Interview Ukrainian macroeconomics

Ukraine now lacks philanthropy, people are not accustomed to it

Jaroslawa Johnson, the President and CEO of the first regional fund in Ukraine and Moldova, Western NIS Enterprise Fund (WNISEF), told about its role in developing the export strategy of Ukraine, about numerous fund-sponsored projects and businesses, and promoting social enterprises at the local level.

: Yaroslava, tell us about WNISEF, please.

J. Johnson: Since entrepreneurship was banned in the Soviet Union, the countries of the Warsaw Pact and the post-Soviet republics did not have the market economy after the USSR collapsed. Therefore, the United States came up with the idea of ​​setting up special funds to revive and support small and medium entrepreneurship in these countries. They were funded by the US government through the United States Agency for International Development (USAID).

The Polish fund was founded in 1989 and it was the first of 10 created by the US. Czech and others came after it. WNISEF was established in 1994 and began its work in Ukraine in 1995 with original grant of $150 million received from the US government through USAID.

At the very beginning, WNISEF operated in Ukraine, Belarus, and Moldova. Unfortunately, we worked only a year in Belarus before Lukashenko banned the activities of international funds there. Thus, our activity focused only on Ukraine and Moldova.

: How long have you been working for the Fund?

J. Johnson: I’ve been working at the Fund since 1994. President Clinton recommended me to the organization – all members of the Board of Directors were appointed by US presidents. I initially worked as the Member of the Board of Directors of the Fund, and then I was a lawyer at an American firm in Ukraine until 2014. After the Revolution of Dignity, that company closed its office in the country due to possible risks of working here. Meanwhile, Natalie Jaresko was appointed as the Minister of Finance of Ukraine, and she left the post of the CEO of the Fund. The Board of Directors appointed me as the President and Chief Executive Officer. The members of our Board of Directors are Americans and I am the only one of the Ukrainian descent.

: What programs does the Fund support?

J. Johnson: We have provided a lot of support in Ukraine and Moldova for almost 25 years. We invested in 118 companies during our first 20 years working in the region. In the past three years, we have invested in nine more companies. Our goal is to make these enterprises develop, become successful and change the business environment in the country with our help.

In the first period of our investment activity–from 1995 to 2007–we invested $150 million. Actually, there were even more – over $185 million, as the capital grew: we sold some assets, bought others and then re-sold them.

: Could you please tell us more about the companies in which you invested?

J. Johnson: These enterprises vary greatly. Our Board of Directors believed that agriculture in Ukraine is going to be very profitable, but this was a mistake from the very beginning. In 1995-1997, we didn’t understand that the government fully controls the grain export. And if an enterprise that we invested in wanted to pay us with unsellable grain, it could not be successful. Next, we worked with bricks, ice cream, equipment, concrete, cement – the things went better with these options. We invested and sold, reinvested and sold, and earned money on that.

The situation changed in 2015, after the Revolution of Dignity. The US government decided to allocate funds earned from investment for the developmentof Ukraine – some people call it “technical assistance”. Actually, this is primarily social assistance. In particular, we have four programs in this regard: the Export Promotion Policy Program, the Local Economic Development Program, the Social Investing Program and the Economic Leadership Program.

For example, we provide loans under 5-10% per annum to social enterprises via our partner banks–Oschadbank and Kredobank–within WNISEF Social Investing Program. This program is based on loans. While other programs of our Fund are grants, this one is about loans. We receive applications from social entrepreneurs who give at least 10% of their profits to a social purpose or hire people from vulnerable social groups such as internally displaced persons (IPDs), ATO veterans, people with disabilities, etc. Walnut House in Lviv is one of the borrowers. The company consists of a bakery, catering services, and has a social center for female victims of domestic violence. In Dnipro, we provided loan to the UTOS enterprise of The Ukrainian Association of the Blind and supported an atelier where IDPs work.

We also supported the ATO veterans’ project – the Veterano Pizza restaurant: it was a pizzeria first, which evolved into a restaurant. Our credit helped veterans to achieve this. Since the beginning of the program, we have received more than 100 applications for loans at low-interest rates from social enterprises and have already provided 16 loans. We process applications, check if everything is secure. And we consult such enterprises in any case.

