Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 15 - Evidence
OTTAWA, Tuesday, October 23, 2001
The Standing Senate Committee on Foreign Affairs met this day at 6:15 p.m. to examine and report on emerging political, social, economic and security developments in Russia and Ukraine; Canada's policy and interests in the region; and other related matters.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, I call the meeting to order.
Our witness this evening in our continuing study on Russia and Ukraine is Mr. James Temerty from Northland Power Inc. Mr. Temerty was born in Ukraine and came to Canada as a child. He will talk to us about business in Ukraine.
Mr. Temerty, please proceed with your opening statement.
Mr. James Temerty, Chairman, Chief Executive Officer and owner of Northland Power Inc.: I will tell you a bit about myself and what informs the perspective I hope to share with honourable senators this evening. I am President of Northland Power Inc. Northland Power is an independent power company that designs, builds, owns and operates power projects. Northland Power has had a 51 per cent interest in a heat and power plant in the City of Kiev and has had that interest for five years. It has been involved in significant development of that project for about eight years.
I am also the chair of a family foundation that has some activities in Ukraine as well as being on the board of Ukraine Enterprise Corporation, as is Senator Grafstein. Ukraine Enterprise Corporation has three investments in Ukraine.
Perhaps more interesting and relevant is the fact that I sit on President Kuchma's Foreign Investment Advisory Council. I am there at the insistence of a former Canadian Ambassador who felt that Canada needed to be represented and that Northland Power should be the Canadian representative. The companies represented around that table include the likes of Mitsubishi, Siemens, General Electric, Boeing, Shell and British Petroleum, so I am not there by virtue of Northland Power's balance sheet compared with those large organizations. I am there by virtue of a very important project for Ukraine, that is, this power plant that we have been developing.
That power plant involves modernizing and bringing to bear Western technology on a heat and power plant that was built 50 years ago. Today, that plant is fired by coal. It is not a good idea to bring coal into the capital city of Ukraine by truck and train. Most cities in the OECD environment do not do that any longer. Our project is to convert that power plant to a gas-fired plant using a gas turbine and to use heat recovery steam generators to capture the excess heat from the turbine and turn it into additional electricity.
By doing that, the plant becomes much more efficient and the economy in Ukraine gains because we use less fuel to operate the plant. That would involve an expansion of approximately 150 megawatts. The total capital value of the project is $180 million U.S.
We have not as yet been able to break ground. We are in our third round of financing and are getting close. I will refer back to this point at the end of my remarks.
I would now like to turn to the points that interest this committee, that is, the political, social, economic and security perspectives in Ukraine.
Ukraine is a large country with a surprising depth of culture and education. The literacy rate is virtually 100 per cent. People who spend time in Ukraine comment on the strength of the population.
From a science and technology standpoint, Ukraine ranks very highly in many sectors. Canada is becoming the beneficiary of some of that expertise. I know some people who have emigrated from Ukraine to Canada who are starting up businesses and bringing the expertise they gained in Ukraine and in the old Soviet Union to certain sectors in Canada.
Ukraine is a young nation trying to find its feet. I think that when you visit you will find that they are making significant progress toward becoming a market-oriented economy.
Politically, the impression that Ukraine gives today is that they are starting to mature. It used to be that the Ukraine parliament was just a gaggle of many political parties. In fact, I had dinner with the former Prime Minister of Ukraine last week in Kiev. He said that the number of registered political parties in Ukraine is 119. That is outrageous. The parliament in Ukraine has 450 members broken up into 119 registrations. Today, there is a general recognition that this is not the way it should be and they are moving to forming blocs. Parliamentary elections are coming up next spring and I think there will be probably five political blocs. There will be the communists, the social democrats, the former Prime Minister Yushchenko's own bloc, the Reform and Order Party, and the moderate socialists. This is evidence that they are getting the sense that they need to reflect more political maturity. I am pleased to tell you that the bureaucracy in Ukraine also seems to be getting on its feet and working.
I have a pet project from which I think Ukraine could benefit. We are helping them publish an atlas of their mineralogy and geology. It is our intention to publish this atlas in English and circulate it to mining companies around the world. To that end, we organized a group of former mining executives including people like Dr. Walter Curlook, former vice chairman of Inco., Dr. Walter Peredery, a former geologist at Inco., and Terry Podolsky, a former senior executive responsible for international development and exploration for Inco. We are helping the Ukrainians put together an environment that will attract foreign investment to the mining sector.
