Interview in Kyiv With Jason Pellmar, Regional Manager at International Finance Cooperation
Jason Pellmar, the regional manager for Ukraine, Belarus, and Moldova at the International Finance Cooperation, the private investment arm of the World Bank, tells UATV about how the organization is supporting the development of infrastructure, smart cities, green energy, and public-private partnerships
One of the projects that has been quite a success is in the south-eastern port of Mariupol, revamping the bus service. But in general, infrastructure is key to your work here in Ukraine. Can you tell me a bit about how the public private partnership works in terms of infrastructure, what you invest in and, perhaps, what you’re not so much interested in?
Indeed, infrastructure is key to IFC strategy in Ukraine. Right now, in order to increase the export competitiveness of the country, we need better infrastructure. And there are different ways of doing that. There is direct investment, so to take for example MV Cargo, which is, we were a lender to the port in the south of the country outside of Odesa together with the local sponsor. And the intent is for Cargill to come into this particular port to improve agrilogistics. Another example would be Nibulon, the leading inland water transportation company. Then you touched on the urban infrastructure, which we call the Cities Program, where we offer advisory support, creating a mechanism to improve private sector interest in improving the urban infrastructure, but also directly supporting the municipality to enhance and upgrade things like their roads, their catenary lines for the trolleybuses, to procure modern buses, like in the case of Mariupol, in Lviv we’re working on autonomous trolleybuses — a really exciting project that has a little battery that’s charged using the catenary lines, and then they can go off the grid an additional 5 to 10 kilometers.
So useful when they break down, for example.
So a green city type concept. And we just signed in Mariupol, where I understand you were as well, with the city of Zaporizhia — our first smart city program globally, using traffic systems, taking the data, and then decreasing cost and increasing efficiencies of the urban transport system. And then to close the other avenue of engagement in infrastructure is the PPPs, the Public-Private Partnerships, where we started our engagement with pilot port concessions, also in the south of the country, Olvia and Kherson — massive success, and we hope to build on that success. We signed a memorandum of understanding with the prime minister to come up with five new bankable projects for infrastructure country-wide.
And how do these PPPs work exactly? Because in Mariupol, for example, for the bus service, it was an entirely public procurement. So how do you assess what involvement private money should have in these different projects?
It’s a great question, and this is something that we actually have worked closely with the World Bank, and coming up with what we call the cascade concept. And the first question you ask is “Can the private sector do this project?” And if the answer is yes, then the government steps away, and it becomes a purely private sector initiative, like the case of MV Cargo, like the case of Nibulon. In the event that there’s public support that’s required, that could be by way of land, that could be by way of certain guarantee mechanisms, then you start to think about the PPP model, the concession model. And then, only as a last resort, do you have public sector lending, and this is particularly important in the case of Ukraine, where we want to reduce the financial burden on the sovereign, allow them to do the things that they need to do: improve health, improve education, but when it comes to infrastructure, infrastructure generally lends itself very nicely to private sector engagement.
And are we talking about not just the ports, but also roads as well? Cause in the RE:THINK. Invest in Ukraine conference, they were talking a lot about toll roads that should be built as well. So are you involved in this?
We are. And so this is again a joint World Bank — IFC engagement, we’re doing a comprehensive assessment of which roads lend themselves best to private sector investment. Again, it won’t be all roads, there are certain roads that should remain in the domain of the public sector, but those roads that have commercial potential can and should and will be concessioned out.
If you see the traffic around Kyiv, I’m sure that has commercial potential, there’s a lot of it at the moment. Moving from the infrastructure to energy as well, and on your website I noticed that you have the Green Energy Finance Project. That’s just one of many projects that you have, and it’s going to run until 2021, at least that’s the estimated date. So I think this concept is very interesting. Can you tell us a bit more about what is this green energy, and what do you hope to achieve, what sort of impact do you think it will have?
So everything that we’re doing in country, we intend to be sustainable, and that means sustainable not only from an economic perspective, but from a climate perspective as well. And in fact, in a short while on the next panel, the global climate director for IFC will be presenting on what type of global climate initiatives we at IFC have. And so when you talk about green energy, I think it’s even bigger than green energy, it’s supporting climate-smart investments in Ukraine. As concerns energy, the focus has largely been through a financial intermediary, a state-owned bank, the fourth largest in country — Ukrgasbank, where we’ve helped build up the internal capacity of the bank to enable them to do $800 million worth of green energy lending, financing. And that is with regards to renewable energy, its energy efficiency, so we’re very proud of this engagement, and in fact, it’s this engagement that has led to the follow-on engagement of the SME Advisory, as well as trade finance lines, and the next step in our relationship with Ukrgasbank is to help take them private.
