Yuriy Luchechko: ENTRANCE TO THE EUROPEAN BIOETHANOL MARKET WILL ACCELERATE THE MODERNIZATION OF THE ALCOHOL INDUSTRYThe development of the alcohol industry in recent years is one of the most explosive problems of the development of the processing sector of the agroindustrial complex of Ukraine as a whole. Establishment of government enterprise “Ukrspyrt” in 2010 was aimed at improving the management of alcohol production and ensuring a fundamentally new level of competitiveness of products. Despite the favourable organizational, resource, production and technical prerequisites for the expanded reproduction, the enterprise had not been able to overcome manifestations of stagnation and reach the ascending trend of development. However from the end of 2017 and in the first half of 2018, the enterprise’s management succeeded in localizing the crisis developments and reviving the investment support for projects of modernization and reconstruction of the technical and technological base of alcohol productions. During 7 months of 2018, government enterprise “Ukrspyrt” was financed with 80 million UAH capital investments, which is 3 times more as compared to the entire 2017. We asked the acting director of government enterprise “Ukrspyrt”, Yuriy Mykhaylovych Luchechko, to share his thoughts on the future development prospects and priorities of the enterprise, in particular, increasing the volume of investment and diversification of production and economic activities.

– Yuriy Mykhaylovych, at this point of time, what should be the main strategic priority for the development of the government enterprise “Ukrspyrt”, the implementation of which will allow to ensure the required level of capitalization of alcohol productions and as high as possible utilization of capacities?

– This is primarily the production of bioethanol and alternative motor fuel with its content using spare capacities of alcohol enterprises. Having established the production of bioethanol, we will be able to ensure the use of environmentally friendly component in motor fuel, which significantly reduces emissions of toxic substances, reduces dependence on energy imports and improves the overall ecological situation in the country. Especially since we are obliged to increase the production of bioethanol in accordance with the National Renewable Energy Action Plan for the period up to 2020, according to which the total expected contribution of bioethanol and ETBE produced from bioethanol, to achieve mandatory indicative targets for their consumption in transport for 2020 is foreseen in the amount of 320 thousand tons of oil equivalent. But according to expert estimates the volumes of production on the basis of ethanol (bioethanol) amounted to only 80-85 thousand tons in 2017. With such volume Ukraine will not be able to meet the EU requirements for mandatory use of 10% of biofuel or other renewable resource in transport fuel.

– So, the focus of government enterprise “Ukrspyrt” on bioethanol production correlates with the new energy indicators of the EU?

– Ukraine, having entered into the Free Trade Area Agreement with the EU, which came into force on 1 January 2016, undertakes to implement the Directive 2009/28/EC of 23 April 2009, which provides for the introduction of biofuel or other renewable fuel into the aggregate consumption for transport in the amount of 10% by 2020. In pursuance of these requirements, the Cabinet of Ministers of Ukraine issued the relevant Decrees no. 791-r of 3 September 2014 on “Action Plan for the Implementation of the Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources” and no. 902-r of 1 October 2014 on “National Renewable Energy Action Plan for the period up to 2020”.

Earlier the Cabinet of Ministers of Ukraine issued the Order no. 927 of 1 August 2013 on “Technical Regulations Regarding Requirements for Automotive Gasoline, Diesel, Ship and Boiler Fuels”, and the requirements of DSTU 7687:2015, which regulate and allow the use of a volumetric share of bioethanol of up to 5% in the production of traditional motor gasoline.

In addition to the said institutional grounds for the production of bioethanol, Ukraine also has preferences within the free trade between our country and the EU, which set EU duty-free tariff quotas for ethanol (the total volume of the EU tariff quota for Ukraine for 2018 is 56.2 thousand tons; in 2019 the tariff quota will increase to 70.8 thousand tons, in 2020 – to 85.4 thousand tons, in 2021 – up to 100 thousand tons. So the bioethanol capacitive market of the European Union countries opens for us.

– You are talking about well-formed institutional preconditions and favourable market conditions for the establishment of bioethanol production at unused sites of alcohol productions of government enterprise “Ukrspyrt”. And is there a sufficient resource base for the production of the fuel product you mentioned?

– Places of business (PoBs), where it is planned to establish the production of bioethanol and alternative motor fuel, are located in those regions where there is a sufficient amount of sugar- and starch-bearing raw materials. These raw materials are currently exported to countries where bioethanol is produced. So basically the added value is exported, which can be created in Ukraine with the help of our capacities and provide a synergetic effect both for agricultural producers and food production and processing industries. I am convinced that after the establishment of bioethanol production at PoBs in Vinnytsia, Kyiv, Lviv, Ternopil, Cherkassy and Chernivtsi oblasts, the food production and processing sector of the agroindustrial complex of these regions will get new impulses for development, which will gradually help to overcome stagnation in industries adjacent to the alcohol production.

– But does the enterprise have the necessary technical and technological capabilities to establish bioethanol production in the nearest future?

– Government enterprise “Ukrspyrt” possesses spare capacities in the production process that can be used for the production of bioethanol and alternative motor fuel based on 35% bioethanol. The enterprise also disposes technical and technological opportunities for obtaining bioethanol from starch-bearing raw materials, both “wet” and “dry” way, as well as from sugar-bearing raw materials. There is a required staffing, production and technical support for the introduction of technology of production of motor fuel with the content of bioethanol on the basis of the equipment for blending gasoline and diesel fuel. Government enterprise “Ukrspyrt” is alternative fuel-certified in accordance with the legislation, which is also confirmed by an expert opinion regarding the presence of alternative fuel features in “SUPER A”/95 motor fuel.

– Production of bioethanol will definitely be accompanied by the generation of significant volumes of secondary raw materials. How can they be used?