Last week, I attended a round table with 36 people from various agencies of the government. There was a real sense that this is a worthwhile thing to do. People are cooperating among the different ministries and agencies of the government. When we started there eight years ago, we did not get the sense of this kind of communication between departments and agencies of the central government. We are also seeing more young professionals in significant senior bureaucratic positions in the government.
On the international political front Ukraine is declaring itself as having a pro-European orientation. I was in Ukraine in August on the occasion of the tenth anniversary of Ukrainian independence. I attended the gala concert where former President Kuchma spoke for quite some time. President Putin was in the audience and former President Kuchma made it a point to stress Ukraine's commitment to joining Europe in the future.
Socially, the population is becoming more realistic and is accepting the fact that prosperity will not happen in within months. When independence first happened, there was a tremendous amount of optimism in Ukraine. Indeed, in parts of Europe people thought that of all the former Soviet Union countries Ukraine had the best potential to quickly raise its standard of living. Today, Ukrainians are accepting that it is not a process measured in years but in generations. That is encouraging.
There is also a sense that Ukrainians are feeling that it is a good thing to be Ukrainian in today's environment. They are managing their economy better than their neighbours to the north have been able to do in the recent past. That is due to their smaller size. It is a country that you can get your arms around much more easily than you can Russia.
In the first few years after independence, many Ukrainians felt that they should not have voted as overwhelmingly for independence as they did. Ninety-two per cent of the population voted for independence. Today, support for independence is swinging back to very high percentages because they are starting to see the benefits of being an independent state.
That is not unlike Canada. It is good to be Canadian and to have the association we do with the Americans as we travel around the world, because we have the benefits of the knowledge, expertise and technology of North America without having the baggage of being a superpower. Ukraine also has the benefit of what its large neighbour to the north can bring without having that baggage.
When you travel to Kiev, I think you will find that it is a marvellous place. Ten years ago, I would not have said that. Today, however, it is quite a pleasant place to stay, particularly if you are staying at the Premier Palace Hotel, and I highly recommend it. It is the only five star hotel in the city. There is, however another opening soon. It will be an Intercontinental Hotel.
The city is a bustle of renovations and new building. Magnificent churches are being rebuilt. Monuments are going up left, right and centre.
I remember driving past Independence Square last week and noticing a monument that I had not seen before. I mentioned to my driver that it must be brand new. He replied that it was old; it had been there for two months. Driving a little further we approached the Kiev-Mohyla Academy and I saw another statue that I had not seen before. I asked my driver whether that one was new. He acknowledged that it was new, that it had only been there for a of couple weeks. Mayor Omelchenko of Kiev is doing a marvellous job of renewing the city and putting a lot of Ukrainian symbolism throughout.
Kiev is an amazing place to be in the spring. When President de Gaulle visited Kiev many decades ago, he was most impressed with the greenery throughout the city.
He remarked that Kiev is not a park in a city but a city in a park. That is the impression that one gets in Kiev in the spring.
Another thing that is noticeable these days in Kiev, and in other parts of Ukraine as well, is that one hears the Ukrainian language spoken more and more often. When I first started going to Ukraine more than eight years ago, it was disconcerting to hear just Russian spoken. Today, people are speaking Ukrainian. The energy sector for some reason was particularly very Russified. I could never get certain ministers of energy to speak Ukrainian. I would speak Ukrainian but they would answer back in Russian. Today, they are speaking Ukrainian. I do not have to ask for it now, it just happens.
Indeed, at this round table about which I spoke earlier everyone spoke Ukrainian. The people seem to be comfortable with bilingualism. On television, for example, the anchor in a program will be speaking in Russian. When they go to an interview, the question is asked in Russian but the answer is given in Ukrainian. We did not see that a few years ago when almost exclusively the language spoken was Russian.
The economy is doing very well. Macroeconomically, Ukraine is doing better than any other country in Europe. Former Prime Minister Yushchenko, who used to be chairman of the National Bank of Ukraine and is very much on top of macroeconomics, said to me that, indeed, Ukraine is pretty well leading the world. The GNP is up 11 per cent for the first eight months of the year. Industrial production is up 17 per cent. Inflation is around 10 per cent. The economists are surprised by it themselves. Hard currency reserves are at an all-time high.
Ukraine is showing positive economic activity for the second year in a row. Last year, it grew 6 per cent during the year. The question this year is whether it can repeat that 6 per cent. In fact, Ukraine is doing significantly better this year.
