Interview with the New Acting Head of Ukrzaliznytsia: Private Traction Will Emerge Whether We Desire it or Not

Oleksandr Zavhorodnyi granted his first interview since his appointment to the post of acting General Director of Ukrzaliznytsia to the CFTS portal. He discussed the direction in which the new management of Ukrzaliznytsia will lead the country's railways, railway reform, and railway tariffs.

The office of the head of the State Railway Administration (Ukrzaliznytsia) is surprisingly modest, even austere. It is a small room with an office cabinet, two tables, and a refrigerator. On the walls are a large portrait of the president of Ukraine, a map of the country, and a picture of a galloping horse. Of all the items in the office, only a figurine from a medieval Chinese battle catches the eye: a horseman wearing armor deftly finishes off an enemy that is already lying on the ground. This is the only thing that reminds one that duels and passions of no less epic proportions are currently (or always) raging at Ukrzaliznytsia. However, it is not always easy to understand who is on the horse and who is defeated on the ground. "Is this your figurine?" we ask Ukrzaliznytsia’s General Director Oleksandr Zavhorodnyi. He throws a glance at the office cabinet and shrugs: "No, they are all from my predecessors. None of my things is here, except this this pile of papers on the table. Those are my stuff." On the table is a very impressive stack of documents, a laptop, a calculator... That is all.

Read more: "Key Points from the New Ukrzaliznytsia Director’s Press Conference”

Your appointment a month ago was a big surprise for the market. Tell us about your journey to this post. You said that you participated in the first competition for the post of general director of Ukrzaliznytsia in the winter. Why did the competition end with nothing?

When a competition for the post of general director of Ukrzaliznytsia was announced last winter, I thought, “Why not participate?” and submitted my documents. I grew up in a railway team and climbed almost all the steps. I believe that I have a sufficient level of training and competence. My decision to participate in the competition was due not only to "volition," but also to competence, backed by capabilities. I know only about five other managers who are currently in Ukrzaliznytsia or worked there in recent years that can also head such a company and achieve good results.

What I observed during 2014 was like a knife through my heart... Wagons and locomotives were not being repaired and the infrastructure was being killed. I set myself the clear task of trying to become the head of the enterprise, especially considering the fact that I realized that the years are taking their toll and that one has only a short period within which he can realize himself as a leader in this field.

Do you support the idea of a competition?

The idea is absolutely correct, but it is my conviction that Ukrzaliznytsia should be headed by a person education specifically in the railway industry.

But there are many other examples in the world

The director general of Ukrzaliznytsia is not the manager of a plant. At a plant, it is possible to appoint any manager and then appoint a person with a technical education as the deputy manager. However, there are many "plants" within Ukrzaliznytsia. It is a large corporation, and it is necessary to clearly understand what it does and make hourly operational decisions related to the process of transportation while the situation is changing every 5-7 minutes. The transport sector operates on the basis of real-time management - a person without industry-specific professional education cannot head the sector. He will simply not be able to manage it efficiently.

Today we are talking about reform of Ukrzaliznytsia, its corporatization, and approximation of its standards to those of Western companies. There, it is very common for railway operators to be run by financiers and economists, for example. Do you not consider it normal for the corporatization of Ukrzaliznytsia to be managed by a manager without a railway education?

This entity will not be liberalized because Ukrzaliznytsia has social commitments. We are obliged to provide transportation at all costs. For example, we need to ensure transportation of coal today and I am not asking, “Did you hold a board meeting or not?” We need to transport it.

If we are talking about that article that you wrote and which I later criticized, all the people named in the article run sub-structural units, except Grube (who heads Deutsche Bahn - Ed.) All the others head branches - logistics, passenger, and regional.

"The things that obstruct our work are attempts by external forces to influence processes within Ukrzaliznytsia, use it to earn money, and speculate on its name"

No, they are independent companies...

That is right. All of these companies are independent, but they are under the control of a large company. A parent company controls the vertical power structure. The same will happen with Ukrzaliznytsia. The board of the Ukrzaliznytsia Joint-Stock Company may include a person who is not a railway man because his task will be planning and budgeting, and he will not have operational tasks. However, the director responsible for infrastructure should definitely be an operator.