– Our specialists have already developed projects, which will enable us to provide as high as possible level of recycling of secondary raw materials and thus increase the level of integration of production. In particular, production of biogas with a capacity of 9.504 thousand m3 is planned at Khorostkiv PoB (Ternopil oblast). The cost of the project is 100 million UAH. Practically, the implementation of biogas production project will reduce the need for fossil hydrocarbons and thus increase the energy efficiency of production and maintenance of local municipal and social infrastructure.

– What amount of investment is needed to establish bioethanol production? And what about the investment support for modernization of fixed capital at government enterprise “Ukrspyrt”?

– As a result of overcoming stagnant processes at the enterprise, as evidenced by the elimination of losses and establishment of profitable activities, we managed to ensure an increase in the volume of capital investments financing. 80 million UAH of capital investments were financed during 7 months of 2018, which is three times more as compared to 2017. Government enterprise “Ukrspyrt” plans to modernize eight manufacturing facilities in Vinnytsia, Kyiv, Lviv, Ternopil and Chernivtsi oblasts to start producing bioethanol and alternative motor fuel. The total investment needs constitute 1.5 billion UAH.

– Should bioethanol production be established, which markets will be targeted by the enterprise?

– We will supply both the Ukrainian market and the markets of the EU countries with bioethanol. As I noted before, all institutional preconditions to tap into the EU market exist, primarily unfilled quotas for supplying bioethanol from Ukraine. It is planned to export 85.2 thousand tons of products according to the UKT ZED code 2207 20 00 10 “Grade B bioethanol” annually. The enterprise will use the other 80.5 thousand tons of products for the production of product items under the UKT ZED code 3824 90 97 10 “Motor fuel “SUPER A”/95” and “Alternative motor fuel for petrol engines”.

– Yuriy Mykhaylovych, in addition to bioethanol and related products, what product items are you planning to develop and how much do you need to invest? And how will this affect the efficiency level of production and economic activities of government enterprise “Ukrspyrt”?

– We plan to produce food-grade “Lux” and “Pshenychna sl’oza” alcohol with an annual capacity of 12.8 million daL at 17 PoBs. The required investment amount is 317 million UAH. It is planned to produce technical fl uids with a capacity of 4.08 thousand tons per year at the Tkhorivka PoB (Kyiv oblast). A capital investment project worth 20 million UAH is scheduled to be implemented in 2019. Raw alcohol will be produced at three PoBs. The total annual capacity will be 2.4 million daL. The investment value of the project is 52.5 million UAH. Three PoBs will produce industrial alcohol. The total annual capacity is 2.5 million daL. The investment amount will equal to 11 million UAH. It is planned to produce DG and DDGS high-protein livestock feed at 31 PoBs. The total value of investments is 346 million UAH, and the annual capacity is 189.8 thousand tons.

According to forecasts of our specialists, the utilization of planned investment resources will enable us to increase added value at government enterprise “Ukrspyrt” by 63.5 million UAH in 2019 as compared to 2017, and by 446.8 million UAH in 2023 as compared to the same base. The increase of the added value at government enterprise “Ukrspyrt” in 2019-2023 will ensure a substantial increase of mandatory payments’ receipts to the Consolidated Budget of Ukraine and state earmarked funds. According to our forecasts, in 2019 as compared to 2017, these receipts will increase by 24.9 million UAH, and by 1.02 billion UAH in 2023 as compared to the same base.

– You put a premium on the significant economic benefit from the implementation of the proposed strategic priorities of government enterprise “Ukrspyrt” development. And what kind of social benefits will be achieved?

– The expected economic benefit, as I noted before, demonstrated by the increase of receipts to the Consolidated Budget of Ukraine, namely to the local budgets, will increase the budget-replenishment role of government enterprise’s “Ukrspyrt” PoBs, which will be crucial for accelerating the socio-economic development of the depressed administrative regions of agricultural specialization (the main area of PoBs location). The establishment of bioethanol and other types of production will unequivocally influence the increase of wages of the PoBs employees and will require additions to the labour force, and this will be a decisive factor in increasing household incomes and employment growth of the local population of administrative centres, cities of district subordinance, settlements and villages.

– What changes to the regulatory framework and the system of fiscal regulation of alcohol and alcohol-containing liquids production should be made so that the strategic priorities for government enterprise’s “Ukrspyrt” development you listed are to the fullest extent introduced into the economic environment?

– The implementation of the proposed strategic priorities of government enterprise “Ukrspyrt” development will be possible subject to the implementation of a certain set of institutional changes, namely the adoption of legislative acts. Firstly, it is necessary to accelerate the adoption of the draft law “On Amendments to the Tax Code of Ukraine and certain legislative acts of Ukraine regarding the development of the alcohol industry”, which provides for the levying of excise tax at the rate of 0 UAH per 1 litre of absolute alcohol. Elimination of excise tax rates will not have significant negative consequences in terms of the revenues of the state budget, but it will at the same time give a boost to the production of bioethanol, the use of which in motor fuel will reduce the cost and sales price of fuel by 10-15%.

Secondly, it is needed to establish a moratorium on the recourse to the assets of government enterprise “Ukrspyrt” as a taxpayer under financial sanctions, applied before December 31, 2015, for the time before the decision to privatize the enterprise. In the event of a decision to establish the moratorium, conditions for profitable activities of the enterprise, increase of receipts to the State Budget of Ukraine, effective utilization of production capacities of the enterprise will be created.

Thirdly, it is critical to ensure cooperation of government enterprise “Ukrspyrt” with the State Fiscal Service of Ukraine and other state bodies in the development or improvement of technical regulations and instructions that would enable the production of alcohol-based products in Ukraine, in particular mixtures of odoriferous substances and diluents.

– Thank you very much for the interview!

Prepared by Vasyl’ HOLYAN

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