What made Daugavpils trams more expensive – inflation or corruption?

There is no conclusive evidence that half of the trams were assembled in Latvia

Raivis Šveicars/Latvijas Avīze

It has been six months since four new trams have been running in Daugavpils, the procurement of which was accompanied by various problems over several years, including doubts as to whether the Daugavpils Locomotive Repair Plant (DLRR) had actually assembled the trams. Maybe the Czech company Pragoimex did the job, and in the end just put the DLRR logo on the front of the tram in Daugavpils?

How justifiable is the price of one wagon, which amounted to EUR 1.8 million, knowing that in 2017 a similar model cost two times less in the Czech city of Olomouc? How can we assess the fact that last December, the two parties agreed on the delivery of nine more wagons at a cost of EUR 1.4 million each? Has DLRR become a true tram assembler, with the potential to export its products abroad? The plant’s representatives say that they have assembled about 50% of the new Daugavpils wagons and are ready to increase their involvement in tram production and assembly in the future.

Burning deadlines and supplier

Until last October, the Daugavpils tram fleet consisted mostly of Russian-built trams, many of which were manufactured decades before the millennium change, some purchased in 2014 and others in 2019. The experience with the new Russian trams has been bad, as they have not been reliable. The Russian invasion of Ukraine and the sanctions that followed have created even more problems – it is no longer possible to order parts from Russia. The company says that this could mean that Russian trams will simply stop working in the future. 

“When we bought the previous trams, we did not talk about Russia as an aggressor country, we were still cooperating then. Now there is a strict red line. Back then, the cheapest option was the priority, and Russian trams always were that. Now we need to think about modernisation,” Artis Druvinieks, Member of the Board of Daugavpils satiksme (DS), admits the mistakes.

To replace the ageing fleet, a tram tender was launched in 2021, in which DS hoped to buy 12 new trams made in the European Union. That failed. The same year, another procurement ended in failure. Also in April 2022, when only one application was received – DLRR in partnership with the Czech Pragoimex. At the time, the offer was not of quality and DS did not like the fact that Jaroslav Křemen, a former Member of the Board of Pragoimex, was convicted of corruption in 2021. However, in September of the same year, the contract for the supply of four trams was concluded with DLRR, still in partnership with Pragoimex. DS allegedly received assurances that Pragoimex was no longer involved in malpractice. However, the lengthy procurement process meant that the date was fast approaching when EU funds would no longer be available to the city. In fact, within a year and two months – by the end of 2023 – the trams should have been at DS’ disposal. 

“It was not easy at any point, but there were several reasons – the geopolitical situation, the cost increase, the tight deadlines and the complex specification, taking into account the climate conditions and everything else to minimise the risks as much as possible,” says Artis Druvinieks. He says that a number of components were chosen to be more expensive but more durable, such as the stainless steel body of the tram – so that it would not be affected by salt, sand and rain. “All the solutions are focused on high performance. Clearly, it is not cheap.” The trams survived the winter well – there were small problems, but nothing major.

Two thirds of the trams in Daugavpils need to be replaced, so DS is currently working on a modernisation plan. “We definitely need to upgrade four types of wagons. We can be relatively sure about 12 wagons, but certainly not about 25. We are also talking to DLRR, which is interested in modernising trams. Maybe they will cooperate with the Czechs again. We have also spoken to Polish companies. But we do not know if anyone will apply again when the procurement is announced. We estimate that modernisation would cost half as much. If we can modernise ten wagons or buy five new ones for the same money, we have to take the first option,” says a DS Member of the Board. The company wants to finalise the modernisation plan this year so that all the documentation will be ready when the new EU funding programmes open. 

Assembling other companies’ products is not a common practice

Why only DLRR in partnership with a Czech company applied? And why did the Czechs not apply individually? Why do they need intermediation by the DLRR?

Unfortunately, the management of the Czech company Pragoimex avoids answering the questions of Lucie Sýkorová, editor of the Latvijas Avīze partner portal HlidaciPes. 

A transport industry expert, who wished to remain anonymous, told Latvijas Avīze that such a model is not very common and is not the most effective: “I do not know where the fault lies. Maybe the procurement volume for Daugavpils is always too small. Maybe the problem is in the procurement itself and in notifying potential tenderers. In theory, there was nothing preventing Pragoimex from applying themselves. The previous Daugavpils trams were also procured through an intermediary – a Lithuanian company, and there is not even a single tram network in Lithuania. Did the previous trams not go through intermediaries, too?”

