Infrastructure Talk with Yuriy Golyk about the decentralization, roads, overloaded trucks, and other aspects
Deloitte spoke with Yuriy Golyk, Adviser to the Prime Minister of Ukraine (ex-adviser to Governor of Dnipropetrovsk region), as part of the Infrastructure Talks column on the CTS portal.
The interview is conducted by Dmytro Pavlenko, Tax & Legal Director, Head of Infrastructure Industry Group at Deloitte Ukraine, PhD in Law, and lawyer.
Yuriy Golyk is in charge of the development and innovation in the Dnipropetrovsk Regional State Administration (DRSA), namely road infrastructure development. Last year, the total regional budget for road construction projects led by Yuriy amounted to UAH 1.3 billion. According to DRSA, 500 roads were repaired in Dnipropetrovsk region during 2015–2018.
To recap on the first year of full-scale operation of the Road Fund, decentralization of public funds, and revision of the road infrastructure funding model, we discussed new rules of the game, current situation with the roads, overloaded trucks, Dnipro airport, and many other aspects.
Dmytro Pavlenko: Hello Yuriy. You are a famous blogger in Ukraine, and in the intervals between publications, you are busy building roads. Where do you find time for the roads?
Yuriy Golyk: It is rather the opposite. I find time for writing the blog posts in between the road construction works. I stopped using Facebook during the day after having realized that it is a very contagious ‘hobby’ that consumes a lot of time. Still it offers a convenient way to share information about achieved progress and the work done. For instance, one website, let's name it “New Time”, will, for example, write an article about an overturned truck accident in Dnipro, but it will never write about opening of the country's best children's intensive care hospital in Dnipro, where the life of a 30-week old baby was saved. That is the reason why I have become a blogger. All day long we are busy building roads, and in the evening we write blog posts.
D. P.: Our blog is read by busy people. Could you tell in a few words what, in your opinion, should be done with Ukraine's road infrastructure?
Yu. G.: We are having parliamentary elections this year. In my opinion, the political party that runs in the election should use only one slogan: “Roads”. A big billboard saying: “Roads” followed by three exclamation marks, and below: “We guarantee to build 80% of the roads in three years.” That is all.
D. P.: Thank you for explaining it in a few sentences. What would be next?
Yu. G.: The second task for such a political party is to win an election and get the Prime Minister's post. The Prime Minister should be doing what the Governor of Dnipropetrovsk region currently does – start the budget preparation from the “Roads” line item. First, we write down the amount of money needed for the roads, and then everything else. There are two figures: the number of decaying roads (because the last large-scale construction of roads took place under Brezhnev; at least, that was the case in our region) and the number of roads put into service. Until the number of decaying roads will be higher than the number of roads put into service, the situation with infrastructure will remain the same.
Of course, there are new sections of roads offering you a great driving experience. As for our region, we had the following situation: there were no roads inside the populated areas, but there were roads between these areas. For a period of 15 years, during which these roads have not been constructed or maintained, they have decayed. As the region’s administration, we can deal with the issues related to road construction in populated areas. And that is exactly what we did. Over the past four years we have built 500 roads. Moreover, we determine the volume of completed road projects not in kilometers, but in actual roads built. In contrary, Ukravtodor (the State Road Agency of Ukraine) has a solid practice of repairing roads by segments. But it is a questionable practice, as there are no separate road segments but roads as a whole. Ukravtodor reports that it has patched a pothole on a certain road segment. It is not the right way of doing things. They have either to repair the whole road or not to report on the work done. At present, we have another situation in the region: when you are coming into town, you are driving down a good road, and when you are exiting the town – you start hating Ukravtodor.
When preparing the budget, we determine the number of road building companies operating in the region. Then we determine the type of roads they build and the scope of work they perform. This allows us to understand what companies will participate in what types of tenders, and to determine an approximate level of competition. For example, we know that a private entrepreneur will not be building the Dnipro-Zaporizhzhia highway. On the contrary, a company that builds the Dnipro-Zaporizhzhia highway will not be dealing with the construction of roads in rural area. They are simply not interested in such projects. Then we arrange a meeting with the road companies and ask what investment plans they have for the coming years, what equipment and machinery they plan to buy. Moreover, we request information about how many square meters, kilometers and tonnes of asphalt concrete they are ready to cover. We understand their targeted scope of works and adjust it further by about 20%. After all, there is always a dependence on weather conditions or unforeseen circumstances. Then we translate the proposals of these companies into Hryvnias. Thus, we estimate how much money will be needed to complete the required scope of works by one or the other road construction company. In addition to the regional budget, there are municipal and rural council budgets with which these companies also work. We try to find balance with them too. We ask them how much money they plan to allocate for the road projects. When we draw up the budget, the finance department states the amount required for road projects first and the rest comes after.
In my opinion, any head of the government should begin preparation of the state budget by determining the amount of money needed for the roads. He should find out the number of companies operating in domestic market, the scope of work they can perform, and the amount of money required to complete such work. The resulting amount should be adjusted further by about 20% because they would still slightly embellish their expectations. Allocate this amount of money. Then get together all the regional heads of Ukravtodor, governors, and the Anti-Monopoly Committee to elaborate unified road requirements. Pay to the lawyers so they could review these requirements.
D. P.: I could not agree more with this point.
Yu. G.: Then you need to speak with the Anti-Monopoly Committee about the right way of organizing tender procedures to avoid tender trolling. Set the task that the companies would participate in tendering process during January-February and start working in March. The contract will be awarded to a tender winner. Then allocate the funds and start working. The road construction industry is very receptive. To ensure operation of one asphalt plant together with all the equipment and people you will need around UAH 300-350 million. These plants will create additional employment opportunities and provide additional tax revenues for local budgets. This means that there is a continuous money circulation.
In our case, the situation is rather different. How much funds are allocated for the road projects? – This much. – Ok, let's split them between the projects. This is a wrong approach. In Dnipropetrovsk region, we build this process differently. Last year, local budget allocated UAH 1.3 billion for the roads, which is probably the largest amount of funds allocated during all the years of Ukraine's independence. Nevertheless, it is still less than the required amount.
