Ukrzaliznytsia Cargo will be the number one in Europe – Interview with Stefan Hofsaess

Advisor to the Infrastructure Minister of Ukraine Stefan Hofsaess in an exclusive interview to the CFTS portal on the reform of Ukrzaliznytsia, future cargo rail company, the impact of the Association Agreement with the EU on the railway industry and the prospects of Ukraine's transit potential.
Mykola Zasiadko 30 September 2015 14:31

Ukrzaliznytsia glides through reforms. Public joint-stock company "Ukrainian Raliways" has been created recently. Its acting board chairman became the current acting director of the State Raiway Administration (Ukrzaliznytsya) Oleksandr Zavhrodniy. The next step is the creation of specialized companies in the structure of the future joint-stock company. The Infrastructure Ministry has decided to engage foreign experts in this process.

Thus, Stefan Hofsaess became the advisor to the Minister Andrii Pyvovarskyi for the Implementation of Railway Reform. According to the minister the German expert " has worked on projects for development of railways and subways around the world: from high-speed rail in the Netherlands and Beijing to a subway in Puerto Rico". But the adviser's main task is to create Ukrzaliznytsia Cargo – the cargo company in the structure of the updated Ukrzaliznytsia".

We met with Mr. Hofsaess in Kiev and talked on the vital issues. On the vision of the future of public joint-stock company "Ukrainian Raliways" and cargo rail company in particular, on the impact of the Association Agreement with the EU on the railway industry and the prospects of Ukraine as a transit country. Much attention was paid by Stefan Hofsaess for comparing of Ukraine's railways to those in China, Austria and even in East Germany. According to the advisor, Ukrzaliznytsia Cargo has all chances to become the leading cargo rail company in Europe. It needs a little to achieve this status, considers Stefan Hofsaess.

How did you become an advisor of infrastructure minister Andrii Pyvovarskyi for the implementation of railway reform in Ukraine?

A friend, who worked many years in Kiev for the German organization GIZ, has told me about the reform of Ukrainian Railways and I was very interested from the beginning. I had my first visit to Kiev in May and I am now in Kiev since four weeks.

Why did you agree to the proposal to become an advisor?

I think that the reform process is very interesting. I have been working in the railway business since 24 years. And such a reform is a challenge, and I would like to bring in my experience into this process.

You have large experience working in railway companies such as Siemens. But Siemens isn't cargo company.

I have experiences in the design, construction and operation of railway systems and in the engineering consulting business all over the world. I joined Siemens in their management consulting group back in 1991, working on restructuring projects in their transportation, power and medical groups. For example we did the restructuring of their railway electrification business between 1992 and 1994. I joined Siemens Transportation Systems in 1994, and I worked until 2008 in their Turnkey System Division in many different projects in Greece, UK, Netherland, China, Turkey, Thailand, Malaysia and the US. Between 2001 and 2005, I was a president of their Asian business. Between 2005 and 2008 I was President and CEO of that division.

Have you ever transformed or reformed some company?

I started my career at the Fraunhofer Institute, Berlin, working on restructuring programs of big engineering companies in East Germany in the first phase of transition after German reunification back in 1990. As I mentioned before, I then worked in the Management Consulting group of Siemens in complex restructuring projects.

From 1998 to 2001 I was the lead negotiator for the largest PPP-project in the Netherland, the HSL Zuid high speed line. The successful negotiation of this 25 years infrastructure concession deal was done in parallel to the reform and restructuring of Dutch railways, i.e. splitting of operation, infrastructure and the setting up of the regulatory body.

Also I was responsible for implementation of other PPP projects in Thailand, Taiwan and Malaysia. The airport rail connections in Bangkok and Kuala Lumpur were built turn-key and we supported the buildup of the operation and maintenance companies and we were running the railway for the initial first years. At the same time we renewed turn-key the freight and passenger line in Malaysia between Rawang and Ipoh under running operation.

And what were you doing in China?

In China I was developing rail business during the reform of China Railways. I was negotiating the first Chinese high speed line between Beijing and Tianjin, which was built in very short time to make sure its opening of operation just before the opening of the Olympic Games 2008. And also here we had to support the operational startup of this system. Such business you cannot do without the necessary understanding of railway operation.

During that time, China Railways – with its old State Enterprise structure – went through their reform and restructuring process. There is some similarity with Ukrzaliznytsia, they also had their own manufacturing units, construction companies, design institutes, universities and hospitals. The Chinese brought in companies like Siemens, Bombardier and many others to form Joint venture companies. Today, many of the former subsidiaries of China Rail are successful players in the national and international market. I think this knowledge and experience is very important for the ongoing reform of Ukrzaliznytsia. In the beginning of their reform the Chinese were looking to Germany and France, on Deutsche Bahn for example, but then they had developed their own Chinese way of restructuring the railway.

Why on Deutsche Bahn?

Deutsche Bahn was formed in 1994 after the reunification of the two German railway companies – Deutsche Bundesbahn (West Germany) and Deutsche Reichsbahn (East Germany). By the way, Deutsche Reichsbahn had similar structures that Ukrzaliznytsia has today.

About what similarities you are talking?

Before the forming of the new Deutsche Bahn, the East German railways had factories, construction companies, hospitals like Ukrzaliznytsia has the same. The restructuring of those non-railway assets was not in the focus of the German railway reform. In that respect it might be better to review what the Chinese have done.

