While many parties are keen to help keep Ukraine's private sector running, IFC has been front and centre of the initiative. By Nick Herbert.
Ukraine’s private sector plays a significant role in maintaining the country’s economic activity despite Russia's invasion, but it needs support. As a member of the World Bank Group, the International Finance Corporation is using its resources and influence to address private sector financing needs now while preparing the ground for future reconstruction.
Despite a large state presence, the country’s private sector represents a sizeable proportion of Ukraine’s economy, providing jobs, goods and services, and contributing export and tax revenues.
Before Russia’s invasion of Ukraine, the private sector accounted for up to 70% of the country’s GDP, according to Lisa Kaestner, IFC’s regional manager for Ukraine and Moldova. So, when Russia crossed Ukraine’s border, “the first priority for us was to keep the economy going, keep the private sector going”, she said.
IFC already had a long-standing relationship with Ukraine before February 24 2022. Ukraine joined IFC in 1993, since when the institution has invested around US$3bn in the country. That relationship changed in February 2022.
“We, as did all developmental partners, had to quickly rethink what we could do,” said Kaestner. “As Russia’s invasion of Ukraine prolonged, we realised that we would have to revise our strategy.”
In December 2022, the team presented a new strategy to the IFC board for approval. A US$2bn Economic Resilience Action programme was endorsed by the board that proposed IFC finance US$1bn at its own risk beside another US$1bn to be invested alongside first-loss guarantees, concessional loans and grants from donor governments.
The programme has three pillars.
“The first pillar, being by far the most active so far, is around trying to keep the private sector alive,” said Kaestner.
It continues to support agribusiness, construction companies and the other small businesses important to keeping the economy going.
The second pillar focuses on essential infrastructure, including transport and communications.
“This is more challenging, and it hasn't gotten any easier with targeted strikes on infrastructure assets,” said Kaestner. “The risks remain high, but we do have a pipeline of opportunities in infrastructure that we continue to assess.”
The third pillar is around supporting Ukraine’s displaced population.
“In partnership with the EU, we have a grant-based programme to help municipalities and housing associations,” said Kaestner. “This funding is fully concessional as opposed to commercial.”
IFC provides grants to help repurpose buildings to house displaced people and repair damage.
“It's an extension of a programme we had before the invasion where we were working with homeowner associations on energy efficiency improvements, so it was not too hard to pivot that programme to cover repairs,” said Kaestner.
Measurement
The package's headline number is impressive, but the real success of the programme will be determined by the ability of IFC to finance projects in a timely manner as well as the impact made by its investments.
IFC has already made considerable progress in mobilising its share of the ERA programme.
“Since Russia’s invasion of Ukraine, we've committed US$400m,” said Kaestner. “Most of that has been without any concessional funding because raising the concessional funding takes time.”
For example, IFC has utilised its Global Trade Finance Programme in Ukraine to guarantee US$164m in imports and US$64m in exports, much of which has gone towards supporting agricultural trade.
“The agricultural sector is struggling without access to ports and, consequently, the revenues needed to buy next year's inputs,” she said.
Prior to the invasion, Ukraine’s agriculture sector was one of the world's top producers, with exports totalling US$27.8bn in 2021, representing 41% of the country’s overall exports.
The right blend
Trade finance’s short-term nature mitigates some of the risk taken by IFC in this programme, but to engage in longer-term projects – either through providing working capital finance or in financing capital expenditures – then it will need to de-risk its balance sheet.
“The sorts of investments we can make will evolve over time, thanks to the availability of blended finance,” said Kaestner.
While IFC provides liquidity directly to some medium-sized players – such as agribusinesses – for smaller enterprises it is most efficient for it to work through intermediaries. Blended finance is applicable to both activities.
In July, IFC conducted its first blended finance transaction with Hungary’s OTP Bank and OTP Leasing. The investment consists of an unfunded risk-sharing facility of up to €40m, with IFC’s risk participation being up to 50% of the project.
“We share the risk on OTP’s portfolio to SMEs in order to help them free up balance sheet space to finance more SMEs,” explained Kaestner. “On this transaction, we have a guarantee with the European Union, which helps to de-risk IFC’s exposure.”
