Among the national treasures of Ukraine’s state-owned companies, Ukrzaliznytsya is the crown jewel and yet a flawed diamond at the same time.
A colossal monopolist, the state’s only railroad company is constantly criticized for being inefficient, disorganized and massively corrupt.
In the middle of 2016, the government hired Wojciech Balczun, the ex-head of Polish Railways, to put Ukrzaliznytsya back onto a proper track. But only seven months later, critics say that Balczun is wasting the unique opportunities he was given, while the CEO himself shuns publicity and brushes off criticism, saying he didn’t come to Ukraine to participate in public debates.
Some estimate that Ukrzaliznytsya is still losing half of its possible revenue through inefficiency and corruption, and blame new management for failing to put an end to it.
Minister vs. CEO
Even Minister of Infrastructure Volodymyr Omelyan has not been satisfied with Balczun’s management. But when he demanded a report from the Ukrzaliznytsya CEO, Prime Minister Volodymyr Groysman sided with Balczun and went as far as transfer Ukrzaliznytsya from Infrastructure Ministry, and put it directly under the control of the Cabinet.
Balczun and Omelyan were in open confrontation over the reform of the company at a cabinet meeting on Jan. 25, when Balczun reported Ukrzaliznytsya’s results for the last year. While Balczun stressed his successes, Omelyan asked about the failed corporatization of Ukrzaliznytsya, costly court cases that were lost, opaque procurement, and the lobbying of private interests.
In response, Groysman jumped to Balczun’s defense, and claimed Omelyan lacked competence in the field – unlike Balczun, who, while being the frontman of a Polish rock band at the same time, led Poland’s PKP Cargo rail company for five years.
However, the experts tend to side with Omelyan, claiming that Balczun’s reform efforts are barely visible.
Moreover, Balczun came in for criticism for not stopping his music career. His band Chemia is scheduled to give 16 shows in Poland in March and April, according to the band’s Facebook page. Balczun, meanwhile, has been getting one of the highest salaries among state-owned company heads – Hr 463,000 ($17,000) a month, plus bonuses.
The Kyiv Post tried to get an interview with Balczun several times, but he never found time for it.
Losses suspected
Vladimir Shulmeister, who served as deputy infrastructure minister for a year in 2015, spent a lot of his time at the ministry looking into Ukrzaliznytsya, which at the time reported to the ministry.
He left the ministry together with his boss, ex-minister Andriy Pyvovarsky at the end of 2015, but he is still preoccupied with Ukrzaliznytsya.
He claims that the state behemoth, which that hadn’t been making any money for years before it earned a relatively small profit of Hr 303 million in 2016, has been losing up to $2 billion yearly through corruption and mismanagement. The total revenue of Ukrzaliznytsya in 2016 was $2.9 billion.
Shulmeister named a few of the holes and schemes that drain Ukrzaliznytsya of money.
Among them: Procurement abuse, manipulating tariffs for cargo transportation in favor of big companies, renting out vehicles and properties for under-the-table payments, and losing costly court cases.
Oleksandr Zavgorodniy, who served as the acting CEO of Ukrzaliznytsya for slightly over a year in 2015–2016, thinks that Shulmeister’s $2 billion evaluation is over the top, but agrees that corruption is taking its toll on the state company.
He gave one example from his own experience: During his short time leading Ukrzaliznytsya, Zavgorodniy fired some 100 people. Many of them, he said, had to go because they, while working at Ukrzaliznytsya, controlled private companies that sold services and supplies to Ukrzaliznytsya.
In one particular case, the head of a major department was fired for such activities, but his replacement was found to be doing exactly the same thing shortly after.
Zavgorodniy blames corruption on the company’s extremely low salaries. The head of a unit managing 400 people at Ukrzaliznytsya could be making just Hr 7,000 a month – less than an average salary offered on job search websites.
“With a salary like that, of course he will be looking for the ways to survive,” says Zavgorodniy.
