GetMarket Coordinator Maksym Babaiev interviewed Alyona Skichko, Partner at Baker Tilly Accounting Services. They discussed the low level of green tariff payments to clean energy producers in 2020, and how this issue affects current business and the prospects for RES projects.
- Alyona, hello! Please share with us what you do and how your work is related to renewable energy.
- For almost 15 years I have been providing accounting services and full support to the departments of foreign companies operating in Ukraine, together with colleagues from Baker Tilly Accounting Services. We are connected with the renewable energy sector because it has become a significant part of our portfolio over the last two years. This industry is actively developing and, because it is a new sphere for Ukraine, most companies, especially with foreign investment, needed professional assistance in order not to make mistakes and take into account all possible risks in conditions of uncertainty.
- The market is new and has been developing and expanding very rapidly so far. What do you think about how the investment climate in Ukraine has changed, considering the aspects of your work? Please describe in two or three theses what happened before and how it is now.
- Well, I would like to say that over time, the interest of foreign investors in Ukraine has been changing. In other words, in the past, more representative offices were established in Ukraine in order to be present and to "explore" what is happening in Ukraine. But these projects were rather cost centres than projects that are focused on active commercial work. Of course, there were exceptions, for example, the IT industry. Yes, we have many projects on the FMCG market that have been working in Ukraine for decades and have created certain capacities. But if we look at the overall background and statistics, the majority of foreign projects did not have the risk appetite to invest in real assets in Ukraine and develop structures that would generate income for them. Things have changed in the last three or four years. More private investors, who tried to implement smaller projects in Ukraine, have appeared. There was interest in infrastructure projects that needed to be expertise in reforming or reconstructing certain sectors, i.e. the construction and reconstruction of certain utility networks. And among other things, there was a very active and strong interest in renewable energy sources. It is not a secret that quite attractive conditions have been created, voted by Parliament and implemented in operation. Therefore, investors, even though Ukraine is still a country with a high risk of running a business, have started choosing us to implement large-scale projects with significant funding. As a result, over the last two years, the renewable energy sector has been one of the most frequent requests for new companies, new customers and it has required constant support and expertise. When the market is being built, there are still no defined approaches, including tax authorities and other regulators, but they must be performed correctly, so companies needed professional assistance to avoid risks in the future.
- Most of the Ukrainian renewable energy companies have credit obligations to Ukrainian banks or international financial institutions. How can you assess the risks to these companies and what is the type of companies operating in the renewable energy market that may have serious problems in terms of threats to their operations?
- We cooperate with projects from relatively small to very large ones in various formats, and each of them has its own situation, its own cash flow, opportunities to finance and refinance its activities. That's why it's difficult to generalize, because each situation, each project is different and has a completely different set of risks and challenges. But in general, of course, companies, when they make such investments, have a budget and a cash flow forecast. Moreover, if there is only one source of financing for their activities, and these are not the businesses where something can be diversified, because there is a single buyer, a single source of money. If they do not carry out their obligations, then there is a gap in cash flows in the company. They need to look for sources of financing because there are current costs related to the maintenance of the plant, the management of a legal entity, the reporting, the payment of taxes, salaries and costs related to debt servicing. If the funds received from external sources of financing, such as a bank or financial institution, the company is obligated to pay interest and service the body of the loan according to a schedule. If there are certain breaches of this schedule, the company loses its reputation as a reliable borrower. The ability to refinance such obligations is very limited since the market itself is overheated, the risks are increased and if, in general, for Ukraine, when a Ukrainian company from any industry goes to the open market to attract credit funds, they already pay much more than companies from neighbouring countries. However, they have to compete with these companies, thus if a company has no reserves to make refinancing of its account by increasing charter capital or internal corporate loan, the situation is quite uncomfortable.
- The question of courts can be divided into aspects: courts to the Guaranteed Buyer and arbitration courts. The arbitration courts are a long-term procedure that can compensate for lost profits, but they will also require many resources. So it is too early to talk about it because companies will come to this after a certain period, compare to claims against Guaranteed Buyer. Are there any of your clients who are suing and how do you evaluate these claims in terms of results at all?
