Interview with Kirill Shevchenko, Chairman of the Board of Joint-Stock Bank Ukrgasbank for LDaily
LDaily: At the end of 2017, the government presented a long-awaited strategy for reforming state-owned banks. What changes will be made in Ukrgasbank? Will you have a new strategy?
K.Shevchenko: If you compare a new document with the previous version of February 2016, then that part of the strategy that concerns Ukrgasbank has not been changed. As early as April 2016, we approved our Green-banking strategy at the shareholders meeting, in May 2016, we signed the first agreement with the International Finance Corporation (IFC) and from that moment we are actively developing the idea of a “green” bank. And already there are results confirming that we were not mistaken with the direction of development. In 2015, we were 17th in terms of assets, with a market share of less than 2%, today we are in the top five banks, and our market share has exceeded 6%. At the same time, “Ukrgasbank” is the only state bank, which since 2015 has not demanded capitalization, and during the last three years did not take a cent from the state budget. Moreover, we started the reform of the corporate management system in 2015, even before the first version of the strategy for the development of state-owned banks appeared. All that is mentioned in the strategy now, we have already realized.
Decision-making process is collegial, there are working committees, Supervisory Board, headed by an independent director, created a system for countering conflicts of interest. In fact, this is revolutionary not only for state-owned banks.
I repeatedly face with the perplexity of colleagues from private banks – how is it possible that the head of the Supervisory board has become an independent director? They, for example, do not understand how to explain their owners in Vienna or Paris the necessity for such changes. After all, any owner wants to manage his business directly. But here we need to pay tribute to IFC, they helped us to implement corporate management reform, advised how to do everything right. On the one hand, there is nothing complicated about this; on the other hand, the bank is a large organization, it is impossible to rebuild it in one day. The biggest changes must occur in the minds of employees. Especially when we began to engage in Green-banking and develop “green” lending.
LDaily: What are the conditions, such as terms and money flow, of possibility to be included into Ukrgasbank IFC capital? Who is already enlisted to it?
K.Shevchenko: In November last year, the Ministry of Finance, Ukrgasbank and IFC signed a Memorandum on IFC consulting services for the bank development, as well as to its investment attractiveness enhancing . This partnership is a powerful signal that Ukraine is serious about attracting private investments into the banking sector and about qualitative transformation of Ukrgasbank.
Under the terms of the Memorandum, the IFC’s share in UkrGasBank should not exceed 25%. In practice, 5-15% is enough, so that the innovative financial technologies of this organization have had the maximum impact on the global development of not only UkrGasBank, but the entire banking sector of Ukraine.
For us, this means a new level of reliability and qualitative change of services, new clients inflow, lower credit rates, the most innovative corporate management and many other opportunities that appear for Ukrainian banks for the first time. Such cooperation is a kind of showcase of opportunities for the 189 countries of the International Bank for Reconstruction and Development. Indeed, IFC has many years of experience gained from investing in difficult and emerging markets.
LDaily: And then will the full sale of Ukrgasbank take place?
K.Shevchenko: In the first strategy of the state-owned banks development in February 2016, it was declared the obligatory withdrawal of the state from Ukrgasbank until the end of 2017. To the end of 2017 the privatization had been postponed. The heavy burden of the state sector in the amount of 55% of the entire banking system continues to put pressure on the country’s budget. Naturally, current situation influenced in the Ukrainian economy. I would remind you that 2015-2016 was marked by a severe economic downturn for the country. Today it can be stated that
the restart of the economy has been completed, the banking sector has strengthened and stabilized, and the growth of bank assets, an increase in the liquidity of banks testifies my words.
Future expectations also encourage. Ukrgasbank has been summarizing its profits for the third year in a row. In 2017 it exceeded 600 million UAN. For reference: in 2014 losses amounted to UAH 2.8 billion, the first quarter of 2015 also gained minus. In the case of maintaining the same trend and with a stable political and economic situation, the privatization of Ukrgasbank will take place during the next 2-3 years, and maybe even earlier. Always, in order to sell something, first you must increase its value. And privatization has a special meaning during the period of economic recovery, when it will be profitable both for the state and for the bank.
One of the options for privatization is the entry into the bank of minority shareholders, such as IFC. We expect that in the 4th quarter of 2018, IFC will enter Ukrgasbank capital in the amount of up to 20%, and for the 3rd quarter of 2019, it is planned to withdraw completely the state from the capital of the Bank and its sale to a private strategic investor.
LDaily: What, in your opinion, will be the banking sector after 2022? In your opinion, will it be possible to reduce the share of the state and, besides “Ukrgasbank”, to sell some more banks?