The expert has observed that more often companies assemble minibuses of other manufacturers rather than trams or trains. “Latvian and Lithuanian companies are assembling slightly modified Mercedes Benz Sprinter minibuses. For the rail transport, the manufacturer usually assembles everything in its own plant. For larger orders, however, it is common for the final assembly to take place in a new production plant (which may be based on an existing company), especially if it is a specific, modified product. For example, in the United Kingdom, many European train manufacturers have their own plants, sometimes based on former British production sites. Similarly, but for different reasons [the war started by Russia], the final assembly of Škoda trains for Latvia and Estonia is currently taking place in Riga at the L-Ekspresis plant.” 

Sometimes, however, it happens that another manufacturer builds another company’s product under licence. “For example, the Russian company Ural Locomotives used to produce commuter trains for the Russian railways under licence from Siemens before the war, and now they have tried to localise the product. But China’s CRRC has produced several other Siemens products – high-speed trains and locomotives. But this is usually on a large scale,” says the transport expert.

As for the price of trams in Daugavpils, the expert points out that inflation has really hit the industry in the last couple of years. However, it is difficult for him to say how big the impact is on average. Anyway, there is something to compare it with, again recalling the Olomouc trams, which cost 1.4 million. “Of course, in this case, it is local production, standard gauge, a slightly higher number of wagons – that can reduce the price per unit a little anyway.”

“Yes, it is expensive, but…”

Artis Druvinieks, a Member of the Board of Daugavpils satiksme, once again emphasises that there were two choices – to agree to pay EUR 1.8 million or not to agree and not to get new wagons. He also personally believes that EUR 1.8 million is a very large sum, especially compared to the 2019 trams, which cost half a million. “More than three times the price, but we understand that the situation plays a role. After February 2022, prices changed drastically. We know who supplied the world with metals, raw materials and other products. As soon as that direction closed, prices were increasing in all industries. There is an explanation for everything. Yes, I think it is expensive, but if this offer had not been accepted, there would have been no trams at all,” says Artis Druvinieks. 

“Very often you put out a tender and during the process, five or six tenderers are interested in submitting an offer. In the end you only get two applications, and you cannot ask why. Apparently, the ones who did not apply were probably assessing their capabilities, the economic advantage. Our procurement had a very tight schedule. If I were in their position, I would probably also measure everything seven times and think whether I need it. Because in case of non-performance, penalties kick in, all the risks kick in and the project goes down the drain. The sword of Damocles is already hanging over them. I think many would have wanted to produce, but over a longer term,” says Artis Druvinieks. He does not believe that DLRR would have made a significant profit from the deal. “The deal is more about the city getting something – to keep the company going, to pay salaries. Subjectively speaking, I suppose this is also a set-up for the future,” says Artis Druvinieks.

The supervisors see no irregularities

Ieva Luste, Representative of the Central Finance and Contracting Agency (CFCA), which supervises the project, explains to Latvijas Avīze that there is no objective reason to doubt the compliance of the costs with the actual market situation at the time of the procurement, taking into account that a public procurement was carried out, the evaluation criterion of which was the most economically advantageous offer with the lowest price. 

“The CFCA has assessed both the procurement procedure for the wagons and the performance of the procurement contract and these checks have not revealed any irregularities which could potentially lead to a risk of a reduction of the EU co-financing. In addition, the CFCA has carried out an on-site inspection of the project, including a check of the compliance of the trams with the technical specification of the procurement, and no deviations from the procedure for the execution of the works set out in the procurement contract were detected during the inspection.”

Assembled like lego

Latvijas Avīze also had the opportunity to visit the Daugavpils Locomotive Repair Plant itself, including the depot where the trams were assembled. The space, which can accommodate two tram wagons, is small. At the time of our visit, there were no trams on the tracks. The lower part of the train is standing. There are a few worktables and a large box in which packages of parts have been thrown in. Is this really where the trams were assembled? I cannot say that it is not. The local newspaper Latgales Laiks also visited the depot in November 2023. The pictures show that at the time, five or six workers were working on one of the new trams, screwing some body parts, wheels, seats and doing other jobs.