Shulmeister, in his turn, blames both bad salaries and the absence of proper controls.
Both Shulmeister and Zavgorodniy applied for the job of the head of Ukrzaliznytsya in 2016, but lost the competition to Balczun. Both claim there wasn’t a real competitive selection, but that the government rigged the hiring process.
Opaque procurement
Ukrzaliznytsya purchases thousands of parts annually to repair its worn tracks. Since the use of the new electronic procurement system ProZorro became mandatory for all state-owned companies, abuses and fraud have been partially eliminated, though some contractors have learned how to game the system in their own interests.
One of the ways to get around the system is to become the sole contractor for essential supplies.
This happened with the Lviv-based factory KRT Corporation, owned by Yaroslav Dubnevych, a lawmaker with the Bloc of Petro Poroshenko faction in parliament, who heads parliament’s Committee on Transport despite having obvious conflict of interest: His businesses sell many millions worth of supplies to Ukrzaliznytsya.
His KRT Corporation produces fastening clips for rails and rubber gaskets for Ukrzaliznytsya. In 2008, Ukrzaliznytsya changed the technical standards for the clips in a way that ensured that only the clips patented by Dubnevych matched the new standard.
Left as the sole source of one of the railway’s most essential supplies, KRT Corporation is flourishing. Asked about this in 2014 by journalists from the Nashi Groshi TV show, which focuses on corruption, Dubnevych denied any wrongdoing and said that his clip was simply better than anyone else’s.
Over 2014–2016, companies affiliated with Dubnevych won procurement tenders worth Hr 1.7 billion for Ukrzaliznytsya and its subsidiaries, according to Nashi Groshi and Omelyan.
Shulmeister says that the ones to blame for abuse of procurement aren’t the contractors, but the people who allow the abuse.
Cargo tariffs
Cargo transportation constitutes some 80 percent of the yearly revenues of Ukrzaliznytsya. The biggest cargo clients is SCM, the holding company belonging to Ukraine’s richest man Rinat Akhmetov. The companies in the SCM holding accounted for 38 percent of the cargo transportation in the first half of 2015.
Shulmeister claims that Ukrzaliznytsya is losing up to $400 million through unfair tariffs applied to transportation by SCM companies. The cargo transportation tariffs, fixed in hryvnias, are too low, both Zavgorodniy and Shulmeister argue, but businesses strenuously oppose any attempt by Ukrzaliznytsya to raise them.
In his time in the office, Zavgorodniy raised the cargo tariffs by 15 percent, and Balczun is now looking to rais them by another 25 percent, but business organizations like the European Business Association are fighting back, arguing that expensive transportation could kill off Ukrainian exports.
Another aspect is transit transportation. While Russia banned transit of Ukrainian cargo through its territory back in 2016, Ukraine keeps letting Russian cargo in, and encourages it by giving the transportation companies discounts that are applied to their Russian clients.
The discounts for transit tariffs are negotiated individually, which also leaves space for corruption.
Costly trials
Omelyan blamed Balczun for Ukrzaliznytsya’s lost court cases worth Hr 2 billion ($71 million). The cases included ones against PUMB Bank and Alfa Bank for debts of Donetsk railways and a disputed debt to Turkish infrastructure company Dogus.
The fight in the case against Dogus Insaat ve Ticaret AS – regarding the construction of a bridge over the Dnipro River in Kyiv – has been going on since 2010, although a final ruling was made in 2016. According to it, Ukrzaliznytsya is obliged to pay Hr 613 million.
Zavgorodniy, however, said that the case against Dogus was lost even before he was appointed, so it wasn’t fair to blame Balczun’s administration for it. On the other hand, he blames the current management for losing court cases against the banks – cases that could eventually cost the state railway company Hr 1.6 billion.
While the experts criticize Balczun’s reforms, he insists he has a “clear and modern vision” of how to make Ukrzaliznytsya a leading transportation company.
But for now, it seems, he’s keeping the details of that vision to himself.