Last year, we even managed to redo the roads of Ukravtodor using regional budget funds. In other words, we financed Ukravtodor that has not even thanked us for that. We also completed construction of a highway to Zaporizhzhia and built the bridge on the Dnipro bypass road at our own expense, even though we were not supposed to do it. Accordingly, the first thing we need to ensure the construction of roads is a political force that will support the road projects. The second thing, is a head of the government who will change the way in which budget is prepared and will make roads the state’s top priority. Otherwise, there will be no infrastructure.
D. P.: Here is the quote by Governor Reznichenko: “The results of the decentralization reform speak volumes: over the last three years, more than 600 infrastructure projects have been implemented in Dnipropetrovsk region alone. This year, we plan to implement almost 350 projects. We have not had such volume of construction and repair of roads, schools, kindergartens, and hospitals in all the years of Ukraine’s independence.”
The scale of infrastructure development is really impressive. What is the secret?
Yu. G.: Every Governor who takes up the post in the municipal administration sets out the priorities. If a Governor comes from outside, he can either impose his point of view or listen to long-standing officials. Usually an entire procedure of the latter is centered around the message ”Let's hope nothing evil will come of it”. Because every Hryvnia spent from the budget is subject to control by NABU, MIA, DEP, SBI, Prosecutor's Office, Military Prosecutor's Office, tax authorities, SFS, SAS, Accounting Chamber, and State Audit Service.
D.P.: Now I have to interpret all of this...
Yu. G.: And we have to work with this. All of them chase after you and inspect budget spending. That is why officials have a fear of spending money. To avoid problems, they prefer to direct funds to protected budget items, such as payment for energy sources, payroll and bonus payments, etc. If there are capital expenditures, there will be criminal cases opened. In our country, every construction is a criminal case. Always. At the same time, the presumption of innocence is not practiced in Ukraine. We cannot stand by and let them seize documents just for one simple reason that an entire law enforcement system is based on false pretenses and extortion. There is only a handful of criminal investigators and service officers who are genuinely interested in resolving a matter. Besides many officials are not interested in it.
When the Governor of Dnipro took up his post, he said that he is not interested in how things used to be before. He was born in this region and has lived here for 30 years. He is concerned about what would be done during his tenure. That is why, given the existing problems of the region, every budget preparation we start with determining an amount that we are ready to spend on road construction. Someone may set other priorities, such as procurement of schoolbooks in large quantity, material aid, etc. Our priority is infrastructure development.
D. P.: I am taking some notes during our interview. I have noted down that you have ‘no fear’. Is that right?
Yu. G.: No, we have fear. Well, not a fear but rather a sports competition – a so called ‘tug of war’.
Here is a simple example. We conducted a tender with five companies. One company won the tender and constructed the road. Then there are two case scenarios. First scenario: for example, the road is built in Synelnykovo district. A local service officer using e-data finds out about the receipt of funds and sees information about the ProZorro tenders. He goes to inspect the road. After inspection, he decides that the road surface is slightly uneven. He writes to the court: “Visual inspection has revealed that insufficient amount of crashed stone was used in the road construction.” He requests to grant permission to seize documents from the Administration to confirm this fact. The judge (for US $100 or free of charge) grants the permission. Then he comes to the office to seize the documents. If we refuse, they start harassing us with search warrants. There never were any roads in Synelnykovo district. And suddenly, out of the blue the roads are being constructed. He simply cannot comprehend how this could be possible without stealing any money. In his understanding, construction of roads involves stealing of money, and if someone steals money, then he should get his share. If I start making problems, they will share with me.
In fact, there are plenty of similar examples in the road construction industry. At the same time, there are cases when a contractor fails to perform its obligations in full. In this case, we blacklist such a contractor and try to do everything possible to prevent him from ‘causing further damage’ in our region. Moreover, we have a 5-year road warranty. We make the contractor eliminate any deficiencies at its own expense.
D.P.: Making a claim for warranty repair of the road – this sounds great. Are there any examples?
Yu. G.: Yes. For instance, there are two companies against which we have initiated criminal proceedings.
D.P.: How to build a good road honestly and within legal boundaries?
Yu. G.: There are different stories. For example, a contractor won a tender and constructed a road. However, the company has a record of financial transactions with dubious counterparties. There is a court decision to recognize this company as a shell company. Then they start to investigate into the case further. The following information starts to appear in the press: “Reznichenko's employees steal UAH 4 million from the road construction.” In fact, we did not steal money; we paid to the general contractor. Moreover, we do not have authority to monitor finances of the general contractor. We do not care about how he spends money. What is important to us is the end result. Did the contractor build the road? – Yes, he did. So what did we do wrong? – Nothing. Nevertheless, our reputation gets affected. Since budget funds are involved, they start prosecuting the contractor. Then they try to extract a confession from the contractor that he has entered into a criminal conspiracy with us.
We have already explained to all the contractors that they should not get involved with dummy companies. Instead, they should concentrate on operating within the limits of law. You may receive less profit, but you will have a clean record and will be able to continue working. Every company that is engaged in the projects financed by the state budget and performs its work honestly and earnestly deserves our respect. When I am being asked whether I would work with the state budget when I return to the business sector, my answer is no.
D. P.: The situation you described above represents a common problem not just for the companies operating in the infrastructure sector, but for all business in general. Companies operating within legal boundaries are affected by their partners’ problems with tax authorities. Businesses should get used to the fact that today they are responsible for selecting and checking the counterparties for fair practice.
Now let's get back to you. I have crossed out “no fear” and instead have written down “thrill of a competition”.
Yu. G.: Yes, that is right. Moreover, we believe that we are going to win because common sense always wins. Most of the changes taking place in the region are evident to law enforcement officials. At a certain point of time they start realizing that they should stop chasing us.
D.P.: What are the sources of the regional road fund replenishment?
Yu. G.: There is no such thing as a ”regional road fund”.