K.Shevchenko: Let’s look at this process with the eyes of the state as the owner. Any business owner wants it to make profit. There is no other way than to sell this property. That is confirmed by our whole story. Otherwise, pre-capitalization will be permanent. The state is the responsible owner; it will never leave its banks. Therefore, the sale of state-owned banks is the only way out. Of course, the price of this sale will always be open. But if we compare the options: to sell today cheaper, but to reduce the constant costs in the future, we will not see sales alternatives.
If there is political will, by 2022 the state will still have remained a major player in the banking market, but this big player will not have the current monopoly position.
LDaily: At first, many people took the idea of the ECO-Bank skeptically. How perspective is this direction?
K.Shevchenko: Yes, we know about skeptics. But the prospects are huge. In 2015, when the Paris Protocol on Climate Change was adopted in place of the Kyoto Protocol, the Green Bank Network, which united the “green” banks, was created in parallel. They are, by the way, public, with the exception of several municipal banks in the United States. It is anticipated that through this network of banks, programs, aimed at achieving the objectives of the Paris Agreement, will be funded. It is a question of keeping the growth of the global temperature within 2 ° C. To do this, it is necessary to invest over $ 50 trillion in various “green” projects by 2040. Without the existence of specialized financial institutions, it is impossible to achieve these indicators.
Moreover, today the International Energy Agency and the World Bank acknowledged that the main source of 2/3 of the world’s anthropogenic greenhouse gas emissions is traditional energy. About 80% of the world’s energy consumption is due to the burning of fossil fuels – coal, oil, gas, causing a sharp rise in temperature on the planet, which in turn leads to natural disasters. That is why, under the same Parisian agreement, the World Bank Group in 2019 completely ceases to finance oil and other fossil fuel projects.
Now it is clear that among the main means to achieve the goals will be measures to encourage a rapid transition from fossil fuels and increase investment and market share of clean energy sources and solutions, especially wind and solar energy, as well as energy efficiency. Throughout the world, green banks, like UkrGasBank, operate in three areas: finance renewable energy projects, energy saving technologies and environmental protection projects. So, today, in the world, the lag in financing of these projects is about $20.7 trillion for Ukraine, according to the IFC, in order to achieve its goals by 2030, it is necessary to invest in green projects of about $70 bln. We claim one-third of this market. We have a lot of to do.
LDaily: Did the Green-banking strategy justify itself? What are the results?
K.Shevchenko: Today Ukrgasbank is the leader of “green” financing in Ukraine regarding financial support for the introduction of new facilities in 2017. According to the National Commission on the State Regulation in the Spheres of Energy and Municipal Services, every 3 MW of the received “green” tariff in 2017 in the country was financed by Ukrgasbank.
We actually started eco-lending from the zero point, as a result of which, as for the January 1, 2018, our portfolio of eco-loans is UAH 8.7 billion. For comparison, this is the volume of all net assets of the 25th largest bank in Ukraine. If we talk about alternative energy, since the beginning of cooperation with IFC, we have already funded 88 clean energy projects with more than 261 million euros with a total capacity of 470 MW.
We have 58 solar and 4 wind power plants, 16 small hydropower plants, 4 projects in the direction of biomass and 6 projects in the direction of biogas.
Due to all implemented eco-projects, gas savings will amount to about 400 million cubic meters annually, and the reduction of CO2 emissions by more than 800 thousand tons annually. This would be the same if we removed almost 390,000 cars from the roads at the same time.
But this is just one of the fields in which we work. The second direction is the financing of energy-efficient projects. Here we are talking about energy-efficient construction, energy modernization of enterprises, thermal generation, energy efficient transport.
For example, we credit the replacement of equipment – agricultural, industrial to more energy efficient one. This direction is very relevant for Ukrainian business. Economic growth is minimal, so if business can not provide growth, then it is necessary to reduce costs. For example, the replacement of lighting on a production scale pays for itself in a year and a half.
The third area is the financing of environmental protection activities. In the framework of cooperation with the Ministry of Ecology and Natural Resources of Ukraine, we have been working with the first hundred of the largest environmental pollutants. Our bank issued a loan to Zaporizhstal to install a new filtration equipment, which allowed reducing harmful emissions in the city by 20%.
Already due to our “green” financing, CO2 emissions to the atmosphere decreased by 780 thousand tons.
Also we have a unique product – eco-card of bio-based materials (corn and sugar cane). Externally it is no difference from the traditional plastic. At the same time, the eco-card after the disposal does not harm the environment. This card is unique not only for Ukraine, but also for Eastern Europe.