Economically successful states have a high percentage of small and medium-sized enterprises, and we now have only 15% of such companies in Ukraine. This happened due to the long Soviet history where business was banned, and people didn’t dare to take risks. The figure is higher in other countries: 87% in Poland, 93% in the USA… Therefore, our goal is to work with small and medium business, because here we also have the added value of our cooperation, as we see that entrepreneurs do something useful for their communities. In the modern world, smaller enterprises are much more flexible. We think that if this program had more funding, it would be actively developed in the eastern regions of Ukraine, as there is a greater need for development.

Within the Export Promotion Policy Program, we support the participation of Ukrainian producers in international trade exhibitions and trade missions. The Fund has provided support to more than 250 companies–small and medium enterprises from Ukraine and Moldova–in participation in 35 trade promotion events in 20+ countries. We need to show what exactly Ukraine can sell if we want to enter new markets. Previously, many Ukrainian manufacturers did not understand how they should prepare for exhibitions, so their participation used to be only “scientific”.

We took honey producers for the first exhibitions in Germany, and they looked at everything there as if it were a miracle. They haven’t seen how honey is sold in the world since Ukraine exported honey in barrels with mixed varieties. Manufacturers saw how this product is sold in Europe – in small jars with labels, bright lids, for higher prices, so this added value brings more money. Manufacturers were inspired by this attitude and began to pay more attention to marketing. They also realized that muffins, pastries, and muesli can be made of honey, which also gives additional profit!

In 2017, we launched a new Uventures fund for investing in early stage technology startups. The Fund provides co-financing and scaling assistance for Seed to Series A startups with co-founders from Ukraine and Moldova. To be eligible for receiving investments, startups must have the minimum viable product oriented to large addressable market and ready for global distribution. We have invested in 9 startups at the moment. The Fund offers investments in the amount $100,000 to $500,000.

: How do you work with the government?

J. Johnson: We supported the development of the first National Export Strategy for Ukraine, as relations with Russia actually ceased in 2016-2017 war years, and it was almost impossible to export Ukrainian products there. The Russian Federation received almost half of exports not so long ago. We had to correct this, so we financed the creation of a National Export Strategy. The strategy reflects real and actual problems, opportunities and prospects of Ukrainian exports. This facilitates the coordination of public and private sectors in the consistent simplification of trade procedures, improves access to foreign markets, and enhances the competency and competitiveness of exporters.

We also supported the establishment of the Export Promotion Office under the Ministry of Economic Development and Trade of Ukraine and we fully financed it at the first stages (before other donors joined). Since then, the Office has been working on a comprehensive list of education programs, trade promotion and special contents, supported by WNISEF. Thanks to this work, Ukraine has fundamentally changed its export orientation in the past three years: if over 50% of goods went to the Russian Federation before the Revolution of Dignity, only 9% is exported there now and 41% goes to Europe and other countries.

Additionally, we began to finance theInvestment Promotion Office, UkraineInvest, two years ago. The prime minister was supportive of this project and actively involved in its implementation. We invited Danylo Bilak to lead the Office. UkraineInvest has helped attract $1.5 billion to Ukraine over two years. The Office actively participates in shaping the regulatory framework for doing business, conducts an expert analysis of the environment, and shapes the agenda of key issues for the development of Ukrainian business climate.

The government highly appreciates the economic benefits of investing in institutions such as the Export Promotion Office and UkraineInvest. That is why financing of both institutions–50 million UAH for each of them–and transforming them into official state institutions were added to the 2018 budget. This enabled us to ensure long-term stable operations and to raise the work of both Offices to a new level.

Also, the Local Economic Development Program aimed at encouraging changes in all spheres of life in cities and communities operates within the Fund.

The ProZorro electronic public procurement system is among important projects that we funded within this program. We were the first to support this project which is one of the key projects since public procurement was one of the most corrupt areas in Ukraine. The system has helped save over 64 billion UAH to the state budget to date. ProZorro opened up access to public procurement for small and medium-sized enterprises, as purchases were made “behind the scenes” previously.

