Ukraine’s giant state railway network operator Ukrzaliznytsia, practically a byword for corruption and embezzlement, has long brought the Ukrainian state nothing but losses.
But its new management, under CEO Wojciech Balczun, who also happens to be a Polish rock star, aims to change both Ukrzaliznytsia’s poor image and its poor results.
Balczun, who took over as CEO of Ukrzaliznytsia on May 24, has a good track record in railroad reform, having previously turned around his native country’s largest railway freight carrier, PKP Cargo. During Balczun’s five years in office from 2008 to 2013, PKP Cargo went from making a $26 million annual loss to an annual profit of more than $130 million (in 2011).
In heading Ukrzaliznytsia, he takes over a company in a similarly poor condition as the old PKP Cargo. Ukraine’s state-run railroad monopoly ended 2014 with a $13 million loss, and it made a whopping $96 million loss in the first quarter of 2016 due to currency fluctuations and amortization.
So Ukraine’s government is pinning its hopes on Balczun to change the company’s direction, and fast.
“The new management will bring a new quality to the work of Ukrzaliznytsia, including passenger and cargo traffic,” Prime Minister Volodymyr Groysman said in the parliament on May 20.
Balczun’s job will be overseen by the Infrastructure Ministry and its newly appointed First Deputy Yevhen Kravtsov, a lawyer who worked as Ukrzaliznytsia’s acting CEO until May 23.
Together with former Infrastructure Minister Andriy Pivovarsky, Kravtsov developed a five-year plan to turn Ukrzaliznytsia into profitable enterprise by 2020. According to the plan, after undergoing corporatization, the company will concentrate on infrastructure development, cargo transportation, passenger traffic, and the conversion and privatization of enterprises and other facilities that it owns.
“We have to switch to a model based on economic efficiency… and on an understanding of cost price, on where we get financing, on who our clients are, on who pays us, and why,” Kravtsov said.
Although the government expects Balczun to come up with his own development strategy, Kravtsov said that they have a similar view on how to solve the company’s problems, so his plan will continue to work under the new CEO as well.
Balczun was not available for comment.
Polish citizen Wojciech Balczun (R), who was appointed CEO of the state railway network operator Ukrzaliznytsia, speaks at a Cabinet of Ministers meeting on April 20 next to Prime Minister Volodymyr Groysman. (UNIAN)
Call for staff changes
The new state-sector hiring process that came into force on May 1 should mean more qualified candidates, tracked down with the help of headhunters and international organizations, come before the nomination committees. But to keep any new staff, Ukrzaliznytsia is going to have to pay better wages, starting from the top.
“A general director cannot get Hr 12,000 ($480)… if the turnover of Ukrzaliznytsia is several billions,” Kravtsov said, adding that raising wages was a fundamental part of reforming the state monopoly.
The newly appointed CEO is to be paid an annual wage of $700,000. Salaries for board members and top managers will be raised as well. Moreover, salaries will be linked to key performance indicators.
“(We’re going to pay him) not because he is Polish, but for his actual achievements,” Kravtsov added.
Low wages have been the main cause the corruption in Ukrzaliznytsia, Kravtsov said, not just the courts and prosecutors’ failure to combat bribery. As of today, the approximate monthly salary of a regular Ukrzaliznytsia worker is $200, while administrative staff are paid $280.
Besides salaries, Ukrzaliznytsia also pays pensions to its retired workers.
“The railway today has 330,000 workers and 220,000 retirees,” Kravtsov said, adding that no other state company has to support such a large number of pensioners.
Cargo transportation
Freight transportation remains the most profitable area of business for Ukrzaliznytsia, despite corruption, poor maintenance, and the misuse and waste of resources. The main need today is for investment in infrastructure and rolling stock, Kravtsov said.
The rail network is also the only way to move freight for Ukraine’s biggest producers of grain, metal, ore and other top exported goods.
“It is impossible to carry ore either with your hands or in cars,” Kravtsov said.
One of the reasons for Ukrzaliznytsia’s poor performance, according to Kravtsov, was that it artificially lowered transportation tariffs for certain types of transported goods. However, he did not specify which goods these were.
“As of today, we have Soviet-era tariffs, which were last revised in the 1990s,” Kravtsov said. “They, my colleagues, they think in Soviet terms – (how to) transport as much as we can and as far as possible?”
He said tariffs in future would have to be set at economically justified levels.
That process has already started: in May, Ukrzaliznytsia announced a 15 percent hike in its rail cargo transit rates, which followed rises totaling 30 percent over the previous year. The hikes were met with fierce resistance from the industrial lobby, which relies on rail to transport its raw materials, Concorde Capital investment company analyst Roman Topolyuk told the Interfax news agency.
For Ukrzaliznytsia, the rate increase will probably offset the depreciation of the hryvnia. The 15 percent hike brings in $800,000 a day, or approximately $292 million annually.
Another urgent task, Kravtsov said, is to renovate the rolling stock, something that has not been done since the 1990s.
New freight service
Over the long term, Kravtsov plans to turn Ukrzaliznytsia’s cargo transportation arm into a logistics company.
Instead of shipping goods from one railway station to another, Ukrzaliznytsia will provide clients with “door-to-door” transportation services. Trucks will take a customer’s freight from their warehouse to the rail station, where it will be loaded onto wagons, transported across the country, unloaded onto trucks again, and delivered directly to the customer.
According to Kravtsov, German company DB Schenker Rail cargo carrier provides a similar service. However, it will take Ukraine at least five years to set up its own service of this type, he said.
Passenger traffic
Despite cargo transportation being a top priority for Ukrzaliznytsia, the unprofitable passenger business is also to undergo changes, Kravtsov said.
At the moment losses from passenger transportation are compensated for by earnings from freight shipping. But according to Kravtsov, the costs of passenger transportation should be covered mainly from the budget, as the state derives the most benefit from passenger traffic.
That benefit, he said, is not measured in monetary terms, but in terms of labor mobility – many people rely on the trains to take them to and from their place of work, which might even be in a different oblast to the one in which they live. A new train service from Zhytomyr to Kyiv, soon to be introduced, is an example of one of these long commuter services to the capital.
To improve services for passengers, Kravtsov suggests scrapping around 100 night trains and replacing them with daily expresses. He said that at least 80 percent of passenger traffic should travel on daytime services. First to go will be the night train from Kyiv to Kherson, which has a journey time of 11 hours. The new express train will do the same trip in just seven hours.
Foreign investment
Ukrzaliznytsia went into technical default and was declared insolvent in April 2015. It became impossible to conclude any development agreements or to bring in investors under those conditions, Kravtsov said. But Ukrzaliznytsia has come a long way since then, and may soon even be attractive for foreign investors, he added.
“It’s probably not very often that you see a company that is almost bankrupt moving to stability, growth and good prospects in just a year,” Kravtsov said.
Today, Ukrzaliznytsia plans to take loans from the European Bank for Reconstruction and Development, renovate its rolling stock, purchase locomotives, and electrify lines. It also has a potential agreement with a Chinese investor lined up.
According to the Infrustructure Minister Volodymyr Omelyan, the Chinese investor, the name of which is not yet being disclosed, is interested in building two high-speed passenger rail lines in Ukraine.
“We’re planning to sign a memorandum with one of the biggest Chinese investors on the development of … high-speed passenger rail lines on the Kyiv-Lviv-Warsaw-Berlin and the Kyiv-Odesa routes, and then extending it to Crimea – when it is again under the control of Ukraine,” Omelyan said in parliament on April 25.
Kyiv Post staff writer Alyona Zhuk contributed to this story.
