Using Ukrainian businesses as an example, we will tell you about the companies working successfully with the European Union
European financial programs for businesses help Ukrainian enterprises become more modern and more innovative. The only thing left is the ability to seize the opportunity.
The launch of these enterprises requires substantial outlays for development and testing of prototypes, promotion, entry into other markets, further research and development. Regular loan financing is not always available for innovators, because banks usually offer loans with high interest rates, which are simply unbearable for businesses in the initial phase of development. At the same time, the practice of financing technology businesses in Europe is an ordinary thing.
This practice is already gaining momentum in our country as well. Today, there is a number of business initiatives from the EU offered in Ukraine. These are grant programs for innovative businesses, low-interest financing programs or programs allowing to engage a practical consultant for a small fee. For example, EU4Business, a comprehensive initiative of the European Union combining a number of programs for entrepreneurs has been on offer for ten years to date. It includes a program providing access to funding; under this program, both traditional and innovative businesses can receive funds and additional opportunities.
We will tell you about these opportunities using as an example two Ukrainian companies which took advantage of European financing and enhanced their innovative component and “added value”.
Energy with an alternative
Technology businesses are eligible for participation in grant programs. HORIZON 2020 is the European Union’s largest framework program of financing science and innovations with the total budget of 80 billion euros, running from 2014 to 2020. This EU initiative provides funds on a competitive basis to support development and implementation of innovations, particularly in entrepreneurship and the manufacturing industry.
For nine years, Salix Energy, one of the leaders in the alternative energy segment, has been growing energy willow. This plant is a relative of the well-known white willow, but unlike the latter, it grows very fast and does not require special soil. Because of that, energy willow became a prospective material for biomass used to produce electricity and heat.
And Horizon 2020 program gave Salix Energy a substantial scientific and practical impetus to reach higher.
Iryna Gnap has been at the company’s helm from the very beginning. She says that there were many things in the market they were doing for the first time, and on top of that, they didn’t have sufficient experience and lacked personnel. However, they were highly motivated to become serious players in the alternative energy market.
In 2016-2018, having already gained some experience of doing business in this area and the necessary competencies, Salix Energy became a participant of the international project “Sustainable exploitation of biomass for bioenergy from marginal lands in Europe” (SEEMLA) within HORIZON 2020 Program’s framework. The most important objective of the SEEMLA project is to assess and improve the leading experience in using low-productive lands to make them more sustainable from the environmental, economic and social viewpoints. The program’s participants included Germany, Ukraine, Greece and Italy.
During participation in this program, the company received 130 thousand euros for research in the growing of energy cultures. This project helped Iryna popularize information about bioenergy in Ukraine, as well as receive useful scientific and practical experience in working with foreign colleagues.
In her interview to Biznes vmESte, Iryna spoke about the way her company came since 2011, how its trade flows were reoriented and how SEEMLA affected Ukraine’s energy sector in general.
We are the “pioneers” of the bioenergy market in terms of growing energy cultures, and therefore, we devote a lot of time to its popularization. We participate in conferences, organize Energy Field Days, work with international organizations promoting this trade in Ukraine. We are also cofounders of the Bioenergy Association of Ukraine. In a word, we are active, setting trends in our industry. So, when we heard about the opportunity to take part in SEEMLA, we decided to go for it.
It turned out that in order to be eligible for participation in this project, an applicant must have expertise and competencies. This project envisaged research, and everyone involved in it — a consortium of four countries and eight participants — had required competencies. They included specialists in land use and in soil analysis. SEEMLA consisted of many elements: what marginal lands are and how they are defined; there were also pilot plots and research on them. To be sure, it was our case where we conducted practical studies using our own (land, labor, intellectual) resources.
It was interesting for us to work with colleagues who also had relevant competencies, to share experience, compare results, gain new useful knowledge and receive answers to questions we had. For example, why certain soils produce no results or, conversely, excellent results. In Ukraine, there is nobody whom we could seek advice from in this regard.
What results did you receive from this project?
We obtained a lot of data regarding the impact of certain factors on plant growth and harvest yield. We are developing the area of seedling selection for planting. Considering the lack of experts and specialists in the market, these official studies enable all stakeholders to analyze results and make appropriate decisions: what soils to use and what cultures to grow in these soils.
We also worked a lot under this program on how to improve legislation: we analyzed limiting factors and what needs to be done in the legal area to help this industry develop. Reputational component is also important for us, because we worked jointly with colleagues from other European countries who have appropriate competencies, knowledge and experience. It was important for us to conform to the general high level.
What is your most important achievement from this project?