And are these popular? The Ukrgasbank lending to different companies, is this in demand?
I think the numbers speak for themselves. Nearly a $1 billion worth of green energy investments is a testament to the fact that there is very strong demand for these type of instruments. And our engagement goes beyond Ukrgasbank. Just last week we signed an agreement with OTP Leasing, which is the first green leasing investment for IFC in Ukraine, a $50 million financing package to allow OTP, and this is a very much in climate-smart agri, but also other sectors of the economy will be impacted by this type of activity. In Mariupol as well, we are looking at a battery storage project. Again, a very technologically advanced way of helping bring on more renewable energy on to the grid in Ukraine in a sustainable manner. So green energy, green finance is core to our strategy in the country.
How do you choose your projects? Because you probably have so many different things that you could get involved in potentially, and I know that IFC’s increasing more and more its budget, I guess, for Ukraine. So what is the criteria, are you just looking at profit, or what are the other mechanisms you are looking at?
It comes back to the word ‘sustainability’ that I used before. So it’s not so much profit maximization that drives us, but we have to make sure that we can succeed in the country, such that we can use the proceeds that we generate and recycle them back into the economy here in Ukraine, but also in our other markets, so we are market-driven. But what really gets us excited is the development angle of the work that we do. The projects that we do have to create employment, they have to create tax revenues for the government, they have to be climate-friendly, so I think that we look at things from a very broad spectrum, different than perhaps a commercial bank or a private equity shop would do. We’re looking through a lens of “Is this project the right project for the country and the people of Ukraine?” And you’re right, the options are tremendous, but we also have a country strategy, which, and I spoke about this a bit on the panel, really prioritizing the infrastructure investments, building off of the concession law, the banking sector reforms that I spoke to earlier, and energy-related matters, and then of course the agricultural sector — agrilogistics, but also the primary agri and value-add agri.
Do you see your portfolio diversifying? Because you mentioned infrastructure, agriculture, banking, these have always been the traditional big players in your portfolio ever since you started or, at least, IFC started in Ukraine. But do you see this changing with technological change or has it remained quite stable?
We are market-driven as I mentioned, so we will support those sectors and try and open up those sectors that have the most potential. And more recently, the agricultural sector lent itself best to investment and to growth. But now, thanks to the concession law, we expect to see a lot more investment from us and from our partners in the infrastructure space. We expect to see much more activity in the financial services sector. In fact, our portfolio is not that large to date in financial sector, but with the intent to work out the non-performing loans, we think that there is a lot of potential in distressed asset workout type vehicles, the privatization angle with the state-owned banks. And as lending increases on the back of land reform, on the back of banking sector reform, then that will enable us to further diversify into other sectors of the economy and step up our financial support.
How big is the problem of non-performing loans now? Has it changed over the past couple of years?
It has changed, but not to the extent that it should. Ukraine unfortunately still has the title of the highest non-performing loans globally. But that being said, Ukrgasbank has been very successful at reducing its non-performing loan portfolio, which we want to showcase to the other state-owned banks. Follow the lead of Ukragasbank because there’s now a model that enables them to do so. But there’s further regulatory work that’s required, the World Bank and IMF together with IFIs and IFC are recommending that there’s further regulatory support to create a framework to enable larger-scale workouts. And that has to happen in tandem with judicial reform. People need to trust the courts. Because if there is no trust in the courts, then it’ll be very hard to work out the troublesome loans.
And it’s interesting that you mentioned the World Bank as well, because the IFCs, the private investment arm, but also it’s part of the World Bank, and the World Bank is more to do with policy, I believe. So what policy would you like to see pushed in Ukraine in terms of not just, I mean, what’s the most pressing reform? I guess you mentioned judicial reform, but what others?