There are three types of roads.
Roads of state importance: international (I), national (N), regional (R) and territorial (T) roads that are on the books of Ukravtodor. For example, M04 Dnipro-Pavlograd-Donetsk highway (M04 Znamenka-Luhansk-Izvaryno motorway) or H08 Dnipro-Zaporizhzhia highway (Boryspil-Dnipro-Zaporizhzhia-Mariupol motorway) or H11 Dnipro-Kryvyi Rih-Mykolaiv highway (H11 Dnipro-Mykolaiv motorway) or P73 Dnipro-Nikopol highway.
Provincial (P) and rural (RU) roads that are on the books of the regional state administration, effective from 1 January 2018.
In addition, there are communal roads with no postal code assigned, for example, Zhylianska street (the interview is conducted in the office on Zhylianska street), which is on the books of Kyiv City Council.
Until 1 January 2018, we could only finance roads located in populated areas, which we actually did. We had a designated line in the budget for these roads. The Road Fund of Ukraine started its operation on 1 January 2018. Part of its budget is allocated to the roads of the regional state administrations and Ukravtodor, and a small portion of funds – to the road traffic safety programs. These funds are allocated in proportion to the length of the roads in each region.
Ideally, the regional state administrations should receive a certain portion of funds from the Road Fund. In practice, the amounts are adjusted manually, as was the case this year. For example, Vinnytsia and Zhytomyr regions received more money compared to Dnipropetrovsk region, although there are fewer roads than in Dnipropetrovsk region. Ukravtodor receives funding from two sources: the Road Fund and the state budget.
D. P.: Were there any changes made to the process this year?
Yu. G.: There were changes in the Road Fund. Last year, 50% of the Road Fund was supposed to be made up of the revenue from excise tax on fuel produced in Ukraine and exported to the country. This year, it was supposed to be 75%, but later this amount was decreased by UAH 3 billion. Why? Because Ukravtodor needs UAH 3 billion to repay its outstanding debts. The amount planned to be used to repay debts was redirected to those roads that MPs considered necessary to repair. We were lucky because we received UAH 1.2 billion for the construction of new highway to Kyiv. Nevertheless, we consider the existing fund allocation process unfair. It is not the right way of doing things.
For instance, this year Ukravtodor gives UAH 1 billion for the construction of P51 Kharkiv-Lozova-Pavlograd motorway (a regional highway). However, there is the Dnipro-Kryvyi Rih highway that is in urgent need or repair, which could benefit to 2 million people living in the area. The same situation is with the Dnipro-Nikopol highway. We have already completed the Dnipro-Zaporizhzhia highway. If we had repaired another 70 km of the road to Nikopol, it would have greatly improved the lives of people. In my opinion, currently Ukravtodor does not decide which highways should be built or repaired. Such decisions are taken by MPs.
D. P.: To what extent the regions are independent in making respective decisions?
Yu. G.: They are absolutely independent in making decisions regarding their roads. On the other hand, the regions, including our region, have to deal with Ukravtodor's highways as a result of the ridiculous Soviet practice of building and repairing roads in sections. Let's do one section this year, and the next year we do another one. This is not the right way. Let's complete an entire highway in one year. The funds were allocated to Zaporizhzhia highway last year, but in 2018 the funding was stopped. How is it possible that 15 km of a highway is completed, and the remaining 25 km is not. Either an entire highway is repaired or there are no results. That is the reason why we had to complete this highway.
D. P.: You often express gratitude to the taxpayers of Dnipropetrovsk region...
Yu. G.: That is true, because everything we build is funded by the taxes paid to local budget.
D. P.: ...and criticize Ukravtodor. I have a small challenge for you. You need to thank Ukravtodor for something.
Yu. G.: I do not think that there is something that Ukravtodor has to be thanked for. In my opinion, it is necessary to treat Ukravtodor critically, the same way we treat ourselves, and by analyzing the existing shortfalls. Frankly, I do not see any positive aspects in the work of Ukravtodor.
In my opinion, when certain speculators start blocking tenders all over Ukraine, head of Ukravtodor should go to the Anti-Monopoly Committee (AMC) and speak from the position of a public official. He should not ask. There is a law that must be respected. In order to do so, he should mobilize all concerned parties and request AMC to consult Ukravtodor's branches on the procedure for holding tenders.
It just does not make any sense when Ternopil region divides a 17 km road into 170 sections and executes contracts for control sums.
D. P.: To what extent a human factor is important in such an organization as Ukravtodor, or is it rather an institutional problem?
Yu. G.: I believe that it is an institutional problem. Besides Ukravtodor cannot regulate anything. It can only spend on roads the amount of money that was allocated from the budget. From this perspective, Ukravtodor is an institutional problem. If the Cabinet of Ministers or Verkhovna Rada will start allocating to Ukravtodor UAH 350 billion instead of UAH 50 billion, this will no longer be an institutional problem.
On the other hand, the human factor is also important. As a head of Ukravtodor, you have to lobby the interests of road industry and not to be limited by what is already available. You received UAH 50 billion for the roads. But why not UAH 150 billion? Address the Verkhovna Rada, participate in live broadcasts, write appeals to the President – wheedle the funds needed for the road projects. Prove the expediency of funding road-related activities, hold industry conferences, talk to MPs and companies since they also have lobbyists. Do something to raise more money.
Ultimately, there is the Law on the Road Fund. It should be agreed that no one can make changes to it, as was the case this year. There is a certain amount allocated for the roads of Ukravtodor. Divide it between the regions depending on the length of roads. Every region will know that each year, during the next 10 years, it will be receiving a certain amount of funds for the road projects. The regional state administrations will also be allocated a certain amount of funds and it will independently decide what roads should be done first. As a result, there will be no need in Ukravtodor. What is Ukravtodor? It consists of two structures: the Road Agency of Dnipropetrovsk region and the Regional Road Agency. The Regional Road Agency consists of district road enterprises. These enterprises do not have new equipment and machinery as it has never been purchased. They have more accountants than employees, including an office building that needs to be paid for, etc. What for? To maintain roads? When the state contracts a private company for a major road overhaul, it pays per kilometer of the road or for the work completed, but it does not pay the company additionally to cover its administrative expenses. Nevertheless, the Regional Road Agency is financed separately for office and road maintenance. So why don't we remove the line “Office costs of the Regional Road Agency and district road enterprises” and use the services of private companies instead? Let the private companies that constructed the road be responsible for its maintenance.