Consolidating efforts of professionals. We did research (one could say, science) on our own, but here, we got a chance to receive serious support. This support helped us get confident in some things, brush other things aside and turn closer attention to still other things. For instance, during the project we introduced a new culture, Pavlovnia. Therefore, this project became an informational impetus of sorts. One should remember that scientific research does not produce fast results and instant return of bonuses or investments. One should not expect everything “here and now”. This is a long-term investment. It will surely give impetus to development of the bioenergy sector, in particular, subject to stabilization of the political and economic situation.
Speaking about business development, what stage is your company at today?
We have finished the investment period of creating plantations, and are now at the harvesting stage. The areas allocated for planting according to our business plan have been sowed. Presently, we are gathering harvest and use it for our boiler plants (generating heat) or sell it. We were forming plantations since 2011. At first, we laid 130 hectares and then were increasing the fields until 2014.
The first years were solely the investment phase. Back then, we didn’t have harvests – we only invested money. Today, we have 1700 hectares of plantations. The first harvest was gathered in 2014. It was a small, test amount. We learned and perfected the very technology of gathering biomass, organization of logistics and management of these processes. A business like this did not have benchmarks and standards in Ukraine. We had to develop it by way of experiments and trainings and by inviting our European colleagues to share their experience in organization of business processes.
What investments does the first stage need?
Today, Ukraine’s agricultural market is “technically” quite sophisticated, and therefore, it is advisable to use the available agricultural machinery. They in Europe work according to the same mechanism, particularly in Poland. There are operator companies providing soil preparation, plantation laying and management, and harvesting services. If you lease machinery or order services, investments will amount to approximately 1000 euros per hectare during the first two years. That includes direct production costs of purchasing selected planting materials, soil preparation, plantation laying and management during the first two years.
How your structure of sales changed over five years?
In 2014-2016, we exported almost the entire biomass harvest. We laid down an export profile in our business plan, because back then, this industry was undeveloped in Ukraine. During the first two seasons, we sold our biomass for export only, to Poland. In that country, the green energy market is quite developed, in particular, heat generation from biomass. But in a few years afterwards, Ukraine also began transition to renewable energy sources. In particular, the country started to use biomass-fired solid-fuel boilers. Therefore, our structure of sales has drastically changed now: the entire biomass we produce is consumed inside Ukraine.
What, in your opinion, has caused such a reorientation?
High gas prices, enhancement of the country’s energy independence and the coming of global trends triggered Ukraine’s transition to renewable green energy. Therefore, installation of “green” production plants takes place in both the communal and the private heat production sectors, helping them save money on heat and energy prices. In my opinion, the latter segment is developing more rapidly, and it presently has a greater capacity than the communal segment, where enterprises operate mostly on firewood, pellets or briquettes — these are low-capacity facilities.
Biomass is economically viable for high-capacity enterprises (starting from 3 MW). The higher capacity a generating plant has, the more cost-effective it is for it to use biomass comparing to pellets or briquettes. In 2014, we launched first solid fuel-fired boilers jointly with our partner, Avanti-Development. We installed them in Ivanychi village of the Volhynian Oblast. We leased existing boiler plants and installed there 3.4 MW biomass-fired solid-fuel boilers. It was our pilot project of using our own biomass, energy willow chips. It was important for us to gain experience in managing biomass and its combustion process to generate heat. There was no such experience in Ukraine back them as well. Today, our strategy is to expand this capacity to combust the biomass we gather at our plantations and produce heat, to develop a vertically integrated business.
Why did you choose vertical integration as a business development direction?
The availability of an own raw material, biomass, and the desire to create an end product. We have prepared a business plan and saw economic effectiveness. Our generating plants are located in Volhynia, close to our plantations. It is an economically attractive situation, because we spend only the necessary minimum on logistics.
For Iryna, one of the most important achievements from participation in HORIZON 2020 is the fact that results obtained from this project provided informational support and facilitated detailed analysis of the industry’s problems in general. Now, this information is publicly accessible, and everyone who needs it can receive the necessary recommendations and start planting energy cultures.
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Receiving financing from a large financial institution in the EU is difficult. So, to help Ukrainian businesses receive a loan on advantageous terms, the EU signs contracts with the European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB) and KfW (German Development Bank)/German-Ukrainian Fund.
These international financial institutions work with a number of banks in Ukraine, which issue business loans at market interest rates. It is a number of Ukrainian banks, such as ProCredit Bank, Credobank, Creditvest Bank, Raiffeisen Bank Aval, OTP Leasing and the state-owned Savings Bank and Ukrgazbank, which issue affordable loans. Thanks to funding from the EU, businesses get the chance to receive financing for further development of their innovative component.
Entrepreneur Yevhen Pelykh was one of those who took advantage of a business development loan. Three years ago, he and his partner Andrii Buhai have established their own company, Fortis Pharma. Since Andrii is a veterinary doctor, his specialization bore upon their company’s profile.
