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4 July, 2011  ▪  Oleksandr Mykhelson,  Іrina Khodorova

There’s Always a Plan

National projects are not so much determined by the interests of Ukraine, but by those of business structures, that are linked to politicians

“Our top priority should be to promote significant national projects. They will become central to the growth of economy. This is the key idea,” President Viktor Yanukovych once stated, as he presented a strategy for overcoming the financial crisis. It has been almost a year since then, and budget spending on “development projects” has increased nineteenfold in Q1 of this year, as compared to the same period in 2010, although it remains unclear, how they benefit the country. According to official sources, some of these programmes are part of the preparations for Euro 2012. Andriy Sadovyi, the Mayor of Lviv, mentioned recently that the government is planning to allocate an astounding USD 4bn to his city for the implementation of the “Olympic Hope 2022” project, even though as yet, no decision has been made regarding Ukraine hosting the Winter Olympics. Where does this hope come from? Or could it simply be that the government is searching for any ends to justify the means? 

THE ABC OF NATIONAL PROJECTS

A national project is an ambitious economic initiative which concentrates the maximum amount of available resources on the development of specific commercial branches or the establishment of individual objects. Implementing such a project appears justified when it becomes a stimulous in the development of contiguous industries, the creation of jobs, and the generation of income that exceeds actual spending. Economists consider the projected effect to be “cumulative”, while budget resources are fully capable of being the financial source of specific initiatives. There is nothing new about this approach. Franklin Roosevelt used it during the Great Depression: by spending public money to hire an army of the unemployed to build roads and work on other projects, he gave Americans the opportunity to keep body and soul together in the tough times of economic downturn and preventing them from revolution, while the country gained a much-needed infrastructure at little cost. 

For some reason, Ukraine is failing to follow this successful example. Some experts have already labeled Euro 2012, the most advertised national project, a disaster. “We are investing into the construction of roads that are part of the championship infrastructure,” states a reliable source at the State Road Administration of Ukraine. “This leaves us nothing for repairing, maintaining and building roads in other regions. If this continues, road construction enterprises could go bankrupt in some oblasts soon.” Another similar story is unfolding at Boryspil Airport, where the general contractor for the construction of Terminal D is not even hiding the fact the deadline for the opening of the terminal could be postponed until the end of 2011, even though Borys Kolesnikov, the Minister for Infrastructure, announced that the deadline was September 2011. The reasons for construction delays are the traditional corruption and blatant sabotage of authorization procedures by bureaucrats. If this is what happens with real projects, just imagine the situation with virtual ones! 

AN AGENT WITHOUT A PORTFOLIO 

Multipurpose development projects are officially supervised by the State Agency of Ukraine for the Administration of National Projects, a relatively new structure that was established in mid-2010 and is chaired by Vladyslav Kaskiv, a member of the komsomol, field commander of the Maidan during the Orange Revolution, one-time spokesman for President Yushchenko, and project manager for Mr. Yanukovych&Co. The official task of the Agency is to reform the social, transportation and energy sectors. Last year, it stole the spotlight as Articles 76 and 78 of the State Budget Law allowed the Government to amend the amount of the state debt without any external control and spend excess borrowings on “development projects”. These articles did not come into effect until 30 June 2010, since according to the Law of the State Budget for 2010, the procedure for the allocation of excess borrowing was supposed to have been developed by the Cabinet of Ministers. This year’s financial plan does not have such obvious mechanisms for the distribution of resources. However, this does not mean that the Agency sits idle, since all mechanisms are already set up on the regulatory level. “Olympic Hope 2022” mentioned by Mr. Sadovyi is one such project. 

The Agency also has other promising initiatives, including “New Energy”, “New Quality of Life”, and “New Infrastructure”. Their funding schemes appear similar to the somewhat forgotten previous government-backed lending to commercial companies. Without going into too much detail, as of 11 August 2006, under such loans, 52 companies were indebted to the Government to the tune of EUR 907.3m, USD 580.4m, more than JPY 1.272m, and UAH 81.3m. The Finance Ministry, though without much success, is still trying to sell the rights to collect this debt through tenders. Things may not be so simple with the Agency. According to provision concerning this structure, its President is personally responsible to the Cabinet – it is at the meetings of the latter that projects are approved. What remains unclear is the form of responsibility. At the same time, experience shows that the collective decisions of the Government are the easiest way to evade individual responsibility for milking the public purse for dubious purposes. 

In any case, Mr. Kaskiv’s Agency is only just beginning to operate, but according to open sources, already received UAH 1.158b from the public purse on 12 May 2011 alone.  

BLITZ METHODS  

According to the Agency, most national projects will be implemented through public and private partnerships, with public funding not exceeding 20%. Foreign and domestic investors should cover the rest. “We are hoping for USD 7.5b in investments by the end of the year, of which at least 25% will go to national projects,” said Mr. Kaskiv. So far, though, the government appears to have had little success in finding investors. 

