UARU
The Sunday Show with EBRD’s Francis Malige on His Time in Ukraine
28 October, 2018

This week on the Sunday Show, we are joined by the European Bank for Reconstruction and Development’s (EBRD’s) outgoing Managing director for Eastern Europe and the Caucasus Francis Malige. During his time in Ukraine, Malige has witnessed some of the most important moments in the country’s recent history, having arrived in the crucial months following the Euromaidan revolution and at a time when the war in Donbas was at its most critical.  

Since then, Ukraine has pushed forward with a number of reforms to improve the economic situation in the wake of war and revolution. In his role as the region’s EBRD Managing Director, Malige has worked with private and public sector enterprises, facilitating loans and programs to boost Ukraine’s investment potential and business climate.

As Malige prepares to start with his new position of EBRD Managing Director of Financial Institutions on November 1, we discuss some of his biggest takeaways from working in Ukraine, including the impact of reform on business and what needs to be done to encourage investment in Ukraine.

Has the business climate in Ukraine changed since the revolution? Is it considerably different, or a bit better, or more or less the same? As we know that there still aren't that many high-profile investors in Ukraine.

It's a very good question. I think there's been very, very large improvements in the business climate in Ukraine. There's also very large room for improvement, meaning things still that need to improve. I think one of the things we see, first of all, you build a business climate for investors, if it's good for Ukrainian investors, it's also going to be good for foreign investors. I don't believe you build a special business climate for foreign investors to attract them. I don't think that's the way an economy works. The other thing that you have, when you meet foreign investors outside of Ukraine, very often in many countries, they know someone who has had an issue in the past in Ukraine. And so that makes it difficult to convince people to come into the country because they tend to listen to their compatriots more than they will listen to us, of course. Now what I also see is that those that are here, they see growth in their numbers, they see profitability in many cases, they want to invest more money. You know, when you look at the way the business has evolved -- when I came, four years ago, the number one issue that existed and that everybody was complaining about was about VAT reimbursements. It was impossible to get your VAT back from the state if you were an exporter. And for an exporter, it's really a problem because structurally, you actually pay more VAT to the state, then you are entitled to get VAT back on your exports, but you need the money back from the state. And that has completely disappeared because the corruption that was involved in the VAT reimbursements has disappeared, the state has put together an electronic system for VAT repayments. So that source of corruption, and that sort of worry, for investors is completely gone. Now, what remains today is an environment where there are still questions around the rule of law, questions around the property rights. If I come to Ukraine, say the investors, and if I invest dozens of millions of euros into a new plant, am I actually sure that it will be mine, or will someone through corrupt court decisions try to take it away from me? And that uncertainty remains. I think there's a very, very big positive evolution with the creation of the anti-corruption court, with the new Supreme Court, which recently took a decision in favor of a foreign investor, who was being defrauded by another party. So those a very good signs. For now, they're right at the top of the court system, and so this change needs to go down into the lower level courts, and we also need to see some change in the way the secret service and the Prosecutor's Office behave in order for there to be an environment that will be truly attractive to foreign investors. 

What does this depend on? Is it about political will?

Mostly.

How would you define this political will? What could be done? If you're speaking long-term, you think about the long path towards reform, there should be structural reforms, but we're almost five years on from the revolution, which means there has been time to think about this, there has been time to make a plan. In terms of priorities, those things you mentioned, for instance, about the possible involvement of law enforcement in business, which could be a concern. 

Firstly, you need to reduce the opportunities for corruption. And on that account, Ukraine has made tremendous progress through a number of reforms in the gas sector, in the banking sector, with VAT, with the ProZorro system for procurement and so on. The opportunity to steal is much smaller – it still exists but it's much smaller than it was four years ago. But you also need to do two other things in which, honestly, less progress have been made. You need to hold people to account. In the case that I mentioned with this investor that was being defrauded, they lost in court in the first instance, they lost in court in the appeals. Then they went to the Supreme Court and the Supreme Court completely destroyed the first two judgements and sent it back to the lower courts. But that's not enough. What happened to the judges? Are they still judging, these judges, or are they being investigated is the question. And the third thing that needs to happen as well, and where Ukraine has not made a lot of progress is getting the money back. And so, I think what needs to happen is.... And it's hard to do these two things because you can't hold a judge to account without thinking through how you're going to do this and still preserve the independence of the judiciary. You don't want to have a system  where the judges are under the influence of the executive. So these are difficult things to do, but it does take very strong leadership, very strong political will, a consensus among parliament and among the government to drive these changes.