It is evident as you travel the country that many of the industrial facilities are up and running and doing something to orient themselves toward working with the West.
In the economic sphere you see more and more transparency. For instance, Ukraine privatized a number of electric distribution companies some years ago. Unfortunately, it did this with six of the smaller electric distribution companies. There are 29 of them in the country. Unfortunately, they all ended up in the hands of Ukrainians and Russians. That was not the strategy. The strategy was to try to bring Western companies in who would bring capital and Western know-how.
This time around they went about it in a much better way. They had an auction and ended up hiring Credit Suisse First Boston to place another half-dozen district electricity companies. Of course, Credit Suisse First Boston insisted on a western-style auction. It took some doing but that is what they got. The result was that they were able to bring very significant western utility-type companies into the Ukrainian energy sector.
As we do business in Ukraine, we find that transparency is now mentioned quite a bit. It is accepted. The culture is beginning to understand that is what is needed and how business is done.
Ukraine has resolved its outstanding gas debts with Russia just recently. That was a terrible weight hanging over their heads for many years.
Finally, Ukrainian officials and Mr. Putin have been able to agree on rescheduling the debt over a 12-year period, a burden that is now easy for Ukraine to handle.
The IMF and World Bank are lending again. This is a reflection of the way the Ukrainians have helped themselves on the economic front.
From a security standpoint, I do not see any threats. The borders are secure. As you know, Ukraine is active in the Partners for Peace program. At every opportunity it tries to send the signal that its orientation is to the West. Indeed, Ukraine showed no hesitation in siding with the countries of the world on the terrorist issue.
Ukraine has made friends with all of the neighbouring nations. I am not aware of any border issues between Ukraine and its northern neighbour.
Ukraine is a country worth supporting. Canada declared right from the beginning that it had a special relationship with Ukraine. That manifested itself by Canada being the first Western nation to recognize Ukrainian independence. Canada has been Ukraine's promoter to bodies such as the World Trade Organization, the World Bank, the IMF and others. CIDA has been very active in programs in Ukraine.
However, Canada does have some shortcomings as it delivers on its special relationship to Ukraine. These are in what we will call the commercial sphere. When one looks at the countries that are investing in Ukraine, Canada does not show up. The Netherlands has had more significant investment than Canada. One thing that honourable senators ought to be aware of is that our export credit agency is reluctant to do business in Ukraine and Ukraine today continues to be off-cover as far as the Export Development Corporation is concerned. That is in contrast with the Export Credit Agencies such as the ones in Austria, Poland and the Czech Republic. Those nations did not declare a special relationship with Ukraine but are open to supporting their companies through their export crediting organizations.
The only way that EDC funding is available to Canadian companies making investments in Ukraine is through something called the Canada Account. However, the Canada Account is not that simple to access.
Our own investment project in Ukraine is now within striking distance of being completed for financing. Of the $180 million U.S. that the project requires in various forms of equity and senior debt we are within $20 million U.S. of that amount. That is not a number that is out of reach for EDC, and we will be going to EDC yet again. Certainly, any assistance we can get in encouraging them to take another look at Ukraine and possibly helping that move along would be advantageous for all concerned.
This project will be the largest private, commercial, energy infrastructure project undertaken without a sovereign guarantee in the Ukraine. I think Canada should be the country that lands that first large energy infrastructure project in Ukraine.
Thank you, Mr. Chairman. I am now open for your questions.
The Chairman: Thank you very much, Mr. Temerty. It was very interesting.
Senator Bolduc: You gave us a fairly rosy picture of the place. I can understand that. Sometimes when I talk about Quebec I do the same.
Tell us about the framework of the rule of law in the country and the application of the law: that is to say, the enforcement of contracts, the independence of the judiciary, the taxation system, and the trust that business has. There is comparatively little foreign investment in the country. Businessmen are not ready to invest. I understand that the European Bank for Reconstruction and Development is so-so in Ukraine. Would you say a few words about those areas, from your experience and observations?
Mr. Temerty: I was thinking about that as I was coming here today, senator, knowing that my comments would be on the more optimistic side. That is my nature. I am a half-full kind of person. I have great difficulty seeing the pessimistic side of things. You must also understand that I also was born in Ukraine.
As to your question, senator, let me say that we have not had to access the courts. What I do know about that experience with other companies is that the Western companies who access the courts with a problem tend to win. I understand that a very significant percentage of the rulings favour the Western investor. My figures may be dated because I have not looked at them recently, but I recall that approximately 85 per cent of the rulings come down in favour of the Western investor.
