Yuriy Shchuklin, logistics market expert, advisor to the “Ukrzaliznytsya” Head of Board   

 

It took humankind more than 100 years to become aware of and accept the fact that the Earth makes circles around the sun, not the other way round. We are no longer in the Middle Ages but a certain group of economic players still manage to propagate the economic model based on the similarly erroneous understanding of the world order as the one defended by adherents of the Ptolemy system. I mean the functionaries of the state-owned “Ukrzaliznytsya” cargo transporter and the group of economic actors who strive at being recognized as “the center of the Universe” and, having imposed their narratives, successfully justify speculative price formation for the railway cargo shipment market.  Meanwhile, the erroneous understanding of reality that they propagate and that has, regrettably, entered decision-makers’ minds, is in the following:  They are convinced, without any doubt at all, that all economic processes and logistical events, shipment of cargos, should be centered around the state-owned “Ukrzaliznytsya” shipper, be performed according to its “Statute” and “price formation rules”, under its “caring” monopolized management and tutorship… 

Their fundamental error is in the following: Demand for cargo logistics (and for the “Ukrzaliznytsya” services as its component) emerges only (!) as a result of the Manufacturer’s activity and the contracts the Manufacturer has concluded with this aim.  Not any other way! It is the activity of the Manufacturer and the manufacture of the produce that is valuable for the customer that is the main precondition for economic relations between all economy players who operate the produce from the loading point, from the manufacturer to the point where the customer receives it.  Yes, logistics is a component of the formation of added value, and the price of cargo at consumption point is different from the price at the birth point.  However, if there is no cargo, no produce, the prerequisite for any further relations disappears: what will traders and shippers do then if there is nothing to sell, transport and earn money for?  Within a healthy economic relations system, all the processes must be centered around production with its own goals, plans and activity cycles. The strategic goal should be the state of relations between production, trade and logistics when the main mover of the relations, the manufacturer, is stimulated to continue their economic activity which is to manufacture!   

In Ukraine, the main factor of price formation on the railway logistics market is only the appetites of economic players who service the economic need of the agrarian sector for access to sales markets. The agrarian manufacturer is given the role not of the service customer but of a raw-material supplement. For 25 years, we have been working within the system where traders compete with manufacturers for access to markets and do this with the help of purchasing the logistics chain! The outdated and inefficient system of managing railway shipments, so vigorously defended and protected from alien eyes and from changes by “Ukrzaliznytsya”, allows to purchase shipment capacities and form the state of constantly unsatisfied demand of agrarians for the access to sales markets. 

Regular speculative price peaks, when the price for a grain-carrying railway car momentarily rises five- or six-fold, is a constant pain for Ukrainian agrarians, manufacturers, grain exporters. This year, when the speculative price bubble led many agrarians to the lack of money for the autumn sowing campaign, the “Ukrzaliznytsya” managers have finally heeded the agrarian business communities.   The state-owned shipper had  changed the auction parameters in early October which made impossible participation of broker companies who do not own agrarian cargos and who were using the auctions solely with the aim of purchasing the limited resources of logistics and for raising prices.  This unprecedented action had immediately led to prices for railway cars becoming three times cheaper. Practically at once, sharp criticism on the part of traders was voiced: They maintained that it was inadmissible that manufacturers could acquire cars so cheaply and without traders! At the same time, there were arguments on the part of “Ukrzaliznytsya” functionaries who said that limiting participation of some players in the auctions, even if they are brokers, contradicts competition principles and infringes on economic freedom…   

Both these signals have one common reason: The price formation principle used according to the demand of agrarian communities, where the major factor is real, physical, not artificial (!) demand of direct manufacturers, destroys their current economic model of re-selling  logistics.   

Apparently, the time has come to clarify what are in practice “the competition principles” and “economic freedom” a danger to which has been suddenly perceived by traders, brokers, and “Ukrzaliznytsya” functionaries in the shape of manufacturers receiving opportunities to directly buy a ticket to markets for their cargos.   

What the traders are and what are their functions in Ukraine? The first group of traders are multinational companies with access to big and cheap money. They can allow themselves to sell agricultural produce at prices that have nothing in common with profits, and their business model no Ukrainian trader or manufacturer can replicate. As they have their trade representatives (grounds) on every continent, the multinationals are always capable of compensating for their losses at any market by profits at other markets.  Apparently, their KPI is mostly in retaining their share of the market.

The second group is the group of the so-called “local traders”. They are numerous. They are small companies who make “gray” grain out of “black” grain by buying grain for cash, without documents and selling it to the multinationals in ports, this time officially, with no cash involved. As a rule, their margin is enormous, bigger than any other market actor has, and they would always have protection from authorities because this sort of activity is impossible to be conducted without a “roof” from respective bodies of power.  These two categories of traders are similar in that for their economic model, for their managers, it does not matter what the price of logistics is: It will be paid for by manufacturers anyway.   

