Head of "Lemtrans" V. Mezentsev: Ukrainian railway infrastructure lost in the last century and requires serious financial investments

26.06.2017

Source: Ukraine; IA: «Interfax-Ukraine»

Exclusive interview with the General Manager of the Ukrainian largest private railway carrier "Lemtrans" Vladimir Mezentsev for Interfax-Ukraine  

— Tell us, what is “Lemtrans” for today?
— Today "Lemtrans" is the largest private operator with huge cargo base and transportation load up to 60 mln tons annually. The main rolling stock consists of the low-sided cars. And today we have 18 thousand of such cars not taking into account the blocked ones at the territory of ATO.

For all this time we have invested heavily in the development of business and economy of the country, in general about 4 billion UAH since 2010. These funds were used to purchase the stock in order to meet the growing needs of the 

— You’ve mentioned a part of the blocked stock. How many of the stock is blocked there?
— More than 2 thousand low-sided cars. In general, this is not only our problem or not only the problem of Ukrzaliznytsia, it is a problem of all freight forwarders who work in the Ukrainian market. Absolutely everyone has cars in this 

— Tell us about the company’s financial results.
— In the falling market, the company maintains a positive development trend and demonstrates revenue growth (+20%) compared to 2015, namely from 8.042 million UAH to 9.672 million UAH. This was achieved due to operational efficiency and quality management of the stock. The share of the operating stock in 2016 was 92% compared to 86% in the previous year.

The company has a program to update the stock. It provides for the decommissioning of the cars which technical and commercial condition does not meet the requirements of the cargo owner and, according to technical services, prevents expediency of further operation.

— What are the transportation rates for the five months of 2017?
— For the five months of 2017, the volume of transportations we have is 22.61 million tons. This is less than for the same period of the last year. In 2016 there were 24.18 million tons, this year slightly less due to the closure of the ATO zone (a decrease is 6.5% — IF).

— What are the transportation plans for 2017? What numbers do you plan to achieve?
— Our initial plan is 65 million tons. Now we still do not exactly know should we correct it for a smaller side or not.

— Is there any reserve or preliminary plan for 2018?
— None for 2018. Usually, the planning for the next year begins at the end of August. Therefore, if you contact us in September, we can roughly tell you the volume of transportation we see the next year.

— Do you plan, for example, any technological and organizational measures to increase traffic? Probably, acceleration of turnover of the rolling stock or other things?
— We constantly raise the issue of reducing the turnover of the rolling stock and speeding up traffic at all conferences, emphasizing the need to go innovatively. The whole world today is trying to increase the turnover of goods not at the expense of the number of the cars but by increasing the tonnage, increasing the route. That is if we carry 55 cars today, that is the countries that carry 70-80 cars. If today we have 23.5 tons of axle load, that is the countries with 25-30 tons of it which gives a significant leap to the economy of such countries.

— Will your railway infrastructure allow increasing the load or 23.5 tons per axis is the limit?
— Yes, our railway infrastructure, unfortunately, stuck in the last century. Therefore, serious and significant infrastructure investments are needed so that these types of the cars and the given configuration of the cars can be used. You cannot buy a sports car and ride on a country road, you must first prepare the road and then already buy a sports car and use it.

— Specify whether you work outside Ukraine or not.
— We work on western crossings. Namely, it’s Poland, Hungary, Moldova, and the Czech Republic. We lift the shipments in these directions and have no other directions, in fact.

— What is the cargo share of the main shareholder of the company SKM Group in the general transportation structure?
— In order to have a correct understanding of the share of SCM cargos, it must first be said that SCM in open-sided cars is more than 40% of all goods transported in Ukraine. Therefore, naturally, its share is very large and it is probably the largest shipper that transports bulk cargo by route deliveries. Its share in us is more than 80%.

When we first started our cooperation we needed to win the competition from Ukrzaliznytsia. We knew that the chase would be a long one but we wanted it very much. We saw the defects of Ukrzaliznytsia in terms of service attitude to the customer and we understood that we have chances. This meant competitive prices but at the same time the best service and better stock, compliance with deadlines and guarantee of the supply of the car, etc.

We started somewhere from 50%. I want to say that our share is not directly proportional to the share of SCM enterprises. If we have more than 80%, then they can have it from 50% to "Lemtrans", some small enterprises of the group may have 20%. According to the transportation structure, we cannot say that we render services only to SCM group.

Transportations for all customers including for the companies of SCM Group are carried out only on market terms.

