Business news from Ukraine

Exclusive interview of co-owner of the RDS road construction group Yuriy Shumakher for Interfax-Ukraine
The first question is about your rebranding. Has the company completed it, or is it in progress? What are your goals? Why did you decide to rebrand the company?
Today companies have to monitor the market and the latest technologies not only in their business areas. We and our brands have gone through a long way of transformation. Initially, the company was created as the Rost (Growth) investment group for construction of housing and commercial real estate. Actually, that is from where the name came from – to grow. When we decided to invest money in roads in 2005, we named the project Rostdorstroy.
Now we work in the field of road construction and are already in the top three companies in this market. We monitor worldwide trends not only in the sphere of road construction. Ubiquitous digitalization and a huge flow of information make brands and companies to grow more rapidly and keep up with the time. Therefore, their visual and media image changes. Everything is becoming more simplified, easy. That is why we decided that the name of the company Rostdorstroy is long and heavy, especially for the European market, in which we, in addition to the Ukrainian market, want to be represented. We decided to move to a new level and rebrand the company, starting from the name, changing it to RDS, and ending with a new approach to advertising.
In general, we want to take the company’s image to a whole new level. Our rebranding is in progress. We have created the company’s accounts on Facebook and Instagram. This is connected with numerous factors.
The main thing is that since the new president had been elected, we can see in general how the approach to road construction has changed. It has become a priority of the state. A planned approach is being used, and it is planned to double the financing of roads in 2020. We can see that big and powerful foreign companies are entering our market. We need to keep up with their level, to purchase high quality equipment so as to save our positions in the market. Technologies are upgrading every year. When we visit trade shows in Dubai or Germany, we can see that road construction equipment, construction materials and specialists’ skills are getting better year after year.
Anyway, I call all of them partners, and not competitors, because we are together in construction of modern roads. Therefore, we should hold relevant talks, properly introduce ourselves and stand for the company’s position. That is what we need rebranding for.
In December 2019, the Cabinet of Ministers allocated additional UAH 15.2 billion to close 2019. How much public funding will the sphere receive in 2020? And do you find it acceptable for the country?
I find them not just acceptable, but really sufficient. Even we are sometimes surprised by the fact that such money is allocated for roads. Over UAH 30 billion has been allocated, the Verkhovna Rada backed this decision. Moreover, the Verkhovna Rada also voted in favor of another UAH 20 billion, which will allow the government to attract extra loan funds. And this means that more than UAH 50 billion will be allocated for roads.
As the heads of both the Infrastructure Ministry and Ukravtodor say today, it is planned to attract additional UAH 10-15 billion from other sources so as to, let’s say, complete a record number of kilometers of roads this year. The money has been allocated and we have to do our job next. We have to do it both in quarries and on railway. This is very important, because not any spot can be reached by vehicles in the country. Today there is no comparison between the possibilities of motor vehicles and the possibilities of railways. Therefore, we are very concerned about proper arrangement of logistics.
In previous years the work of railways was really tough – the cars fleet was outmoded and it was poorly upgraded by Ukrzaliznytsia, taking into account that, thank God, the country had a record harvest and, as a result, there was a lack of cars for both the road business and grain transportation. That is what concerns us.
The main thing, which makes today’s government of the country in general, the ministry, Ukravtodor, etc., significantly different from the governments of past years, is the fact that today we have got an adopted resolution. Usually we saw the following picture: the national budget is adopted, but they issue the list of roads only in April (if we are lucky!). Tenders take a long time and it was not until June that a road company could start its work. As of today, the budget had been adopted by January, we have the list of roads, hence this helps the customers and Ukravtodor’s services to carry out tender procedures and us, as contractors, to bid, win or lose. And, above all, we can start our activities from late February if weather allows. Today, to spend UAH 60 billion of budget funds (not including the money from the European bank, which are allocated separately), a symbiosis of the customer and the contractor is necessary, as well as various types of road repairs. There is intermediate road maintenance – a simplified system of tenders and, respectively, of types of work which do not require licenses and expert assessment for projects at all, although some customers make it. Speaking about overhauls and construction of new roads, they require expert assessment and state licenses. We know that with regard to many aspects these agencies and expert assessments are unable to change rapidly just like many other institutions did under the new president and government. Therefore, there is a lot of bureaucracy which has to be defeated by stipulating the procedures in the legislation. We have some problems here so far.