We financed ProZorro as a pilot project, while other donors stayed away from it. They joined only after they saw the results. We were brave! ProZorro is now also a state program, so we no longer support it.

The Fund supported the CANactions School for Urban Studies because we understood that cities and villages needed access to the innovative urban ideas. This is about how to economically reborn the city and improve the infrastructure. Cities and communities have funds thanks to the decentralization reform, but they are don’t know how to use them. This is the main reason for us to finance CANactions.

Furthermore, we organize the International Mayors Summit for the third year in a row. We invite foreign mayors together with Ukrainian ones. At such events, our city mayors see that every locality in the world solves the same urban issues. No matter whether it is Argentina or the United States, or Ukraine: there are always too many people, but little money,  roads, and schools… When we invite senior executives to our summit, they communicate and see how other world cities solve problems and receive new ideas for solving their own issues.

: What projects have a chance to attract investment and what do they need to do?

J. Johnson: You can find more details about the programs on our website wnisef.org. Each of our program managers is actively communicating with potential grants recipients. We differ from other technical assistance funds. The Board of Directors let me choose programs. We have a small team of nine persons. We meet, discuss programs and decide what to do in our four areas: export promotion, local economic development, social investing, and economic leadership.

: What assets does the Fund own?

J. Johnson: The Fund has investments in companies in Ukraine and Moldova. We don’t receive any additional money from the US government, all the capital we now possess are from the original USAID grant. We have the right to use future funds from investments exits both for the legacy programprojects and additional investment.

: What does Horizon Capital do for the Fund?

J. Johnson:Horizon Capital manages WNISEF investment portfolio. It was founded in 2006 to attract private financing to new direct investment funds. Today, Horizon Capital manages three private equity funds and an investment portfolio of WNISEF with more than $800 million in managed assets. There are more than 40 institutional investors, most of which are the US and European pension funds, university funds, family offices, as well as international financial organizations such as IFC, FMO, DEG, EBRD.

: Would you be so kind to tell us about promoting education?

J. Johnson: Each of four WNISEF legacy programs has initiatives for promoting education. Most such projects are implemented within the Economic Leadership Program framework. In particular, the Fund launchedthe SEED Grant project, which provides scholarships for studying at top 50 US universities in MBA (Master of Business Administration), MPA (Master of Public Administration) and LLM (Master of Law) programs. We have already provided 45 scholarships. The maximum grant amount is $120,000.

We also support the Ukrainian Emerging Leaders Program. This is a Ukrainian program at Stanford University. The project provides a unique opportunity for young professionals working in the field of policy development, lawyers, entrepreneurs, and heads of Ukrainian public organizations to receive academic education under the guidance of leading Stanford faculty from Freeman Spogli Institute for International Studies. The aim of the Program is to strengthen the leadership skills and the educational base of the scholarship necessary to overcome the challenges that hinder the development of both Ukraine and the whole region.

Another project we fund is Canada’s Mitacs Globalink Research Internship Program for Ukraine. This is the first Canadian-Ukrainian research internship program for Ukrainian students with a great scientific potential. This summer, students spent 12 weeks participating in internships under the guidance of Canadian professors in various disciplines: from engineering, technical and mathematical sciences to humanities and social sciences.

Our largest program is the Ukrainian Leadership Academy (ULA). We opened it in 2015 and have been supporting it for the fourth year already. We now have six branches – in Kyiv, Lviv, Kharkiv, Poltava, Mykolaiv, and Chernivtsi. There are 408 ULA graduates and 250 students in the 2018-2019 academic year.

: What do students get when studying at the Ukrainian Leadership Academy?

