Ukrzaliznytsia is Ukraine’s state-owned railway company that operates a more than 13500-mile network. As one of the biggest companies in the nation and a key to Ukraine’s economic success, several key reforms have been initiated within the company in the wake of the Revolution of Dignity. One crucial step was a change in leadership, and here Yevgeny Kravtsov, the new acting chairman of the management board, explains how he intends to lead Ukrzaliznytsia and his country into the 21st century
A leadership renewal was a seen as key to reforming Ukrzaliznytsia and you were appointed Acting Chairman of the Management Board in August 2017. What is your vision and how is new leadership going to change the company?
Management is at the basis of the development of any company. Management should be professional, motivated and results-orientated. Just two years ago, the salary of the head of Ukrzaliznytsia was $500 per month. For such a small remuneration, it was difficult to look for effective management. After a number of actions on the government side and negotiations with labor unions, we have just secured market level remuneration for managerial positions. This now gives us the opportunity to attract the best professionals in Ukraine. We also have international experts working in the company, which is a very encouraging sign.
In terms of the leadership and changes within the top management, we have several issues to address. As the only nationwide railway company, we are a state-owned monopoly, and we’re operating with the technical standards of the ex-soviet union – those which are applied in other CIS countries. It’s quite an interesting environment. On one hand, we are looking for new modern approaches in management. On the other hand, we are in the field of old era standards and technology. We need to keep the balance of the specialists and professionals who have experience with the system and those who have fresh perspectives. Some of the traditions and the overall stability of Soviet framework has its benefits, but we’re out of date. The company needs to change quickly. Just two years ago the company underwent the process of corporatization. Before that it wasn’t a company, it was a quasi-ministry. This was an important challenge, and I was responsible for this corporatization. The idea was brought forward 12 years ago, but we successfully corporatized the country in less than a year and already this is a basis for a transformation of the infrastructure. This modernization is key because it is impossible to make modern infrastructure from a Soviet-style enterprise.
What are the priorities to bring Ukrzaliznytsia into the 21st century?
One of the basic things is the change of management. With new people and new ideas, the company will gain a new identity. The second thing is more practical but equally important, and that is the question of technology. We are an industrial transportation company that is based on our assets – our locomotives, infrastructure and our people. Unfortunately, after more than 25 years of Ukrainian’s independence, we do not have the best heritage of technical conditions of our infrastructure. The technical conditions of our main assets are about 90 percent used, which means we need a technical revolution. We need brand new, modernized assets and rolling stock to be implemented. For the next five years, we have an ambitious plans for capital expenditures and plan to invest more than $5 billion. This year’s budget is roughly $1 billion. This is 2.5 times what it was last year, four times more than what we invested two years ago and seven times more than what was invested three years ago.
It’s interesting because we are one of the biggest taxpayers in the country. We don’t receive assistance from the state budget. This is our own money from our operations and the money we raise from capital markets or loan markets. This is another challenge. When we look for new projects, we have the parallel question related of the source of financing.
In February, Ukrainian Railways announced a milestone $1 billion deal with General Electric (GE) to supply 30 freight locomotives to Ukrainian Railways. This is a major step in modernizing Ukraine’s rail and the biggest deal ever for GE in Ukraine. What are your thoughts on this agreement?
It’s not only one of the biggest deals of this kind in Ukraine, especially after the last four years, but it is the biggest and only such deal for the company in general. This is an example of having a strategic partnership with the best international companies in their fields in terms of physical and technical renovation. This is a result of our long-term negotiation. It lasted two years and we worked with GE for the last nine months. They see how the company is changing, they’ve worked in Ukraine for a while so know the market and they see Ukrzaliznytsia is a reliable partner for doing business.
Starting this year, Ukrainian Railways has also announced it will significantly change procurement systems and processes, becoming a state-owned company with International Certification in procurement and supply. What will these changes mean for the company and potential partners?