We work with them on a contractual basis. The only thing I want to add is that a few years ago we have already come to the format that we should have long-term contractual relations so that they could also plan the cost of their products for the end consumer, at the warehouse, and we could understand the traffic volumes. Therefore, we have come to the format of long-term contracts and long-term relationships.

— Saying of long-term contracts what period do you mean to apply?
— This is a three-year horizon. We are striving to find some formula of 10-year mutually beneficial cooperation but so far we failed. By the way, with all enterprises and partners, we always conduct, first of all, negotiations on long-term cooperation. They will be provided with quality rolling stock and we will be provided with a cargo base.

— Following the example of the seaports which attract new cargoes to increase their cargo handling, are you attracting new companies, new cargoes to increase cargo turnover?
— Our rolling stock carries various cargoes. It's ore, coal, metal, and construction cargo. All kinds of cargo in bulk, in fact, including and rack. We are represented in all segments. The question of whether a new kind of cargo is possible in low-sided cars is probably rhetorical. Why? Because there are no new goods.

We closely follow other types of the cars. We analyzed the situation in the grain market, but with the tariff policy that exists in Ukrzaliznytsia, for example, this project does not look so attractive to begin investing in grain carriers.

— You’re saying that there is no sense of investing in them, aren’t you?
— Well, if the grain carrier does not pay off even for 10-15 years then somehow even the bank looks at these investments skeptically. We are not ready for this investment either.

— In today's conditions of increased theft of goods, attacks on the stock, how do you ensure the safety of transportation and the safety of goods?
— And this issue we raised twice at the conferences that took place in Ukraine, namely, that we have an insufficient system for the protection of goods and the rolling stock. This is not just our reality but a catastrophic scale challenge for the entire industry. The figures speak for themselves: in 2016 more than 5,000 cars operating in "Lemtrans" were dismantled, which is 158% more than the previous period.

Understand that according to the regulatory and legislative framework Ukrzaliznytsia is responsible for the safety of cargo and the rolling stock. Private business cannot influence this process by hiring its own brigade, putting into the structure or giving protection to some stations, crossings; there is no legislative base to introduce such a procedure. Therefore, it remains only to raise these issues at some meetings and somehow in this direction to focus the attention of "Ukrzaliznytsia." This is our common problem. Most likely it is necessary to follow the path of reforming the legislation.

— Speaking in general, according to your estimation, how much did railway freight traffic in Ukraine decrease? What are the possible options to fix this situation, compensation for this "drawdown" of the market?
— If we compare 2016 and 2015, the market sank in significantly. The level is approximately the same; a reduction is only about 2%. If we take a longer period, for example, already with 2017, I think the reduction will be about 20%. Due to what catch up these volumes? I think we should develop industry after all. This is a global problem, unfortunately, we cannot influence it. This is a problem that must be solved at the state level. Among the methods is the stimulation of construction as such and the development of infrastructure, because with the increase in construction cargo Ukrzaliznytsia's freight turnover will grow, due to this the GDP of the country may grow, and, accordingly, the employment of people will increase. That is, the only infrastructure, large infrastructure projects can pull our economy.

— Due to what it is possible to finance such projects in the existing conditions? What are the possible funding sources?
— This is probably the question to be put to "Ukrzaliznytsia" and to the government, not to us. World practice is the loans of international financial institutions, loans of the European Bank for Reconstruction and Development. I heard that the EBRD gives $150 million for building the cars. But, in my opinion, it would be better to invest this money in the infrastructure. Investing in the infrastructure will accurately allow the cargo flow to increase including freight turnover and the profit of Ukrzaliznytsya.

— In continuation of this issue let's discuss the theme which has been discussed for a long time. This is the reform of Ukrzaliznytsia. There are two strategies, the first of the ministry and the second belongs to "Ukrzaliznytsia". Do you know them? How can you assess these documents?
— Both strategies have the right to exist and there is nothing wrong written there. There's only what should be and, generally speaking, it is very difficult arguing with the content. The question is in tactics, how to achieve these goals? And also the question is in detail. Since we work more with the rolling stock, I will make some such accents on it.

The strategy was written for the period since 2017 to 2021. The investor should understand that there is a rolling stock: low-sided cars, cisterns, platforms, grain trucks. So, what will be the working park of the low-sided cars, grain carriers, cement carriers and other rolling stock for years? Owning such information, the investor will clearly see the picture that there is a certain volume of traffic, which makes conditionally 100 million tons, and under this case, for each point, there are 2 thousand, 5 thousand some types of the cars. Now, he understands that you cannot transport these 100 million tons with five thousand cars. This requires 7 thousand cars meaning that the deficit of such a rolling stock will be 2 thousand. It is then that he can already plan, look for the company that is engaged in professional activity in this market, to invest in this rolling stock for these purposes.