J. Johnson: First, we cover all the expenses. They do not receive a diploma because it is a program focused on the year of study between high school and university. However, they receive the education they lacked in high schools. Teachers aged on average 55, still work in Ukrainian high schools, and most of them were trained in Soviet pedagogical institutes. They don’t have modern ideas and approaches to teaching young people, they do what they did before, by inertia. Children usually passively sit and learn everything by heart. We also see that teachers want to work effectively but can’t depart from the Soviet mentality. For the youth, the Soviet Union is only a historical fact like the Roman Empire or ancient Greece. It used to exist once, and they didn’t feel and won’t feel that on their own experience.

The idea of ​​this program came from Israel. We met with the former Deputy Minister of Education of Israel in 2015, and he spoke about a very successful program founded 20 years ago. They noticed then that Israel lacks something in educating young people in a spirit of patriotism and responsibility for themselves, their families and the state. In particular, young people abandoned many scientific and philosophical works that the rest of the world was reading, so they founded this kind of program.

Israel has 60 such schools, although the country itself is as large as Odessa region. We came with an audit visit, saw 9 schools and made sure this was a really effective project. Then we met with a large group of scholars and leaders of Ukrainian society. Slavko Vakarchuk, Vlad Troitsky, and many other people confirmed that Ukrainian youth should have such education.

So, during the 2015 pilot year, we traveled to Ukraine’s largest secondary schools and selected 39 students. We opened the first academy in Kyiv, Puscha-Vodytsia, and it became very successful.  In 2016, we had five such institutions, and the sixth one was opened this year.

: What criteria are there for students?

J. Johnson: We have sophisticated criteria. We take into account not only grades and successes but also whether children can work in a team, whether they are ready to take responsibility and whether they want to give something to the community. We have three verification levels. There were over three thousand applicants this year, only 250 were selected.

: How much do you invest in this school?

J. Johnson: It turns out to be over $10.000 per person.

: You mentioned social projects. How the social direction is developed in Ukraine?

J. Johnson: It’s just evolving. Vasyl Nazaruk who heads the Fund’s Social Investing Program is constantly taking part in conferences and roundtables in various regions of Ukraine. He teaches at the Kyiv Mohyla Academy, holds speeches and encourages people to evaluate their problems from the perspective of what they can do for society.

What Ukraine is lacking now… Philanthropy. It is quite developed in other states. Those who have funds and want to help the community – for example, in America-allocate money for a good purpose and receive significant additional benefits. We don’t see this here, people are not used to it. There are exceptions, but you can count them with the fingers of one hand. There are very few people who have high earnings thanks to successful enterprises and give money for a good purpose. I mean supporting the Ukrainian Catholic University or the Kyiv Mohyla Academy, or the Ukrainian Academy of Leadership, or Tabletochki, etc. There are entrepreneurs who can provide funding, but the state doesn’t encourage this. This is very important in other countries. They encourage philanthropy so that citizens are convinced that not only the state has to finance everything, but people also can do that.

: What are the difficulties for the business environment in Ukraine?

J. Johnson: The rule of law is the biggest problem. The legislative framework of Ukraine may not be perfect, but it exists, and there are some laws we can work with. However, there is a problem for investors when you go to court you can’t be sure that your rights will be protected. With this in mind, many business structures are created to prepare documents according to English law for offshores. This is also not good, because why should a company be registered in Cyprus or having assets there instead of working in Ukraine? They are afraid to appeal to the Ukrainian court, knowing that they will lose their investment. Nevertheless, other states have overcome it, for example, there is no such thing in Poland: they don’t do anything in Cyprus, they do everything in their country because they know they can appeal to their courts and get a fair decision. So,

if we talk about fighting corruption, the most important elements are courts and the judicial system.

: What are your plans for the Fund and the Academy for 2019?

J. Johnson: We are now creating a foundation for the Leadership Academy, as we are aware that our assets will be used and the fund will be closed in 5-10 years. This is a planned closure. Therefore, we want to make sure that some of our projects such as the ULA will be viable after the end of our funding. We are negotiating with people from Canada and the USA, with Diaspora, organizations, and entrepreneurs to sponsor the fund that will support the Academy in the future. Some of our programs have completely switched to state support, while others have received support from businesses and donors. This is all for good.

Please read: Establishing fair and transparent rules of the game begins with the business itself

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