We are one of the biggest buyers in Ukraine. Unfortunately, our current system is not effective or transparent enough and opens doors for non-effectiveness and even corruption. So, we took a series of steps to make it more transparent. Take diesel procurement for example. We are the biggest single buyer of diesel in the country and previously there was corruption in this area. Since I began we have saved roughly $8 million on the procurement of diesel. Before, we didn’t save, we paid more. It’s strange, but it was the case. Now there are transparent and stable rules for all the suppliers. This year, we also became the first state-owned company in the country that implemented an index-based price in our procurement. We are currently procuring diesel in the relation to the market price. During the first four months of this year, it has saved us roughly another $6.5 million.
But procurement is big. Generally, we have more than 5,000 contract parties with whom we work and more than 40 tender committees across the country. Our payments to contractors range from about $150 million- $270 million per month. It is difficult to centralize control but what we have decided to do, along with our partners in the European Bank for Reconstruction and Development, is a project of audit, change and certification of our procurement supply system. We have engaged the UK Chartered Institute of Procurement & Supply (CIPs) to conduct a benchmarking and corporate certification of procurement and supply management of the company. It’s a huge step forward, and we are planning to finalize this project by the end of the year. When it is done, we will be the first and only Ukraine enterprise, state-owned or private, which has gone through the procedure. It should give us a brand new and changed system of procurement that should be effective, transparent and manageable. But for the moment, we are operating through ProZorro, the government’s public and transparent e-procurement system.
How have all of these changes been paying off financially?
We have had good results. Our books are audited by Ernst & Young and last year, for the first time in four years, we made profit. It’s a very important and positive sign. The first quarter of this year has given us more promising signs. The profits for the first quarter of 2018 are two and a half times than what they were in all of last year. That is a clear signal that the company is moving in the right direction and is in a good financial state.
You have said that the company’s new focus is building partnerships with investors. What opportunities are available to build those partnerships?
There are two main possibilities. One is related to portfolio investors, and we already have the Eurobond issued on the market which are currently in good condition in terms of pricing and liquidity. And we’re looking to, most likely sometime between next September and February, go public again to raise money for the further development of the company and to optimize our existing portfolio.
The second part is strategic partners. GE is just one example. We have ongoing negotiations with international producers in terms of rolling stock and the locomotives as we plan on the further modernization of our fleet, in particular, electric locomotives, passenger cars and passenger trains, as well as professional operators in railway transport. In terms of where we look for investors, there’s a wide array of opportunities. There is our core business, related to cargo transportation, in particular the modernization of the rolling stock fleet. Currently, the margins and the pay periods on our markets are quite attractive. Other opportunities surround the production of railway and machinery technology. We have a large amount of factories and plants all over Ukraine, which were planned for Soviet-type economy and infrastructure. We don’t need this number of premises and plants now, and we are looking to reorient and modernize these sites for other production. The next part is our passenger business, in which there are several segments for collaboration. One of the most interesting, however, is our railway stations. We have more than 120 big railway stations and about 1,000 regular stations. This is a large amount of property that currently doesn’t generate profit, and actually causes losses. Our aim is through centralization, property management, concession, rentals and others ideas, to make them profitable. We have 300 million passengers per year, which is a tremendous amount and this is an opportunity.
How will improved rail services boost the overall economy?
First of all, let’s understand what Ukrzaliznytsia is now for the national economy. We are the most common form of transport the majority of exported goods produced in Ukraine – agriculture, metal, fertilizer, machinery and other goods. As a key part of the economic system of the country, when we have certain problems in terms of our infrastructure or transport capacity, it is immediately reflected on the whole economy. At the same time, we are sure that we can do even more. Each dollar that we invest in capital expenditure multiplies at least four times over in the chain of production and ricochets throughout the economy.
What are your personal goals for your time here?
I’m CEO of the biggest Ukrainian state-owned enterprises. On one hand, it’s a big honor to be acting in this role at this time of history. At the same time, it’s a huge responsibility. My family all lives in Ukraine and my long-term goal is to make the company as good so I can tell my children that I have done something really good. The honor and heritage of Ukrzaliznytsia is part of my job.