Is the structure of Ukravtodor effective today? Can your company propose some innovations as a market participant?
They are already being implemented. Let’s say, the current structure of Ukravtodor, in my opinion, completely meets modern requirements. It is a state mechanism when the automobile roads service is the distributor of public funds. Naturally, there are various mechanisms and, probably, Ukravtodor could hold all tenders in all regions on its own. But it was created to reform a bulky machine which was supposed to be headquartered in Kyiv. Now each region has its own automobile roads service.
So, you mean the distribution of Ukravtodor’s powers in regions was effective?
Yes. But today in the composition of Ukravtodor there is the so-called SJSC (state joint-stock company), which unites the operation of roads. It is also a bulky machine with lots of employees, numerous, if you remember, DEUs (road maintenance sections), RaiDUs (district road authorities) in every district, which were in charge of road maintenance. A serious confrontation is under way in this area, and in their time they used to win all tenders for road operation in all regions, which included patching repairs, road maintenance, snow cleaning, road marking, guard rails, etc.
They used to win billion worth tenders and ‘operated’ these roads, because constructing a road is half the trouble, one has to operate it. And operations add at least 50% to roads’ durability. The state companies won tenders and used outmoded equipment which had not been upgraded for decades. They always lacked funds and faced other problems. The situation is changing today.
Firstly, private companies (like us) have been invited, and due to a new bidding system they are ready to invest money in machinery and equipment. I mean very expensive equipment for snow cleaning, blades, sand spreaders and other modern staff. All these guard rail pile drivers and various other equipment used for road operation. They never invested in this before, because they did not want to take a risk. I think the fact that today tenders are held for three years in advance is a serious renovation, which is being implemented in Ukravtodor. Tenders are held normally in the ProZorro system. Such an establishment like SJSC can be eliminated without any troubles.
Should there be a system of government audits in the sphere? What should it be like? What part can public control play in this system?
I think that the current format of road checks is the main sticking point, which in many aspects hinders us, as a road company, from development. The system of checks in the sphere of road construction is ineffective and outdated. The number of checks in the sphere is much higher than in any other spheres, which have them at all.
I think that reform of this system is one of priority tasks of the National Association of Road Builders of Ukraine today. It appears that road builders in Ukraine work in line with one system when money is received from the European Bank for Reconstruction and Development (EBRD), but switch to a different system while working through public procurement. This is nonsense.
Our major initiatives are related to the necessity for a unified system of tenders and performance quality checks. So, if we have the ProZorro system and a company wins a tender in this system, one should not say that something was wrong about it. This system was created to carry out all procedures transparently. Secondly, all tenders should be held only with firmly fixed prices. Why they used to be held with variable prices? That is because there was no financing, it was divided into tranches for four years. Obviously, the prices could change during these three years and that is why the customer held tenders with variable prices. A variable price is a reason for all law enforcement agencies to think that we are deceiving the government.
Today almost every law enforcement agency has a department in charge of controls in the road construction sphere. Inside the automobile roads service, there is a technical service which checks us when we submit forms. In the structure of Ukravtodor, there are the DerzhdorNDI (the State Road Research Institute) and the DorCenter (the State Center for Road Quality Check and Certification), which additionally check us. Ukravtodor always has the right to schedule its audit in order to check one or another road. There is also the accounts chamber, which can come to audit road builders. This is wrong. I think one independent agency should carry out road audits. An absolutely independent expert, who won the customer’s tender for engineering support, carries out checks abroad or when the construction in Ukraine is financed by Europe. It is like an audit company that signs every conclusion and stakes its reputation, which it had been building for decades, on it.
An independent audit system, in which not public officials, but independent experts audit road construction, should be developed. That is what we created the National Association of Road Builders of Ukraine for. It works very effectively, although we have been working for less than a year, and the law on public procurement has been amended due to our initiatives. We are ready to keep working in this direction.