For three years, Fortis Pharma LLC has been manufacturing various veterinary drugs. Scientific research and development is the basis of the company’s activity and its key area of business development. Among the company’s products is a number of original drugs enjoying substantial demand in Ukraine.
The company started operation with own investments. They were applying for financing quite often, to bridge cash gaps or replenish working capital. But to buy new equipment, Yevhen decided to get more substantial external financing and turned his eye to lending programs of EU banks. Last year, he received a hryvnia loan for development of his business at 20% APR from ProCredit Bank which works with EIB.
In his interview to Biznes vmESte the entrepreneur speaks about his experience in working with the banking sector.
What has Fortis Pharma business begun with?
It began with the meeting with my present partner Andrii Buhai. He has been in this trade for over 10 years, and has knowledge and experience. As for me, I started with a chain of 5-6 drugstores in the Kyiv Oblast. After the meeting, we merged and that was how Fortis Pharma LLC was born. In the beginning, I was importing pharmaceuticals from France and Poland, but eventually, we started to produce drugs to order. There were first attempts: we were bringing ingredients from China and making medications for the Ukrainian market. We were learning and experimenting. As of today, we have registered close to 20 brand names and manufacture over 100 various products.
What are the specifics of manufacturing veterinary drugs?
The biggest stumbling rock in this area is drug registration. During the last year, registration fees have tripled. A business like that is quite technological, so it requires investments in scientific research and improvement of production processes. On top of that, we offer scientific oversight and practical consulting of customers. As a result, consumers are able to get their things done promptly and comprehensively.
Besides pharmaceutics, your company has another business: animal husbandry. Please, tell us about it.
Presently, we have almost 500 heads. We employ scientific approach to this kind of business as well. It is important for us to prepare the right diet in order to not only increase weight but also improve the quality of meat. We are developing grain feeding. Due to swine fever, we are reorienting toward the raising and export of cattle. Meat breeds are mostly used for that, but a lot depends on quality. For example, we have milk cow breeds, but thanks to our high-energy feeding we can see that a milk calf may not be inferior in any way to a meat bull. But that is rather a hobby that can bring some additional profit. This is a new and interesting segment for us.
Who are your buyers? Is there a customer you are proud of?
We are proud of all our customers. We have regular market relationships. But at the same time, we opted for the strategy of not doing business with toxic clientele, because their toxicity obstructs our harmonious development. Exports are a significant segment of our business. We deliver our products to Turkmenistan, United Arab Emirates, African countries, etc. A lot of our exports go to Azerbaijan. While during the first year we delivered 20 thousand dollars’ worth of products there, the today’s figure is already 370 thousand. We work with many other countries as well. We offer a wide range of services and products, from drugs to cattle.
What is your company’s expense structure?
We spend the most on equipment and materials. The stock (e.g. packaging and containers) eats up a lot of working capital. If the product range is extensive, the stock is also substantial. To get a good price, orders should be placed for large consignments. Therefore, we have to have a “fat layer” for production. In addition, we need to invest a lot in the stock of reagents and chemicals. We import ingredients from China and Europe. For instance, we buy aerosol containers in Turkey and vials in Germany. The key is the price-to-quality ratio. We also spend a lot on facilities and equipment, which require improvement, repairs and renovation.
We constantly buy equipment. For example, one of our most recent purchases was an isothermal truck – a truck allowing to maintain required temperature during transportation. Drug manufacturing has one specific feature: it requires substantial working capital. When buying ingredients and containers, receiving orders and during production we have to spend money, which the sales will then return. That’s why we often take small loans to bridge these cash gaps.
Why did you decide to take advantage of a European funding program?
We have substantial demand for foreign financing. We also have business expansion plans, thinking about opening at least one more site. Presently, we are looking for the location for a new production facility. Therefore, loan financing allows us to move forward. I worked with ProCredit Bank in the past as well, and knew people who worked there. I learned about the program offered by that bank, read the terms, and eventually, we decided to go for that particular bank. We borrowed 2 million hryvnias at the market rate, and spent this money not only on bridging cash gaps: we also were able to buy new equipment, in particular, new storage refrigerators and extraction mills. Presently, we are also buying young livestock for our site.
Before applying for this program, you have to have a clear understanding of what you want to spend this money on: upgrading equipment, renovating facilities, etc. It will allow your business to grow. Our business does not spend a lot of time looking for loans, although this is a quite ordinary thing in the world. So, we also came across the opportunity to apply for European financing. We decided not to miss it.
Both Yevhen and Iryna got the chance to invest in added value of their enterprises. There are many other examples like these businesses. More and more often, Ukrainian entrepreneurs are applying for European financing, which will enable them to develop and expand their business. And also, this is a good experience, an opportunity for networking with European partners and exchange of knowledge and findings in their sectors.