D. P.: If you were to decide what should be done to remedy the situation with Ukravtodor, what would be your actions?
Yu. G.: I would distribute funds between the regions. In my opinion, a Minister of Infrastructure who is responsible for the development of the country's infrastructure should have a dedicated deputy who would be dealing only with the road related issues. He should directly communicate with the governors and, figuratively speaking, be ‘hand and glove’ with them. He should call them once a week to discuss what is being done in each region.
D. P.: Why there is no Deputy Minister for Roads if the roads represent an essential and integral part of the infrastructure?
Yu. G.: There is a Minister of Infrastructure, but his scope of responsibility covers only ports, aviation and the rest. There should be a dedicated Deputy Minister who will be responsible for the roads. Basically, Ukravtodor acts as a Deputy Minister for Roads. But there should be someone in the country who would see the whole picture. We see the overall picture across our region in terms of each street and village. We understand who is responsible for a particular road, what companies are engaged in the road construction or repair works; however, there is no such a capacity at the country’s level.
D. P.: There is an opinion that no matter how good the constructed road is, it would still be destroyed by overloaded trucks. We are constantly witnessing new ‘records’ of excess overloading. These trucks literally destroy anything on their way; they even damage the weight checkers. Do you have any counter measures in place?
Yu. G.: I could not agree more. We tried to deal with an issue by building three large certified weight and dimension checking stations, each worth UAH 11 million. The actual problem was that many overloaded trucks were stopped and checked on non-certified stations. Then they went to court and sought cancellation of penalties for overload. The construction of certified stations was funded from our regional budget and the municipal budget of Dnipro. In other words, we have spent money on things that should have been taken care of by Ukravtodor, which means less or no funds for the construction of a kindergarten, school, etc. This is not the right way of dealing with the issue. But what is the right way? The answer is simple. All roads go through the regions. Every region has its territorial borders as well as the entry and exit roads. For example, the Dnipro-Poltava-Reshetylivka highway has one exit and one entry lane. It is necessary to install weight control stations on these road lanes to measure the weight of trucks. If the truck's weight exceeds the set limits, a driver will automatically receive a fine. If a driver fails to pay the fine, the next time he is stopped by the police his vehicle will be sent to the impound lot and will remain there until the fine is paid. End of story.
Currently, they are planning to launch this experiment in Kyiv region. Why only in Kyiv region and not across the whole country? Why the head of Ukravtodor doesn't go to the Verkhovna Rada to get this issue resolved? Why doesn't he try to steamroll the issue through MPs? Why not make a media frenzy if it is an effective way of getting the message across? Give an ultimatum: either you vote for truck weight regulation or there will be no roads in the country. This is exactly what should be done. Having realized that sooner or later there will be problems with overloaded trucks, we have spent more than UAH 30 million to build three stations on entry roads to Dnipro. This is 60% of the regional freight traffic.
Adopt the law that will introduce cargo weight control. That is all that is needed. Moreover, the installation of weight control stations will not require the allocation of budget funds. I think we even have discussed these stations with the Poles. Hire private companies that will install these stations at their own expense. Create a competitive market. Determine locations where the stations will be installed, hold tenders, clearly outline the contractor’s obligations: when and what types of stations should be installed. Let the company that installs stations take 2% of the total fines collected. In the end, it still would be cheaper than keeping all these ‘freeloaders’. End of story.
D. P.: In some Western European countries, representatives of private companies write out fines to motorists. Once I have parked the rented car on an empty street of Jerez in Spain for five minutes. In just three minutes I was given a ticket. When people have a direct commercial interest, they work very efficiently.
Yu. G.: We believe that everything that could be outsourced should be outsourced. Everything that could be removed, including even the regional state administrations, should be removed. This is a huge amount of money going down the drain. Such institutions and processes simply should not exist. The same goes for weight control stations. Let the company that installs such stations earn by collecting the fines. Then let the debt collection companies pursue payment of debts owed by fined motorists. In fact, everything is very simple: when everyone realizes that they will be caught, overload will drop by 90%.
D. P.: How competitive is the market of the contracting construction companies that repair the roads? We know that there are only two companies in Ukraine building the cement concrete roads. One of them is engaged in the construction of new runway in Odesa airport. Many projects are performed by Turkish construction companies. Perhaps, it is worth focusing on this aspect and creating private road building companies?
Yu. G.: There are such companies already. In fact, the competition is rather intense. There is an excess of the road construction companies in our region. This year, we expected to receive more money from Ukravtodor, although we have a certain amount of funds available – about UAH 2-3 billion. All of the road construction companies are private. Ukravtodor does not build roads anymore; instead, it performs only pothole patching works.
D. P.: Here is an idea for attracting investors for the development of such capacities: the region invites investors to build asphalt plants and in return it guarantees them contracts for the construction of roads in that area.
Yu. G.: We cannot guarantee them such contracts as we can only work through the ProZorro system. Moreover, there are certain aspects that should be considered. A road construction company that has no asphalt plant within a radius of at least 70 km will not participate in tenders. A company that does not produce a bitumen-concrete mix and buys it from other companies has different cost of sales and different margin. Usually, there are four companies participating in a tender. A company that does not have its own production facilities in the area cannot decrease its prices. However, the companies that have such facilities may decrease their prices by 5-6%.
D. P.: ProZorro is a compelling argument. Moreover, it is the law on public procurement. Perhaps, the law could be changed? Think of it as a program to attract investment for the development of new capacities and subsequent construction of roads in compliance with the law of Ukraine. I mean, if there is an investment for the construction of plants, an investor will be awarded a contract as an incentive. Does this idea sound promising?
