Financing and advice to Danish businesses in Ukraine Olexiy Parkhomchuk Senior Advisor 15/01/2015
WHAT IS IFU? Independent government-owned fund, operating on commercial terms Advice and risk capital for globalisation of Danish companies 800 investments in 88 developing countries 46 of years experience Total contracted investments of more than 10 bn DKK 115 invested in share capital and loans bn DKK PAGE 2 15/01/2015 Event via insert / 'header & footer'. Max one line
Financing Risk sharing and long-term Investment horizon Share capital Loans Guarantees Investment period 6-8 years Agreed exit Strategic partner Board work Strategic advice Additional financing CSR reporting FOUR ELEMENTS IN IFU S VALUE CREATION Advice Evaluation of business plan Financial structure Legal set-up Partner negotiations Governance/CSR Access to local authorities Finding premises Network & local presence Experience from 800 investments in 88 countries Seven regional offices in Africa, Asia and Latin America 44 local and regional advisers Experienced investment teams PAGE 3 15/01/2015 Event via insert / 'header & footer'. Max one line
INVESTMENT MODEL Example of financing Total investment: DKK 15m Danish company IFU DENMARK UKRAINE Loan DKK 3m Share capital: DKK 7.5m (75%) Share capital: DKK 2.5m (25%) Loan DKK 2m Project company From DKK 1-100m. Maximum 49% ownership PAGE 4 15/01/2015 Event via insert / 'header & footer'. Max one line
IFU'S INVESTMENTS EUROPE Investments (no.): 36 Total investments (DKKm): 5,583 IFU investments (DKKm): 531 Actual direct employment (people): 8,441 UKRAINE (since 2000) Investments (no.): 52 (25 active) Total investments (DKKm): 1,945 IFU investments (DKKm): 342 Actual direct employment (people): 6,973 POLAND (1991-2012) Investments (no.): ASIA 146 (0 active) Total investments (DKKm): 9,027 IFU investments (DKKm): 949 Actual direct employment (people): 14,289 Investments (no.): 389 Total investments (DKKm): 43,497 IFU investments (DKKm): 4,780 Actual direct employment (people): 80,908 LATIN AMERICA AFRICA Investments (no.): 125 Total investments (DKKm): 8,247 IFU investments (DKKm): 1,443 Actual direct employment (people): 24,777 Investments (no.): 256 Total investments (DKKm): 54,089 IFU investments (DKKm): 3,671 Actual direct employment (people): 44,735 PAGE 5 15/01/2015 Event via insert / 'header & footer'. Max one line
INTEREST TO UKRAINE (retrospection) Market access to 45 m of retail customers (5 cities with > 1m inhabitants) Reduced production costs, unsaturated market, attractive margin rates Cheaper access to raw materials Export advantages in the region (Eastern Europe, former USSR) WTO member (2008), DK-UA Double tax avoidance convention (1996) PAGE 6 15/01/2015 Event via insert / 'header & footer'. Max one line
Ukraine has proved to be a difficult country to do business in/with Low pace of economic reforms Frequent retreats on democracy, political pluralism and human rights High level of corruption, red tape, overcomplex taxation, complicated administration; weak investor protection Malfunctioning and politicized court system Lack of support from local authorities, extortion via charity Low European languages proficiency, underdeveloped business culture Outdated education; low labor productivity Lack of trust even inside the Ukrainian, still immature, society Shadow economy: 25-50%; Gini Index: ~ 35/100 #112 out of 189 World Bank s most recent Ease of Doing Business ranking (#137 in 2013, #152 in 2012) PAGE 7
Who does run a business in Ukraine? Sell in UA (i.a. via local representation) Maersk Line Novo Nordisk, Coloplast Danfoss Grundfos Cimbria Rezidor (8 hotels / 1900 rooms in UA) JYSK (14 stores) Vestas (~60 x 3 MW turbines by 2013) Kamstrup, Logstor Rockwool, H+H Bigadan DSV, ICT Grene Velux Skov, Skiold Haldor Topsoe ECCO Pandora, Shambala, Skygen Produce in UA (via subsidiaries) Carlsberg (3 breweries; USD 500 m investments) Danosha + 3 other DK groups of agri investors (~20,000 sows) Ciklum (software production, 2,000 IT people) SimCorp (software production) Auditdata (software), CDM (software) Dolle, Gangsø Sika Footwear Jahn & Jensen Products (import of food products to UA) Danish Textiles, Raitex Actona suppliers of metal components (includ. for UA market) suppliers of wooden components PAGE 8