Ukraine is coming to the election cycle, in 2019 there's going to be presidential and parliamentary elections. What are your concerns? Particularly in terms of negotiations and agreements with international partners. We've already had the example of gas prices, for instance, the further negotiations with the IMF that the prices should be higher, and then there was an increase, but then it was explained that: no, we won't go more than 23% instead of a 63% raise. What are you concerns related to the political campaigning and how this will affect agreements and promises?

Politics is politics. To win elections, sometimes you need to make decisions that economists don't agree with. But that's not my concern. We're an investor. We see good projects and we invest in projects. I'd like to see more good projects and in order to do that, you need to bring some visibility. Now, people say: Ah, there's an election and it's not clear who's going to win, and to me -- sorry but that's democracy. It's actually a good thing when you cannot know who's going to be the next MP and the next president. It means it's a competitive elections and not everyone in every country in the world has that. That's called democracy. But in order for there to be a situation where a change in government does not completely change the business climate, the reform environment, and so on and so forth, what you need is strong institutions. Before the presidential election, before the parliamentary election, Ukraine has a strong central bank, after, it will still have a strong central bank, and the independence and the strength of that institution needs to be preserved and needs to be respected so that, in Ukraine, there's no uncertainty as to what's happening to the banking sector, depending on who's the president. That's not how advanced countries work. You have strong institutions that respect the political power and are respected by the political power. 

But, for instance, in cases of particular policies like land reform, which everybody said would never happen before the end of the election cycle, but it's lasted for decades already. So what are the most critical things which should move forward despite of everything and can't be stopped? 

First, I think... You don't have private property if you cannot sell. So having land reform that enables people that want to sell their land to sell it is a matter of democracy, freedom, human rights and so on. If you own an apartment in a city and suddenly people say: You cannot sell it -- then why did you save your money and put it in your apartment? You don't have the money anymore? So the right to sell is important. If you have the right to sell, then other people have to have the right buy, by definition, otherwise there's no market. Now, this is a very difficult question that has a lot of stakeholders that are interested: landowners to small farmers, the large companies, foreigners that may want to invest and so on. So it's very, very complicated. A lot of progress has actually been made in developing a vision for a land market once its opened. There have to be the rules of the market, there has to be financing available for the market. If you open the land market and then you do not make financing available, then people that don't have much money and want to buy the land that they're working, especially the small farmers, won't be continue working that land, and that's bad. And then you also need... And that's where the rule of law environment is really important you also need a dispute resolution mechanism. If after the opening of the markets, suddenly your neighbor comes and says: Hey, that piece of land there is mine -- you need to have a mechanism that you can trust, w  here a decision is going to be made whether the boundary between his land and your land is actually here or there, or should be decided differently. I think these are the three elements that are really important in any land reform. And there's a false basis for this, which is a broad consultation with all of the stakeholders, so that people are comfortable with what's going to happen. So it's not something that you can do quickly, it is something that will have to happen, again, because there's no private property if there's no right to sell, but also because, on the basis of the current system of leases, there's no encouragement for people to invest in the land, and irrigation, for example, is very insufficient, especially in the south of the country. It's not going to get any better with climate change and with global warming, and so on and so forth, so the ability to invest in irrigation inland is going to be critical for the future success of the already successful agriculture in Ukraine. And the problem is, no one is going to make a decision to invest more than the value of the land in irrigation systems if you are not sure that you can keep it. If you have a five-year lease, and the land cost is one thousand dollars, why are going to invest two thousand dollars' worth of equipment and irrigation that you cannot move to the next piece of land if you need to move. 

One of the direction EBRD was and is following is privatization of the big state-owned companies. And there hasn't been a big or successful showcase for the international partners. We can mention the Odesa Portside factory here. So what is your take on that? If we summarize what has happened in the last four years, I remember, we always asked the ministers what their priority was and they would give this list of 20 companies and then it never really happened.

