You're reading: Kyiv keeps murky firm for metro contract that critics say will waste millions; Klitschko’s people defend deal

Despite the change in power in Ukraine's capital city, one of the main financial drains from the municipal budget remains the same, an independent audit has shown. 

Kyiv’s metro has kept a contract with Kharkiv-based Alfa Pay Terminal, a murky firm set to make millions of dollars over the next decade by setting up a new fare card system for public transport. Critics say this is money that could easily have gone to the city budget instead.

Representatives of Alfa Pay Terminal refused to be interviewed for this story.

The original contract with Alfa Pay Terminal was made during the administration of former President Viktor Yanukovych. The company was the only bidder for this contract in the April 2013 competition, raising speculation that the contract was fixed.

The company pledged to invest $1.5 million into a new ticketing system for the Kyiv metro in return for 8.47 percent of the metro’s gross revenues for the next 10 years, according to Public Audit, a non-government watchdog that examined the deal recently.

Even if the current low metro prices of Hr 2 per ride remain in place, Alfa Pay Terminal is set to make about $4.7 million per year – a handsome return on their investment.

If the metro fares are doubled per trip as planned, the firm’s profit will increase to $9 million per year. In the next 10 years, Alfa Pay Terminal can expect to earn between $45 million and nearly $93 million per year, the Public Audit report said.

The company will be making money despite the fact that the metro itself remains loss-making, draining millions of hryvnias from the municipal budget annually. Although the metro is used by nearly a million people per day, each ride is heavily subsidized.

The metro company lost Hr 330 million in the first half of this year alone, according to its press service. It received Hr 16.7 million of subsidies from the municipal budget and Hr 31 million from the state budget to cover the shortfall. The rest it made up through advertising income and through rent.

“The research showed that the Kyiv metropolitan, despite its unprofitability, is one of the most lucrative municipal enterprises of Kyiv, especially for corrupt schemes,” the Public Audit report concludes.

But one appointee of Kyiv Mayor Vitali Klitschko, elected on May 25, said he looked into the deal and found it to be a good one for the city. Kostiantyn Korniyenko, deputy head of Department of Transport Infrastructure at the Kyiv City Administration said the contract was thoroughly checked, and it was found that it “meets the interests of city residents.”

“The investor company not only spends its own money for creation of the system but also takes serious operational expenditures for future service of the system, which wasn’t taken into account in the survey,” Korniyenko said in written comments for the Kyiv Post.

Korniyenko said Alfa Pay Terminal would introduce electronic tickets not only for the metropolitan but for the entire transport system of the city. According to preliminary estimates, the company will have to invest over $15 million, the sum that “cannot be financed by city budget,” Korniyenko added.

Korniyenko said Public Audit made “serious mistakes” in their estimates of investment it will take to set up the new ticketing system.

Public Audit experts agree that the estimate was a mistake, but say that’s because the investment figures were actually inflated by Alfa Pay Terminal. “Unfortunately the schemes of artificial overpricing of goods and services in order to receive kickbacks, increasing of company’s share in project, decreasing of taxation are common for many years,” the audit said.

Moreover, Public Audit’s report said that the metro has actually started introducing an electronic ticketing system and multiple ride cards on its own, and the existing system can be used as a prototype for the new electronic ticket system.

Moreover, authors of the research said that the city metro would easily be able to raise $1.5 million without external investment and paying a good chunk of their income to a third, private party. “It would be more advisable for the city to keep this money at the municipal enterprise,” the auditors said.

There’s little known about Alfa Pay Terminal’s real beneficiaries.

Mykhailo Leonov, who calls himself an “authorized representative” of Alfa Pay Terminal, told the Kyiv Post in October 2013 that he wasn’t allowed to disclose the owners of the firm. He, however, insisted that there had been more than one bidder for the contract with the city, and his company won fairly and squarely.

Public Audit said that Alfa Pay Terminal is an offshore-registered business. This company has already won a lucrative contract for electronic payments in Kharkiv metro. “Its promoter and curator in Kyiv was Yevhen Vodolazov from Kharkiv,” who was a head of Department of Transport Infrastructure of Kyiv state administration until recently, the report said.

But Korniyenko, the current deputy head of Kyiv transport department, called Alfa Pay Terminal an experienced company that proposed “good technical solution for payment of travel.”

He said the city is determined to keep the contract, even if for a risk of losing a breach-of-contract lawsuit against the company. Korniyenko said that legal haggles with the company would also also down the shift to a more modern payment system than plastic tokens.

As of Oct. 3, ticket offices at Poshtova Ploshcha metro station stopped selling tokens as the first step towards the shift to electronic tickets that will later work in all types of public transport.

“Moreover, breaking an investment deal would create undesirable precedent that will have negative impact on investment attractiveness of the city,” Korniyenko said.

Kyiv Post staff writer Oksana Grytsenko can be reached at [email protected]