Investors underestimate the potential of mid-sized business in Ukraine

These days the main aim of any Ukrainian company is to survive in conditions of increased economic risk, independent of whether the company is a large agricultural holding or an average agricultural producer. The high level of debt, the scarcity of working capital and the outflow of investments are just a small part of the list of the risk factor. The director general of “MKD consulting”, the expert of the Reanimation Package of Reforms, PhD in Technical Science, Michael Prazyan, gave an interview to IA “APK-Inform” telling how to reduce their influence and reverse the situation into a positive one.

– First of all, Michael, tell us, please, what kind of service does “MKD consulting” offer? What is the share of agriculture in the total volume of provided services?

– In general, the management consulting services of MKD consulting to our clients helps them to boost a development. Mainly as a preparation to attract investments or loans, we support our clients to improve of theirs business processes, models, marketing activities, etc. Sometimes, to sell theirs business is only thing that our clients wanted from us. That is why our company is specialized, as well, in providing clients with services of investment consulting. Today about a third of “MKD consulting” clients associate themselves in some way to agribusiness.

– What tendencies can be seen in agribusiness nowadays? For example acquisition, consolidation, etc? And what is the reason?

– Nowadays differently directed tendencies can be seen in this sector. From growing expectations of those who have crossed over to export markets now or will do in the nearest future, to the despair of small households because of the lack of access to the feeders of operating assets and debt load of such businesses. No doubt, there is nothing good in such tendencies, especially for development, but indeed there’s no tragedy and we have at least two reasons why. Firstly, a part of the sales is provided by home consumption, and, secondly, it is quite a familiar occurrence, and agrarians try to manage their debt by means of controlling the scale of what they manufacture and other factors.

– What main barriers, would you say, stand on the way of fund raising in the agricultural sector of Ukraine? From your point of view, which sectors continue being investment-attractive in spite of such a complicated political and economic situation in our country?

– Today investment-attractive economic sectors in Ukraine are the mechanical engineering industry in certain courses, agribusiness and agro-processing, IT-services, light industry, residential sector after reforming, everything connected with efficient energy use and consumer market (because of low base effect).

In general, agribusiness is one of the drivers of economic development in Ukraine. However, Ukraine needs to develop like a postindustrial country. Find its place and niche in new technological waves and patterns. In my opinion, it’s a mistake to connect the future of Ukraine with the agricultural sector only.

If we speak about the barriers of financing attraction in this sector, then as for small and mid-sized agribusiness there’s a discredit of understated procurement prices at the home market and access to infrastructure (like elevators etc.). More general problems, for example, are the totally corrupt judicial system (reforms don’t work), and problems connected with registring of property and things like that.

Besides, legislation and infrastructure registration (registering of property, lease arrangements, rotation of warehouse-keeper’s certificates etc.) in Ukraine there’s also underfunding of operating assets, underfunding of capital investment projects and infrastructure projects. Excessive governmental adjustments and other international standards should be adapted to AA/DCFTA. The lack of skills of cautious production is what I’m talking about (according to the Japanese method kaizen).

– Which segment of business (big, mid-sized or small) will investors prefer, in your opinion? What kind of risks are therewhen they are financing each of these segments?

 – Big investors are already focusing on the market leaders; they are the largest agricultural holdings as a rule. From our point of view, such criteria are not always justified. Due to its instability to risks and other reasons. Particularly, the off-site control of agricultural workers from the offshore company is typically aimed at a here-and-now money chase. At the same time, soil fertility can come down or be lost forever; social basis for reliability of agro-industrial clusters and the future of rural living are being disrupted. There’s nothing like this, for example, either in the USA or in Germany or in France. The owners of our agricultural holdings can’t have any emotional connection with the people or the area of their industry.

In a similar way, “tolling” schemes during the Post-Soviet period generated many billionaires but didn’t give anything either to the countries or areas and people apart from supplying them with bare necessities. Admittedly, I don’t think that agriholding is always a bad idea. After all, in Ukraine there are some good examples practically in every sector.

We think that mid-sized business companies have a big potential of efficiency according to different indexes. Land banks of such companies (in general, they are former collective farms) vary within 1000-30000 ha per farm. Also the mid-sized business companies are interesting, especially those which provide distribution services, infrastructure, agro-processing and others for agro pastorals. An account base for such companies is the ultimate consumer, small and mid-sized businesses which are very flexible and enduring in crisis conditions.

– Many investment trust companies declare their intention to cross over to funding of export-oriented companies. What do you think could be the reason? And how will this impact the industry?