IFC will collaborate with other financial intermediaries soon.
Grains of support
As more blended finance resources are added, IFC should be able to ramp up its financing.
In April, the Netherlands and Switzerland signed up to provide US$53m to the ERA programme, which it expects to leverage between three and four times – potentially resulting in support of over US$200m in financing.
The Netherlands will provide US$43m to support the agricultural sector and ensure emergency liquidity for private companies in agricultural-related industries. Switzerland will provide US$10m to support Ukraine's small-scale farmers.
New agreements signed at the London Recovery Conference of June 2023, which marked the first financial contributions from the UK and the US to the ERA programme, included support for Ukraine's cross-border trade, energy security, agribusinesses, construction and renovation.
British International Investment, the US International Development Finance Corporation and the World Bank’s Multilateral Investment Guarantee Agency agreed to risk-share IFC's trade finance exposure. BII and DFC intend to provide US$25m and US$50m, respectively, to support trade flows of critical goods, while MIGA has approved US$20m to support trade finance guarantees under the joint IFC-MIGA envelope.
These agreements increase the capacity of IFC's Global Trade Finance Programme in Ukraine from US$200m to almost US$300m and could facilitate up to US$1bn of cross-border trade over the next three years.
IFC and the European Commission also announced a partnership aimed at de-risking and enabling up to €200m in financing from Ukraine's financial institutions to smaller businesses, with a focus on agribusiness and women-owned enterprises.
And the UK agreed to contribute US$30m in support of energy security, renewable energy and energy efficiency. Energy is one of the country's most impacted sectors, with reconstruction needs estimated at US$47bn.
London was also the site where an agreement was signed to support the state-owned Ukrainian Danube Shipping Company to modernise and expand its fleet.
“I think that will form part of Ukraine's reconstruction,” said Kaestner; “transporting goods along the Danube rather than through the Black Sea.”
IFC's advisory projects in the infrastructure area will be implemented in partnership with the Austrian Federal Ministry of Finance.
Stability plans
Despite the private sector’s immediate need for support, IFC is also looking ahead to the next phase.
“We’re preparing for when there's a bit more stability, to be able to engage more actively in reconstruction,” said Kaestner. “We see an important role for the private sector in the reconstruction process both in terms of providing finance but also in construction. Many of the construction companies, or the producers of construction materials, will also be private companies.”
There is a sense that the international community is interested in the potential for reconstructing Ukraine.
“We get invited to speak at lots of chambers of commerce in different countries, primarily in the EU,” said Kaestner. “Companies that are not already in the market are a little hesitant to come in right now, but they are trying to understand the opportunities that should present themselves once there's more stability and peace.”
For now, the bulk of IFC’s financing is for companies that are either Ukrainian or, if they are international, have been active in Ukraine in the past. But it continues to look ahead, working on two tracks: financing things now, but at the same time doing the work needed to quickly mobilise financing for reconstruction.
“The first priority is to increase the financing we can provide to partners, whether Ukrainian or foreign, trying to keep businesses running, but the second is to increase engagement with the government, and with private partners, to prepare the conditions to start financing and taking steps towards reconstruction,” said Kaestner.
The government is focused on the reforms it will need to put in place to meet EU accession requirements. IFC is also advising the government on different options in public-private partnerships and other ways to bring in private finance.
Alongside the European Bank for Reconstruction and Development, IFC will help the Ukrainian government to establish a PPP to modernise the Port of Chornomorsk.
They will prepare a contractual framework, set bidding criteria and tender rules, and consult with potential investors to pave the way for a successful tender.
“I'm optimistic that many of those reforms will support more opportunities for the private sector,” said Kaestner.
Even then, the key challenge in creating bankable projects will be the manifold risks faced by companies amid Russia’s invasion of Ukraine – possible direct damage to assets, access to inputs, access to markets, risks around the labour workforce.
“The risks are really daunting,” said Kaestner. “For IFC, that means taking a significant amount of risk on our own balance sheet – we see it as part of our role in Ukraine – but to finance significant amounts, we’re looking for blended finance to help de-risk.”
Over time, as the situation stabilises, Kaestner expects IFC to go back to more fully commercial funding. It’s just that nobody knows when that will happen.
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