Do you plan to participate in a new competition for the head of the Ukrzaliznytsia Joint-Stock Company?

Of course.

You have already spent the first month in the post of acting head of Ukrzaliznytsia. What have you managed to do or what do you plan to do in the near future?

It is important for the railway complex to perform its direct function – as a carrier – well. Therefore, our operational decisions involved increase of the operational fleet of passenger and freight cars and locomotives. We increased the number of repairs of the most sought-after rolling stock: gondola cars, grain carriers, and diesel locomotives. We reviewed the logistics of passenger transportation, added trains for services between major cities and Odessa, and extended trains to ensure that they consist of the maximum number of railcars. For this purpose, the platforms at the Odessa train station have even been converted. One of the urgent tasks is to ensure that the industry is technically strong, and we are actively working on this. The autumn-winter period is approaching and we need to prepare well. Another important area is transportation of thermal coal to power stations, and we are working on this in conjunction with the Energy Ministry, the SBU (the Security Service of Ukraine), and other regulatory agencies. We are establishing dialogue with manufacturers to improve logistics and tariff formation, we are creating a public council to oversee procurement procedures, and we are preparing regulatory documents for registration of a joint-stock company.

What kind of difficulties did you encounter in the first month?

We have no problems with workers and technological issues. It is possible to resolve everything, cure diseases… We only need the tools and time. The things that obstruct our work are attempts by external forces to influence processes within Ukrzaliznytsia, use it to earn money, and speculate on its name. However, that will not stop us on the way to improving the industry. The road will rise to meet the one who walks it, and our goal is for everyone to see and feel how the country’s railways are changing.

Passenger Transportation is a mine that needs to be developed

What is your vision of reform of commuter train services?

We are currently creating a general concept for passenger transportation - a system of hubs - that we will consider at the next meeting of the technical council. We will present it to the public in a month. For now, there will be no changes to the structure of passenger transportation. However, when commuter train services are transformed into a separate branch - regional trains - they will remain part of an integrated system of passenger transportation. A commuter train must arrive in time for a passenger train and not arrive 15 minutes after it.

Does this mean that the types of reforms implemented in Poland and partly Russia, where operation of commuter trains has been transferred to regional authorities, is not planned?

No. On the contrary, we are currently talking about taking back municipal commuter trains from Kiev.

When can cross-subsidization of passenger transportation be abolished or will it not be abolished?

The problem is that the current method for distributing money between the two areas is provisional. It does not confirm the amount of loss that is currently incurred from passenger transportation because it is smaller. We are still investigating the margin by which it is smaller.

"We are currently creating a general concept for passenger transportation - a system of hubs - which we will consider at the next meeting of the technical council"

Do you not think that the expenditures declared by Ukrzaliznytsia are not accurate and that the losses are perhaps overstated?

The issue is not the expenditures. Where do the railway’s losses come from? Firstly, we work with the government very inefficiently. What does this mean? We currently have losses of UAH 1 billion from compensation for transportation of government-subsidized passengers. We have transported passengers, but we have not received compensation for their transportation.

Secondly, prices of energy and materials resources were increased in 2014 and 2015. The average increase in the prices of these resources ranges from 25 to 80%. However, our tariffs were raised by 15%. This means that the 70% of the tariff that was not raised constitutes a direct loss. We are increasing our losses further. Therefore, losses totaling UAH 9.3 billion have accumulated specifically for these two reasons. In addition, our taxes have increased. We have paid much more in taxes during the current period than we expected to pay under our financial plan.

Thirdly, we did not make capital expenditures in the previous period because our financial plan has only just been approved. As a result, we did not significantly increase expenditures because we are not amortized. I think our business will break even if we bring Ukrzaliznytsia’s economy into a normal state.

Even while subsidizing passenger transportation?

Subsidization of passenger transportation is also a controversial issue because everything depends on the level of control over the primary number of passengers that are receiving the service. If we are checking a passenger's ticket, then he must buy it somewhere. However, where can he buy it on a platform? Yes, he can buy a ticket from the conductor of a passenger railcar who is the only conductor serving the entire train. However, half the passengers will have traveled free of charge by the time the conductor gets around.

