Banking sector Interview

In our opinion, a project can be successful only if we bear the same project risks

Anton Usov, the EBRD Chief Spokesman, commented on Ukraine’s investment attractiveness to foreign investors, the legal challenges that affect the Bank’s work, and the most attractive sectors worth financing in Ukraine.

: How does the EBRD work in Ukraine? Is there a general model or do you have a separate plan for Ukraine?

A. Usov: Frankly speaking, we do not have unique models for Ukraine. All countries share the same work principles. We work out a medium-term, commonly four-year, strategy for each of them, which is tailored for the local context and relevant to a particular country.

We have two workstreams:
1) The public sector – infrastructures, such as electricity, water, light, transport, roads, ports.
2) Private projects − we work in nearly all industries except alcohol, gambling, and the military-industrial sector. We are the largest investor in Ukraine operating here since 1993. We have invested over €14 billion into the country. There are countless projects in industries from nuclear power to confectionery.

: Could you tell us more about the business model selected for Ukraine? What does it include?

A. Usov: The point is that we have certain urgent tasks in Ukraine. The priority and an action plan must be obligatory agreed upon with the government. In particular, we support the Ukrainian banking system by offering special programs for improving the service standards of local banks including corporate governance to provide them with credit lines for financing small and medium-sized businesses. We are also considering projects to support energy savings and trade finance to stimulate export and import transactions through collaborating banks.

We are also actively working with the regulator (NBU) on various aspects of improving the entire banking system. The situation in Ukraine is very unusual, as the state owns more than half of the banking system, which we don’t consider a positive factor. This happened after the nationalization of several major banks. We are currently working with the government on the concept of state-owned banks’ development and helping select supervisory boards of these institutions. We believe this significant challenge will make the system more viable. Banks should provide lending to the real sector with regard to the risks and specificities of the country while maximizing the benefits for share and deposit holders.

Energy – and energy security in particular – is a vitally important area. As you know, Ukraine imports the lion’s share of hydrocarbons. Both oil and gas are not getting cheaper. Geopolitics also plays a significant role in this matter. So, we should consider diversification. This applies not only to the oil and gas sales geography of the country. We fund alternative energy projects – wind and sun, biogas and biomass. Ukraine has specific resources on a sufficient scale and we are developing a lot of projects in this industry. This is recently one of our most high-priority focus areas. This year alone, we funded several major solar and wind projects in the south.

Ukraine is still a very cost-intensive country in terms of energy use. Therefore, we are also working on energy-saving projects. Unfortunately, many consider building new generation capacity, not the rational use of existing resources, the solution to this issue. If Ukraine pays more attention to energy conservation, it will save on energy imports. By the way, nuclear power plants produce more than 50% of the country’s electricity. We have a special program aimed at improving the safety of these stations. This is a list of specific measures for all 15 reactors operating in Ukraine.

You might produce high-quality milk, cheese or something like that. However, they will never get into retail chains if there isn’t a way to deliver these products to the consumer. Due to this, we finance highways construction. Our most famous project is the Kyiv-Chop M-06 highway. It was reconstructed in three stages: Chop – Lviv, Lviv – Zhytomyr, Zhytomyr – Kyiv. Anyone traveling westbound can assess its quality. We also closely cooperate with Ukrainian railways by financing both rolling stock upgrades and infrastructure construction. For example, the Beskidy Tunnel in the Carpathians was put into operation last year. This allows quadrupling the capacity of the area – the main railway gate to Europe. We also work closely with towns in virtually all country areas at the municipal level. Thus, we are engaged in projects for the reorganization of heating systems and switching to alternative fuel, which will reduce the cost of using boiler houses; in water and water treatment projects, replacing municipal transport with more efficient and environmentally friendly rolling stock samples. These projects are implemented in many Ukrainian towns.

We had two very interesting cases in the pharmaceutical sector this year. The first was a joint project with Yuri-Farm (a domestic manufacturer of cancer drugs), and the second – with Farmak, a well-known company in Ukraine. Yes, I should also mention agriculture and everything related to it. Agribusiness means every process from cultivation and growing to packaging and sales. We support the full range of this business. There are powerful grain trading companies among our clients, such as Kernel and Nibulon, or Astarta, the manufacturer of sugar and dairy products. We also cooperate with grocery retailers. For example, we have recently entered into another loan agreement with the Novus supermarket chain. The agricultural industry confronts us with huge challenges. Ukraine is a powerful agricultural country, so it would be great that Ukrainian goods enter new international markets. Not just grain should be introduced but goods with high added value – already finished products. Put simply, it shouldn’t be milk but yogurts, not grain but bakery products. That’s why we are actively working on the Ukrainian export brand. We have already helped several enterprises enter the Chinese market. It is important and we are now keeping a close eye on the markets of Asia, the Middle East, North Africa. The outlook is promising as these markets are receptive and solvent.