Yu. G.: I am a great fan of the theory of probability. When we were implementing the ProZorro system, we prepared a description of the associated risks. We can see what companies are bidding for the projects. After assessing them by 40 or 50 parameters, we understand the level of risk exposure, outcome of tenders, and possibility of achieving the set targets. We understand, more or less, all the consequences. We can predict a tender winner with a 50% and even 70% probability.
For example, there is a tender for road construction. A company that plans to participate in a tender has not even bothered to read the project documentation. It just applied for the tender. This means a certain amount of points off for such a company. If a company studies project documentation, asks questions and shows interest, it means that a company is competent in the road construction sphere, it understands all the process and knows how to deliver project. Then you need to look at the number of production facilities in the area. If there are no facilities, it means that the company is just trying to assess its chances of winning a tender. If it has the required production capacities, it will be determined to win a tender whatever the cost so as not to let a competitor win.
Of course, it would be much easier if we were told that “we are the most trusted organization in the region, and we can select the contractors independently”. If it had really been such a case, we would have got all the companies together, distribute the scope of work, determine the amount of investment and who will provide such investment, and start working on the project. We would also get from the companies a 5-year guarantee on each road, and if they fail to deliver on their commitments, they would be 'kicked out' from the region. But in our country everything is being assessed on the low common denominator basis. We are being told that everything will be decided by business cronies. That is why tenders should be held through the ProZorro system. At least there are some chances that the business cronies will not be awarded a contract. Tenders should be won by the most worthy companies. That is why I do not believe that this would be possible without the ProZorro system.
D. P.: Let’s assume that there is an investor who wants to build an asphalt plant in Ukraine. Would your region be interested in talking to such investor? If so, will there be a competition for the investor, and what can you offer?
Yu. G.: Firstly, an investor does not build a plant but rather assembles it. Nowadays, all plants are transportable and assemblable. Secondly, we are interested in such projects, but we do not run after the investors. We go on a premise that all data are open. Everyone who wants to bid, one way or another, will come here. If we see that a company is starting to build a plant, that it will definitely participate in bids, we welcome this move. However, there is no competition for such companies because now there are more capacities than money in the country. They are on the lookout for a region to attach themselves to.
If you look closely, today, the market has adjusted itself. Those who have invested in the development and quality – Onur (the so-called ‘Turks’), Avtomagistral – they all are entering new regions. Those who had quality issues (for example, the notorious Poltava Budtsentr) who, except for being involved in a bid-trolling process, are not doing anything now; they are hardly building anything. If you build well and you invest in what you are doing, you will build it anyway. There is no need to run after you. There are companies such as PBS that is owned by Shevchenko, the former owner of Bukovel. He builds in Ivano-Frankivsk region. If PBS comes to Dnepropetrovsk region, a big question will arise, “How are you – originally from Ivano-Frankivsk – going to build something here?” Yes, he will provide documents saying that he has an agreement with some plant from where he will be taking some kind of asphalt mix, but that’s not the thing. The thing is that they are just sizing us up.
D. P.: We mentioned concrete roads. There is an opinion that it is difficult to switch to them: service standards, tender bids, we have it all customized to asphalt roads. Is this a reasonable argument, or an excuse to maintain the status quo?
Yu. G.: First, equipment and reagents used to maintain regular asphalt roads are not suitable for concrete roads. Second, we have no experience in concrete roads operation. Moreover, concrete roads that are currently being built should be used for 2-3 years to determine whether there is a point in building such roads. Historically, America has concrete roads, while Europe has asphalt roads. Near Munich, there seemed to be concrete roads, but they are being remade now. Only practice will tell.
D. P.: That means that you need to try and you will try?
Yu. G.: Yes, trying is the right way to go. Moreover, several such roads are already being built. Let’s see how these roads will perform.
D. P.: Do you have such roads in your region?
Yu. G.: No, we do not. There is a road that leads to us from the Poltava region, the Reshetylivka-Dnipro road, which is partly concrete. It needs to be observed. However, there is no point in building such roads in towns, as there is no high traffic load. It is enough just to ensure high-quality asphalt paving.
D. P.: Do you believe in toll roads in Ukraine?
Yu. G.: No. Although this definitely needs to be done. After all, we will never reach the finish line if we do not start. If we start now, we will come to something in 20-50 years. I do not believe in toll roads because of our mentality that we do not like to pay. We do not like to use paid video services, we like to download from torrents. Our way of thinking is not the same as in Europe. That is why I do not believe in them.
D. P.: Post-Soviet thinking? Historically, and not only in the Soviet period but for centuries, people did not have private property. As a result, respect for such property – especially for someone else’s – was not formed. The same goes for understanding that you have to pay for someone else’s property if you use it.
Yu. G.: Yes. Moreover, I would do everything so that toll roads appear, and so that people begin to get used to them. Personally, I would use such roads and I am ready to pay. I have been paying all taxes openly since the mid-2000s; I declare my income without being an official. I am a dollar millionaire and I do it consciously, while someone can have two yachts and be a ‘beggar’ according to declaration.
D. P.: A toll road is likely to be the result of a public-private partnership. There are competing opinions on this matter. Some believe that without public-private partnership (PPP), infrastructure development and improvement is impossible in Ukraine. Others say that it means a very high dependence on such an unreliable and corrupt partner as the state. Do you believe in public-private partnership?
Yu. G.: No, I do not. I believe that the state needs to be removed from wherever possible. The lesser presence of the state the better.
D. P.: That means, from the PPP formula, the P that stands for the state needs to be removed?
Yu. G.: As an example, I will give you the towns of Pokrov and Marhanets. In 2016, they disconnected from Naftogaz completely, as they had debts of 30-40 million each year, and switched to alternative energy sources. There were two options. The first was that the town and regional budgets would build a boiler house at their own expense, and the local Teploenerho would continue to deal with it. Option two was to attract investors to do this. We picked the second option. Why spend the budget money on something that can be done for the investors’ money. They would get a working business, which would pay off in 5-7-years due to a tariff.