There is another important factor being the speed of transportation. You can buy a lot of cars but if the speed will decrease, these cars will not take out the cargo. You cannot buy cars at all, but increase the speed of transportation, the speed of handling goods, respectively, the cars will be enough. Understand: the investor is always looking for where there is some concept of a deficit or money, or resources, or assets, and there he invests.

All over the world, they prepare some kind of platform, infrastructure, and only then they tell investors: there is a platform, here we have brought the communication, here we have summed up the phone, communication, gas and so on. Please come, build a house here, a hub, some shopping center. Similarly, here: if Ukrzaliznytsia clearly shows that the infrastructure is ready for new innovative cars that will be provided with a large cargo, it will become much better.

After all, what is the greater volume of transported products by one locomotive? This immediately reduces the unit costs, the deficit of the same locomotive traction, which is not enough for today, and this is the reduction of all resources, cost reduction. Therefore, the products, respectively, will be more competitive. But for this, you need to create prerequisites.

Therefore, if we talk about strategy, then private business would like to see a more detailed document. And I am deeply convinced that right now it is necessary to run from the very bottom to just stay in place.

— Yes, it would be a good idea for the investor to protect his investments...
— Of course.

— Ok, now we have two strategies. Don't you think that in fact, historically, strategies and their implementation have a big gap between them? Is it possible to implement these new strategies now?
— They can be real under several conditions. The first is government support; the second is the availability of finance. And the third is a motivated team that will implement this strategy. The strategy should be clear to the investor because no one gives money just for fun.

The same IMF or other investors say: "Do it and all get what you need". So for the financial investors do not push anyone in the back, they need to show a detailed plan and say: "Look, here are the niches that you can invest in view of those legislative limitations that exist today". It is very important to go through the first steps so that you do not stumble afterward.

— In terms of private traction, in your opinion, who could become an operator if the market opens since large investments are needed? Are there such investors among the domestic ones?
— Here the question is not who could become an investor. There are a lot of financial mechanisms that allow all domestic and foreign companies to use locomotive traction. There are companies that work at the financial leasing market, which buy the rolling stock, including locomotive traction, in some countries, and give it to operational leasing. And now it is possible. The question is in understanding what kind of income this rolling stock or this locomotive traction will bring.

Today there are two components in the tariff: carload and infrastructural, and the locomotive component in the tariff is absent. That is the investor cannot even potentially assess how much a purchased locomotive can bring money. Therefore, in order to talk about who will buy and how to buy, you need to understand that we give a clear opportunity for a private investor to invest in locomotives. And if tomorrow we'll say that you need to replace 100 locomotives, and each locomotive costs $3-5 million, then probably no investor, neither Western nor, especially, domestic, will not give 4 billion USA. Therefore, it should be a long-term program. Talking about money, there are a lot of examples when companies are created that are specifically engaged in financial leasing and transfer it to the operating leasing.

— Probably, this mechanism would be even better than to create a classic operator…
— Maybe. The classic operator can be created by the team of the professionals which will manage the operating leasing already.

— This is, again, with the opening and some development of the traction market...
— Yes, of course. It is necessary to go through several stages of formation of this market. It is impossible to write the rules and tomorrow they will start working. It should be some stage of becoming. It will not be smooth immediately but you need to move towards it, because all of the today's problems, written in the strategy, are correct, that the wear and tear of all assets of Ukrzaliznytsia are from 70% to 90%, and it's true. But "they took and bought everything" — and it is impossible to do, not in any country.

— In terms of reform, what are the main constraining factors that you see?
— The speed of movement and, unfortunately, it does not grow. I think this is the most important constraint, restraining development. Please, understand that the key components for the development are investments, modern technologies and a motivated team of the professionals.

— How can this be changed? Again, is it attractive for external financing?
— Only by attracting external financing. When it comes to investing, everyone shows a picture that wear and tear are 90%, and they say that you need a lot of money. But, as everywhere and everyone, there is the Pareto principle saying 80 to 20. The same is in our country: 80% of the money of "Ukrzaliznytsya" are brought by 20% of the directions. These are the ports, metal processing plants and western crossings if we talk about domestic transportation.

So, maybe, we do not need to immediately make rapid repairs on the whole network? Maybe, we must choose these basic directions for the ports and start their modernization. To calculate that in this direction the speed must be such; that this kind of the cars should work in such a direction instead of 55 in the structure, but, let's say, 70. Negotiate with the ports so that the speed of cargo handling is appropriate, and start making steps for the consignors to see that there are really structural changes that benefit shippers in the first place.