LDaily: How do you think, if it is possible to stimulate Ukrainian business become more energy efficient?
K.Shevchenko: Here the state plays a huge role. As long as in Ukraine the cost of emitting one ton of CO2 is 41 kopecks – 1.5 cents, it is unprofitable for businesses to invest in energy efficiency and care for the environment. Our nearest neighbor, Poland, the cost of CO2 per ton is $ 1, in Sweden – $ 118 per ton, in Finland – from $ 54 to $ 68, in Denmark – $ 23, in the UK – $ 22 per ton.
In fact, today environmentalists are interested in socially responsible companies or companies that are a part of international groups and are a subject to the same rules as for companies in the EU. For example, today’s global business is relying on renewable energy sources. At the corporate level, there is a steady tendency to expand their use. An example of this is the American Business Act on Climate Pledge, which has already been signed by 81 companies. Among the signatories are such leading corporations of the world as Amazon, Apple, Google, Microsoft, major trading networks (IKEA, Nestle, Danone), car dealerships Daimler, BMW, Audi, Renault, Volkswagen and GM, as well as a number of world banks such as the Bank of America, British HSBC, Swiss Commerzbank and others whose investment portfolios also include renewable energy.
Also, there is another option for stimulation business responsibility in the world – tax incentives. In the US, for example, there is a pollution tax. All income from it is accumulated in a special fund and are sent to compensate interest or body for a “green” loan. As a result, a company that wants to build an office center, where the electricity consumed will come from wind energy, will be able to save on tax and obtain a preferential loan.
In Ukraine there is a charge for pollution of the environment. It is paid by almost all manufacturers. According to our estimates, this collection provides about 4 billion UAH per year. The purpose of these funds is the construction of sewage treatment facilities, filtration equipment. How many wastewater purification plants can one build within the country? Of course not many. But if you send these funds to compensation for Eco credit, then the effect will be in times bigger. We have already begun discussing such an option with the Ministry of Ecology and Natural Resources. The final decision will be for the deputies.
LDaily: Under what conditions can business now get green financing?
K.Shevchenko: We give our mortgage loans an average under 18-20%. As a rule, such financing is 2 points less expensive than usual. But according to some programs for the people Ukrainians, the rate can be 0.001-0.01% per annum. Under such conditions, for example, we credit the purchase of electric vehicles. Projects on alternative energy, we are ready to lend in the currency – at 6-7% per annum. The average lending period for alternative energy projects is 3.5 years, projects aimed at improving energy efficiency – about five years.
By the way, with the help of our programs, we offer a large, small and medium business an easy and affordable transition to modern environmental equipment. Moreover, we will tell them how to do it correctly and with minimal cost. For example, a client, who wanted to upgrade the equipment at the factory, came to us. According to his calculations, the payback period is 3.5 years. In our bank, it has been set up a special department which conducts a technical examination of each individual project. By the moment, as I have already said, we are asking IFC for “green” projects that evaluate them from the point of view of world experience. Our colleagues advised him to upgrade the project. As a result, the payback period decreased to two years, and after a year and a half the client paid off the debt to the bank.
As a part of implementation the eco-bank concept, there is a steady increase in the share of eco-loans in the loan portfolio of small and medium business of the Ukrgasbank.
As for the January 1, 2017, the portfolio of eco-loans for small and medium business amounted to UAH 480 million (share in the total loan portfolio – 43%), and as for the January 1, 2018 – more than UAN 1 billion (share in the total loan portfolio – 50%).
LDaily: What eco-programs are popular among Ukrainians?
K.Shevchenko: As for the Ukrainians, our program “Eco-Energy” is very popular – granting of credits for the purchase of solar power plants and heat pumps under the program. Over 9 months of 2017, since the launch of this product, Ukrgasbank has issued more than UAH 23 million in loans, and we are not going to stop here – we plan to further improve the terms of lending and expand the list of partners for this program.
Due to the constant rise in prices for traditional energy sources and an unstable power supply system, alternative energy sources are an effective investment not only in energy independence, but also in the preservation of the environment. Using our unique program, the borrower not only connects to the development and distribution of alternative energy sources, but also gets the opportunity to earn extra money, and this is a long-term investment in homeownership, the profitability of which does not decrease over the years.
Also Ukrgasbank is one of the active participants of the “Warm home” credit program within the framework of the State target energy efficiency program, whereby the borrower not only gets the opportunity to warm up his own homeownership or installation of equipment, but also receives the compensation from the state to 35% of the loan amount. In 2017, according to this program, the Bank issued 16,694 loans for a total amount of more than UAH.452 million.
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