Time running out to sell Ukrspyrt ethanol-producing monopoly
Anestimated 600 million hryvnias ($28 million) in losses last year and 41 rundown factories – that’s what Roman Ivaniuk inherited at the beginning of January, when he accepted his latest job as temporary general director of Ukrspyrt.
Ukrspyrt, the country's monopoly producer of potable ethanol, is one of Ukraine’s most corrupt state-owned companies within the Ministry of Agriculture.
Its previous director, Mykhaylo Labutin, is wanted by Interpol for the misappropriation of at least Hr 300 million, among other charges. The
state-owned firm is still not on the government’s privatization list, but Ivaniuk is running it as if it is.
“I’m still a big believer that the most efficient owners of businesses are private entrepreneurs and private businesses,” Ivaniuk says.
The 32-year-old director says it makes much more sense for such a business to be privately owned, with no prosecutors and tax inspectors sniffing around to see “if we’re doing an efficient job or not.”
In private hands, Ukrspyrt would be twice as efficient as it is now, the Volyn Oblast native says. “Big national companies have got to be privatized.”
Previously employed as the management director of Concorde Capital, a Ukrainian investment bank, Ivaniuk had also worked at Ukrspyrt back in 2006, as head of its financial department. In 2014 he ran for parliament in the Oct. 26 elections for a party in the Bloc of Petro Poroshenko, but he failed to win a seat. He’s in a different race now – one of five contestants vying for a permanent position as Ukrspyrt’s general director.
If the state alcohol monopoly is finally sold off, Ivaniuk has a clear idea how it should be done. The state business has to be split into several groups of companies, with the stronger ones sold together with weaker ones as a package, he says.
“If there were four or five companies like Ukrspyrt… they couldn’t control prices - they would have to fight for efficiency, modernize their production systems,” Ivaniuk says.
Selling each company separately is not an option, since buyers could be found for no more than 20 plants, and the rest would have to be closed down completely. Ivaniuk sees this as a major problem.
“Can you imagine shutting down a factory in the middle of nowhere where only 600 people live, in a village, where 150 of the residents work at the Ukrspyrt factory?” Ivaniuk says. “That would mean you’d be closing down the village too.”
Corporatization is another option, but the temporary director is not a big fan of that idea. Even after such an overhaul Ukrspyrt will still “be a package that belongs to the government, so all the problems that I face right now will still be there.”
The biggest of those problems is, of course, corruption.
Ivaniuk says many of the middle managers and directors of ethanol plants have made connections with local government officials over the years in order to create schemes to drain cash out of the business. “It’s hard to just get the source of income out of their pockets,” Ivaniuk says. “They use all their powers, all their deputies, all these committees to tell us that the ethanol plants have to be nationally-owned.”
Meanwhile, some of Ukrspyrt’s top customers - Ukrainian vodka producers such as Khortytsia, Nemiroff and Petrus - are fighting for the opportunity to produce ethanol themselves. Ivaniuk estimates that private companies could save around Hr 80-90 per decaliter if they were allowed to produce ethanol independently.
And ahead of its possible privatization, Ivaniuk is looking to make savings at Ukrspyrt as well. While he thinks the company would sell for perhaps $300 million today, improvements in efficiency could triple its value over the next two years, he says.
While Ukrspyrt is waiting for parliament to approve its privatization, it is trying to rebuild links with the European Union and Turkey. “We use to export more than 10 million decaliters back in 2006-2007. Right now we export zero,” Ivaniuk says.
However, the European Union countries and the United States are mainly interested in technical ethanol, or bio-fuel, compared to the potable ethanol Ukrspyrt makes that is used to produce liquor. “The market of Europe is 15 million tons of ethanol. Only 10 percent of that is potable,” Ivaniuk says. Other ways ethanol is used are in various cleaning fluids such as windshield wash, or in medicines.
So Ukrspyrt’s new management now wants to concentrate on bio-ethanol production. Even though most of it would be exported, it would also prove to be a good substitute at home for less efficient forms of energy - for example, it could be a good replacement for natural gas.
The state enterprise is experimenting with the fuel itself. “Two of our plants don’t use natural gas anymore. Their efficiency is almost 40 percent,” Ivaniuk says. The plan is to refit six other similar plants to use the replacement fuel.
Other efficiency measures have resulted in Ukrspyrt managing to decrease its use of raw materials by 20 percent. That, along with savings from the removal of 25 percent of the staff from the company’s head office and the replacement of top management, should mean
Ukrspyrt makes “approximately Hr 300 million in gross profit by the end of the year,” Ivaniuk says.
Just by making it more difficult for middle managers to steal money during the purchase of raw materials, Ukrspyrt is able to save around Hr 20-25 million per month, Ivaniuk says.
One way this was done was to establish a “purchasing commission” consisting of five people. “There is a collective decision, and all the (managers) that sign up to this agreement know they are responsible for these purchases,” Ivaniuk says.
Increasing operating capacity is another way to improve efficiency and fight corruption at the same time. Previously, plants were operating only at round 50 percent of their capacity, while now it’s more like 90 percent. Ivaniuk says the officially unused capacity of some companies was in fact being used – to produce alcohol illegally.
“That’s why back in 2014 they used so much gas and wheat to produce one liter of product,” he says. “When you have an efficiently working plant, it means that you cannot simply produce illegal ethanol there.”
Yet more savings come from closer cooperation with farming companies. Right now only 17 of Ukrspyrt’s ethanol plants are fully functioning. To make use of the other three dozen plants, the monopoly is starting to strike deals with local farmers, in which the state enterprise provides storage services to agricultural companies, as a lot of its own storage capacity is empty.
Some of the farmers in turn sell grain at lower than market prices to Ukrspyrt. This is for two reasons, Ivaniuk explains: first, grain producers often prefer to sell their grain right away, in bulk, and so save on transportation costs, and second, the quality of wheat needed to make ethanol can be lower, and the grain thus cheaper.
This is not another corruption scheme in which the government resells the grain at a higher price, he is quick to add, and his message to potential Western investors is: “Don’t be afraid, because this is the time to pick up great assets at quite a reasonable price.”
Ivaniuk believes Ukrspyrt can be sold off - but time is fast running out.
“We’ve been talking about the privatization of Ukrspyrt for the last 10 years, and nothing has been done,” he says. “If the company is not sold by the third quarter of 2016, it will be a lost cause.”