Opinion on investments in clean technology projects in Ukraine

Knowing my interest in. investing in alternative energy. I sent the text of a curious article. This article was written by Vadim Novikov - a man whom I know personally and with whom we interacted tightly enough 4 years ago on the subject of silicon. Here's what he wrote:.

In order to answer the question: ...
a. In which country is the project?.
2. In what economic environment is fundraising?.
3. Which sector ( industry) is a project of the economy?.
4. At what stage is the project?.
5. What are the preferences of the owners of the project to participate in its funding organizations?.
6. What is the scale of the project?.

Only in the light of these circumstances can solve the problem of financing. Also from the beginning is to stipulate that our discussion applies only to professional sources of funding, money from donors or from relatives living outside of our theme, as well as public funds.

Start from the beginning of these issues. Country - Ukraine. This means the maximum financial risk (level 7, ie the maximum level of risk on the scale adopted by the European companies that insure credit risks abroad). This level is determined by a combination of factors such as political instability, the state budget deficit, and m. Dr.. and m. n. In practice, this means that the project in Ukraine to attract funding should be substantially more attractive compared to conventional project in any other European country.

The economic situation - the financial crisis. This situation in Ukraine means the complete absence of domestic long-term financial resources. The length of available bank credit is measured in months, and a typical requirement of the investment project is measured by years, and I 'm not talking about the price of the loan at 20 % and above. Price does not matter, since it applies only to the ...

The sector - Clean Technology. This means that the project can rely on the attention of financiers, as was the case with information technology 10 years ago. In addition, it means the possibility of priority access to specialized financial sources with a non-profit or not for commercial purposes.

Stage of project development. There is a general rule: the less developed the project, the less chance for him to find money. Raise money for the development of new technologies in Ukraine, honestly say, there is practically no chance at all, the money for the expansion of a normally functioning business can be found with a probability of 90%. This applies to clean technologies in the same way as the new technologies in other industries.

Participation in the project financiers. Simply put, the question is, whether the owner of the project is ready to start up a business co-owner of the rights of the financier, or sees it as only the lender. If limited to the last, this practice removes much of the funding sources, which are investment funds.

scope of a project. Again, put simply, the more money the project requires, the easier it is to find them. Ukrainian entrepreneurs tend to be the opposite situation and deliberately underestimating the scale of their projects.

In these circumstances, we consider the currently available sources of funding. Immediately divide them into two forms: debt and direct investments. In practice, meets and intermediate form ( mezzanine financing, from the word ...

DEBT.

The situation with them in the Ukraine - ... In these circumstances, there are two real source of credit: ( a) The international specialized institutions, and (b ) a mechanism related lending programs to support exports, which exists in most countries that produce manufacturing equipment.

Specialized international financial institutions (IFIs ), which funded projects in Ukraine, are well known - is the European Bank for Reconstruction and Development ( EBRD) and International Finance Corporation ( IFC). In 2009,. it added yet another institution - the Clean Technology Fund (Clean Technology Fund), which, unlike the first two, has its administrative apparatus. The fund can be used to finance projects authorized by the organizations. In particular, in Ukraine, such organizations are authorized by the EBRD and IFC. Information about the EBRD and the IFC is easily accessible and plentiful, so I can only say certain things, of practical importance for the applicant's financial.

IFI is very sympathetic to the clean technology projects in any country, including in Ukraine, but a very unfavorable IFIs are to a large Ukrainian business in any field, including in the field of clean technologies. The reason is obvious: IFI funding large projects, but under the condition of transparency and good reputation of their respective owners. They do not take consideration of the project, owned by Don Pedro to some of Belize, the origin of the capital of which is covered with darkness offshore jungle. So the corrupt origin of most of the major Ukrainian capital - this is still the main obstacle to apply for funding to MFIs. When you read in newspapers about 145 in the world, know that it directly affects the availability and cost of financing for Ukrainian companies.

As the EBRD and the IFC is not only unable to finance the project entirely, but can not even finance at least half of the project. IFC may finance up to 25% and 35% of the Bank to the needs of the project, the remaining money to the project owners must look elsewhere.

