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"Vesti" We found out who the authorities are awarding billion-dollar contracts to this year.
The war on corruption, tender scandals, market redistribution, and new evidence of bribery by Ukravtodor management. This is how the next season of large-scale road repairs in Ukraine began, the cost of which has suddenly nearly doubled in a year. Vesti investigated who the authorities are awarding billion-dollar contracts to this year and why old corruption schemes are thriving in the country.
Who received the money?
According to the plan, 4,5 kilometers of national roads and 2 kilometers of local roads will be repaired and built across the country this year. These figures are comparable to last year's 4 and 2,5 kilometers, respectively. A total of UAH 85,2 billion is planned for budgetary expenditure on roads.
Clearly, bidding wars for such resources have already begun. The "road cartel" is also in turmoil. This is the code name for the six companies that formed the National Association of Road Builders of Ukraine (NADU), which won 70% of all road repair contracts last year.
Since the beginning of the year, the corporation's pool of favorites has noticeably shrunk. Now, almost half of all tenders are won by just two Odesa-based firms, Avtomagistral-Yug and Rostdorstroy. Since the beginning of the year alone, they have won tenders worth 6 billion and 5,1 billion hryvnias, respectively. The ultimate beneficiaries of Rostdorstroy are Odesa City Council deputy from the "Trust Deeds" party, Yuriy Shumakher, and businessman Yevgeny Konovalov. Incidentally, in Odesa, Yuriy Shumakher has long been known as "Trukhanov's chief road builder." He is also the Odesa mayor's business partner in the offshore company Corderoy Trading Limited. Rostdorstroy's supplier is SKVO, a company controlled by Trukhanov's daughter.
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As for Avtomagistral-Yug, it is officially owned by Valeriy Korotkov and Oleh Nalivany, about whom little is known in the company records. However, the company has long been linked to Kharkiv businessman Oleksandr Boyko due to his company, Shlyahovik-97, being the largest supplier of construction materials and equipment to Avtomagistral-Yug.
SUNP rounds out the top three in terms of tenders won. This year, the company won contracts worth UAH 3,3 billion. This joint venture was founded in 2017 by Maksym Shpil, a Ukrainian businessman and owner of the MS Capital holding company, together with his German partner Walter Zacharias.
Another prominent representative of the "cartel" is "Onur Construction International" (8% of tenders), whose beneficiaries include Lviv resident Oleh Farion, as well as Turkish citizens Onur and Ihsan Çetinceviz.
Civil wars
Meanwhile, no new players have emerged yet. Moreover, as Yuriy Nikonov, an expert with the Antitrust League and a regular monitor of Ukravtodor's procurement processes, told Vesti, the competition is playing out.
"This season is still far from a complete conclusion, of course, but the first trend is already visible: two companies from the top six have completely dropped out, while two have become clear leaders. Speaking of one of last year's leaders, Altcom, this year it's been consistently losing. Moreover, it's losing in competition with its own 'cartel' colleagues. It's difficult to say yet what led to this. It could be explained by regional preferences. Or perhaps their tenders haven't been announced yet. That possibility also can't be ruled out," Nikonov told Vesti.
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Or perhaps the company's pace of budgetary funds utilization was undermined by a joint investigation by Polish and Ukrainian law enforcement. Specifically, the National Anti-Corruption Bureau of Ukraine (NABU) and the SAPO recently served a notice of suspicion to Altkom owner Oleksandr Tyslenko for bribery of the former acting head of Ukravtodor, Slawomir Nowak. According to investigators, he systematically paid bribes in the form of "subscription fees" to Ukravtodor management in exchange for "loyalty" to his companies. Overall, NABU and SAPO established that the bribes involved amounted to $575 and €70 between 2017 and 2019.
Meanwhile, no new major contractors have emerged yet. And it's unlikely they will anytime soon. "They're trying to push all newcomers out of the market. Just recently, Ukravtodor got rid of the Chinese, claiming they'd done a poor job building a road near Zhytomyr. Now they're also liable for a penalty, according to a court ruling. And those who did manage to break through—two new Turkish companies and a consortium involving Yaroslavsky (a Kharkiv businessman and president of the DCH Group—Author's note)—as we can see, haven't become the new favorites," Nikonov told Vesti.