I am not a lawyer so I will not get into the technical questions. However, I can tell you the country seems to be trying to build a society based on law. There is a respect for order and the rules. In our relationship with our partners in Ukraine our experience is that they observe and practice the rules. Should we ever have to go to court, I expect it would be the same kind of experience as those I have heard about with other Western companies.
Senator Bolduc: In your opinion, is it fair to say the country has taken the side of the market economy?
Mr. Temerty: Yes.
Senator Bolduc: Ukraine will not go back on that?
Mr. Temerty: There is absolutely no way of going back.
Senator Bolduc: People from CIDA came here and explained to us about a great many projects they had in Ukraine. I think that the orientation is sound with the accent on the market economy, democratic development and governance: things that are basic for a civil society. I think it is good. I see that of $300 million they have put at least $228 million in technical cooperation. Did you observe one of those projects when you were there? If so, what did you think about it?
Mr. Temerty: The only one about which I am aware is the science and technology project they probably told you about. It was chaired by a former colleague of mine from Montreal. That project was trying to capture the scientific and technological base that might have been going to waste after the collapse of the Soviet Union. It is a great effort.
Recently, I hosted a lunch for the Deputy Prime Minister of Ukraine. At the end of the lunch we had a question-and-answer session. One of the gentlemen in the audience had direct experience with that program in Kiev. He made it a point to stress that it was a positive and successful experience where the Canadians were able to tap the technological expertise that Ukraine offered and were able to do it at a very competitive price.
I am sure CIDA was instrumental in helping that happen.
Senator Austin: Thank you, Mr. Temerty, for your picture of Ukraine. I am very much looking forward to visiting that country. I wrote down the name of the five-star hotel that you recommended. I take it it is a rather new hotel.
Mr. Temerty: It dates back to almost a hundred years ago. One hundred years ago it was called the Premier Palace and then it became the Ukraina Hotel, and only recently it reverted back to its original name. They took the name of the Ukraina Hotel and put it where the Moscow Hotel used to be. We no longer have a Moscow Hotel in Ukraine. We have the Ukraina Hotel on Independence Square, and the Premier Palace where the Ukraina used to be.
Senator Andreychuk: I can assure you that this committee cannot afford to stay there.
Mr. Temerty: It is more economical than some hotels.
Senator Austin: Let me come to some more serious topics, although where one stays is always an important point.
First, what is your experience with respect to what is known as the diaspora Ukrainians? You said Canada does not show up in the investment account. I take it one fair conclusion is that Canadian-Ukrainians are not investors, apart from yourself, in Ukraine. What is the reason for that, sir?
Mr. Temerty: That is a good question. It is a lonely thing being a Canadian businessman of Ukrainian origin. There are not that many of us around. There are many of us who are doctors, engineers and professionals in general. Indeed, many are in politics.
Perhaps I can draw a parallel to the Quebec that I remember. I grew up in Montreal in the 1950s and 1960s. The thing to do in those years was to be in the clergy, or to be a notary, lawyer, doctor or engineer. Any of those careers were considered to be suitable but being a salesman was not.
It is somewhat like that in the Canadian-Ukrainian culture. We do not have deep pockets, but we are a large middle class community. There are few Ukrainians from the diaspora that can go back and do business.
Senator Austin: There was not a culture of business among the Ukrainian immigrants to Canada, and so it was a barrier to accessing Canadian economic roles, but the generation of today, I presume, has become quite active in a business setting.
Is that the principal reason Canadian-Ukrainians are not playing a role in the development of Ukraine?
Mr. Temerty: They are playing all kinds of roles outside business. For instance, Dr. Bohdan Krawchenko, a professor of economics from the University of Alberta, founded an academy for the training of government bureaucrats in Ukraine. Upon arriving in the newly independent Ukraine, he realized that the country needed training because they had less experience with autonomy than Canada did. He convinced the President of the day that what they badly needed was an institute that would train bureaucrats. He set it the academy eight years ago.
Another Canadian, Professor Bohdan Hawrylyshyn set up the first M.B.A. program in Ukraine. My foundation has been involved in setting up another M.B.A. program in Ukraine. We just launched it this September, and I am the chairman of that institution.
In many spheres, the Ukrainian diaspora in Canada has been helpful to Ukraine, but they do not show up with the dollars. Why should they? The Netherlands does not have a very big Ukrainian population, yet the Netherlands has invested significantly in Ukraine. I would like to see Canada invest and it does not matter to me whether they are French-Canadian, Ukrainian or anything else.