We also left out public utility companies. None of the local MPs is involved in wrangling budget money and graft schemes now, no one is stealing. People who worked well moved into a private company. The boiler houses that did not operate run on eco-friendly fuels now. Kobolev is happy, none of MPs is crying, “Give me a nomination, or I will crucify you on TV.” When all this was happening, we had a town council meeting in Marhanets. The mayor there was a woman, a former teacher. MPs beat her in the stomach, for real. Although she just wanted to read on-camera, “I put the matter to the vote.” You can imagine to what extent MPs got used to graft schemes there.
D. P.: You said you are a dollar millionaire. Right now, the media will write, “A dollar millionaire is involved in a graft scheme on the roads”
Yu. G.: I take it easy now. I am used to it because you cannot prove everything to everyone. Sooner or later, we will cease to be civil servants, and I will not be dealing with roads. Today, I think that the companies that work with our administration actually got lucky. We communicate with them. If a conflict arises, we are on the side of the business because we came from the business sector ourselves. Besides, I do not want to be an official.
D. P.: Regarding the news about construction of the airport on the border between the Dnipropetrovsk and Zaporizhzhia regions, are there any promises?
Yu. G.: I am not ready to say. We will execute any order we receive. We had two options. Option one, we would figure out how to collect all the land in the old airport for the construction of a new runway. We were ready to start building it in three months. And option two, it would be an airport in Solone, for which an amount of UAH 200 million was allocated. If there is an order from the Minister, we will do our part.
In my opinion, a new airport should be built in Dnipro. There are several factors regarding the old airport. The first one is an inappropriate location: if the temperature is -2 °C or +2 °C, there is always fog there. In addition, there must be some serious drainage system because all the accumulated water flows into this lowland. The third factor is that everything is riddled with court cases there – an old story, who is related to whom and who owes whom. There is the former owner on one side and the state on the other. I do not think that the state will invest in it until it settles down and gets clear who owns what, and who the beneficiary is.
D. P.: What airport it would be more convenient for you, as a passenger, to fly from?
Yu. G.: If there is a choice – to fly from a new one in Solone or from the old one in Dnipro – I will fly from Solone. Because I fly a lot and I want to fly comfortably. Besides, if we compare a new airport in Dnipro and a new airport in Solone, it is better to fly from Dnipro, of course. The old airport is in downtown, and it takes 15 minutes to get there. Check-in closes 30 min before departure, and if you leave 45 minutes earlier, you have plenty of time. In Kyiv, this is impossible.
D. P.: If you are late for a flight from Dnipro, do you call the airport director and ask to hold a plane for you?
Yu. G.: No, I just try not to be late. I know exactly at what time I should be at the airport. Moreover, I love flying, I love airports, and I just like being there. I always arrive well in advance.
D. P.: The name of the city Dnepr or Dnipro comes from Dnipro, the main river in Ukraine. Why don’t we have river transport? Why can’t I get from Kyiv to Dnipro by public transport via the river rather than via a bad road?
Yu. G.: I do not know. It is a good question. My mom’s friend lived in the town of Komsomolsk (it is called Horishni Plavni now) in Poltava region. This town was built around PGOK (Poltava Mining and Processing Plant). Almost all its residents are the PGOK employees. A fantastic town: the Dnipro river on the one side, and a forest on the other side. Now I will tell you how we used to get there. At night, we departed from Luhansk by train, in the daytime we were in Dnipro, then we went to the riverboat station, and after we traveled by river transport. In my opinion, the whole problem is in a general decline in the country: we did not have decent airports and now we have no decent river transport. This is the infrastructure that was destroyed. In addition, river transport is needed to transport scrap metal, pipes, and grain. By using river transportation, we reduce the load on roads.
D. P.: That is the point. For example, to transport 5,000 tons of cargo today, you need up to 200 trucks or just 1 river ship! Energy consumption per 1 ton-kilometer in river transport is 5 times lower than that on the road, even on a new one.
Yu. G.: Why is this not happening? I am not ready to answer. I know that two or three river elevators in Zaporizhzhia region were built by Nibulon. Now they are trying to do this in our region as well. In the near future, we will help them with documents again, and this should definitely be done.
D. P.: In Ukraine, there is no law on river transport, although we participated in drafting the respective law, which is many years old now. Instead, we have the USSR Statute on Inland Water Transport of 1955. New legislation should open the river as a form of the transport infrastructure for competitive use and development. Maybe today’s players do not need competition?
Yu. G.: We are strongly opposed to monopoly. For one simple reason: there is no such thing as monopolies. Take Pepsi Cola and Coca-Cola, Real and Barcelona, even the notorious Gazprom is not a monopoly because liquefied gas has appeared. All monopolies end badly. There must be competition.
D. P.: If you are planning to work with Nibulon’s management, can you ask them how do they assess the prospects of the inland water transport bill?
Yu. G.: I will definitely ask them.
D. P.: Your team in DRSA consists of truly passionate people who have achieved a lot thorough their work and commitment. Your results can be compared with other regions. It seems that everything is driven by the human factor. Are institutional changes possible so that after you and your team return to the business sector the successors can continue to build roads and other infrastructure in Dnipropetrovsk region?
Yu. G.: I think, yes. Because, in our region, the governor is trying to preserve institutional memory. We really liked the idea of secretaries in the ministries, where the Minister is a political player who comes and goes, while a secretary signs a contract for 5 years. We have such ‘secretaries’ in our team. These are people who worked at the Regional State Administration (RSA) before us, are working with us, and will work after us. Our task is to ensure that they have institutional memory because the agenda of any next governor after Reznichenko (although I hope that he will be the last governor, in fact) will be put together by people who have accumulated this experience.