And the conductors put half the money their own pockets...

Half is unlikely, but the conductor takes a certain part of it. Nonetheless, most passengers will travel free of charge. What if we adopt the European practice of letting passengers disembark only at hubs where they can only disembark when they show their tickets?

Currently, we are developing an experimental program jointly with a bank. I will not name it yet. We are developing a system for sale of commuter tickets by automatic machines. We will install machines that will sell commuter tickets to avoid passengers claiming, "I did not have time," "I forgot," etc.

We will also introduce the system currently used in subways, which allows passengers to make payments with their smartphones, telephones, or cards. We are currently considering a system that will allow a person to pay his fare from his gadget when boarding a train.

What about the rural areas?

Yes, it is difficult to do in remote areas, but it is quite realistic in large cities. The Pridneprovskaya Railroad conducted an experiment last month. They hired a security company that simply blocked the exit of passengers. The result of this operation: they paid UAH 190,000 to this company for their work but earned UAH 1.479 million in additional revenue. Therefore, commuter transport is a mine that needs to be developed, and it will generate income.

Currently, there are sufficient resources within the railway industry to improve its profitability. These revenues will be enough to ensure its operational durability. However, we cannot modernize, build railway lines, develop high-speed travel, or acquire rolling stock with these revenues. In all European countries, the government subsidizes all these processes. For example, the government plans the budget for electrification of a certain line and subsidizes the cost. Unfortunately, we do not yet have this. Therefore, when we reach the next stage of development, we will go to the government and say, "We are ready to give money." However, another 5-7 years of hard work is required to raise our profit rates in all positions before we can do this.

"We must adopt a harmonized tariff for transportation of a ton of cargo"

Tell us about the new draft law on rail transport. Did you participate in its drafting and to what extent does it meet market challenges?

All laws relating to rail transport are documents on which I am working constantly and directly. I submit my comments and corrections, and I have been doing this since last November.

Since November last year? In was status?

Initially, in the status of a person criticizing the current situation. I created a group of experts that engaged in discussion of various draft laws.

Was it a two-way traffic?

Yes, we submitted official documents to the ministry. Then, the minister noticed the group in March and made contact. He invited two members of the group to become its permanent representatives in the ministry and participate in the drafting of various types of working documents. I gained the official status of adviser to the minister in July or May. There are many draft laws that we developed and there are even documents related to automobile traffic because I was engaged in inspections.

"The draft law has been approved by all ministries and departments, and it will be submitted to the parliament for a first reading"

Do you have comments on the draft law that is currently in the parliament?

At present, the draft law has practically been read at all stages. If I had my way, I would pass it in a shortened version and then add bylaws. However, a decision to prepare a full version was made because of the creation of new entities. Today, the draft law has been approved by all ministries and departments, and it will be submitted to the parliament for a first reading.

The draft law provides for creation of a national tariff regulation commission. When can it be created?

Regulations on the operations of agencies – the National Tariff Regulation Commission, the state railway agency, the State Transport Safety Agency, the State Bureau of Accident Investigations – are currently being drafted. Regulations on the operations of these four agencies are being drafted with the aim of launching their operations in the period of September-October. This draft law is strictly in line with the European directives, in which everything – security, legislation, operation, and tariff formation – is divided between agencies.

What are the arguments in favor of creation of the NTRC?

In addition to regulation of tariffs, there are three arguments in favor of creation of the NTRC. Firstly, it is necessary to understand that the NTRC will work not only on rail transport. Currently, the Ministry of Infrastructure is responsible for about 40 tariff positions. Various structural units of the ministry administer them. The creation of these agencies is necessary to eliminate the dependence and influence of tariffs on the access of outside carriers.

When can the NTRC be created?

Within a period of one and a half months, but a legal framework must first be created. The next stage will begin after the first reading of the law and adoption of a decision.

Will you seek increase of tariffs?

Our freight tariffs lag behind the rate of inflation by 36% and passenger fares lag behind by 29%. However, we cannot increase the number of passengers by raising passenger tariffs because travel will become expensive for passengers. Although, throughout the world, buses and cars are a cheap form of transport, trains – excluding suburban trains – are for those with average income, and aircraft are for those with high incomes.