Senator Austin: The purpose of our study is to make recommendations with respect to the bilateral relationship with Ukraine and how that relationship should develop. On October 2, this committee heard evidence from CIDA with respect to its programs in Ukraine. CIDA is focused on two issues; some training in the economy, but mainly the fostering of the development of a civil society, NGOs, the encouragement of local enterprise, not necessarily economic enterprise, and active involvement in governance. The key words are governance and transparency.
What should our policy be? Is there some way we can stimulate diaspora Ukrainians to take a greater interest in Ukraine? Is there some policy the government could develop in that area? Would it make any sense to do so?
You are obviously well-received in Ukraine, but are overseas Ukrainians welcomed in Ukrainian life today, or are there barriers, resentments or cultural differences that would make their collaboration with Ukrainians a special problem today? I am not singling Ukraine out. There are overseas Chinese who do business in China and overseas others do business in home countries.
Mr. Temerty: There is an attitude you get from time to time in Ukraine from Ukrainians that the Ukrainian diaspora is fine and good, but what have you done for me lately? That is true.
Senator Austin: Or what do you want from me? Do I have to appreciate you? How do you want me to appreciate you? Those are the psychological conditions that can occur.
Mr. Temerty: That is right.
Senator Austin: Do you experience that?
Mr. Temerty: I do not, but I hear about it. The Ukrainian diaspora have an annual conference in Kiev around Independence Day. At the last conference President Kuchma addressed the group. A statement was made that the diaspora had not done very much for Ukraine. I understand that the President of the World Congress of Ukrainians got up and quite eloquently rattled off a whole list of things that the diaspora did do for Ukraine, both in Ukraine and back in their own home countries. For instance Ukraine was very poor in the early post-independence period. It did not have the funds to establish an embassy here in Ottawa. A Canadian-Ukrainian from Toronto bought the building that became the first Ukrainian embassy.
Indeed, there is this some tension and a sense that they believe that we have not done enough for them. Perhaps it is because they would like to see our involvement expressed in dollars. As I said earlier, the community is a professional one, it is middle class, but it is not one that can open a lot of businesses.
Senator Andreychuk: An eloquent foreign minister from Greece once said that his greatest problem as foreign minister was bridging being the gap between the citizens of his country and the diaspora of his country.
Mr. Temerty, you are in the business, and many Ukrainian- Canadians were obviously those who came over in the first wave. Those people were peasants. They were not in the educated elite class. They were good farmers and they became good farmers in Western Canada and elsewhere.
Then there was a later wave, and, finally, the wave that came after the Second World War. This group was well educated but were escaping the Soviet system. This diaspora did not have the opportunity to grow up and be able to go back to their homeland and look at it and understand it. It was certainly a country they were obsessed with freeing. Would you agree with me that part of the problem is that both sides have to learn to work together?
Mr. Temerty: Yes. That is an excellent observation. There was an interruption in the continuity between Ukrainians in Canada and those back home. In my own family's case, I never knew my relatives in Ukraine.
The interruption for my father and mother had been 40 years. Many things happened in Ukraine in those 40 years. The Greek, Portuguese and Italian people have left their homelands and come to Canada by choice. Here they have made a living and prospered. They go back to visit their homeland and are brought up to date on the situation in their home country. That was not the case with Ukraine. When Ukrainian-Canadians went back, many were shocked and surprised. They became disoriented. I recall a Ukrainian immigrant visiting with me in Toronto saying that I was not Ukrainian. I was surprised. She was right. I am not. I am really not. I speak the language and I can relate to many things Ukrainian. However, in terms of understanding her and the community and society that she grew up in, I am not the same as she is. I am a Western person. Senator, you are on the right track with your observation.
Senator Andreychuk: You have painted a picture of Kiev that I think I understand. More recently, there has been some economic movement that looks positive. Do you agree that the real test of whether the economic gains can be solidified will come if the next election produces the kind of election that shows an awareness of some of the problems you brought out? Do you believe that whatever transition there is in Parliament it will be done in a peaceful, orderly manner according to their elections system?
Mr. Temerty: The elections have been democratic, and each successive election was better than the previous one. They are growing up. The expectation is that this next one will be likely the best yet. We will see large blocks in Parliament and not the fragmentation we saw in the past. There is a potential that we may see one block be significantly larger than the communist Bloc. That is the Bloc headed up by the former Prime Minister Yushenko. He told me that his personal goal is to be elected by no less than 25 per cent of the vote in Ukraine, and anything below 25 per cent he would consider a loss.
