Two EU initiatives will help Ukrainian small and medium enterprises to get more loans to to improve their management.
High levels of creativity, the low cost of intellectual product, and the competitive price of labour are a few of the advantages benefitting Ukrainian small and medium-sized enterprises (SMEs), according to Volodymyr Patis, a Ukrainian businessman.
Patis is a co-founder of “Eskada-M”, a company that exports furniture to many European countries. Its example denies the too-common idea that no one expects to see Ukrainian companies succeeding in EU markets.
Today, Ukrainian SMEs often find their way to success through international clusters. These clusters are composed of many firms based around the world working together as a single company. Each of these small firms does their own individual part of work. “In Ukraine, people are more used to a “closed cycle” logic, where one and the same company, for example, chops wood and makes furniture out of it. But this logic no longer works in the world,” Patis says. Today businesses are looking for narrow niches for specialisation, where they can achieve low costs and high efficiency, and surpass other firms in these particular segments. In so doing, they are integrating into international production chains.
Despite many positive examples of this kind of success, Ukraine’s SMEs still face many difficulties. They often lack strong contacts with EU-based clients or partners and good B2B (business to business) relations. They are sometimes short on advanced marketing skills and lack understanding of how today’s businesses are operating around the world. “Our businesses often lack a systemic approach,” says Inna Sosnovska, an expert with Strategic Consulting Group, and advisor to the dean of Kyiv Mohyla Business School. “A Systemic approach implies understanding what value a business can bring to a client. If a business can do something well, it does not necessarily mean that it will be able to sell this commodity to the client. If a business produces doors, for example, it could have a variety of different clients – hotels, construction companies, dealers – and the type of the commodity will vary depending on who the buyer is,” she says.
Moreover, the Ukrainian business world needs to understand that it must, “invest in the intellectual part of its production : in marketing, in positioning, in sales,” Patis says. “Some companies in Ukraine are going bankrupt simply because they don’t have sales departments,” he adds.
Last but not least, Ukrainian SMEs often lack access to cheap capital.
To react to these challenges, the EU recently launched two complementary initiatives. One of these is EU Support to Ukraine to Re-launch the Economy (EU SURE) and has a budget of €95 million. EU Commissioner Johannes Hahn and Ukraine’s economy minister, Aivaras Abramavicius, signed the agreement launching the initiative during the Commissioner’s visit to Kyiv, on June 18.
Details of the programme will be finalised soon, but several things are already known. The project is intended to work at the “macro-level”, helping change the business environment in the country, working with Ukraine’s economy ministry and other regulators to reduce regulatory burden on businesses and to formulate and implement economic development policies.
In addition to these high-level efforts, the programme will also work at the “grassroots” level. “By 2016 EU SURE will establish a network of Business Support Centres in 15 Ukrainian regions to help business with advice,” says Boris Filipov, sector manager with the EU Delegation to Ukraine dealing with private sector development.
The centres will replicate a model created by the European Bank for Reconstruction and Development, in its existing offices in Kyiv and Lviv. They will provide advice to businesses and share costs for this advice, helping to improve management of the companies, and introduce international financial reporting standards and good marketing practices. They will also help companies to adapt to new regulations coming from the Association Agreement and its trade chapter (DCFTA), which enters into force January 1, 2016.
However, better skills are not enough to really boost the success of Ukrainian SMEs, and both the EU and Ukraine know that. Ukrainian SMEs lack a key element for their development: access to capital. Interest rates for loans are sky-high, and can reach 30% in the national currency. Loans in euro or dollars are cheaper, but more risky, due to the hryvnia’s instability in the past year.
To respond to this challenge, the EU came up with a new idea: an initiative called “DCFTA Facility” to be administered by the European financial institutions (principally EBRD and EIB). Contrary to EU SURE, DCFTA Facility is a regional programme, focused not only on Ukraine, but also on Georgia and Moldova. It also differs in its goals. First, DCFTA Facility will be focused specifically on helping Ukrainian business adapt to the new realities of the free trade area with the EU. Second, it will be more “material” than EU SURE, as it will facilitate Ukrainian SMEs’ access to loans.
One of the elements of the DCFTA Facility is a “guarantee fund.” The fund will cooperate with commercial banks active in Ukraine. “It will provide a so-called “risk cushion” to banks ready to increase and improve their lending for small and medium-sized enterprises,” says Gabriel Blanc, programme manager at the European Commission dealing with energy and economic development issues. In other words, the fund will enable banks to provide more loans to SME’s by reducing the risk associated with this type of lending.
As a result of this programme, for example, a bank can “reduce its interest rate for an SME, with the possibility of getting partially reimbursed by EU funds if the loan is not paid back by the SME,” Blanc says. The bank can also increase the duration of the loan, also expecting risk sharing from EU funds, and decrease the required collateral. Another element of DCFTA Facility is “currency hedging“: this will reduce the risks related to exchange rate fluctuation. “For example, if a bank borrows in euro and lends to SMEs in hryvnia, and then faces losses due to the hryvnia’s devaluation, EU funds can be used to mitigate the risks related to this loss,” Blanc explains.
DCFTA Facility will also help Ukrainian companies to adapt to the new realities of the free trade area with the EU. For example, it will co-finance business consultants for agricultural enterprises on the issue of testing needed to comply with EU agricultural standards. When a company needs to buy special equipment to conduct these tests, the DCFTA Facility can provide an incentive to the company to help compensate for part of the cost of this investment.
The DCFTA Facility’s total budget will reach at least €100 million for Ukraine only. More than that, it is expected to trigger at least €1 billion in new investments for Ukrainian SMEs. Importantly, the programme will be implemented in cooperation with commercial banks active in Ukraine; their networks, accessible in the regions and rural areas, can help broaden access to capital.
These two elements of assistance (advice to businesses and improved access to capital) will be closely linked. The business support centres will help businesses to develop projects that will later be able to secure the necessary loans. In doing so they will also, indirectly, increase the chances of SMEs getting investments for their development.
All this can provide a boost to Ukrainian SMEs, so that they develop better locally and also have better access to international markets. Needless to say, the success of the Ukrainian economy and society in many ways depends on how SMEs will adapt to the changing reality, and whether they will be able to sustain existing jobs and create new ones.
This article was first published in Den newspaper, in cooperation with EU-Ukraine Cooperation News.