On July 17, the Verkhovna Rada, Ukraine’s parliament, has scheduled a vote on a “compromise” bill that would have it deal with the government’s willingness to respect its promises to pay almost $500 million in arrears that it owes to investors in the renewables sector and on the reduction of the tariffs in the solar and wind sectors.
This vote, which will be one of the last votes of the parliamentary session before the fall sitting, is quite significant as it will determine whether Ukraine can be relied upon as a reasonable and responsible investment partner and whether it has both ability and intention to honor its contractual obligations.
As legislators consider this bill, they must not only think of the country’s investment image within the world’s investment community but most importantly understand that failing to solve this challenge will cause numerous bankruptcies of renewables companies, putting at risk Ukraine’s state banking system, who are major lenders to these companies and risk severely crippling the country’s macro-economic stability due to the banking systems exposure.
One has to wonder that after being the leading sector for attracting foreign investment over the last five years, why would such a bill even be needed?
The simple and perhaps most embarrassing reason why the bill is needed is that the government didn’t have the money to meet its promised financial contractual obligations to these investors. This is a result of a continued amateurishness in long term planning on the government’s behalf and definitely a result of not being aware of the seriousness of consequences when a government fails to fulfill its contractual obligations to its investment partners.
In addition, it illustrates that in Ukraine, there continues to remain a misunderstanding of the fundamentals of the machinations of Western type of business. A vast majority of Ukraine’s political and governing class is not intimately familiar with Western business practices for they have neither learned them, had experience in, and or operated successfully in such an environment.
Ukraine’s governors must learn that foreign investment is not a handout, but a responsible commitment and intellectual ascent to a way of doing business that brings a return on investment and rewards risk while increasing job growth, and in this case, energy independence.
What’s in the bill?
The bill has two essential components.
The first, the need to establish a legal basis for the payment of arrears.
Since March 2020, the government has only paid 5% of their debts to producers. Currently, the government owes producers $500 million or approximately $125 million a month.
The second is the reduction of tariffs on renewable energy. The “compromise” bill, would call for a reduction of the tariff for solar by 15% and 7% for wind.
During the long, drawn-out negotiations that have taken place for over 10 last months, the government, after receiving $2.1 billion from the International Monetary Fund chose not to immediately pay its arrears, but rather, sought to leverage their position. Their strategy was to put renewables’ investors in a position that if they wanted to have their arrears paid, they would have to accept the reduction of tariff rates.
This would mean that If the “compromise” bill is passed, the government has implied that it would then reduce their arrears to producers by 40% in the fourth quarter of this year, and then by 15% per quarter thereafter, presumably having the debt paid off by year-end 2021. There has been a suggestion that if the bill is passed on Friday, the government will pay for July production starting in early August.
Failure to pass the bill portends dire, if not potentially catastrophic consequences for Ukraine’s state banking sector, its quest for energy independence, and to the country’s economy.
If producers are not paid, they will not be able to service their loans. There will be numerous defaults.
The successful passage of bill #3568 will go a long way in dealing with the crisis of confidence suffered by well-intentioned foreign and local investors in the renewables sector, whose confidence has been greatly shaken by the government’s inconsistent and erratic behavior during 10 months of negotiations.
The bill would hopefully also allow many producers to restructure their loans with State banks by including a 2-year extension of the green tariff as suggested by the American Chamber of Commerce.
Also of importance, the bill’s passage will illustrate to the foreign investor community that Ukraine’s government will have learned an essential lesson in how to manage foreign direct investment. That being, that as a government and a legislative body, it will have learned that if it chooses to grow an economy along western lines and with western investment partners, it must constantly prove, by showing in practice, that it has a higher sense of mature commitment to the contractual promises that it makes to investors.
That it realizes and respects the economic risks taken by foreign investors. That such relationships are not singular “transactions”, but if they are to be long term, they have to be based on mutual trust, the commitment to fulfill promises, and be based on consistent behavior that breeds and engenders confidence.
But perhaps most importantly, the bill’s passage will be an important sign, or confidence-building measure that the government can remedy the consequences of its broken promises and its failure to meet its financial and contractual obligations which greatly eroded investor confidence and severely compromised future investment, putting at risk enhanced government revenues and job growth. But lastly, that it is willing and able to pursue legislative remedies to ensure that Ukraine is learning how to create and become an investor-friendly jurisdiction.
The vote on the compromise bill on Friday will have immense repercussions on Ukraine’s immediate and long-term future.