His popularity in the country is very high. He is someone to watch out for. I have come to know him and his family and I am very impressed. They are good, solid, honest and sincere people. His attitude is that it is a sin to be a rich man in Ukraine because the country is so poor. The average wage just a couple of hundred dollars a month.
Senator Andreychuk: Kiev is certainly the exception. Outside of Kiev there is a lack of development. Land reform seems to be the critical issue and an issue that has yet to be settled. We have studied the Russian system, and it seems the oblast have a lot of control that has precluded the movement of the country forward. It has brought on the lack of the rule of law because the governors of each area have an inordinate control over appointments, courts, contract granting, et cetera. Therefore, the rule of law is very important.
Is it a replicated system in the various regions and is that one of the impediments to their progress, or is it substantially different in each region? We hear Dnipropetrovsk is a very important area and a lot of power is concentrated there, which precludes Kiev moving the way it wants to in terms of the federal government.
Mr. Temerty: It is probably not much different than in most countries. Yes, there are power blocs in different parts of Ukraine. Dnipropetrovsk is one and Donetsk is another. Kiev, Harkiv and L'viv do not play as important a role as the West thought they might play because L'viv in Western Ukraine has a better memory of independence than the rest of the country.
It is easier to manage Ukraine than it is to manage Russia. Russia, it is the largest country in the world with 10 time zones, whereas Ukraine has one time zone. As a result, the oblasts in Ukraine are run more closely to each other than the oblasts in Russia.
The Agricultural sector has been very strong this year. The numbers are phenomenal. Production is up 30 per cent. I understand that all of the agricultural land in Ukraine is in private hands. It is operated privately. If you are referring to the ownership, I do not know what the status of that law is. Some of the aggregations are too large for my taste because they have aggregated thousands of hectares, and that is not what they should be doing. They have given the land to the private sector to run. The results are very promising.
Senator Andreychuk: I will ask you directly about the issue of corruption. It is an issue that always comes up. Can you do business in Ukraine without having to get over that impediment?
Mr. Temerty: I am glad you ask the question, senator.
Our energy project required 125 different signatures to acquire the various permits and licences necessary to put a shovel in the ground. I can tell you that there has not been a nickel spent on corrupt dealing.
When I talk to other people that are doing business in Ukraine I ask them the same question and I have not met anyone who has been forced to do anything improper. The people I talk to are Canadian business people. Perhaps there is something about us Canadians but we do not know how to do business that way. I made a decision not to operate Northland Power in a number of countries for just that reason; I did not want to do business that way. I can tell you that I have not seen the corruption that is so often spoken of.
The press has made a big deal of the corruption. I am sure it is there but, perhaps, it is corruption between Ukrainians.
The Chairman: Senator Andreychuk knows I always refer to my neighbour, Ms Zurakowski. I defer to her on matters Ukrainian. I have learned that the Ukraine can be divided into two areas, Dnieper-Ukraine, which was part of the Soviet Union from the beginning and long before.
Of course, Galicia has only been part of the Soviet Union since the Ribbentrop-Molotov Pact of 1940. Galicia had always been Austrian, and the people who came to Canada many years ago came with Austrian passports. They never experienced the famine, the terrible force of collectivization that happened in Dnieper Ukraine, or the purges because those events occurred in the 1940s, after the border changed. Is this a factor in Ukrainian politics? It must be because of the enormously different tradition.
Mr. Temerty: It is.
The Chairman: Would you like to tell us about that?
Mr. Temerty: It is a factor, yes. There is a larger concentration of Russians on the left bank of what you call Dnieper-Ukraine. Any politician needs to carefully consider his strategy so as not to be cast as one or the other but appeal to both. President Kuchma was able to do that very successfully. In the first election he perceived the dissatisfaction of the residents on the left bank. There had been a tendency there to feel that, perhaps, they had made a mistake although they had overwhelmingly voted for independence. He catered to that and was able to win an election on that basis. However, he realized that his future success required that he also had to approach the Western Ukrainians and establish a political base in Galicia. He did that. He did not become president to dismember his country. He put a signal out to the west that he was very much a Ukrainian and very much a nationalist.
In the second election, the west voted for him in significant numbers. He lost some in the east but gained in the west and was able to win the election.
