On December 22, 2009, a press conference was held in the press center of LIGABusinessInform Information Agency dedicated to: “The role of credit rating agencies in the time of crisis and important changes to come to the rating service market.”
The event was attended by the Smila City Mayor Mr. Andriy Kolesnyk, Cherkassy Region, the Vice-President of the Association of Ukrainian Cities Mr. Myroslav Pytsyk, and Credit Rating Agency representatives, Mr. Stanislav Dubko, General Director, and Mr. Arkadiy Polyak, PR Director. Vasil Kisil & Partners Law Firm was represented by its senior associate of the Real Estate & Construction practice Mrs. Natalia Dotsenko-Belous.
Credit Rating Agency representatives outlined their six-year experience of cooperation with cities in various regions of Ukraine. According to the General Director Mr. Stanislav Dubko, in 2008 revenue side of municipal budgets showed an increase of 30% and thus enabled to allocate funds to cover local needs. In 2009, revenue side of the budget has fallen some 3 -10%. Since the source of municipal investments is the development budget, local budgets, which were filled insufficiently, affected the level of services rendered to citizens as well as the rate of renewing existing utilities. In many cities, this budget item has reached just a mere 20% from the total needed. According to expert estimations, this item will not be accomplished for more than 50% throughout Ukraine. It reflects the acute shortage of investments for modernizing and upgrading municipal utility systems and for increasing the quality of public service. A high level of tear and wear in the municipal infrastructure, from 40% to 60% according to different sources, directly indicates the acute need for new opportunities and fund raising instruments to be searched immediately.
As the exchange market develops, cities commence to actively use bonds for the above purposes. Investments into municipal bonds have always been reliable to high extent. For example, many US cities use bond issuances and raise annually about USD 3 bln. In the recent years, USD 400 million of new borrowings has been raised through this market. Moreover, municipal bonds continue to maintain high long-term ratings on the capital market as compared to the mortgage market once overestimated.
Unfortunately, Ukrainian bond market with municipalities involved shows low level of activity and business standards. This is notwithstanding that, most Ukrainian cities maintain investment category ratings, which confirms that opportunities for raising funds are available.
Cities still remain rather secret objects to be understood by external investors. Economic and financial indicators, debt burden and structure, management arrangements, and social and economic indicators, all of them influence the decision an investor makes on whether to invest funds or not. So, those municipalities who wish to raise funds for development purposes need to work on disclosure and supply of such information. Alternatively, this part of work may be undertaken by rating agencies facilitating the attraction of investors into municipal budgets.
Representatives of local governments reported on their cooperation with Credit Rating Agency and successful experience of raising funds for development of cities. In particular, Mr. Myroslav Pytsyk notes that municipal authorities have been hardly ever able to provide a proper business plan. Therefore, they still have to cooperate with western companies or few Ukrainian dedicated firms having sufficient expertise and reputation to prepare such global and specific projects.
“Changing service delivery technologies, saving energy resources and doing such things through raising respective financing rather than funds of the electorate, this is the task for Ukraine to deal with presently,” – said Mr. Myroslav Pytsyk.
The Smila City Mayor Mr. Andriy Kolesnyk shared his insight regarding the implementation of similar projects. Those objects which the municipality intended to sell in 2009, do not reach the expected return rate now. For this reason, it would be more advisable for a city to raise a loan and make the minimum work required out of such funds.
Most banks, however, are reluctant to grant loans to cities. Therefore, municipal bonds are now the most solid source which may be used for the city development. Special consideration should be given to attracting investments into energy-saving technologies which cities may initiate. Such initiatives are supported, inter alia, by Smila city which, for example, managed to abandon in full using natural gas and change to alternative energy sources.
Mrs. Natalia Dotsenko-Belous told about the legal framework of credit ratings as an important fund raising factor. She noted that there had been only a few normative acts adopted in Ukraine during the 19 years of its independence to tackle credit rating issues. Among them is article 4 (example 1) of the Law of Ukraine “On State Regulation of Securities Market” stating those events when an investment rating is to be assigned in a compulsory way.
In 2006, the EU Parliament was actively involved in elaboration of the Regulation on Investment Ratings which main provisions may be reduced to the following:
- Obligatory certification of rating agencies;
- Obligatory certification only if 10 companies at least have been rated by such agency during 3-year period.
The European Securities Commission developed the Code of Conduct Fundamentals for Credit Rating Agencies containing warranties to certain extent for those investors who use credit ratings of such agencies.
In 2009, the Draft Law “On Amendments to Certain Legislative Acts related to Ratings” was brought before Verkhovna Rada (Parliament) of Ukraine and registered on October 29, 2009. Unfortunately, this draft law was not designated for comprehensive regulation of the rating service market. For example, a requirement of compulsory licensing contained therein would certainly result for the moment in an additional bureaucratic barrier on this market.
Mrs. Natalia notes that Vasil Kisil & Partners, jointly with the Ukrainian Building Association (UBA), European Business Association (ЕВА), and Ukrainian National Mortgage Association (UNMA), is now developing the Draft Law “On State Regulation of the Rating Service Market,” which draft would include all details and requirements to have this market operated in a civilized way. Participants of the group developing this draft law believe that this law, once effective, will enable to eliminate corruption schemes and to enhance investment attractiveness either of Ukrainian cities or various business entities. New draft law will contain the following conceptual provisions:
- Differentiation between the competences exercisable by executive authorities while raising funds;
- Approval of the procedure for selecting rating agencies and determination of the procedure of their certification;
- Clear definition of rating procedure and provisions setting forth the responsibility of rating agencies.
“I hope that this draft law will ultimately be considered and adopted, and thus will become the next step towards the adaptation of the Ukrainian laws to the EU laws. Accordingly, an issue of trust in rating agencies and in credit ratings in general will be closed,” – added Natalia Dotsenko-Belous.