It is necessary to understand that the railway cannot be a cheap mode of transport. Because we have such low tariffs, we are essentially maintaining break-even operations instead of developing and building new trunk lines and buying rolling stock. Tariffs should definitely be raised, primarily freight tariffs.

What mechanism for raising tariffs do you currently see?

Three models are being considered currently. We are still discussing which model to adopt as the basis. At the same time, a proposal on direct increase of tariffs has been submitted to the Cabinet of Ministers.

What are these models?

The model of direct increase, the model of canceling the preferences for the inventory rolling stock, and the model that I suggested, which involves a combined approach. The essence is that we must come to a tariff for transportation of one ton of cargo.

Regardless of the type and class of goods?

For us, it does not matter what ton of cargo we move - a railcar of coal or grain. In any case, we expend a certain quantity of electricity per ton of cargo, and coefficients are then calculated based on this basic tariff (coefficients are apply because, for example, operation of a grain car is more expensive than a gondola car). Thus, we will have a justified tariff.

Have you found out what the market’s attitude to this will be?

We will demonstrate this concept by 15 August. We will not violate the requirements and expectations of the market because the market will understand why this specific tariff. However, we are currently studying our competitors’ tariff formation in general. For example, at what price is gravel transported by road? However, the market is distorted because transportation by road is not regulated. According to our estimates, we have lost 8.5 million tons of grain that we could have transported by rail since the beginning of the year, and this is despite a revenue rate of USD 12. You can calculate how much money we have lost just because the process of transportation by road is not regulated.

Will river port operators’ proposal to reduce the cost of transporting grain to them be considered?

To consider this issue, it is necessary to make concrete calculations. However, in practice, all small stations that are located in river ports have 6-7 loading tracks and the lengths of these tracks can accommodate 12-15 railcars. It is clear that the cost of our shunting operations will be higher than it would be if we simply provided railcars and then drove them out.

This is the negative aspect of Ukrzaliznytsia’s monopoly. It is more profitable for it to operate on trunk routes only, and everything else comes second...

We are considering establishing within the corporation a shunting company that will engage in import, export, and transportation because locomotives will be used for freight or passenger transportation and our shunting operations will thus fall away. For now, such an idea exists.

An initiative on online access to grain carriers was widely touted recently. In reality, it all ended with only the ability to view railcar availability and nothing more

We currently load 1,450 railcars per day. We loaded 900 railcars last year. That is, we are transporting 76% more grain than before. All applications that are filed on every railway are currently processed. Grain carriers are in operation.

We can increase the number of grain carriers by an additional 500 per day, surpassing the peak that was reached last year. However, at the same time, no consumer has approached me to say that his application for grain carriers was not accepted or that his grain was not transported. If such issues exist, let us look into them.

What about online convenience?

Online convenience is as follows: all those customers that are currently connected to the Mesplan automated information system will be able to make bookings that way. This system makes provision for such a function.

Private traction will emerge whether we desire it or not

The draft law on rail transport provides for introduction of private traction. We understand that it will not be introduced immediately after adoption of the law and that there will be a transition period. How long will the transition period be? Are negotiations being held with specific operators of rolling stock and locomotives on entry into our market?

No such negotiations are being held. They simply do not exist.

No interest or no negotiations?

No negotiations, and there is no particular interest either. For one simple reason: when a potential private carrier or operator comes to us with a dual-system electric locomotive, then we can open a dialogue. In principle, the subject is closed until such locomotives appear.

Why is it closed? I will give an example. We have a combined rail system (direct/alternating current), and a train from Krivoy Rog to Odessa changes locomotives three times. We can move to the issue of private traction only when dual-system electric locomotives appear and when a train is attached in Krivoy Rog and detached in Odessa.

Apparently, private companies will buy these locomotives

We will see when they buy locomotives based on the technical specifications they receive from us. However, they will not receive the technical specifications earlier than 20 days. We will hold a meeting of Ukrzaliznytsia’s technical council, at which a concept on the type of electric locomotives that should operate on Ukraine’s rail network and their operating parameters will be adopted. The result is a situation in which the Kryukov Railcar Building Works has drafted two dozen technical specifications for various locomotives because there are no concrete specifications. I asked the owner of the works why they did this and he replied, "We will build all types of locomotives." Maybe they are not needed. Do we really need so many locomotives? We must understand the type of electric locomotive we are choosing. We will also consider the main issues involving electrification at the meeting of the technical council.