In addition, we also have 120 regional MPs. I am sure that, out of 100 core regional MPs, 90% will be elected again in the next elections. For one simple reason: everyone in the region has already done so much during their tenure (and they still have one and a half years of tenure) that has never been done in the region before. Why do we have 100 votes now? Because these MPs understand what they are voting for in the budget. They cannot vote against the roads in Kryvyi Rih as they simply will not be understood. That is why they all come and they all vote. We understand that even if, for example, we leave tomorrow and someone else comes, MPs will say, “Guys, we already know everything, you keep doing the same for us.”
In addition, our projects are not linked to the calendar year; we are not building anything within the calendar year. We build within a year taken as a period of 365 days – that means, if we start in May, we finish in May. We run many processes in parallel: for example, three schools are finished, eight more are started, and so on. A scenario where we leave and everything stops will not take place – many processes have been launched already, including the roads.
D. P.: I like your narrative about leaving out the state. You say that Reznichenko can be the last governor. Does it mean to close the doors and turn off the lights in the administration? That is some serious expectation setting. In how many years will this happen?
Yu. G.: I think that in 2020. Poroshenko will be elected for the second term, we are sure of it. We will do everything possible in the region to make it happen. Because there are too many changes taking place. If you turn on sensibility and switch off emotions, it is very difficult to argue with this. We visit different districts and communicate with people. For example, we arrive to a district, which used to be the most undeveloped districts in the region, and now there are 2 kindergartens, 2 schools, 1 stadium, and 18 roads.
There will be parliamentary elections – we hope that we will not participate in any elections, but we will help to ensure that a relatable political force is elected. There will also be local elections. In our region, we used to have 352 village councils – 26 districts, each of which is divided into village councils. That is either a number of villages, or one village, in addition to towns. Then ATCs (amalgamated territorial communities) started to form. There are 62 of them now. Each ATC is comprised of 3-4 village councils. Then, in theory, the districts, district administrations, and district councils should go. Towns and ATCs should remain. Moreover, there is a law allowing rural settlements to be attached to towns. We already have a number of such cases in the region. There will remain either a town as a conglomeration or everything around it, as an amalgamated territorial community. When the amalgamated territorial community (ATC) remains, a superstructure in the form of a district administration will not be needed, as long as there are ‘conventional clones’ of Reznichenko in each ATC or in each town.
Probably, in 2020, a regional administration and regional council will still remain, but we proceed from the fact that a regional administration will turn into a prefecture under the decentralization reform. Taxes that went into the regional budget will be allocated across ATCs. We are in favor of this. Then, in my understanding, a resident of any populated area should know the President’s surname – that is a symbol of the state – and a surname of his/her mayor or head of ATC. Such a resident may not know surnames of the Prime Minister and other ministers because he/she does not need them, as only these two people will be important. In this case, we, as you say, will turn off the lights in the administration in 2020.
Alternatively, the administration will be turned into a prefecture on the basis of a regional council, elections to which will be held, and some executive committee will be created where the administration employees will go. In fact, they will be engaged in the implementation of budget and budget programs within the regional council. This scheme is less favorable as there will be yet another state agency that will be doing something Perhaps, it is not needed. On the other hand, it would be easier in terms of management since there should still be some hierarchical structure and reporting relationship. For example, when you have 85 heads of territories that are not accountable (just like the mayor now, as he does not report to anyone), this is probably more difficult in terms of management. Are we ready for this? I can name 10 heads and mayors I will not be embarrassed for. As for all the rest, there are issues to consider. That means, if we take the evolutionary path, we need to keep the administration and regional council for another 5-year term. Perhaps, by reducing the number of MPs and functions, we could move away from them completely in the future.
D. P.: We are supposed to talk about infrastructure, but we ended up discussing a lot of politics. This is all interesting but I do not know what will remain in the interview.
Yu. G.: Keep everything. If we are to end the conversation about the administration, I would like to mention that we want to turn the administration building into a 7-story hotel. It has thick, sound isolated walls.
D. P.: Keep a few rooms in the style of ‘Soviet red corner’ or ‘Governor's office’ and suchlike. With threadbare rugs, fanciful interior and attributes of what used to be there. After all, the building also has an institutional memory of different times.
Yu. G.: Maybe, there will be such a thing. There are no decent 5-star hotels in Dnipro, and there is no airport. There is Kharkiv Palace and Superior Golf Club in Kharkiv. As for Dnipro, there is only Axelhof Hotel. In my understanding, a five-star hotel is when you enter and see a piano, it has a beautiful hall, and you enjoy being there. Axelhof is a small building with a limited space where it is not even possible to ‘move around’. There should be a five-star hotel in Dnipro.
D. P.: Still it is much better compared to what it used to be. When I went on my first business trips to Dnipro, there were only Astoria and Astoria Lux.
Yu. G.: Yes, the situation with hotels has improved, but that is not ideal yet.
D. P.: Your team is like a team of superheroes for whom nothing is impossible. Do you have an infrastructure project that you cannot afford now, but the region really needs it?
Yu. G.: In terms of implementation, no. The most complex project we had was the children’s surgery. The surgery is completely automated – everything is managed by the system via mobile phone, and it has laminar air-flow operating rooms. You enter the operating room, press a button, the door closes and all the air is sucked out and replaced with clean air. Babies are operated on in these operating rooms. They have a different immune system and even very small levels of microbes pose danger to them. It was very difficult to connect all this with all the substations and oxygen stations. Part of the equipment was loaded through the roof. It was difficult to get the timing right as we had to open the roof when it was not raining and install all the equipment. Nevertheless, we have managed to build it in one year and a half.
As for the implementation of complex projects, there is only a question of funding. For example, the Dnipro-Kryvyi Rih road project. We simply cannot start building Ukravtodor’s roads instead of building schools.
No one really understands how did we manage to erect the flagpole in Dnipro. That is a complex project and Klychko did not dare to take it. He had a 50 million plan; I do not know what he was going to do for this amount. It is likely that he wanted to create a park around, that is why his budget figure is objective too. We completed the project for 18 million, including a small park around the flagpole.
It was technically challenging to build the first inclusive children’s park. Our thank you goes to Maryna Poroshenko – she provided us with all the know-hows she has managed to find. We even received individual children’s simulators, which we put together. Pavilions, caterpillars, it all was made by a local architect.