As the next presidential election approaches, people will be strategizing how to cast themselves as being on both sides of the Dnieper. Mr. Yushenko, for whom many people in the west have great hopes, is very conscious of that. He is especially fortunate because he was born and raised in the east. However, he took his higher education in Western Ukraine. The Western Ukrainians relate to him very well. The Eastern Ukrainians do not see him as an Eastern Ukrainian as much because they see his orientation to the west of Ukraine. He is aware of that. It should not be all that difficult for him to go back to the east and say that he is a native son and that his brother and mother still lives there. I think he can make that connection to the people in the east. Yes, that is a big balancing act in that country.
The Chairman: I have an interesting atlas about the border changes. It is not a government of one part of Ukraine. I have been told that people from Galicia do not agree with the government from Dnieper. This has been overcome; it is not a government based in one of the two regions. Is that correct?
Mr. Temerty: I think you likely heard that from the diaspora, from Ukrainians who tend to be from Galicia. I do not know that you would hear that in Ukraine. Initially, in the first term, there was that reflection, even in Ukraine, because Kuchma was so identified with Dnipropetrovsk where he had been the general manager of a very large industrial complex, including the largest missile factory in the former Soviet Union.
The Chairman: Is that where Brezhnev also came from?
Mr. Temerty: Yes, that is right.
In his early government, the people around him tended to be people from Dnipropetrovsk. One of his longer standing prime ministers was also from there. His government no longer reflects that.
Senator Austin: I should like to pursue a completely different topic with you, Mr. Temerty. You were talking about corruption in answer to some questions that were posed. The evidence we have been given is that Ukraine is ranked eighty-eighth on Transparency International's list of the 90 most corrupt countries. It is interesting to hear of your own experience.
I wanted to look at Darnitsia as a bit of a case study just so we can understand something of the economic situation there. You will take over a brown-field project and rehabilitate it, I take it, and the Ukrainian side will hold 49 per cent. Is that the equity contribution of the plant as it is today?
Mr. Temerty: Yes, that is correct.
The Chairman: It has a positive cash flow, does it?
Mr. Temerty: Today, it is kind of break-even on the cash flow.
Senator Austin: What I am looking for, as you obviously know, is whether it has leverage value in raising debt. In other words, you will use the asset today as part of the security for the debt structure that you will put together in the rehabilitating of this operation.
Mr. Temerty: That is right. The physical assets, which will be contributed by the Ukrainian side as their equity in those assets, has been evaluated independently several times, and it does not amount to a huge number. It is about $25 million, which is paltry if you consider that this plant supplies heat to 300,000 residents. The thermal value of the energy it produces is 600 megawatts. It is huge. The electrical energy produced by the plant is about 150-megawatts. Therefore, $25 million for that large physical asset is not a lot of money for the EBRD or other institutions to come to grips with, and we have no resistance whatsoever. If anything, it could be upvalued.
This is a whole new plant. Its whole financial structure changes because we could not finance the plant on the basis of the plant continuing and selling its electricity as it is doing today to the electricity marketplace at today's rates, which tend still to look subsidized. We wrote a power purchase agreement with the electricity network of Ukraine. Under that power of purchase agreement, the terms are completely different and the rate that we are being paid is the rate that we need in order to leverage the equity that will be contributed and to raise the money to build this $180 million project.
Senator Austin: You have a guaranteed price on power delivery, against which you can finance the rehabilitation of the station. Is that correct?
Mr. Temerty: Yes. We have a very solid power purchase arrangement that is probably one of the better ones around anywhere. The Ukrainians want this project. Therefore, they were willing to listen to us as we said that we needed specific terms and conditions embedded in the contract in order for us to raise the money. We are not asking for sovereign guarantees, but for the banks to lend us the money on the basis of only these assets, without recourse to any other assets or central government help.
Therefore, we asked for known electricity rates, tied to U.S. dollars, adjustable every day for the fluctuation in the currency, with the fuel as a pass-through to the electricity network.
Senator Austin: That is so that as the cost of fuel rises the price flows through to the consumer.
Mr. Temerty: Yes. It is a very solid PPA. The bankers have not been able to pick any holes in it and that is something with which I am pleased.
Senator Austin: You will be paid in U.S. dollar equivalents by the grid. Is that correct?
Mr. Temerty: That is correct.
Senator Austin: And the grid is a state entity.