You are building your company as a part of Ukrainian business. Do you or others have ambitions to move to the international level? Have you made any attempts to bid for foreign tenders, and are you also preparing the company for the international environment?
We already have been participating in international tenders in Ukraine for five years. International tenders have their own problem. We also have raised it in our national association. We are trying to make our government hear us. We prepare for tenders in line with international standards as long as money from international institutions are involved there. Today, we have signed a contract worth $12 million for the construction of the M03 highway.
Moreover, we have ambitions to participate in tenders abroad. Unlike Ukraine, tenders in Europe have very strict criteria. A mandatory requirement, in particular, is experience in the European Union for at least three to five years. We participated in tenders in Moldova several times, but having no experience, we lost. Now, we are trying to analyze the market and participate in tenders in Moldova and Romania. We also plan to try to enter the Polish market as a subcontractor.
We have to stand in the market, therefore we plan to improve our profitability. It should be higher in the countries with higher risks. If risks in the country are smaller, then profitability is lower too, however they pay better there. We want to try to enter the European market. In addition, we are already buying almost all machines abroad. Ukraine practically does not produce its own machines. We also can buy Belarusian machines. Leasing packages are cheaper there, thus we will have lower cost price for project implementation. That is why we are trying to enter that market too.
How much did you spend on machine fleet in 2018-2019?
In general, the acquisition of modern machines, mechanisms and vehicles cost the company UAH 167 million. We annually invest about $8 million in the renewal of our fleet of road machines. In 2019, the company’s fleet was expanded with 114 units of road machines and equipment.
RDS uses its own funds, funds borrowed from Ukrainian banks and leasing companies to upgrade its fleet. Also, part of the equipment is bought through financing of manufacturing companies such as Wirtgen and Zeppelin. We purchase mainly foreign equipment from leaders in modern machine building.
There is an interactive map of road repairs on Ukravtodor’s website. Both the repaired roads and the sections which are yet to be repaired are marked on it. If you glance at this resource, you will see a noticeable imbalance in the volume of repairs in certain regions: while large-scaled works are being carried out on dozens of sections in Kyiv region, for example, in Khmelnytsky region only four sections with completed works are marked, and repairs on two of them took more than ten years. We have the same situation in Cherkasy and other regions. Does this mean that roads in Khmelnytsky or Cherkasy regions are better than in Kyiv region?
Today, the government’s approach to the distribution of funds for road construction is different from the schemes that were used in past years. Unfortunately, everyone and their dog participated in it before. This referred, in particular, to making decisions on which regions should receive financing. The issue passed through the Verkhovna Rada committee in which relevant parliamentarians worked and each of them wanted to not offend the regions from which they were elected to the Verkhovna Rada. Therefore, in fact, if we look even at the last year’s budget, the distribution looked as follows: let’s say, there were UAH 10 billion for 20 regions and each region received UAH 500 million.
Such an approach makes it impossible to develop the strategy of transport corridors, which, in turn, stimulate tourism, logistics and development of ports. They started to build a road in Khmelnytsky region and, respectively, they made a section worth UAH 500 million. For this the contractor built a big expensive plant and they failed to provide it with a normal amount of orders then. Next year new lobbyists came, this region was deprived of lobbying, hence no money was allocated for it. That is what this approach looked like. Any other contractor in Ukraine can tell you.
The situation has changed now. Since the new management had been appointed at the Infrastructure Ministry and Ukravtodor, a consistent policy has been carried out for the development of priority transport directions. One or another region may suffer [in terms of financing] this year in connection with this policy. For instance, local roads, which are financed under an individual program from the automobile road fund, will be constructed there. Meanwhile, national roads will be constructed to a lesser extent. It is because we have a strategy. I believe it is the right thing to do, as we will have one completed road, instead of several unfinished. We will certainly have all of the roads completed, not in a year, but in five years, as the president said, and all of them will be real, finished roads. Thus, roads will be built by areas in the coming years. There is an obvious imbalance, but it is linked with the strategy. I find it absolutely correct.