D. P.: There is such a concept as ‘digital infrastructure’. Has anything been done or is being done in the context of digitalization?
Yu. G.: Sure! The hospital I mentioned earlier is managed via mobile phone. Lots of equipment at water services companies is also managed via mobile phone. There are many schools with CCTV systems and checkpoints installed, etc. From this point of view, yes. Last night, two surveillance cameras were stolen from a school. We’ll find them. That is the Darwin Award case: two guys approached the camera, looked into it, took it off, and left. Don't they know that all feeds are recorded to servers.
D. P.: Well, we have reached the end of our conversation. I know that you read a lot...
Yu. G.: Yes, I did last year. This year, not so much.
D. P.: We are talking about infrastructure and transport. Can you recommend 2-3 books on the topic, apart from the “Atlas Shrugged”, which we have read already.
Yu. G.: I did not like this book. As a child, I read “The Financier. The Titan. The Stoic” and it seemed to me that it was better. About infrastructure... Try “Airport” by Arthur Hailey, that is off the top of my head.
D. P.: If you remember some other books, please let me know, because you know them for sure.
Yu. G.: I read a lot about aviation, but it’s not pure infrastructure. There are million books about aviation.
Everyone who worked in government agencies after 2014 should be obligated to write books. We need some state program or a philanthropist. After leaving your post, sit for a week, talk to a recorder, then make some editing, and write a book. These books should be published; it will be the most interesting political thriller.
D. P.: To document institutional memory.
Yu. G.: That is first and foremost. Lozhkin did the right thing: he left after himself something that can be read. Yatsenyuk also could write a book. It is clear that he will not tell everything but still, he can explain something, and that’s important. Because, for any official assuming office, it is important to get a full picture. So you were appointed, and what do you do? You can communicate with a certain circle of people you have access to, they will help to shape the picture. You need to master your emotions very well to single out what is right and wrong. Alternatively, you should not believe what they will tell you. That is some challenging task.
D. P.: In 2020, you close the administration, get some rest, and in 2021 start writing memoirs?
Yu. G.: I promised to write a book. Actually, I have already started it. I am just unlikely to manage it on my own. I will get a co-author and will write it by all means. At least some records will remain to understand what was happening and why.
D. P.: So we can start reading Hailey's “Airport” and then there will be a book written by you?
Yu. G.: Yes, but it will be more about people, not about infrastructure.
D. P.: Infrastructure is man-made, and it always involves people. The last thing: ask us a question.
Yu. G.: For me, Deloitte is a different world with all these investment banks, consultants. Perhaps, this question is not to you but rather to the oligarchs.
After all, they often hire people from the Big 4 to work in their businesses. It is my understanding that if there is an oligarch, he/she can form a regional state administration, even the government. If you form the government, send your representatives there, bring smart people with good education and experience from the Big 4.
D. P.: Civil service prospects for people from a company like mine? I will express my subjective opinion, without reference to the company and any oligarchs. I think that many of our colleagues are ready, but there is a mandatory and simple condition: marketable salaries. Not in envelopes or unclear how and from whom, but transparent marketable salaries. Without this, the civil service, in my opinion, is not competitive. This is volunteering, but I think that the romantic times of volunteering for the state have passed.
Yu. G.: I understand this. Why can’t they understand one thing: business capitalization depends on the country's capitalization.
D. P.: Infrastructure and sport?
Yu. G.: This is the decentralization law. If we stay in the DRSA for another 2-3 years, our region will become No. 1 in the country in terms of the sports infrastructure. I think that in 10-15 years, if you take any representative team in the country – be it Olympic sports or football – 20-30% of such teams will be from Dnipropetrovsk region.
Professional sport, as I understand it, has a pyramid structure. In order for Shevchenko or Ronaldo to be at the top of this pyramid, there should be Konoplyanka, Yarmolenko, Harmash, and other prominent sports figures and athletes below, followed by the level represented by children who take sports at the age of 6-8 years. The children are eliminated at each stage and only the best remain in the sports. Nevertheless, the children have to train.
There is a photo of me taken in Yuriivka in summer 2017: a school stadium used as the region’s base sports facility. It had rough pitch, rusty gates, rusty shield, and was overgrown with knee-high grass. Last year, we opened a new stadium there, which is similar to Olympiisky stadium in Dnipro. It has a 105 by 68 field, a football pitch, run tracks, playground, separate coaching locker rooms and showers. In one year we have built five or six such stadiums across the region. At present, we are building another 20 stadiums. All these stadiums have full-sized fields with a 6 cm turf grass. We could have reduced the cost and use a 4 cm turf grass, but we wanted these stadiums to meet the high standards of modern sports facilities and be suitable for Dynamo-Kyiv field trainings.
When reconstructing a basketball complex in Kamianske, we made a new parquet flooring. General contractor ordered this parquet from one of the NBA firms dealing with parquet flooring. We understand that the State Audit Service (SAS) may pay us a visit and ask why we did not buy parquet from Ukrainian producers, which would be 4 times cheaper. But we would risk it and try to explain that in Kamianske children will be playing on the NBA parquet. If someday some of these children will get to the level of the NBA players, it would be all due to the NBA parquet.
Our task for 2022–2023 is to ensure that every district center has a great stadium as it plays an important role and is a magnet for young people. First, they stop drinking beer and start training; they start to develop a passion for sports activities. Then the parents start asking a local mayor to find money for coaches. We will provide a strong foundation for sports infrastructure. Then it would the local council's task to develop it further.
D. P.: Great. You have made a very ambitious forecast: in 10-15 years, 30% of all Ukrainian representative teams will be from Dnipro. As we are very meticulous at Deloitte, we will have to meet with you again in 10 years’ time and check it.
Yu. G.: I believe it will be so.
This interview contains the respondent's direct speech without curtailments, changes, corrections or retouching; it reflects the respondent’s subjective opinion and may not coincide with the position of Deloitte. Deloitte is not responsible for the information provided.