Well, it's true that there's not been privatization. What is actually not completely true is that there's been no progress. I think there has been progress. We now have a modern privatization law, which is much better than what existed before. We now have the means to have transparent auctions for privatizations. However, it's not easy to privatize the state-owned firms in Ukraine because most of them are actually difficult cases. Anyone would find it hard to attract good and transparent investors in some of these cases because of some corruption schemes that existed in those companies, because of some very high debt situations that exist in some of these companies, some of them have very little activity, so you buy yourself a plant but it doesn't work, you have to restart it. In the case of the energy sector companies, some of them have their own legal issues. Coal is not very attractive to investors anymore, so, for example, Center Energo, which is a good company, profitable company and so on, but works on coal. Four years ago, it would have been more attractive but a lot of large energy companies have actually moved away from coal, so it's going to be difficult to attract good invest ors. But there's no reason for this program to not move forward. We now have, again, a good privatization law and I hope and I expect that this government until the election, and the next government, will continue this policy.

What makes law better? Why do you trust in that?

For example, one of things that was fixed in this law was, under the previous law, you needed to have an evaluation of the assets done under Ukrainian standards, and that often reinvented in inflated price expectations. And so if you start an auction with too high a price, a lot of investors are going to come and say that they're not even worth looking at this because if you set the minimum at this much and the value that I see is here, why would I bother?

What are the top-priority enterprises now that could be privatized? Where should we look? Where are investors looking?

Well, there's a list that the government has brought out. It's a good list. There's 3000 state-owned enterprises to choose from in Ukraine. What really matters is to actually get going with professional advisers and moving forward with a few cases to demonstrate that it can be done. 

And what hinders this process at this stage?

One is that the people make decisions in the various agencies in the government are not really incentivized to make decisions. As a bureaucrat -- and that's not specifically Ukrainian -- in the world, as long as you have not made a decision, you have not made a mistake. If you have -- and that's more specifically Ukrainian -- the risk that if you decide a price that's lower, or if you set something and someone says: no, the price was too low, you are criminally liable, and that, of course, creates a barrier for people to make decisions. You have people using the court system to slow down the process -- very effectively I must say, unfortunately.

Prime Minister Groysman has signed a new strategy of cooperation with EBRD, so what will change?

I'm not aware that he's signed anything, but we met him this week to introduce my successor. We signed a loan with a local green business company that manufactures, produces sugar to create a biogas plant on the basis of the residue from that production.

We are also very keen to work on the integration of Ukraine with the nearby countries because integration is not just about signing an agreement with the EU or with someone else, it's also having the physical logistical means to implement it -- better roles, better railways, ports that are well-operated and so on.

You mentioned neighbors. Ukrainians could be concerned. Do you mean western neighbors? Northern neighbors? Eastern neighbors?!

I think good ports are good for every neighbor. Including the neighbors that are on the other side of planet, actually, because once the grain is on the ship, it could be going to China. When we look at the infrastructure and network of Ukraine, we discuss priorities of the government, and then when we look at roads, railroads, airports, ports... Improving the airports in Ukraine, it could be and should be done. There should be more competition, there should be fewer monopolies, more routes. Comparing the Dnipro and Lviv airports, which is quite striking because the Lviv airport has many more flights, it's not operated as a monopoly, and therefore it's actually much cheaper to go to Lviv than to Dnipro. So if anybody wants to study the inference on growing the market, just look at the Lviv and Dnipro airports. You have your PhD thesis just right there, in front of you. 

Now you say, should the road go to the east or go to the west? That's for the country to choose. I invest in roads so that they are happy roads, but they are good quality roads with fewer potholes, with contracts with people that manage these roads that are actually based on the quality of the road rather than the quantity of the asphalt that they pour onto the road. It's much easier to count the holes than to make sure that the proper kilograms or tonnes of asphalt are put on the road. This being said, I've been this year to a city like Mariupol and I think Ukraine should invest more in connectivity to that city, especially, as we all read in the press that the connectivity through the port is reduced these days due to the bridge being built and so on, not to go into the geopolitics of it. But I do think there's a need to reinforce the linkage between Mariupol and the rest of the country.