- I would say not from our clients, but the market as a whole. Yes, we have heard about projects that are planning to sue the Guaranteed Buyer. I think it will be more typical for smaller projects, because the more concentration of financial resources, the more arbitration and a higher level of resolution of these issues can be expected, perhaps with the involvement of diplomatic services or group claims. I am not an expert in legal aspects, we are accountants, we see the requests that the client sends us to resolve operational issues, and at the end of the year, we see figures about what the client has done. My observation is that tension is still rising and if there is no clear picture, no transparent repayment plan that will be executed and companies will not receive certain guarantees, they will not be able to plan their activities in terms of how they meet their obligations, how they will pay their employees, how they will pay the accounting company, how they will pay taxes. Of course, they will take steps in the legal field, but the government should understand that if this issue is not resolved locally, there may be more significant consequences of arbitration. So far, several companies are really thinking about starting local lawsuits to speed up the payment process.
- As far as I understand, there is a certain penalty for late payment by the green tariff, so there is also this aspect. Comment from me that if the state is not able to carry out its obligations once, then later the expectations from them should be assessed respectively. The government will have to strongly refute these expectations and intensively prove that it can meet these obligations again. But in any case, the consumer always pays for everything, and we will still pay in one form or another to those people who have brought money here and cannot now expect their return unilaterally. We call this a voluntary dialogue, but we understand very well that many companies, when they voluntarily reduced tariffs, were put in conditions where they could not refuse to accept them, i. e. they had to accept them.
- You have to understand that there is a certain limit to patience, a boiling point, after which the situation will be more difficult to solve and again, if there is a successful precedent for litigation on the market, it can cause a network reaction. As for the projects themselves, when we first started working with the solar energy projects, everything was unclear, there was a very steep learning curve. For the first projects, it was necessary to find out all the details from scratch, to be sure of your assumptions, hypotheses, limitations and it was expensive. The efficiency of the following projects was improving. Now there is competition, so the efficiency of these projects is improved by the fact that solutions have already been developed and a certain part of the resources that should have been spent in the beginning is already getting a return on this investment from all contractors involved in these projects.
- In your opinion, what key steps should the government take now to ensure that companies that have come to Ukraine or want to come here, feel more comfortable, safer and continue investing?
- First of all, this is a big strategic question. To maintain your business reputation in any sphere, sometimes even at the expense of your own losses, you have to stick to your word. So strategically, even if mistakes have been made, we must make conclusions from those mistakes and learn lessons for the future, improve the interaction of government agencies, public oversight and other aspects, but we must always keep our word. This is a strategic step because there are enough uncertainties in Ukraine, enough stereotypes about Ukraine that prevent foreign investors from coming here and creating win-win situations. We have to create such conditions, because a foreign investor, especially from more developed countries, does not just make money, it is reasonable money, which has already passed the test of time, generations and learned from their mistakes. So Ukraine has a stereotype in the market and when companies come and start doing business here, they understand that all these stereotypes do not work to some extent. A lot of expats stay in Ukraine, they create small companies that conduct active profitable business. This is their own experience and we should emphasize it. Not everything is so bad in Ukraine and when a person comes here, it turns out that doing business here, although to a certain extent is difficult, but not to those indicators, and somewhere it is possible to work better. Therefore, the state should not destroy the positive ways for development and still keep your word. The government needs to bring all of these decisions to a more specific format, perhaps a repayment schedule or a forecast on which they are moving towards 95% fulfilment. As for the "Guaranteed Buyer" - a report on the current situation. It is necessary to create conditions for task managers, working in Ukraine, who are responsible for these projects, so that they can provide adequate forecasts and information, key 4-5 figures to their management. It seems to me that such reports should be of a certain regularity, for example, a quarter or a year. Also, it would not be a bad idea to create prerequisites and learn from the businesses what parameters they need to monitor and report on these parameters.