Mr. Temerty: One of the more important aspects of that contract is that we have a priority call on the cash in the grid. That priority call works like this. The first cash in the grid goes to the grid itself, for the grid to maintain its operations. The second call is a small World Bank debt that the grid has. I am sure it has been amortized somewhat. It was $50 million when we first signed the contract. It is now probably less than that. We are then next in line. We are very comfortable with the grid being able to generate the cash to pay for our needs. We are an insignificant fraction of the grid today.
Senator Austin: The key is that the lender is comfortable with the creditworthiness and reliability of the grid. Is this generally the structure on which you will hopefully complete the financing of the project?
Mr. Temerty: That is correct.
Senator Austin: They will roll the power in and average it through the grid?
Mr. Temerty: That is correct.
Senator Austin: It is a very interesting project in the sense of the uniqueness of the financing structure compared with anything we have seen brought to us before. I certainly wish you total success in putting it together the way you have suggested because, apart from your own success, it would give a considerable rise to investor confidence in Ukraine if all the terms and conditions of this transaction could be adhered to.
Senator De Bané: In the last 10 years Ukraine has managed to attract something in the order of $2.5 billion. That figure is way below what it should attract in view of the size of that country. Do you agree?
Mr. Temerty: Absolutely.
Senator De Bané: Second, I would like to read a report done by an institute of economic research that was published on the Web site of the World Bank. It is about Ukraine. I would like to have your comments. I will read to you but two excerpts.
There is a general consensus among the Ukrainian govern ment and foreign donors that the existing machinery of government is not capable of designing and implementing the policies needed to achieve the government's objectives. Recent administrative reforms have generated some im provements, but the government still lacks effective levers to achieve the transition of the Ukrainian economy in society.
The other excerpt is the following:
In effect, old methods and practices have been superimposed on the new economic structure, creating a situation where the best intentions and efforts of political leaders and public officials translate into substandard performance. The prob lem, by and large, is not with individuals, but with the poor fit between institutional arrangements and social needs.
When you look at the last 10 years, would you say that this is a good assessment of where the bottleneck is? Do you agree that that country can achieve its economic potential?
Mr. Temerty: I would agree with both observations because both have elements of accuracy. The first observation, which mentions lack of effective levers in order to institute the reforms that the government wants to institute, bears largely on the question of the politics in the country. Senator Andreychuk and I spoke of it. There is a hope that with each progressive parliamentary and presidential election we will see a continuing evolution and maturation. We hope to see a situation where in parliament you will be able to have an effective group siding with the executive authority that Ukraine has not had in the past except for some sporadic periods of cooperation between parliament and the presidency.
It would be fair to say that there is a sense in the country that we have to get there because we are committed to the European option and to market reforms. There is no going back to the inefficient way Ukrainians operated in the past.
As to old methods on new structures, that is true. It is a big problem. It is changing, but it is a slow process. You go to industry and you still very often see people running the industry who came out of the old system. The only way they know how to run the facility is how they ran it back in the command days.
I have a cousin who used to be the president of a manufacturing facility outside of Kiev. He had manufactured electronics for the military establishment. He could not convert the factory into some useful consumer purpose after independence. It was frustrating to see him struggle. He was like a fish out of water.
More and more we are finding young people that are in positions of power. Last week, I visited with the chair of a Ukrainian bank and this fellow was in his thirties. He was modern looking and sounding. More and more, you are finding the young people coming in to business. However, this is a slow process.
People used to think it would be a matter of months and years. We now know that it will take generations. Some optimistic people think it might take just one generation, but perhaps it will be more than one before the country starts to approach the standard of living of other European countries.
Both observations that you made, sir, have elements of truth.
Senator De Bané: What are the main objectives of your foundation?
Mr. Temerty: It is not a Ukrainian foundation but a Canadian one. It is a charitable foundation. In the past, our donations have gone largely to the medical sphere and education in Canada. Of course, being of Ukrainian extraction, we also look for opportunities to help in the Ukraine.
I mentioned that one of the things that we did was help found a business school in the Kiev-Mohyla Academy. The school was founded in Kiev in 1615. It is one of the oldest establishments of higher education in Central and Eastern Europe. It needed a business school. In fact, Ukraine is badly underrepresented with business school graduates. It could use a tenfold, even a twentyfold, increase in the graduates it produces.
I thought it important that this old institution have a management program. The family foundation therefore was the largest contributor to starting it up.
The Chairman: Thank you very much, Mr. Temerty. Your testimony was interesting and helpful to us in our inquiries.
The committee adjourned.