: What industry did you invest the most in 2019?

A. Usov: We invested almost €200 million in two noteworthy projects in the renewable energy sector this year. One of them was a very large-scale project in the field of transport. We were engaged in the issue of Eurobonds of Ukrainian railways in early September. We have also recently issued a loan to Louis Dreyfus, the largest international company in the field of grain trading. Thanks to our assistance, they will create their own railway company in Ukraine and buy about 1000 gondola cars or so-called hoppers. We took part in many transport projects in Kharkiv, Lviv, Poltava, and Mykolaiv. As a result, the trolleybus fleet was renewed and new low-environmental ecological trolleybuses were purchased.

We have invested about €70 million in agriculture. Our company also started cooperation with Niva Pereyaslavshchina, a group of pork-producing companies.

Jointly with the European Union, we have launched a series of programs supporting small business. The Women in Business entrepreneurship support program which had been working in various countries has finally started in Ukraine. Bank Lviv was the first financial institution in Ukraine to receive money through the program. To date, it has received over €5 million from us to support women’s entrepreneurship. There is a €70 million credit line to support medium and small-sized businesses. The credit is provided through OTP Bank, ProCredit Bank, and Raiffeisen Bank Aval. The fact that most of the projects are traditionally done in quarters III-IV is common for our business. The amount of annual investments has now exceeded €1 billion. Let’s see what number we will have at the end of the year, yet it was very successful.

: What economy sectors do you not finance? Are blockchain and IT among them?

A. Usov: On the one hand, our company is conservative in terms of risk assessment because our shareholders are not individuals but states. Cryptocurrency projects are quite risky. As an institution capitalized by taxpayers’ money, we have no right to take part in them. On the other hand, we work on the legal aspects of the matter and are involved in the legal development of relevant standards related to cryptocurrencies, though they are not presented in this market.

: What economy sector do you consider the future of Ukraine?

A. Usov: This might sound as a cliché, but high technology is our future. The world is currently introducing high technologies that improve the very essence, speed of production, its quality. This is the future.

Everyone knows that Ukraine is a very actively growing powerful agricultural country. However, in recent years, the country has been dynamically developing the IT sector creating the necessary conditions for its further growth, which, I believe, should be one of the state’s priorities. The positive experience of our neighbors from Belarus shows what conditions are created there for IT professionals, how this field is developing, how many global companies are using local developments. They are the pride of the country. Ukraine should pay closer attention to information technology. Was our country more innovative, the outflow of qualified specialists abroad would be much less.

When it comes to technology in general, we approve of foreign direct investment not only because it is money and job creation, but also because serious investor companies implement modern technologies in our market. The more innovative a country is, the more competitive it is globally. Ukraine needs to keep the focus on this.

: You have mentioned the investment climate. How do you evaluate it? How has the change in power affected the investment?

A. Usov: It is a process. There is the World Bank Doing Business ranking where Ukraine has nothing to boast of ranking 71st. Our neighbors − Belarus, Lithuania, Poland are all in the top thirty. Here is the answer to your question. In the meantime, the situation was even worse a few years ago. So, there is progress.

There are quite significant problems with the rule of law in Ukraine, which is an overall assessment of the legal system. Investors, especially foreigners, find it very difficult to get out of this system alive. This is what we hear from international companies coming to this market. Something has started to improve lately, although it all is still far from ideal.

Ukraine is rather corrupted, which is also a very important factor. Those who saw Transparency International ratings understand the point. Listen to investors. Unfortunately, all negative they complain about − tax authorities, permits, inspections, searches by law enforcement agencies − remains. Ukraine should treat this more seriously. Any economy fights for investors, even the strongest one, for example, American or Chinese. Ukraine doesn’t possess exclusive investment attraction features. It is not the place where everyone dreams to do business. The country should be more attractive to investors. Obtaining permits, business opening procedures, other boring things and bureaucracy − all this should be minimized. The new government has recently announced creating a digital document flow, which is a correct decision. Look at Estonia, a quite small country, where almost the entire document flow is held digitally. It is very convenient for business. Creating a similar system in Ukraine is the right direction we should focus our attention on.

: What government projects do you work with?

A. Usov: These are some infrastructure projects − ports, airports, highways, railways, municipal projects, etc. We assist the natural gas procurement. We have recently participated in the issue of Naftogaz of Ukraine Eurobonds.

We are also updating the transmission lines. According to the Bank’s statute, we need to carry out about 60% of projects in the private sector and 40% in the public sector. We have slightly moved towards the private sector, however, I believe, that’s a good thing. Projects are progressing slower in the public sector. They are difficult to prepare for many reasons. For example, some projects can only be implemented under a state guarantee. These are the large state-owned company projects, lengthy enough, demanding hundreds of millions of euros. The funds for such a risky market can be provided only under a state guarantee. The State Guarantee is a budgetary guarantee of loans confirmed by the Ministry of Finance requiring ratification by the Verkhovna Rada. There is also the issue of disbursements – the way money is actually used in these projects. All this is becoming more mobile in private business. Companies develop quicker to get the fastest economic impact.