Sometimes it's said that sometimes the western partners are pushing more reforms than, let's say, the government and politicians. Do you get that feeling?

You know, I think what we do... We're never successful when we're the only ones pushing reforms. I don't believe that the western partners reform Ukraine. I think Ukrainians reform Ukraine, and I think they reform Ukraine for Ukrainians, they don't reform Ukraine because it's going to make them look good in the eyes of the EBRD. They don't care and they should not care. They should care about their country and that's why they do.

But do you feel the will is there and is it enough?

There can always be more. But yes, I feel the will is there.

There was a case where Ukraine has issued bonds a year ago. And then you mentioned it kind of lost hope that Ukraine could live without the IMF tranche. Now they're talking again about going to the market and discussing the new program. Do you think it's an opportunity to avoid reform? As in, getting the money instead of having money which is conditional?

First of all, I think there's conditions to the new IMF program anyway. And there's conditions to the European Union macrofinancial assistance, there's conditions to the World Bank loans. And when we work in the public sector, there's also conditions to our own financing state-owned enterprises, or for projects in the public sphere. We also have conditions, by the way, in our loans to the private sector, but they tend to be less public conditions, they tend to be about how transform from the inside. Now yes there's no trick conditionality attached to a eurobond, other than the expectation of the eurobond investors that the cooperation with the IFIs will continue. When you talk to investors, if you ask the question of the Ministry of Finance, or of other people, they will tell you one of the first questions that every investors has is: where are you in your IMF program?

Generally, what is your take on the whole idea to issue the bonds for Ukraine?

Every country, probably with some exceptions, are very resource-rich but continuously needs to borrow money. Here, we have a situation where there's a lot of focus on one particular issuance because the market was not very open in Ukraine in the past few months. On the basis that people did not whether there was going to be or not the continuation of the cooperation with the Fund. Now, you have that cooperation that continues that reduces the uncertainty that I was talking about. That makes it possible for Ukraine to borrow money. We'll see at what price, but it's not a good or a bad idea, it's just proper finance management for the government.

And about absolute numbers. Is the EBRD planning to have projects in Ukraine, provide more funds, or is it going to be more or less the same for the next year.

In the past few years, we've had years where we've invested as little as 600 million a year in Ukraine, some years where we've invested more than a billion, always I'd like to be around a billion rather than around 600 million. But the truth is, we don't really have a envelope for Ukraine. We are constantly looking for good projects in the private sector, and also in state companies that want to transform themselves.

What are relations between EBRD and Naftogaz now? There was a case when Naftogaz was receiving loans for the program, for buying gas. That program, as far as I know, was stopped. What is the future for that? And what are the discussions surrounding it?

The program you are mentioning, it was not stopped in the sense that someone decided to stop it. It was a three-year loan, after three years, Naftogaz paid back... What normally happens when the loan goes away is that the client pays back. We do have loans outstanding with Naftogaz. We actually a program and the way co-finance with Naftogaz, to refurbish some sections of the pipeline. And we've actually had conversations around the new form of financing for gas purchases, which, for now, have not been conclusive, but we remain available and interested.

Also, there was a statement from Naftogaz that in case there is a rise in price, and that won't be equal for business and private people that they would have losses, like 45 billion hryvnia next year. Do you share those concerns?

I think what you need to see in Ukraine is a real gas market. And then there's the regulation of the gas market, which is decided by the regulator in terms of what price and to whom. But what I see is too much people taking gas and not paying for it. That shouldn't happen. What I see is too many people doing what is politely called price arbitration, and you can translate that as cheating because it consists of pretending that you've delivered gas to individuals at the individual price and then you pocket the subsidy from the government. And, in fact, selling it to corporate at a higher price. So there's consequences in a country like Ukraine to having two different prices: one for the people and for the companies. And those consequences are more corruption and a less well functioning market.