How do you see Ukrainian railway industry from the outside?

Ukrzaliznytsia is a typical state enterprise. And I think that ongoing reform is the right approach of the Government. The detailed implementation of the reform will of course take some years. Ukrzaliznytsia will function as a corporate company and not any more like a government administration; however the Government will remain shareholder and will not privatize the company.

Which country could be an example for creation of railway cargo company in Ukraine?

Ukraine and the EU have signed the Association Agreement. If this is followed, then after a period of time the railway market will be accessible for European companies and vice-versa. And if Ukraine really wants to go along with the Association Agreement, these changes will happen, and this will provide also opportunities for Ukrzaliznytsia.

What changes?

In Ukraine the freight tariff system differentiates the tariffs according to the type of material. In European Union this would be considered as discrimination. When you look on the tariff system of Austrian Railways (OBB) for example, the freight tariffs are determined by the wagon capacity you book. Today in Europe you are booking wagons. And if the factory of our Client is on strike then he has to pay for the booked capacity and not for the actual load and weight. It is a risk of our Client and not the risk of the railway operator. I like the OBB tariff system for its transparency and clarity. We need simple and transparent tariff systems. And the railway has to be profitable.

Why do you think so? All freight transportation in Ukraine is profitable, losses are making in passenger transportation.

I do not think Ukrainian railways are profitable, especially when you take into account necessary investment and capital cost required to keep the system in good condition. You have to earn so much money to cover amortization and reinvestment. Let’s use a simple example: if you rent out apartments as a business for twenty years, and you do not repair and do not reinvest during the twenty years period, you may well annually run good profit. After 20 years you may ask yourself the philosophic question: are you profitable or not? What will be the value of the assets, what about your reputation and the business prospect for the future?

Let's talk about Ukrainian railway cargo company. How do you see its future?

In terms of freight volume, Ukrzaliznytsia Cargo will be the number one rail cargo company in Europe from the beginning. What is the competitive advantage of this business unit? Definitely, Ukrzaliznytsia has cost advantages compared to DB Schenker, which is operating from Germany and has therefore higher personnel cost than Ukrzaliznytsia. On the other hand, DB Schenker is doing much less freight volume than Ukrzaliznytsia, but their freight revenue is still much higher with around 5 billion euros. When you think about DB Schenker or for example OBB, they began as railway operators, now they are rather logistic companies, using the potentials along the logistic value chain. Their business has changed from heavy freight to more and more intermodal container transport and other logistic services.

So do you consider that the railway company should be transformed into logistic one?

I think we have to see the reform as a great opportunity. Since the opening of the European freight market some years ago, the market structure in Europe has changed a lot. There are very few classical railway operators left. The big European railway operators like DB Schenker and SNCF Geodis have transferred into big logistic players. Railway freight is still a major business for them, but their product is the point-to-point logistical delivery chain. If you look at the list of the Top-50 biggest logistic companies in the world, the first position has DHL, which is the former German state enterprise Deutsche Post. Today DHL provides transport on ship, rail, air and road with revenue of more than 50 billion euros. And only two European railway companies are in this list – DB Schenker and SNCF Geodis.

Do you mean that railway companies must be more competitive?

It means that railway operators have to work out a clear strategy based on market developments and future market prospects. Future growth of freight transport is expected along European-Asian corridors, with a prospected growth of 40 percent until 2025. We have to try to get a substantial share of this growth using Ukraine’s central position between Europe and Asia. If I am sitting in Kiev, I have to look who is forwarder in Shanghai, who is forwarder in Hamburg. These are potential future Customers. Recently, DHL signed an agreement with Kazakhstan Railways to provide rail connectivity and trade between China and Europe. So these players are our future customers and we will have to follow this market trend in order to gain in future more business.

I think it is important to know where Ukrzaliznytsia should be in next five years. In Europe, after the opening of the freight market many changes happened, leaving at the end two big players, DB Schenker and SNCF Geodis. Interesting freight lines are under attack from investors and niche players. The railway operators, therefore, had to improve their access to the market. That's why they started to grow into logistic conglomerates – to grab freights business as much as possible.

Nowadays most of corridors from China to Europe overpass Ukraine in favor of Russia and Belarus. What Ukraine's government should do to attract more cargoes from China?

Ukraine is situated in the center of transport corridors from Asia to Europe. When you look at Turkey, how much they are investing in railway infrastructure, you will understand that Turkey is lobbying its capabilities to be a transit country. However, Ukraine has 230 mil ton-kilometers existing freight capacity, Turkey – 5 mil ton-kilometers. If Ukraine wants to be a good transit country, you have to lobby your capacities.

I think that Association Agreement is a good chance for Ukraine to get additional investments from European countries. Turkey signed such agreement many years ago and now they build many infrastructure projects using European capital.

Is open market a challenge for Ukrzaliznytsia?

We have to be prepared for this opening of the market in a few years’ time and we must understand what these changes will mean. Ukrzaliznytsia must analyze the possible changes and understand what the market will look like in five or ten years from now. I think the people working in Ukrzaliznytsia are able to do this. We have to understand the reform of Ukrzaliznytsia as a chance and an opportunity. We should use the opportunity of an open market, we have to be more flexible and maybe more international. Why Ukrzaliznytsia cannot open its own offices in Vienna, Turin or Rotterdam and why Ukrzaliznytsia cannot grab the freight business where it is originates?!