Ukrza­l­iznyt­sya’s new boss un­der fire for lack of re­form

Kyiv Post - - Business Focus - BY YULIANA ROMANYSHYN AND OLGA RUDENKO [email protected] AND [email protected]

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 sta­te­owned 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 7,500 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 Lvivbased 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.

A woman with a mop cleans a plat­form in front of worn and sooty pas­sen­ger cars at the cen­tral train sta­tion in Kyiv on Jan. 12. (Volodymyr Petrov)

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