Is that 50% of the tram? Certainly not, but unfortunately DLRR never showed any other visual evidence to the media during the whole assembly process.

The procurement foresaw that the work would be split in half between DLRR and the Czech Pragoimex – 50% would be assembled by the Czechs (in addition to the Czechs producing most of the parts) and the rest would be done in Daugavpils, receiving the parts and the so-called “know how” from the Czechs. Vladislavs Pavlovičs, a Member of the Supervisory Board of the company, pointed out that DLRR made some of the parts locally with its own machinery. The company has a large metalworking line, ranging from old but still actively used machinery to brand new ones worth several thousand euros, which can produce both less complex metal structures and a complex diesel engine actuator. The company points out that the machinery can be adapted to produce many of the parts needed for trams, so DLRR is prepared to do 70-75% of the work in future procurements. In the future, even more. Discussions are ongoing with some cities in Ukraine and Kazakhstan. Vladislavs Pavlovičs hopes that DLRR will then be able to export its products and services. The plan is still to work with Pragoimex, but as the company hopes to increase its own participation in projects, it also plans to bring in other partners and parts manufacturers.

“When the war in Ukraine started in 2014, we felt pressure and bad things coming from Russia. Clearly, it was difficult to switch from Russia because it was our biggest market. Russian orders accounted for almost 90% of our total portfolio. By 2022, we were somewhat ready for all this. Now we are completely out of Russia. We went to Europe and got a big customer base. Now our core customers are from Poland, Slovakia, Serbia, Hungary, Germany, we work with railways from all countries. Of course, the former Soviet republics remain, including Ukraine,” says Vladislavs Pavlovičs, a Member of the Supervisory Board of the company.

He confirms that DLRR wanted to provide DS with trams in the past, but was outbid by the Russians, who were mediated by the Lithuanians. Ten years ago, there were talks about cooperation with a Belarusian tram manufacturer. We were lucky to make the right choice and choose a Czech company to work with.

Seeing the problematic situation with trams not only in Daugavpils, but also the old Riga trams still in use, the company decided that the experience gained in the maintenance and modernisation of diesel trains could also be used in the modernisation of trams. “By using only European-made spare parts, we could help Daugavpils to cope with its dependence on Russia. Our advantage is that we can start everything quickly. This was particularly important for Daugavpils because the replacement of the Russian trams had to be thought of yesterday, not today or tomorrow. If we have the will and the means, we can easily supply Daugavpils with upgraded trams next year,” said the DLRR Member of the Supervisory Board.

Vladislavs Pavlovičs believes that the price of this procurement should not be compared with other procurements before the war because after the war began, all costs increased. “Second, we have different climate conditions than the Czech Republic, we have bigger temperature fluctuations. Third, the technical specification was different here than in Olomouc. We can go to a Mercedes or Porsche showroom and the base model there costs EUR 60 000. If we want the vehicle to meet our requirements, we start to add extra kit and the price can double.”

The most important thing is to have the documents in order

One of the activists who questioned the legitimacy of the procurement was Aleksandrs Šumskis, who was born in Daugavpils and has lived there for many years but has now been working and living in Germany for several years. He believes that the price per wagon is too high and there is no indication that DLRR has the machinery to assemble a tram. 

“Many people find this procurement strange. The mayor of Daugavpils, Andrejs Elksniņš, is at the head of the company’s shareholders. And there are many rumours that he is involved in some shady, dirty deals. On the other side is the owner of DLRR, Oleg Ossinovski, a millionaire from Estonia. It is well known that he has a long-standing relationship with Elksniņš’ ex-wife Anastasija Udalova, and that they run a multi-million business with EU funds,” says Aleksandrs Šumskis.

It should be noted that the Daugavpils Locomotive Repair Plant is 100% owned by Ossinovski, who is known as a defendant in a criminal procedure for giving half a million euro bribe to the former boss of Latvijas dzelzceļš Uģis Magonis (the Vidzeme District Court earlier acquitted both defendants, but the prosecutor’s office appealed the judgment and the case is currently being examined in the second instance by the Riga Regional Court). Anastasija Udalova is the Chairperson of the Supervisory Board of the company. DLRR had a turnover of EUR 58.9 million and earned EUR 4.9 million in 2022. Anastasija Udalova also owns the publishing house SIA Mediju nams, and the two together own H.A. Brieger, which manages the cosmetics brand Dzintars.