Map of IFU projects PAGE 9
What is happening now Ukraine s economy has been declining during 2014, after 0-growth in 2013. The economy is severely affected by the annexation of Crimea and loss of control over industrial eastern territories 60% devaluation of the local currency; expected 8% GDP decline in 2014 Financial reporting in UAH looks terrifying Economical crisis stimulates UA's nation-building and speed up pro- European development. Signing and ratification of political association and free trade agreements with EU However: It is not easy to get Danes scared We did not have large projects in Donbas; some minor losses in Crimea Some mobilization of employees and vehicles to the army; donations for hospitals The retail market has decreased Restrictions on payments abroad; deficit of hard currencies High uncertainty PAGE 10 15 January 2015
Perspectives We are eager to learn: - performance of the new parliament - performance of the new government - level of offensiveness from Russia, which depends on the viability of the Russian economy (with the oil below USD 70 / barrel the Russian rhetoric has become much more peaceful) - the sustainability of the Ukrainian economy, which depends very much now on 1) real reforms; 2) IMF/EU/USA/Australia/Japan/Canada readiness to help financially if they a progress with reforms Politically, Ukraine is one of the important destinations for Danish investments. Pragmatically, the volume of investments depends on how Ukraine treats domestic and foreign businesses PAGE 11 15/01/2015 Event via insert / 'header & footer'. Max one line
IFU s RESPONSE IFU re-confirmed its commitment to Ukraine: Disbursements according to signed agreements Rescheduling of liabilities 4 new investments were signed in 2014 Neighborhood Energy Facility to support energy efficiency (2Q2015) Possible expanding of IFU mandate, beyond classics - projects with Danish Economic Interest, promoting economic development No lost projects Great cooperation with the Danish Embassy/Trade Council PAGE 12 15/01/2015 Event via insert / 'header & footer'. Max one line
Most perspective sectors of the UA economy Agricultural production and Food processing IT outstaffing, outsourcing, software development Energy Efficiency / Renewable Energy / District Heating Outsourced processing a new revival in textiles and wood / metal processing IFU is prepared to support your projects in these industries in Ukraine. PAGE 13
BALKAN/UKRAINE/CAUCASUS TEAM In Copenhagen: Lisbeth Erlands Investment Director Henrik Henriksen Investment Director Max Kruse Investment Director In Ukraine: BALKAN / UKRAINE CAUCASUS Klaus Prebensen Investment Director Otto Vinther Christensen Investment Director Lars Vestbjerg Adviser Olexiy Parkhomchuk Adviser How to start? Give us a call SIDE 14 15/01/2015 Event via insert / 'header & footer'. Max one line
Challenges to expect in Ukraine, on the top of 2014 risks Ever changing regulations Ruined roads Unreliable infrastructure Not sufficiently high working discipline Minor thefts are a part of remuneration package Larger businesses experience smaller problems in Ukraine Strong competition from Ukrainians, Russians, Middle East and China How Danes are perceived? UA-DK shareholding: so far troublesome Professional tax and legal advice is needed PAGE 15
OVERVIEW OF IFU S INVESTMENT PROCESS Contact Appraisal Agreement Operation 1-3 months 4-8 years First contact with partner(s) Clearance in principle Investment Committee Binding Commitment Investment Committee Shareholder agreement Project operation & monitoring Loan agreement Elements evaluated Additional elements appraised Activities performed Background of partners Financial accounts of all partners Full business plan Management & ownership Legal opinion Disbursement Business idea and rationale Project country analysis Indicative financing structure Ownership structure CSR policies 10 year financial modelling P&L, balance sheet, cash flow Sensitivity analyses Fulfilment of IFU success criteria incl. CSR Updated financial accounts of all partners IFU representation on project company board Financial reporting CSR reporting Additional finance Exit PAGE 16
