, but remain heavily subsidized.
An $4.18 platskart ticket from Kyiv to Kostyantinivka will increase to $4.50, for example, but still cheaper than a $8.20 bus on the same route.
“We are one of the cheapest passenger railways in the world in terms of ticket price,” he said.
Not a prosecutor
Before Balczun departed, he promised to hire a foreign firm to come in and conduct a forensic audit at the railway monopoly to root out corruption schemes.
Kravtsov appeared ambivalent when asked if he would fulfill Balczun’s promise, saying that it would be too expensive, even though it could lead to the return of stolen money.
“Ukrzaliznytsia at this moment will not receive a direct benefit,” he said.
When asked if he thought conducting an audit would help hold wrongdoers accountable, Kravtsov replied “I’m not sure that it’s our job.”
“From a populistic point of view, making a motto to do a forensic audit and clean up the company sounds better, but it will not give a result,” he said. “What will give a much more positive result is if we change the system. I do not know any example in Ukraine at least or globally where the CEO of a company acted effectively as a prosecutor.”