Yet another category are the so-called forwarding agents. Previously, they did perform a lot of work and played a serious role on the market but as time went by, most of their functions have become make-believe functions while other functions have become automated to the maximum thanks to new technologies. However, in spite of the progress, the forwarding agents continue to successfully prove their significance, impose their services, and earn money by using their “connections”.  Гthe main secret of their success is the niche of timely respomsible delivery of cargos within specified terms, created not without help of “Ukrzaliznytsya” functionaries. This happens in the following way:  A forwarding agent buys “absence of responsibility” or railway cars for a certain sum, then re-sells them for a much bigger sum, and with a part of this sum corrupts officials who take care of the “’Ukrzaliznytsya’ responsibility, this being the accurate delivery of empty railway cars, and timely delivery of these same cars with cargo!  At the same time, “Ukrzaliznytsya” has no obligations whatsoever, not according to terms, or dates, or for preserving their cargos intact.  Corruption has become almost “white”: officials would not hold money in their hands but receive their profits from the fact that some forwarding company performs well their obligations for observing delivery terms, they buy their own railway cars, councilors’ and MP seats, etc. What do you think, how a forwarding firm is capable of fulfilling this if the term depends solely on “Ukrzaliznytsya” officials?  As a rule, the buyers for this VR service of responsible delivery from the forwarding agent are managers of multinational traders who shift part of their functional risks on to the forwarding agent and report to their head office that they have successfully outsourced logistics.   

Traders and their managers benefit from the existence of forwarding agents because the latter assume responsibility and also bring something in their beaks. This is needed by the manufacturer as well because they spend their own well-earned money for logistics, thus being interested in lower expenditure and in not artificially inflating the price bubble.

Why no Ukrainian systemic manufacturer, “Nibulon” or “Kernell”, would use the forwarding agents’ services or hire them? These big, financially successful companies have set up their own logistical units and are seeing to their shipping of grain themselves. If one compares prices spent by any multinational trader through forwarding agents to prices spent by manufacturers who ship their cargos themselves, the difference would sometimes amount to 50 oercent, and sometimes it can be even bigger.  

What do you think, which market player is more interesting for “Ukrzaliznytsya”: the one who argues over every cent or the one who agrees with the company, who does not criticize it and agrees to every condition, “rule”, and price?  In the words of Mr Tkachov, who said recently that the daily price for one railway car’s use of 14,600 UAH, offered by auction participants, is “the price that market actors can afford”, “Ukrzaliznytsya” gave an exhaustive answer to this question.    However, the functionary keeps silence about the most interesting thing: brokers come to the auctions and compete with agrarian manufacturers for the limited resource for the same cargo (!).  At that, brokers compete not at their own expense but with the use of the money that they will snatch away from the manufacturer after their “win” at the auction. They do not add any value to the lot or to the transit capacity. This is the secret of the formation of “the price that market actors can afford”.   

So what is the economic freedom defended by “Ukrzaliznytsya”: is this the freedom from parasites or, on the contrary, the freedom for all parasites? Everyone who was doing business in the 1990s remember racketeers who every trader or manufacturer had to pay.  Do I understand correctly that  by the logic of “Ukrzaliznytsya” officials, the racket also has the right to exist because this is economic freedom and, however you bend it, the racket provided traders and manufacturers with a certain service, namely, a guarantee of their existence? Speaking of the need to preserve competition, the “Ukrzaliznytsya” functionaries do not reveal the whole truth: Their understanding of competition means the presence at the market of those players who do not create values but barriers.   

I personally know many agrarians who are not going to sow this yhear. Having worked through the entire year, they gave everything they could earn to traders and forwarding agents, and now they lack money to buy fertilizers. This is because “Ukrzaliznytsya’, while supporting free market with words (although what kind of a free market this is: who else, apart from “Ukrzaliznytsya”, can go to rails, plan, or offer their railway cars to “Prozorro” tender system?), in reality has created barriers for manufacturers while at the same tim creating conditions for traders and forwarding agents when they can successfully overcome these barriers at manufacturers’ expense. 

Under this system, Ukrainian agricultural manufacturers cannot hope to occupy a stable niche on European or world markets. The civilized market wants to work with forward contracts while managers who are corrupted want something different: They want Ukraine to get boggled in spot contracts which are very profitable for them. This is because even if a multinational buys with a minus, this does not mean that the minus affects the managers personally. The interests of agricultural manufacturers are opposite, though: They want to sell their grain in advance, so they are interested to know not just the time frame but also prices for tomorrow’s logistics. When signing forward contracts, they are deprived of a possibility to know in advance how much the logistics will cost. Meanwhile, traders and forwarding agents are interested in such a procedure when manufacturers get to know the price as late as possible and that they find themselves in the circumstances when they have to fight not for the contract’s economy but for its fulfillment, and they agree to any price under the threat of fines.   

25 years ago, the introduction of name-specific tickets for passenger trains had immediately destroyed the scheme of profiteers who stood by railway cashier windows and re-sold tickets. Ukrainians would hardly have accessible digital services for railway tickets today if “Ukrzaliznytsya” would have then refused to sell name-specific tickets under the pretext of protecting the interests of profiteers saying that they were market players, too, as they were standing by the cashier windows and provided tickets for passengers.   

I do hope that Ukrainian manufacturers get an opportunity to have name-specific tickets to markets for their cargos at affordable prices and through an open digital service. This will be the true economic freedom, the freedom from manipulators, profiteers, and parasites