“I am very disillusioned by Ukraine: there were good prospects last year,” said Timothy Ash, Head of CEEMEA Research at the Royal Bank of Scotland, at the Adam Smith Conferences' 7th Annual Ukrainian Investment Summit in London. “It seemed that the great people in the Presidential Administration would promote reforms rather than just talk. But they have wasted their chance.” Many experts share Mr. Ash’s view that reforms have almost come to a halt in Ukraine, while some (particularly tax reform), have gone in the wrong direction, to the detriment of business. As a result, Ukraine is becoming unattractive for investors who do not actually line up to risk their own funds in a public and private partnership. 

A typical example of the way investment projects are implemented in Ukraine is “Air Express”, a surface subway between Kyiv and Boryspil International Airport, the completion of which is planned by Euro 2012, using investment funds. It is not surprising that no investors have come forward, thus construction has begun using the taxpayers’ money. During his visit to China last September, Mr. Yanukovych signed an agreement with the Export-Import Bank of China for a loan worth USD 2b to develop infrastructure in Kyiv Oblast, including the construction of a new ringroad around Kyiv and “Air Express". In 2011, the government issued a state guarantee for this project in the amount of USD 372.3m. However, it is doubtful whether Chinese builders will report on how much Ukrainian taxpayers’ money will be spent. It is well-known throughout the world that Chinese business never demands their partners to play by transparent rules and happily adjusts to what is offered. By the way, in February 2011, the recently fired director of “Boryspil”, Borys Shakhsuvarov, estimated the construction cost of Air Express at USD 200m, not USD 372m. Meanwhile, the Chinese party has taken good care of its own interests: they will hire Chinese as opposed to Ukrainian companies, to lay 30 km of tracks. This means that foreigners will build the railway for Ukraine and Kyiv will pay them the funds that it borrowed from China. For this reason, it is difficult to know whether to laugh or cry at the news (as yet not officially confirmed), of the possible USD 10m investment from China.

CHILDREN - OUR FUTURE

Another striking, supposedly national project is the “Open World”, according to which, all Ukrainian schoolchildren are to be provided with electronic textbooks. To advertise the idea, Vice Prime Minister Borys Kolesnikov presented Viktor Yanukovych with an iPad, “which has sufficient capacity for all school textbooks required throughout their studies”, claiming that all orphans of school age could already get e-readers in the 2011-2012 academic year. According to expert estimates, even the cheapest iPads for every school student will strip the State Budget of more than UAH 10b, compared to only UAH 107m spent on printing textbooks last year. 

Mr. Kaskiv offers another strategy for computerizing schooling. He proposes that all grade five – nine pupils are given netbooks with G4 Internet access instead of the products of Steve Jobs’ company. Education Minister Dmytro Tabachnyk supported the idea but restricted it to orphans, with a deadline of 2013. Of course, this “Other strategy” is not based on the excellent motivation of the initiators. According to Mr. Kaskiv, the cost of netbooks should be covered by the State Budget, “commercial partners” and… parents who will have to pay just “several tens of hryvnias” for their kids’ devices (apparently, full agreement has not been reached with Mr. Tabachnyk). The list of “partners” remains unavailable while a feasibility study is allegedly being conducted. Meanwhile, experts in communications claim that Ukraine needs to set up the G4 network prior to linking schools to it. The easiest way to do this is to use the platform of the recently privatized Ukrtelecom, though it is not clear yet what the monopolist will get from this… Presumably, the investor who bought the enterprise for little more than the starting price will recoup their investment by simply computerizing schools.

THE HORN OF PLENTY

The interests of specific business entities and officials are quite clearly visible in national projects. For instance, the “Natural Energy” project, worth EUR 3b anticipates the construction of wind and solar power stations in Southern Ukraine. The idea seems interesting but the mechanism for its implementation is even more so. The Law on Electricity specifies that from 1 January 2012, the domestic share of raw materials, materials, fixed assets, works and services in the cost estimate of the construction of the ecological power facilities should constitute at least 30% increasing to 50% as of 1 January 2014. This is a clear indication to investors to buy silicon wafers in Ukraine. Obviously, First Vice Prime Minister Andriy Kliuyev doubtlessly has no difficulty in determining who will be producing them. “Legislation essentially determines the monopoly of just one producer, whose production, as of January 2012, must be bought for all power plants using solar energy” comments Oleksiy Feliv, a partner at Beiten Burkhardt international law firm. 

Meanwhile, some other national projects remain on paper – could this be because they are not in line with the interests of business groups linked to those in power. One of them is the construction of a natural liquid gas terminal which could reduce Ukraine’s critical dependence on energy supplies from Russia. The government regularly reports about negotiations with Azerbaijan regarding the purchase of gas and with Turkey to allow tankers with gas from the Mediterranean Sea. As yet, no-one knows who will build the terminal and, most importantly, when. The fact of the matter is that national interests are not always taken into account in national projects.  
 
 


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