As the EBRD, IFC and invest in the project is quite large sums, not less than 10- 20m euros in a project, and this means that the whole project should have cost at least 50-80 million euros. For Ukrainian business, especially in clean technologies, it is quite big projects. Now confident in this scale wind power and get recycling plants, and as confident do not reach the scale of this project production of fuels from biomass or small hydroelectric power stations.

As the EBRD and IFC requirements to expose the ratio of debt and equity capital projects, which in practice means that before applying for a loan to them, must have its own funds in an amount not less than 30 % of project cost.

Although the price of credit to these organizations are now the order of 7-9% per annum, the length - not less than five years, but these features are enough to make them unaffordable for the majority of funding for Ukrainian projects. This is understood to the EBRD and IFC, so we would expect that there will be a special tool for small and medium-sized projects. But while it is not.

Complicated and long bureaucratic procedures and high standards in the preparation of project documentation - also a characteristic feature for all MFIs. In practice this means the need to attract qualified financial advisers, or get a disgraceful spectacle of such collective performances of amateur opera on stage in Milan. Now there is no need for high-quality English language training of financial documentation to invite foreign consultants have enough qualified professionals can be found in Ukraine.

Support Program for export can be used for projects based on imported equipment. Credit in this case gives the bank in the country of manufacturer of the equipment, sometimes it will be a special state bank, but more often the case - is an issue of state bank guarantee private bank, which lends directly to the project.

On export credit programs can be much smaller than the loans of the IFIs, such as a $ 1- 2M, are also available loans in the hundreds of millions of dollars.

Export credits - is related financing, ie loans from Germany can only be used to pay for equipment made in Germany. However, there are some tricks that allow to include in the loan amount, some costs incurred in the Ukraine, but the scope of this article do not allow us to describe how to do this in practice. In large projects rarely happens that all equipment is manufactured in one country, in which case there is a rather complicated, but you polnimaya work on syndication for a project export programs in several countries.

Export credits are much less demanding in terms of demanding and not to the origin of equity ownership of the project. As a rule, the amount of own funds shall be not less than 15 % of the amount credited delivery of the equipment, the reputation of the capital is not analyzed. Export credits to be insured in case of no return in their country of origin. Insurance premium is paid only once to obtain a loan. It depends on the level of country risk (the level of Ukraine is 7, as I said earlier), the category of the borrower and at least some of the significant factors. For example, in 2009. If the borrower was a Ukrainian company, the insurance premium reached 17% of the loan amount, and if the borrower has been authorized Ukrainian bank - that roughly 11-12%.

If credit is not given to you directly, but through the Ukrainian bank, the latter adds to the cost of credit of 5-6% per annum. From my practice, I can say that he had met only one case of direct lending to Ukrainian enterprises - a Czech Export Bank, banks in other countries does not make loans directly. Taking into account the costs of insurance and the services of the Ukrainian bank price of export credits to Ukrainian enterprises in 2009. amounted to 12%.

Shifting the risk of loan repayment on the Ukrainian bank means that the decision on the creditworthiness of the borrower, the method and amount assigned to secure the repayment of a same. In this regard, it is difficult to give some general advice, such as an authorized bank can not only be Ukreximbank, which is practiced more often, but other banks, each of which may have their own opinions and methods of work with the borrower.

Where to start training with the use of funding programs to support exports? . Most of them have very close contacts with the banks that you provide export credits. In a more complex case, you must use the services of financial advisers. It is recommended to do and when a program of export support is available only a fraction of the necessary funding for the project, and when you need a combination of different funding sources.

DIRECT INVESTMENT.

Necessary at the outset to understand that even though interest rates to pay for direct investment is not necessary, but the investment - considerably more expensive financing than the loans, especially compared to IFI loans. Roughly we can estimate that the Ukrainian business direct investment is now three times more expensive than IFI loans. To apply this tool is useful if credit money is not available or are insufficient, or in case of violation of the allowable ratio of debt to equity.

Direct investment can be obtained from two fundamentally different types of sources - from industrial companies and financial investors from. As a general rule, investments from the industrial companies are cheaper than from financial institutions, but, again, as a rule, industrial companies provide investment under full control of the Ukrainian project, and financial companies often agree on the role of junior partner.