: What criteria does a business have to match to receive a loan from the EBRD?

A. Usov: A private business must match many criteria. We always assess the financial side − whether a company is financially viable. They have to provide audit reports for the past few years. We would like to look at the general business structure and a business plan. We always take our reputational risks very carefully and check company owners. It is unacceptable for us if a business owner works in the executive or legislature at the same time. We don’t work that way, even though these are often inseparable things in this country for historical reasons. It’s unacceptable in terms of international business standards. If the political conjuncture changes, the business also suffers.

We pay attention to the specific requirements anyone can check out on our website, such as the equity to debt ratio. If a person addresses us with a project worth 10 million euros or dollars, we expect this businessperson to invest at least half of their funds (money, technology, land, etc.) in the project. We do not fund 100% of a private-sector project cost, this is wrong. In our opinion, a project can be successful only if we bear the same project risks.

: What is the legislative sphere lacking for investors to come, or for you to give more opportunities to credit projects? What difficulties do government agencies face when dealing with their projects?

A. Usov: It depends. In fact, we call them government projects since they are commonly prepared for a very long time. Here are some examples to make it clear.

The first example. We were able to work only with large cities until recently. Small towns were prohibited from borrowing directly from the EBRD or other international financial institutions. There was no relevant legislative provision. There was no budget in the regions until recently; they were financed from the central one. When giving funds to a city, we evaluated its budget and credit rating. It was already possible to build a financial model on this basis. Previously, we did not have this standard for the regions. After its emergence, we started our work in this direction.

The second example. There was innovation but it was refused. Its point was that municipalities could raise money from us only within the development budget. If there was a large city budget, for example, of 100 million UAH, the development budget, let’s say, 5 million UAH, was included in it. The borrowing was limited to this amount. Fortunately, this innovation was refused. There were cases when a city had to buy new trolleybuses for approximately €20 million, which was unaffordable.

We also faced various legislative difficulties and specificities of state project preparation. To give a large state company a sizable loan, we had to receive the consent of the profile ministry. Next, this project had to obtain the consent of the Ministry of Finance, and the elected officials had to vote for it. This process could be endless. We often became a hostage of the political situation: the project was already signed, we were ready to start procurement procedures but there was no approval of the Verkhovna Rada. It is worth mentioning that if the funds for a project are reserved, the country pays a duty for it. So unused money is just wasted.

Thus, Ukraine paid for not using the money while a project was waiting for adoption by the Verkhovna Rada and deputies did not approve it due to personal controversies, conflicts, etc. Occasionally, there were cases related to the lobbying of particular private interests. For example, we offered one municipality to replace their boiler room working on fuel oil to one using alternative fuel. This would reduce the cost of heat supply. However, we faced very serious opposition in the City Council. Everything became clear with a closer look: the opposition to the project was the actual fuel oil supplier. They did not need any savings. This happens when people are driven not by economic expediency or importance to the country but their interests. I’ll repeat myself: the combination of business and politics is unacceptable.

: Does the state provide guarantees to the EBRD? If the company has assets of the Bank, will this protect it from illegal actions of law enforcement agencies?

A. Usov: Our company is non-standard. It is an international financial organization not subjected to Ukrainian legislation. We have the ‘best lender’ status, so many things obligatory for companies subjected to the law do not apply to us. In 1997, we signed an agreement with Ukraine explaining our privileges and immunities. We have some protection from the executive and the judiciary. It usually helps us implement projects. Let me give you an example. Imagine we have allocated money for purchasing heat supply equipment for a city. In this case, the procurement rules of the EBRD’s goods and services are applied, not the law on public procurement (enshrined in the law, by the way). It is an open, international tender under our control – suppliers are chosen according to our terms. And this is often misunderstood. These issues are addressed by the Control and Audit Office, SSU and other services trying to find any pitfalls − they ask why a particular company was chosen, why a city or state company paid a certain amount for a service or goods. Fortunately, our status protects us. We often have to intervene or clarify things but in general, conflicts are usually resolved after showing relevant authorities that everything is done in the legislative field of international law.

: Do you already know what projects the EBRD will fund in 2020? What will the amount of funding be?

A. Usov: We don’t act in this manner, so there aren’t any annual budgets. We follow the market. If there is a finished project, we sign it. As for the industry, we will definitely work with municipalities, transport, banks, energy, and renewable energy.

We can invest about a billion euros annually. This amount shows the potential of the Ukrainian economy.

Please read: If a company wants to avoid problems with assets and controlling government bodies, it is necessary to establish a unified and consistent communication strategy for all authorities

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