The sales are part of a modernization effort at Ukrzaliznytsia – Ukraine’s state-owned rail company – which has financial difficulties.
Ukraine state-owned rail company Ukrzaliznytsia has listed 16 of its real estate assets for sale on its website. It includes several old buildings which used to be shops and warehouses. Prices start from a few hundred thousand hryvnias and up to nine million.
Ukrzaliznytsia lost $53 million in the first half of 2021, according to a report by online publication Marlin, and has a debt of $1.46 billion. To better the financial results, Ukrzaliznytsia is, for the first time, trying to sell unprofitable assets.
The company was close to default this July after being struck by Covid-19 and the lack of passager transport during that time. According to Kyiv Post, the company will auction away these real estate assets with a total starting price of $1.2 million. The following auction is supposed to be held on the fifth of October.
The slow reforms at Ukrzaliznytsia
Ukrzaliznytsia has been criticized for slow reforms and for not delivering coal and grain on time due to a lack of wagons, which are often in bad shape. The tracks are in need of modernization but have been neglected for many years. The Marlin report says that only 9,300 kilometers of the total 19,800-kilometer tracks in Ukraine are electrified, and many are in terrible shape.
Adomas Audickas, a member of the supervisory board of Ukrzaliznytsia, recently wrote about the lack of reforms in the Atlantic Council. He noted that the company “suffers from under-investment and over-staffing” and is “the most complicated state-owned company.”
“Currently, UZ (Ukrzaliznytsia) is undergoing an organizational transformation from a ministerial structure to a holding company with separate subsidiaries responsible for cargo transportation, passenger transportation, infrastructure, and maintenance. This transformation should allow UZ to improve decision-making, controls, and data quality. It will also enable UZ to prepare the railway for market liberalization, which is planned in the next few years,” he wrote.
“The most obvious problem facing UZ on the cost side is the issue of over-staffing. UZ has 250,000 employees, while a modern railroad of this size could probably manage with around 120,000 employees. Personnel costs amounted to 56 percent of total operating expenses in 2020. To put this into context, the figure for most other European railway companies is generally around 35-40 percent,” wrote Audickas.
One of many companies in need of reform
The privatization of unprofitable assets at Ukrzaliznytsia is part of a larger strategy by the government. Prime Minister Denys Shmyhal previously announced that unprofitable state-owned companies would be sold to improve the state budget and fight corruption. That process has already started but has been slowed down due to the pandemic.
The Ukrainian government is now ready to restart with privatizations, said Deputy Head of the President’s Office Kyrylo Tymoshenko recently. He believes that the state budget can get a four-fold increase in receipts from privatizations this year compared to 2020.
“In 2018, the growth of revenues from privatization amounted to 1.2%, in 2019 – 3.1%, in 2020 it was 350%. But we do not stop there because the plans for budget receipts from privatization this 2021 are to increase receipts by another four times,” Tymoshenko said.
Among several other companies, Ukraine expects to sell the Ukrspyrt distilleries, set to bring 1.9 billion UAH to the budget. The mothballed penitentiary facilities, set to bring the government 1 billion UAH, while another billion will come from the sale of smaller companies, where many are in terrible shape and only have very little value.
The State Property Fund, which will oversee the privatization process, also expects to privatize the President Hotel in Kyiv, four thermal power plants, Odesa Portside Chemical Plant, Ukragroleasing, and several regional energy companies over the next few years.
Denys Shmyhal said earlier this year that Ukraine can double its GDP over the next ten years and that the privatization process plays an integral part in this plan.
“And it’s not only our government but also independent economists who see it this way. They compared our situation to countries that faced a similar situation. Over the next five years, we will invest EUR 15 billion annually, we will carry out further privatization and pension reform, and the last but not least, we will also liberalize our capital market. All this will enhance development,” Shmyhal said, pointing out that extensive reforms are needed.