The bottom line is to turn the seller's market into a buyer's market. Understand, and "Ukrzaliznytsya" and we do not work for ourselves, we all work for the shipper. There will be no consignor, neither "Ukrzaliznytsya", nor we are needed.

It is the model "Lemtrans" has been used for its development for a long time. We actively prepared and continue to move in the same direction, to work in the buyer's market, so we buy and repair the stock, conclude long-term contracts with the customers, improve services.

— Are there any some problems in your interaction with Ukrzaliznytsya? What does not suit you as a private operator?
— There are no global disagreements between us and Ukrzaliznytsya. Yes, we are direct competitors, yes, there are conflicts of interest, but we are for fair play. That is when two convoys arrive at the station, one with the state cars, the other with ours, and if there is one locomotive, then, naturally, he will carry the state cars, despite the fact that our train came two hours earlier. Accordingly, in the same way, the delivery of the cars to the shipper: if our train and the train of "Ukrzaliznytsia" came, then the first, naturally, is...

— Is the problem of the delay in loading/unloading is as serious as Ukrzaliznytsia reports?
— This is really a part of the problem and everyone knows about it. Some consignees delay the rolling stock. Again, why did I mention the last century? Because our infrastructure is the infrastructure not only of Ukrzaliznytsia, and not only it is in such condition but it is also the infrastructure of the industrial enterprises, ports, including the fact of grab discharge.

Therefore, it all boils down to the fact that we need to do such a large state program for infrastructure. And, accordingly, it requires hundreds of billions of dollars to bring infrastructure to such a format as, say, in China which over the last 20 years completely rebuilt it, or as in Europe, which has been gradually moving towards it.

China has made a significant breakthrough in 20 years and today at all transport conferences they say that from Beijing to London the train should go for seven days, it is over a thousand kilometers a day. And we have a train going from Ingulets GOK to the ports of Odessa for almost a day.

— Who do you mainly buy the rolling stock from? Are these national manufacturers?
— National. Only national.

— Do you consider buying from Chinese manufacturers? They say it is much cheaper.
— We worked on the issues, let's say, not for the cars, but for Chinese casting in times when there was a deficit, worked for the other spare parts. I would not say that it was very cheap. There is not cheaper than in Ukraine. Not cheaper. And, for a long time, I must say.

— Parallel?
— Yes.

— All versions of the draft law on railway transport which will probably stay in the corridors of the Verkhovna Rada say of the creation of the National Transport Regulatory Commission. Is it necessary indeed?
— I think such a regulator should be. We need an independent body that will objectively assess the situation, impartially investigate any conflicts, accidents, etc. When you are a freight forwarder, owner of the infrastructure, owner of the process, and generally the owner of everything, then, naturally, competition disappears. The lack of competition, as usual, always leads to what? That the situation always worsens. Competition is the driving force of the progress.

— The tariff policy is the most urgent issue for all clients of "Ukrzaliznytsia" and for itself. What is your assessment, opinion, innovative offer, what must be done?
— First, the tariff policy in the long term should be clearly predicted. That is, the shipper must know how much he will pay for the tariff every year for the next 5-7-10 years. It is checked that there is inflation, there are other various nuances, but, nevertheless, there must be some canvas according to which everyone should move.

In order for the consignor to be interested in the development of Ukrzaliznytsia, he must see positive changes. And what turns out today? Today, receiving a tariff, there is a cross subsidy. Cross subsidy for passenger transportation, by kinds of cargo, metal is transported at a single tariff, crushed stone and some other cargo at a lower tariff. The same is the empty run.

In this direction if it is necessary to subsidize enterprises, in particular, city-forming enterprises, then there should be targeted support from the state, but not by Ukrzaliznytsia, otherwise, it will never become a profitable market organization, but will always seek at the expense of whom to subsidize transportation.

Therefore, it is necessary to get rid of non-core assets, the lack of cross-subsidization and the notion that shippers receive instead of increasing tariffs. When nothing has changed for many years but they simply say "we raise the tariff, because it does not correspond to the market rate", then, naturally, this causes rejection of the consignor.

We understand that all interested parties namely the owners of the rolling stock, the state, the shipper, should benefit from the tariff increase. We raise and this means we use this money to improve the services. I think no one will have any questions about this.

— Summarizing, can you name the main changes that you would like to see on the market in the nearest future?
— This is the safety of the rolling stock; increase in speed and shortening of terms for the delivery of goods, absence of locomotive traction deficit. These are three key components that will allow shifting to a positive for all parties and which can be actually achieved via clear interaction of all market participants.