And that's not to say that it's not hard for people who have to pay more money for their gas and for their heating, but what we say is the answer to these people's issues, is not a lower price. It is a subsidy that is targeting on the people that actually do not have the means to pay for the gas. Because if you have  lower price for individuals, what you're doing is you're in fact subsidizing the richer people. They have larger houses, they tend to have them warmer in the winter, and so, if you give a lower price to everyone, you are giving essentially a subsidy to the richer people, and that is taken from the poorer people.

What are the latest developments around Ukrenergo? In particular regarding the supervisory boards.

I think the supervisory board was appointed and Ukrenergo must continue towards what's called unbundling, which is a bit of barbaric word, but it is essential separating the transmission grid from the supervision of the Ministry of Energy. In the electricity market, just like in a gas market, there's a core set of wires because of the gas, that makes no sense to replicate, makes no sense to open to competition. It is the main backbone of the distribution network in the country. That is the natural monopoly. As a natural monopoly, it needs to be regulated properly.

But do you have any concerns regarding this particular company?

We are following the situation but we are not particularly concerned.

You are on the supervisory board for Privatbank. Are you going to stay? What are the prospects of Privatbank being privatized?

I think my term runs out at the next assembly, the next shareholders meeting.

It's in April or May. I suppose that's a conversation that we will have to have. I came on to the supervisory board of Privat at the request of the Ukrainian authorities and with the agreement of the top management of EBRD, and I think this supervisory board works well. We have a bank that now is on the path to recovery, and we have a new CEO that's leading the charge, so, I'm staying. And I think the bank has to be privatized, but in order to privatize it, it needs to demonstrate that it develops a new business model. The old business model of taking deposits out of the people's pockets and lending it to people that don't pay back -- that's not a good business model for a bank, so it needs to develop a business model of lending money to people and actually paying them back. That's for the old clients. So in order to demonstrate that, it will take a little bit of time. I expect that the bank will be ready to privatize probably somewhere in 2021. At that point, it will be a great, positive impact on the banking sector of the Ukraine to see such a large bank go bank into the private sector. I'm sure you know that by now the state-owned banks represent more than half of the banking sector in Ukraine -- so that's Privat, Oshchad, Ukresimbank and Ukrgaz. And that's too much, that's too much and should be reduced.

We are coming to the end of our conversation. There was a case, where you publicly supported the former Minister of Finance Oleksandr Danylyuk, when he was attacked. So how do you explain? Who? Why was he attacked? And, in the end, why did he have to leave?

I'm not the police, so I don't know who was attacking him. I just pointed out an inconsistency which, when I saw that photograph that had been taken in my own house, in my own apartment in Paris, was portrayed as being something that was his and in London. I just said that's not true. I know this photograph, I know this place, that's my place. There was a lot of noise around it, so much the better. I think everyone who wants to print news should check their sources and frame their sentences in a proper way. Why did he have to leave? I think that's a question to ask him.

Still, how do you feel? It's not just about Danylyuk, but as well, within the period of your time Natalie Jaresko, she went to work in Puerto Rico, and then there was also Aivaras Abromiavichus who left the government. All these people were considered these young reformers. In the end, they left, they've done a lot, in particularly in terms of cooperation with partners like you. Is there any disappointment about those kind of things?

You know, why someone leaves a job like a minister is a very complex decision. I think these are very difficult jobs with a lot of pressure, with a lot of things to do. Every single one of them I'm sure had their own reasons to leave. I regret a lot of them because they were our partners and courageous, and making the right decisions for the country. We're constantly looking for people inside the government, and also in the private sector, who are willing to go the extra mile to work on making the country better. 

What is your message? It's probably different to your successor. And what is your message to Ukrainians? You've spent time and worked together.

To my successor I said that it's going to be a lot of fun, but it's probably not going to be a boring job, but it's really worth it because you see the impact of what ERBD does on the ground on a day-to-day basis, and I'm really happy with the engagement that we have in many spheres in the economy and the support that we are giving to the reformers. To the Ukrainian people, if I may, I'd like to say don't lose hope, keep going because you're doing the right thing, you're taking your country to new places. And also, it's probably time to build, to think about building better institutions even more. There's too many situations in Ukraine that I see are being resolved by heroes, people that make the right decision, that go to try to influence powerful people in the right way, and these are the people that have led the Maidan and so it's time for the time of heroes to give way to the time of institutions.