print 24.12.2009

Local Authorities Open for Investors - a press conference

On December 22nd the UNIAN information agency hosted a press conference ‘Local Authorities Are Open to Investors: Raising Funds in the Crisis’, which was participated by Credit-Rating CEO Stanislav Dubko, the Mayor of the city of Smela Andrey Kolesnik, the Vice President of the Association of Ukrainian Cities Miroslav Pitsyk and the Attorney of Vasyl Kisil and Partners Legal Firm Nataliya Dotsenko-Bilous.

The press conference was in response to Credit-Rating assignment of uaBB+ long-term credit rating to the city of Smela (Cherkasy Oblast), though the scope of the discussion turned to be far wider. Specifically, there were discussed such topics as development of infrastructure of Ukrainian cities under deficiency of budget funds, prospects for restoring confidence to the Ukraine’s bond market, employment of credit ratings by municipalities, expansion of role of credit rating agencies in improving market transparency.

The conference’s participants have stressed a series of key problems associated with financing bodies of local self-government, namely poor funding the development budgets of municipalities. According to Stanislav Dubko, during 2003-2008 the Ukrainian cities actively participated in the financial market by raising loans to their development budgets for funding municipal investment-hungry projects. For instance, in 2008 the municipalities raised over UAH200 million from the domestic bond market. In 2009 this figure was recorded at around UAH60 million. As Mr. Dubko emphasized the national bond market halted due to low standards for the Ukraine’s financial market. This does not correlate with the global trends where robust growth and expansion continue.

Moreover, according to Andrey Kolesnik, the Mayor of the city of Smela, many EU countries have livened up in order to raise loans for compensating losses. The European municipalities, with support from their governments, do all they can in order to raise more funds to their development projects and to launch new infrastructure projects. Mr. Kolesnik has also emphasized that any investments in development budgets of municipalities create new jobs. The curtailments of jobs which today take place in industrial companies may be compensated by employment of people in large infrastructure projects.

The Mayor has stressed that the management team of Smela, like many teams of other municipalities, encountered deficiency of receipts to the city’s development budget.

While answering the question why a municipality needs a credit rating, Mr. Kolesnik said that the city of Smela has several infrastructure projects developed. For instance the implementation of the project in heating realm worth UAH85 million involves full shift to alternative energy sources and giving up using natural gas for heating. The project will allow for decreasing expenses for production of heating almost fourfold. A similar project has been developed for the city’s water supply system.

Unfortunately, we could not find investment for implementation of these projects. However, upon being assigned a credit rating, the municipality will be able to cooperate more actively with commercial banks, the World Bank, and other international financial institutions with respect to raising funds.

The conference’s guests have also emphasized such important aspect of cooperation as transparency. According to Mr. Dubko, the Ukrainian municipalities are rather closed for foreign investors for there is too little information publicly available. And the most difficult in terms of obtaining information are small and medium municipalities. Thus, the cities need to overcome the threshold of intransparency, if they are interested in cooperation with international financial institutions. A credit rating is an efficient and understandable tool for disclosure of information, Mr. Dubko said.

The Vice President of the Association of Ukrainian Cities Miroslav Pitsyk emphasized that there are few cities in Ukraine today, that are capable to finance their infrastructures, that is why the Ukrainian municipalities need spurring up and being persuaded that there is a possibility for raising funds from international money markets.

The municipalities remain the most reliable obligors. According to Credit-Rating’s CEO, 92% of ratings assigned to municipalities and their debt obligations pertained to investment grade. That is why the prospects for borrowing funds are higher than those of other types of obligors.

Ms. Dotsenko-Bilous has conducted a comparative analysis of European and Ukrainian legislation affecting rating activities. It should be noted that starting from 2006 the EU has developed 6 guidelines and the Code of Conduct Fundamentals for credit rating agencies, with the rating sector in Ukraine governed by several regulations and one article in the law ‘On Securities’. Besides, starting from October 2010 only ratings of certified rating agencies that comply with certain requirements will be recognized in the EU countries. In this connection Ms. Dotsenko-Bilous believes that a fundamental law ‘On Rating Activities in Ukraine’ needs to be developed and adopted; it will govern the sector and will envisage certification of rating agencies operating in Ukraine, and the agencies’ responsibility for the ratings assigned.

The adoption of such a comprehensive specialized law will allow not only for bringing the national legislation in this realm with the EU’s requirements, but also to establish common rules in the sector.

This becomes extremely urgent taking into account recent scattered legislative initiatives for reforming the sector, which are not systemic and does not take into account the EU’s requirements. An example of such initiative may be a draft registered in October 2009 by the Member of Parliament Lysovyi I.V. which envisages licensing of rating agencies, and contains procedures for regulating the sector that cannot be found elsewhere on the globe. Ms. Dotsenko-Bilous is convinced that the new fundamental law ‘On Rating Activities in Ukraine’ will allow not only for enhancing the legislation, but also for creating environment for rising confidence of all market participants to the activities of rating agencies in Ukraine.

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