DCIF WAS ESTABLISHED IN 2014 AS A PUBLIC-PRIVATE PARTNERSHIP MANAGED BY IFU Institutional investors: Total commmitted amount: DKK 1.2bn (first closing) PAGE 17
DCIF OPERATES IN ALL EMERGING MARKETS INVESTMENT STRATEGY Active minority investor Equity focus Investment size: DKK 10m to DKK100m Pre-agreed exit strategy All major emerging markets except Russia Bogotá Copenhagen Accra Cairo Nairobi New Delhi Beijing Investment types: Renewable energy, energy efficiency projects DCIF investment countries Johannesburg Involvement of Danish investors or suppliers ( Danish economic interest ) PAGE 18
WHAT IS A CLIMATE PROJECT? Mitigation projects effectively reduce greenhouse gas ( GHG ) emissions Renewable Energy Projects e.g. wind, water, solar, biomass, geothermal Suppliers to Renewable Energy Projects e.g. blades for windmills, photovoltaic cells Energy Efficiency Projects (20% or more) e.g. technology upgrade, fuel switch Alternative Energy Projects e.g. utilisation of landfill gas, biogas from agricultural residues Materials or Equipment Projects e.g. insulation material, district heating systems Transport Projects e.g. urban public transport system Other projects able to provide substantial mitigation effects Adaptation projects reduce the consequences of climate change (at least 50% of total project investment costs incurred due to the actual or expected impacts of climate change) E.g. water management, agriculture, disaster preparedness, coastal and natural resource management, insurance and climate change information and consulting services PAGE 19
Most perspective sectors of the UA economy: Agri Production and Food Processing 1/3 of national export Agri land is not for sale; unstable legal environment 1/3 of black soil of the world; 50 m ha of arable land in Ukraine Annual production of grain 45-55 m tonnes of grains (2014 harvest is expected at 64 m) and annual internal consumption of 25 m High profitability of farming business in Ukraine. The good players reach on average EUR 450 EBIDTA/ha Ideal geographic localization of Ukraine close to its major off takers (Europe, Middle East, Turkey, North Africa, China) with easy access to sea USD 100-250 per ha of land lease rights PAGE 20
Most perspective sectors of the UA economy: IT Software Development, e-commerce One of global top 10 software development players (~ USD 1.5 bln / year export) 30 thousand of IT developers ~ 10 Danish owned IT companies IT companies demonstrate 15-25% growth annually Outsourcing to Ukraine: Software development Call centers Accounting / reporting IT support Favorable tax regime for IT companies and IT developers 41% of population internet penetration, mostly social networks 15% of population use smart phones Rapidly growing volume of on-line trade and services inside Ukraine PAGE 21
Most perspective sectors of the UA economy: Energy Efficiency / Alternative Energy PAGE 22 Highly energy-intensive economy - need for energy efficiency and diversification of resources High dependence on import of gas and oil from Russia District heating is very much depreciated and needs huge investments Ukraine is one of 20 biggest CO2 emitters in the world with >1% of global emissions, whereas its economy is 0.2% of the global economy State support - green tariffs - rates comparable to EU levels National grid obliged to connect renewable sources to the network Guaranteed off-take by the State Energy Company till 2029 0% customs duty ; 0% VAT on equipment imports through 2019, but minimum local content must be observed: 15% in 2012, 30% in 2013 and 50% in 2014 Shale gas agreements with Shell and Chevron