Unrealistic goals, political favoritism and lack of money seems to have stalled many projects that were to power the Ukraine’s Cabinet of Ministers ambitious 2013-2014 economic development program.
In the program’s fifth month, many projects remain stuck at the starting line – particularly in agriculture.
The state program for boosting the economy was debuted in March. The government plans to spend Hr 460 billion (more than $55 billion) to gear up key industries in an attempt to boost gross domestic product by 3.4 percent in 2013 and up to 4 percent in 2014, according to the Cabinet’s targets.
Most economists think that forecast unrealistic, as Ukraine’s economy shrank by 1.1 percent in the first quarter, according to the state statistics agency. Most rating agencies and investment banks predict 0 to 0.6 percent growth this year.
One of the development program’s main goals was to replace old agricultural machinery by providing state-guaranteed loans to local producers. The government hopes this will encourage foreign investors to enter joint-ventures with homegrown firms.
According to Agriculture Minister Mykola Prysiazhniuk, five machinery projects should currently be funded with about Hr 700 million ($85 million). The state guarantees mean that should companies default on loans, taxpayers will have to foot the bill.
Also worrying, though, is the fact that the government program’s potential recipients often have close ties to the government and the ruling party. In other cases, their ownership is hidden through offshore companies.
The Kherson machine building plant was one of the firms selected for inclusion in the government program. It has plans to set up a joint project with German combine-harvester manufacturer CLAAS, but it’s still short on publicly available details. Party of Regions member Oleksandr Oliynyk owns the Kherson machine building plant.
Other potential recipients of government-backed cash include the Chervona Zirka plant, owned by Kirovograd-based Party of Regions deputy Pavlo Shtutman, and the Paton welding plant, 61 percent of which belongs to Belize offshore companies.
The program also plans generous support for politicians and businessmen who own greenhouses. The Kyiv Post traced their ownership from company statements or the national registration database.
In 2013, state-guaranteed loans worth Hr 475 million might be set aside for companies like Edem-F, owned by billionaire Dmytro Firtash’s mother; APK-Zernoresurs, controlled by Borys Kolesnikov’s family; and Krymteplytsya owned by the Crimean Party of Regions deputy Oleksandr Vasyliev.
However, the Minister for Economic Development and Trade Igor Prasolov insists the government selected projects, not companies or individuals.
“(The projects) have to either expand the production of commodities that are in demand; or modernize production; or implement projects in those sectors that are not very interesting for the government but are important for the economy – firstly infrastructure, and secondly the housing sector,” he told the Kyiv Post in a recent interview.
Renovating the irrigation system in southern Ukraine is one of the government’s most ambitious projects. According to the government program, almost Hr 2.4 billion will be spent on irrigation engineering over two years, notably upgrades to key canals.
But some experts have said the government’s target is unrealistic. At the moment the ecology ministry is responsible for the system, Prysiazhniuk told the Kyiv Post. Therefore, the agriculture ministry is waiting for legislative changes on this issue and only afterwards will it be able to invest in the technical upgrade of the two canals.
“(In what concerns the) documents, we could start this year,” Prysiazhniuk said.
He added that there are some potential foreign investors who would like to join the project, but provided no details.
Another ambitious program aims to transform 29 distilleries into biofuel plants in just two years. The government’s project envisages Hr 350 million in investments from the state budget and another Hr 320 million of state-guaranteed loans for the project coming from the private sector.
But the economy ministry has yet to allot the needed cash. This year about Hr 300 million was supposed to be earmarked for biofuel, but the budget doesn’t seem to have the money.
“The Economy ministry says there is no money,” says Ruslan Rybakov, a department head at Ukrspyrt, the state company that owns the distilleries to be upgraded.
Prysiazhniuk, however, believes the industry needs a much more modest level of investment – about $150 million – and expects to find new private investors to work side-by-side with the government. In any case, the execution stage is barely starting.
Other priority projects include the construction and modernization of farms, short-term loans for agricultural producers and upgrades to state-run baking companies.
Tamara Levchenko, an analyst at Dragon Capital investment bank, says that livestock and dairy farms should have a chance to get money this year. Some 153 are supposed to be receiving government assistance.
Levchenko says that the government should not waste money on upgrading dilapidated or outdated former Soviet farms, but should concentrate instead on building new ones to modern standards.
Kyiv Post staff writer Kateryna Kapliuk can be reached at [email protected]
The private sector is ahead of the government when it comes to providing farmers with affordable loans to acquire agricultural equipment and crop protection agents.
For example, late in 2012, the European Bank for Reconstruction and Development, together with Austria’s Raiffeisen Bank Aval and global agricultural equipment producer John Deere, started a lending program for the purchase or lease of high-quality farming machinery.
An EBRD study found that more than 70 percent of agricultural equipment in Ukraine is obsolete, which reduces production efficiency, and the quality of collected grains and crop yields. Interest rates in the EBRD program start at 13.6 percent in hryvnias, whereas sector-wide average loan rates for small- and mid-size agribusinesses range from 22 to 24 percent, according to Prostobank Consulting.
Farmers can also receive crop protection loans made by Bayer CropScience today and pay for them in six to nine months. The program’s initiators, Raiffeisen Bank Aval and France’s Credit Agricole, guarantee the deferred payment to Bayer with a promissory note signed by the farmer with a cost of up to 0.4 percent a month. No collateral is required if the overall cost is under Hr 160,000.
Story by Mark Rachkevych, Kyiv Post editor