For our own only
At the same time, in recent years, Ukravtodor has been doing everything possible to make life difficult for potential new players. "Over the past two years, the corporation has developed a system of requirements for bidders such that only the largest companies can participate in the most lucrative and largest tenders. There are several restrictions, one of which is financial security. This is a completely legal requirement. The Servant of the People faction, in its frantic printing frenzy, passed amendments to the tender legislation, according to which the customer can now require that the contractor's income for the previous year be no less than the tender amount. In other words, if you want to participate in a tender worth, say, UAH 3 billion in 2021, then your income in 2020 must be no less than UAH 3 billion. And that's the whole point. The fact is that the "cartel" was formed back under Poroshenko. Even then, leading companies had been identified, and their revenues were only increasing year after year. Meanwhile, the other participants were treading water. To consolidate their "success," Ukravtodor began consolidating tenders. That is, a single road section, which could be divided into five and awarded to five different companies, is consolidated into one huge one. Then they issue a tender for, say, 5 billion hryvnias. And if you want to participate, your turnover must be at least 5 billion hryvnias. Consequently, fewer and fewer companies meet these criteria. This is the consolidation of the existing rules of the game. Only foreigners can break this vicious circle. But the circumstances are such that not a single reasonable foreigner has come to us," Nikonov told Vesti.
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At the same time, as Dmitry Bespalov, head of the international transport modeling company A+S Ukraine and a member of the technical council of Ukravtodor, told Vesti, when we talk about Ukravtodor roads, we are talking about highways of national importance.
"We can't allow some 'Rogi i Kopyta' LLC with one roller and two full-time employees to take on such contracts, working on roads that will carry freight from Asia to the EU. No one's stopping small players from taking on local roads. After all, we have 400 km of roads. Any requirements are a kind of barrier. When a client demands specific things, there's always the risk that they're being tailored to a specific participant. But on the other hand, if you remember how it was before, when road sections were divided into pre-threshold lots and given to small contractors, those roads disappeared after the first winter. The new roads seem to be standing for now. So, maybe there is a cartel, but at this stage, it's to our advantage. Because we'll end up with good roads that will last five to seven years," Bespalov told Vesti.
The cost of repairs has doubled.
It's worth noting that 90% of all Ukravtodor tenders are directly related to routine repairs, the cost of which, according to the transparency initiative CoST Ukraine, doubled last year alone to UAH 11,2 million. Moreover, most of the primary materials used in road construction actually fell in price in 2020. "The cost of bitumen fell by 12%, bitumen emulsion by 8%, and asphalt concrete mix by 1%," CoST Ukraine reports.
Ukravtodor itself attributes the increased cost to higher-quality repairs. They claim that while previously they only did the top layer, as required by standards, now the work is more comprehensive. "This year's current medium-term repairs involve a very large amount of work. Previously, the small amount of funding was spread thinly across all the roads. That is, instead of preparing a full schedule of work, including replacing the road base, they simply laid new asphalt over the old. Now they're doing the full range of work. That's why the cost has gone up," Bespalov explains to Vesti.
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Nikolai Berezovsky, President of the National Association of Road Builders of Ukraine, confirms this. "Overall, the cost per kilometer of repairs increased in 2020, but the requirements for such repairs were also changed, requiring the reinforcement of the road surface with two to three layers of asphalt concrete 15–21 cm thick, lighting and sidewalks, modern navigation (road signs), barrier fencing, and pedestrian crossings," Berezovsky told Vesti.
Is corruption ineradicable?
But the main question on many minds today is: are we overpaying the "cartel"? According to Ukravtodor, since mid-last year, the corporation has always hired an independent technical inspectorate to monitor contractors. "This means there's double oversight. First, there's the client, and second, there's an independent auditor who ensures all standards are met," the corporation notes.
Furthermore, since last year, at the request of Ukravtodor, the Ministry of Economy has adopted methodological recommendations for the corporation's tender process, which all regional branches are required to follow. "However, as we discovered, even after these recommendations were issued, Ukravtodor's regional branches continue to issue regulations that are not included in the recommendations, or even directly contradict them. They themselves came up with these regulations and continue to violate them. For example, Ukravtodor has been told a hundred times that it is forbidden to request reviews three days before a tender. Even the National Anti-Corruption Bureau of Ukraine (NABU) has explicitly stated that this is a corrupt scheme. But nothing has changed," Nikonov told Vesti.