– It will have different impacts. In case of organization of the conditions of profitability of reinvestment of revenue inside the country it will have a positive impact.

The ambiguousness of our evaluation with regard to big agriholdings is based on the negative historical experience of such countries like Argentina and Brazil, which has led to destruction of macro- and microenvironments of rural clusters and their inhabitants. In the case of Argentina, for example, the flow of a big capital into a big export of the agricultural sector during the phase of contraction has led to dramatic political consequences – to the power of black colonels, corruption and loss of economic leadership in comparison to the beginning of the past century. Industrial agricultural production is not a guarantee of prosperity of the country.

I think, right now investors underestimate the potential of mid-sized businesses, especially ones which are oriented toward the home market in its particular sectors. And this is investment neglecting, but it will be cleared up naturally when the 250-300 investment funds focused on the agricultural sector will be working in Ukraine. This opportunity was missed by Ukraine in 2004-2005. Now it’s time to draw a lesson from this experience and create a new reality.

There are 3000-5000 mid-sized enterprises from the general number of 46000 involved in the agricultural sector of Ukraine. As a rule, their necessity in investments ranges from $500,000 to $10-20 million.

A small Ukrainian agribusiness (unlike IT, for example), in my opinion, won’t be a long-time thing for investors. More likely it’s a deal of a micro banking financing and state support.

– From your point of view, are investors prepared to invest in Ukraine based on the guarantee given and despite the conflict in Oriental regions of Ukraine? What kind of guarantees should be there?

 – Yes, they are. They’re prepared, but in a very limited way. Anyway, there’s an indice for high rollers – the establishment of working with the agreement with IMF. Local rollers and other insiders are active even today making use of the low prices to enter the After signing the agreement with IMF, a lot of opportunities will be available which could be utilized for 2-3 years in case of successful reforms.

– In general, how can you evaluate the protection of investors’ rights in Ukraine for today?

– However, the brave ones keep on going. Each of them has their own system of reducing the risk. In general it’s not a good idea, because, first of all, laws and law enforcement practices should work. We still don’t have anything changed; informal relationships and ties still exist as well as local “apanage princes”. This problem can be solved only by the system of measures which should include the reformation of the judicial system, the law enforcement system; and create in Ukraine a system of inevitability of punishments for the violation of property rights regardless of any ties, apart from business deregulation.

– In present conditions many companies appear to be found in a high-risk area because of the high level of the debt load. Which tools can help such companies to stay afloat?

– The agricultural area can’t be considered in isolation from the whole situation throughout the country. It is necessary to set going a general upturn in the economic cycle through the real reform, inflow of investments. Here specific tools are – leasing and warehouse receipts, the inclusion of land and fictitious assets into the economic cycle, etc. And of course, training and education of the staff.

– Define a company whose business model and structure is more likely to overcome the crisis, from your point of view?

– To begin with, there are companies which handle exportation services for such companies. Also, the manufacturers of local products have good chances to export if possible, but it’s not necessary.

New infrastructural assets are very prospective, for example, the building of elevators with the capacity of 25000 and even more tons with the necessary storage and transport faculties. Such facilities will help to ensure the quality of batches of grain and other crops for medium-sized businesses, thereby providing them with opportunities to participate in the export.

The construction of public infrastructure requires studying and implementation of best practices, such as in Germany, for example, and also a high level of collective interaction and confidence of participants. These don’t come immediately, but, according to our observations, many business owners are now ready to interact.

– The agricultural sector has the most important resource that could be used in fund raising operations – it is land. However, there is a moratorium on the sale of agricultural land in Ukraine, and the government doesn’t intend to remove it in the near future. From your point of view, is Ukraine prepared to open the land market? How should this market be regulated in your opinion?

– It’s a difficult question. It’s necessary to move this way. Except what’s mentioned above (land registering, warehouse-keeper’s certificates, etc.), it is necessary to have recommendations for crop rotation and other agronomy issues, as in the USA, for example. Particularly, the measures should be aimed to the protection of soil fertility. Besides, there should be some antitrust measures.

– How would you assess the governmental policy in the agricultural sector over the past year?

– Last year was very ambiguous. From the frustration of the majority of market participants with the work of the previous Minister of agrarian policy to positive expectations from the work of the young and competent team, which has come to the management of the agricultural sector now. The new leadership of the Ministry hasn’t become “crusty” yet, and is ready for the dialogue, takes feedback and is willing to make management adjustments. This is a good sign, which is encouraging. But the main thing, however, is not about individuals, but the creation of institutional conditions for economic activities and, most importantly, its development.