“I know how EU funds work, what the principles of funding are, what tenders look like. I just could not watch it all. I wanted to help, because I believe that millions are simply being stolen. Everyone seems to know about the EUR 240 000 fish installation on the shores of Lake Stropi. But the trams are worth millions,” Aleksandrs Šumskis said, describing his suspicions that Daugavpils is working according to Russian corruption schemes.

Daugavpils satiksme says it was forced to accept the offer because it was the only offer. But projects can be designed in such a way that for some companies the tender is not attractive and the preferred tenderer wins. The fund people are sitting in Brussels or Germany. They are only interested in documents. No one is so foolish as to make mistakes in documentation. A site visit is an hour at best. Of course, there is a friendly welcome, everything is beautifully laid out. Of course, I cannot say that the CFCA has not carried out proper checks,” says Aleksandrs Šumskis.

Even if his concerns are unfounded and the trams were indeed assembled in Daugavpils, he says, there is no way he can accept the cost. He has therefore decided to turn to the European Anti-Fraud Office (OLAF). Aleksandrs Šumskis was told that the Office had started to take action, but he does not know how the case will develop. Three months ago, the case was still open.

“I believe I did the right thing. I am not afraid to reveal my name because I know I do not plan to return to Daugavpils for some time, but if I were there I would worry about my health,” Aleksandrs Šumskis said.

Arturs Burinskis, from Daugavpils, also questions the procurement. “There is always only one tenderer everywhere. Either they do not know how to work or it is corruption. It is typical to have several tenderers! I am already offering an interesting business model to the citizens. If a Mercedes costs EUR 150 000, we could buy the car in parts. Then we will assemble it and sell it for 350 000. If DLRR is the new tram flagship, how many other trams have they sold?” Arturs Burinskis asks. 

REFERENCE

The corruption cancer

The Czech tram manufacturer Pragoimex is directly linked to Škoda Transportation, already described in Latvijas Avīze, which is Pragoimex’s parent company with a 32% stake in the company since 2014. Škoda Transportation was involved in Rīgas satiksme corruption scandal, which was investigated in 2018. Škoda Transportation is currently owned by the PFF Group, which is managed by Renáta Kellnerová and her three daughters, inheriting the company from her tragically deceased husband, Petr Kellner. 

For example, Miloš Kratochvíl, who was the CFO of Škoda Holding when it was led by Czech millionaire Tomáš Krsek and when the company won several Rīgas satiksme tenders that were later investigated by the Corruption Prevention and Combating Bureau, was on the board of Pragoimex for several years. Miloš Kratochvíl is also the former CEO of Central Europe Industries Ltd., the company that was the beneficial owner of Škoda Transportation when it was headed by Tomáš Krsek. Miloš Kratochvíl was also involved in the failed purchase of Olainfarm as a representative of BHM Group, an investment company led by Tomáš Krsek. The BHM Group owns a number of companies involved in renewable energy projects, including in Latvia, which we also featured in the Czech Engineering Tycoons’ Business in Latvia series in Latvijas Avīze in March and April 2023.

The majority of Pragoimex shares (about 2/3) are owned by Krnovske opravne a strojirne, a Czech company engaged in the manufacture, modernisation and repair of train wagons, as well as in the production of trams. Apart from tram production, the company has a product range quite similar to DLRR. 

Pragoimex has not been without scandals over the years. In 2016, legal proceedings were launched against Martin Dědic, a businessman and lobbyist who used his political connections in the Moravian-Silesian Region to help four companies, including Prague-based Pragoimex, win large purchases in Ostrava between 2009 and 2012. Police said the companies knew about Martin Dědic’s influence and paid Martin Dědic for it. Martin Dědic has stated that he was involved in consulting for companies. The police, however, considered this to be bribery, pointing out that Martin Dědic had received almost EUR 1 million from Pragoimex alone. 

In total, six people were convicted by the Ostrava court in 2021 – Martin Dědic was sentenced to eight years in prison, while Jaroslav Křemen, a Member of the Board of Pragoimex at the time, managed to avoid prison – he was sentenced to two and a half years of probation, a fine of EUR 120 000 and banned from holding positions on company boards and supervisory boards for the next ten years.