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He also notes that the corporation's tenders regularly reveal clear lobbying by specific participants. "We often see in tenders that Ukravtodor is extremely picky about the so-called non-systemic opposition. At the same time, it forgives its favorites for major mistakes. For example, by law, if a company makes minor errors in its tender proposal, failing to submit a certificate, for example, the customer is obligated to give it 24 hours to correct them. But Ukravtodor doesn't always grant 24 hours. And from our observations, these 24 hours are never granted to the opposition, but if the cartel's lawyers make a mistake, they usually get that time," Nikonov tells Vesti.
The dark trail of the favorites
Another aspect that unites Ukravtodor's favorites is the criminal cases in which they are involved. One of them concerns three NADU founders—Rostdorstroy, Avtomagistral-Yug, and Onur. They are accused of paying officials from the Kyiv Region Road Service (SAD) kickbacks amounting to 10-15% of the contract price for winning tenders.
"The investigation established that SAD officials unreasonably rejected more economically advantageous proposals during tenders in 2017-2018 and awarded contracts to firms that paid them improper benefits equivalent to 10-15% of the contract price. This amount of money was generated by contractors by deliberately inflating the volume of completed construction work and the cost of construction materials. The money was then converted into cash through fictitious transactions," the case file states.
However, this is just the tip of the iceberg. Rostdorstroy, which holds a 20% market share based on the first four months, is involved in at least seven different cases, ranging from official negligence to embezzlement of budget funds. The quality of the company's work can be gauged by the repair of a small bridge over the Kobelyachok River in the Poltava region.
In mid-2016, the Poltava Regional Road Administration signed a contract with this company for a major bridge overhaul worth UAH 12,8 million. Two years later, during an inspection of the section of road, it was discovered that the bridge needed another overhaul. "During the inspection, it was determined that the bridge was in a state of disrepair and dangerous to navigate," the court ruling stated.
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This fact attracted the attention of law enforcement officials, who discovered that the actual volume of work did not correspond to the stated cost of UAH 1,2 million. Another case concerns the receipt of forged documentation. The former head of the Scientific and Technical Center "Ukrdorkachestvo" (he was dismissed in 2017) is also implicated in the case. He, using his subsidiary Ukrdor, produced counterfeit production certificates and quality conformity certificates for road construction companies.
As Nikonov tells Vesti, law enforcement has hundreds of such cases against all major players in the Ukravtodor market. "There's a high-profile NABU case against Altkom and Onur for allegedly bribery of former Ukravtodor head Slawomir Nowak (according to NABU, the total bribes amounted to over $650), and there's a police case regarding collusion between Avtomagistral-Yug and Tekhnobudtsentr. I'm afraid to even mention the number of SBU cases. But so far, none of these cases have resulted in anything serious for the defendants," Nikonov tells Vesti. Unless, of course, you count the criminal case in Poland against Nowak, who was also released under house arrest.
Meanwhile, the association views law enforcement's complaints with humor. "In our country, they even joke that if a company has no criminal cases, it's a sign of low business activity, not an advantage. Seriously speaking, I'm still unaware of any court rulings that would indicate losses to the state. Looking at the overall picture, the number of criminal cases is no higher than that of other companies in other industries," Berezovsky told Vesti.
How people steal on the roads
Nevertheless, an analysis of the Register of Court Decisions allows us to form a picture of the most common schemes used by unscrupulous companies for personal enrichment. "The simplest method of stealing money is simply inflating the cost of materials. Imagine any road repair tender, and the costs are distributed roughly like this: 3% is wages, 15% is equipment, and 80%+ is the price of the building materials as a commodity. And if you collude with material sellers to inflate the prices on the consignment notes, you can easily split the difference. The second method is what we call: 'not doing everything you should.' For example, they were supposed to lay 70 cm of asphalt, but instead laid 65 cm. Or instead of three layers, they lay one or two. I assure you that the savings resulting from such actions across the entire section will be very significant. But this scheme is used much less frequently today. After all, if experts catch the work being done poorly, you could face criminal charges. The third option is "replacing a good with a bad." This is when a company's contract requires them to repair a road, for example, with Class 1 grade A asphalt, but instead uses Class 2, which is cheaper. This results in false certificates of completion, and so on. And, of course, tax evasion. It's a known fact that many contractors officially pay their workers the minimum wage. In reality, they receive a market wage of 15-20 hryvnias," Nikonov told Vesti.
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