"Those that currently transport goods on routes and have their own rolling stock will have the right to demand their own locomotives under the law"

I understand that you are not against private traction

It (private traction) will emerge whether we desire it or not. Why will it emerge? Because those that currently transport goods on routes and have their own rolling stock will have the right to demand their own locomotives under the law.

Regarding rolling stock, many of our railcars are currently stuck in the Crimea and the Donbass. What steps are you taking to get them out?

We have already taken 379 gondola cars out of the Donbass this month, and we are currently preparing to take more out. There are areas that are simply impossible to reach. If there is an opportunity to reach those areas, then we will take them out.

Will they will give them up?

They will.

Will the Crimea give them up?

The situation involving the Crimea is difficult. They are demanding that declarations should be filed for these railcars, and the filing of declarations will be regarded as recognition (of the annexation of the Crimea).

Development of railway infrastructure around ports and port stations is a very important issue. Do you plan to resolve it? Is public-private partnership on this issue possible?

We are always in favor of any public-private partnership that is within the framework of the law. We need to develop port stations by attracting funds from those customers that are building ports. However, our biggest problem is different. It is not even the capacity of these stations, which is already quite high. The biggest problem is how to get to these stations. Take Nikolayev for example. A 40-kilometer bypass is currently being built there to allow the number of railcars required by these ports to be energized there. There are also questions about the railway sections that are not electrified. When we are transporting cargoes on trains pulled by diesel locomotives, we incur costs that are 3-4 times higher than we would incur if we used electric locomotives. Meanwhile, tariffs are the same everywhere.

Therefore, I am ready to hold any negotiations at any time of day or night with all stations that want to develop. As an example, we have a bauxite quarry in the Lvov region. It previously loaded 15 railcars per day and now wants to load 150 railcars, but the length of the station is designed for 25 railcars. How do you take goods out without reconstruction work? Not possible. It is necessary to sit down at the negotiating table and negotiate.

Who then becomes the operator of a branch line built by an investor?

Ukrzaliznytsia. This is spelled out in the law on transport and all the laws you can imagine in the world. Take Belarus for example.

Is Ukrzaliznytsia ready to return their investment with the help of tariffs?

The railroad could make its investments with the aim of securing return of the tariff that exists, say, in 10 years. However, an investor is also interested in the products it produces and we are interested in transporting them. We have built many different stations, but the issue of compensation was never raised.

The issue was raised when a port operator built a station at the Yuzhny seaport

I cannot speak to that. We once built the Feodosiya station. There was an oil terminal at the Aivazovskaya station. They initially unloaded 120 railcars per day. When this project finished, they were already unloading 800 cars because they were interested in developing rail tracks. Therefore, we sit down, talk, and reach agreement on each individual case.

How does Ukrzaliznytsia intend to recover the transit cargoes it has lost?

We are engaging in recovery of lost transit cargoes. This is a very serious task. The lost transit cargoes are worth a total of about UAH 3.5 billion in lost revenue. We are negotiating with those companies that previously transported cargoes through Ukraine, and we are trying to differentiate tariffs. We are holding talks on adjustment of tariff formation to enable us to be competitive with ports in the Baltic States, for example. Our ports are deeper and larger.

To understand, we lost the cargoes that were transported from Belarus to Odessa ports because of a difference of USD 6 in tariffs. We have lost UAH 1.25 billion in the value of transported cargoes.

What about Russian cargoes?

I just gave you the example of Belarus. It is the same with the Russians. However, I think there are certain prerequisites for the situation involving transit cargoes - including transit cargoes from Russia - to stabilize.

How do you see Ukrzaliznytsia in 2020?

As an efficient, competitive state-owned transport and service enterprise that meets the needs of the market. The client should become the most important thing us. To achieve this, we are already developing a long-term strategy for development of rail transport, changing our technical policy (reorienting towards the standards of the European Union), and making our personnel approach transparent.

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