So as you mentioned, the World Bank, in this case the EBRD and the IFC, we sit together in one building in Kyiv, we’re very much united, and we’re also a sister organization to the IMF. And we have partners like the EBRD, and we do get together these donor and multilateral coordination meetings, and even bilaterals are part of this discussion. And what I think is great is that we are all united in that having identified the key reforms, and they’re all pushing in the same direction as opposed to in different directions. And we talked a bit about land reform. Land reform is something that needs to happen, and I’m confident will happen. It needs to have the appropriate safeguards in place, and that’s something where the world bank with their expertise of how land reform has happened in other markets can help advise the minister of economy, who we heard from a short while ago. And, in fact, he mentioned that he’s going to a meeting right now, part of it is working with media, to inform the public on why land reform is important for them. And so I would very much prioritize land reform because of the opportunity it has to accelerate economic growth, and that we’ll have knock-on benefits for the small and medium-size farmers and small and medium-size land owners. We talked about banking reform already, with greater than 50% share by the state in the banking sector, that’s not sustainable, that needs to transfer to private hands, that requires further support on corporate governance and an NPL workout.
Well that’s the thing, because, I mean, there is, you could argue, the disadvantage that if it does go into private hands, the private banking sector could be monopolized or just have several big players who have a lot of leverage over the national bank. So I guess you would take this into account when you’re looking at these different situations.
We are lenders and partners to the commercial banks as well and, in fact, they are very pleased with the IFC engagement in helping privatize these state-owned banks, because they would argue the opposite, that it’s not. Right now, the state-owned banks pose more of a threat to the commercial banks because of fear of uneven playing field with the state as shareholder, as opposed to being on an even level, competing on private sector.
So what do you think should happen to Privatbank, for example?
So you’ve chosen the most difficult case. So I think we have four state-owned banks as I mentioned. Ukrgasbank was once a private bank, it was nationalized, and there’s great potential for it to be privatized quickly and we aim to do so. Then there’s Privat, Ukrexim, and Oschad, each with their own issues and intricacies. Privat does need to be privatized, it will be privatized, but there are a number of factors that need to be addressed before it could be put on the open market. And right now it has a supervisory board that’s in place, and together with the supervisory board, together with the shareholder – the Ministry of Finance, they’re putting in place a strategy for Privat to prepare it for ultimate privatization.
Moving on to another topic, I would like to talk about foreign direct investment in Ukraine. In your opinion, is it still relatively low? What is the potential here?
Yes, foreign direct investment is, by all accounts, low. And I think we touched on some of it in the panel earlier that part of it is perception, and part of it is creating the opportunities for the private sector to come in. And I think we’re working on both counts together with the World Bank on improving the investment climate, and then trying to create as IFC the framework to bring in more private sector investment, and the concession law and the PPPs is one avenue to do so, the privatization is another. So FDI is low, it’s acknowledged as low, and we need to do something to fix it.
And as in the panel was also about reputation as well, not just perception, but also real reputation and companies that come here. Do you get a lot of feedback from people that you deal with about the importance of the IFC and other international donors?
I think because of these issues, IFC is a trusted partner to international investors. So yes, we have continued dialogue with many investors, NR is in many cases the first port of call for these international investors. It can help share with these investors our experience, and the positive experiences that we’ve had, and I think that gives them comfort.
How do you see your portfolio changing over the next couple of years? Are you looking at its expansion?
Yes, I think on the back of the reforms, I mentioned that we have internal strategy that we’ve just developed, it’s scenario planning, if-then analysis. So if this reform happens, what do we think as IFC, what can we do. And not only mobilizing our own balance sheet, but catalyzing more private sector investment. I personally have measured not based on how much money I get out the door as an institution, but how much money I can bring into the country more broadly by bringing in more private sector investors, by binging in commercial banks. So this is my priority, and I think Ukraine does have the potential to an earlier comment that you’ve mentioned, we have to move beyond saying “Ukraine has the potential” to realizing that potential. And on the back of the reforms that are already in motion, and this new government already has success that they can point to, and on the back of that success, it’s now up to IFC to attract more private sector in the key areas of the economy of Ukraine.
You’ve been in Kyiv now for two and a half years. What’s your favorite part of Kyiv?
So we’ve really, and when I say we, I’m here with my wife and two younger daughters, and we as a family have fallen in love with the city, with the country, very settled here. I think the quality of life is very high. From the greenery of this city to being able to eat well, and the connectivity to Europe, I think we intend to extend our visit because of these attributes of Kyiv and the country.