On investment from industrial companies in this article, I will not speak, as in the field of clean technologies a lot of different industries and a lot of specific features in each of them. For example, dozens of western companies for processing of household waste were trying to work in Ukraine, but no noticeable success was not. The reasons for this must be sought in the peculiarities of our utilities, and this analysis will help us little in understanding industrial companies investing in wind power or other clean technology industry.

The behavior of financial investors is less dependent on industry-specific, and do these investors only in rare cases, have a narrow sectoral specialization. With respect to the clean technology projects in Ukraine, I would have broke financial investors into two classes: investors, specializing in technology, and investors, specialized in the geographical region (Ukraine, CIS, or more commonly, a group of countries in Eastern Europe).

Investment funds clean technologies and similar institutions, such as family offices and private investors focused on clean technologies in Europe is now growing like mushrooms. I am aware of at least 30 European investors such direction, but experience with them shows that they have no intention to invest in Ukraine, for the reasons mentioned above - high risk countries, plus the financial crisis. Let me give one example, at an investment forum in Kiev in May 2009. there was no investor specialized in clean technologies.

I'm not saying that this will continue. The adoption in April 2009. law establishing a ... Now it appears yet at the level of data collection and analysis, but these works themselves give grounds to expect the next steps. Working with these investors should take the time, to maintain a dialogue by informing investors about specific prepared for investment projects. It should be noted that an understanding of the degree of preparedness of the project for Ukrainian entrepreneurs is very different from the Western understanding of the investment managers. Unfortunately, the description of the technological capabilities and social needs that I have to get as investment projects are not. One of the examples in the last month: an analysis of the need of reconstruction of utility boilers in Ukraine. Multi-page document from which it is not clear how to perform this reconstruction in the real relationships and real property investment vehicles.

Regional funds are much easier to convince to go in clean technologies than to persuade clean technology funds to go to Ukraine. And as time goes on it will be easier, this is the trend of social development and financial fashion, so to speak. This process was clearly visible in 2009. on the subject of discussions with the managers of Eastern European Funds.

As is known, direct investment - an investment of money in exchange for shares in the company's capital (investment in other forms, for example, in the form of joint activity without creating a legal entity, are less common, and we are in the form of this paper is not considered). The typical size of investment for private equity funds operating in Eastern Europe, 10-40 million euros in a project that is much more modest investment of funds, such as those in the U.S.. Funds for small investments, the order of 1 - 3 million euros, very little, except the Dutch ... Typically, investment funds acquire a stake in the company at a rate of 25% to 50%. But the high risks of Ukraine forced managers of investment funds sometimes go on to establish control over portfolio companies that are not typical for countries with a clear economic and political life.

In the process of attracting money from investment funds, a number of specific problems, of which only three consider that, from my point of view, are the most essential.

First, the psychological problem of the Ukrainian business owners and managers of the fund should feel for each other trust and sympathy, or at least not feel antipathy. They will be working together for about 5 years in the supervisory board, or maybe even on the board, which requires a psychological compatibility. As one colleague said to me, the manager of the European venture capital fund, making a decision about investing in a company, he makes a mental test, imagining he could every day for 5 years to lunch with the owner of this company.

The second problem is financial: the majority of Ukrainian business owners have a fantastic view of the inflated price of its own company, which makes it impossible to agree with the Fund on the share capital transferred in exchange for investments. Again, pay attention to the questions listed at the beginning. The place and time investment is very strong ( not the interest, but at times ) change the price of business.

The third problem - it is a particular problem out of the project, which is characteristic for investment funds. Investment fund earns money on company profits and the growth of its value. So in 4-5 years after the investment of money he must return them for a profit, and for this he must sell his stake in the business, usually 2-3 times more expensive than it has got to. For the normal co-operation Fund and the owners of the company should at the outset to determine when and how to exit from the project fund. The best way for both sides - selling shares through the stock exchange - is unrealistic for modern Ukrainian business, so often used sales of industrial investor, but it will require concerted action by both sides.

Conclusion:. even a cursory review of funding sources gives an idea of ​​what to select the source, or ( more likely ) a combination of sources need to analyze all the circumstances of a particular project. There is not and can not be universal recipes. Funding for projects is and will be a sphere of individual, sometimes unique, making. This is especially true for countries with high investment risk, which is now and will in the foreseeable future, Ukraine.

Vadim Novikov.

Director of Corporate Finance.

LLC ...