Time run­ning out to sell Ukr­spyrt ethanol-pro­duc­ing mo­nop­oly

Kyiv Post Legal Quarterly - - Contents - By Ilya Timtchenko timtchenko@kyivpost.com

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.”

One of Ukr­spyrt’s 5,000 em­ploy­ees over­sees ethanol pro­duc­tion at a plant. Out of the 41 plants that be­long to the state en­ter­prise, only 17 of them are in con­stant op­er­a­tion. (Cour­tesy by Ukr­spyrt)

Ukr­spyrt’s tem­po­rary gen­eral di­rec­tor Ro­man Iva­niuk meets with the Kyiv Post on Sept. 25. (Volodymyr Petrov)

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