Wholesale markets will conquer Ukraine

Ukraine’s Vice Prime Minister for Agriculture Viktor Slauta said during a teleconference that the cabinet would make every effort to help the agricultural wholesale market, and that there are foreign investors willing to take part in this project — if one is to trust declarations made during a recent agribusiness convention in Kyiv. The wholesale market is fairly innovative in Ukraine, and is quite effective in a number of European countries. How can Ukraine develop an effective network of wholesale markets, based on European experience? How will domestic farmers and consumers benefit from this project. More on this in the following interview with the market infrastructure expert, John MILLNS, and Mykola HRYTSENKO, wholesale market development consultant with the project “Ukraine’s Implementation of WTO and European Neighborly Policy Commitments.”

In 2009, the president of Ukraine signed the law allowing the formation of wholesale markets, yet the investors are in no hurry to make [hard currency] injections in this project. Why?

Hrytsenko: “This law became effective on January 1, 2010 — in other words, half a year has passed since it was signed. After that it was necessary to work out and adopt 12 bylaws, including important ones that altered the Land Code, namely its clauses concerning the procedures of allocating such wholesale market plots. Each such market needs a 15-30-hectare plot somewhere in the suburbs. Previously, large sums had to be paid as compensation for altering the designated purpose of such plots. Now this issue is settled, owing to changes to the Land Code.”

You presented a number of wholesale market investment pro-jects during the latest agribusiness convention. Is the European Union prepared to aid Ukraine financially? If so, what guarantees will it expect?

Hrytsenko: “French investors proposed a billion and a half euros’ worth of investment in this kind of market, in the vicinity of Odesa (with a 300-hectare plot), and a 160-hectare one near Kyiv. Apparently, we have investors, although we lack well-prepared projects.”

Millns: “The European Union doesn’t finance such projects directly, but we still have the European Bank for Reconstruction and Development and the European Investment Bank (ERDB). They issue this kind of loans. The government or a private business must apply for it and submit an investment project. The ERDB has been lending money to all EU countries over the past 15 years, specially to set up wholesale markets. Poland, for example, received enough to establish ten such markets. The European banks’ loans cover only part of the costs. Poland received 30 percent from the ERDB, 20 percent from other investment banks, five percent from private investors, and 45 percent from the government.”

Mr. Millns, you have been actively collaborating with European financial institutions. Has the Ukrainian government applied for a wholesale market loan?

Millns: “From what I know, Ukraine has never applied for such a loan. Apparently your government is expecting private business investments, rather than loans from international organizations.”

Which regions would you single out for such wholesale market pro-jects? How long would this take and how much would this cost?

Hrytsenko: “We’re advising the Ministry of Agrarian Policy of Ukraine against the construction of 24 wholesale markets. Between eight and ten such markets would be plenty for Ukraine — in the vicinity of such big cities as Kyiv, Donetsk, Dnipropetrovsk, Kharkiv, Odesa, Lviv, and Kherson.

“With regard to the cost of such projects, in 2009 our experts were commissioned by your Ministry of Agrarian Policy to develop model wholesale market projects based on European standards. Their findings showed that building a small, 20-30-hectare market would cost €45-50 billion, and I can’t tell you how long, because each such construction project has several stages.

“People are doing business in Ukraine by selling products on roadsides or at bazaars. Therefore, market research must be done before building such wholesale markets, to make sure all these vendors will transfer their business there. Otherwise you’ll end up with an empty marketplace — as was the case in Poland and France. The Poles had to pay €10,000,000 for an old bazaar, just to close it, and only then their wholesale market project started working. In France they had to use the army and police to make the vendors part with their bazaar places and move to the new market.”

Ukrainians are doing business everywhere. How would it be possible to convince them to start selling their goods on a wholesale market?

Hrytsenko: “The appearance of such wholesale markets has to be preceded by a serious public explanation effort; the farmers and the rest of the populace must understand the advantages of such pro-jects. This is precisely why we’re holding meetings with the populace, farmers, organizing [refresher] courses for them and marketing organizations, explaining the wholesale market’s pros and cons.”

How will our farmers benefit from such wholesale markets?

Hrytsenko: “The wholesale market serves to systematize and civilize the price-setting policy on the agrarian market/bazaar. Here is an example. What happened in Kherson at the peak of the fruit-and-vegetable collection season? There were trailers visiting farms, acting as go-betweens, buying their produce — tons of melons — at bargain/token prices, then selling them for a big profit. If they had a wholesale market, they would be able to sell their goods at a profit. Also, we must remember that the buyer is an inalienable component of the market. The market price is determined by supply and demand. In our case, a wholesale market will boost this price by 15-20 percent, and will have better storage and quality control facilities.”

Can the consumer expect a discount on this wholesale market?

Hrytsenko: “These wholesale markets won’t lower prices, but they will guarantee the quality of the produce.”

Mr. Millns, do you think that Ukraine will become a full-fledged member of the EU free trade area without having a ramified wholesale market network of its own?

Millns: “Wholesale markets are a way to improve the quality and safety of your products, although this isn’t a mandatory clause of effective performance within the EU free trade zone. It’s true that the EU member countries have an advanced wholesale market network. However, you have to adjust to the European market standards to do good business there. Ukraine must adopt a civilized market, rather than bazaar, way of doing business to make its products competitive.”

How do you feel about the current level of wholesale infrastructure in Ukraine?

Hrytsenko: “Given the current state of the domestic agrarian sector, wholesale markets aren’t likely to improve the situation. You can make dozens of them, but this simply won’t work because we don’t have the market infrastructure we need. Why is this important? Because 85 percent of the Ukrainian produce comes from individual farmers, from all those old men and women working their plots using their ancestors’ tools. None of them will ever access a wholesale market single-handedly. Among the [theoretical] market operators will be farmers and farmsteads with a mi-serable share in the overall fruit-and-vegetable output. These small-time producers must be organized into consortia and cooperatives.

“I believe that these small-time marketing groups should consist of 10-20 members, so they wouldn’t even need the business entity status. Their members would sign joint sale agreements and elect an individual formally authorized to negotiate business deals. Such a group would exist for a year or two, until its members gain the necessary experience. Then they can form farming co-op societies made up of 100-200 members.”

Is it possible to transfer the European wholesale market model to Ukraine? What adjustments should be made?

Millns: “You ought to bear in mind the wholesale market’s goal, not the model. I don’t see any objective reasons for this project being rejected in your country. Ukraine must simply turn down the sell-what-you-have-anywhere principle. You must organize civilized wholesale markets that will secure the supplier’s re-venues and quality of products.”

For many Ukrainians, especially rural residents, selling their produce where they may remains the only way to earn a living. How can this problem be solved?

Hrytsenko: “Wholesale markets are an element of the European farming sales model, but this model has other components: marketing groups, farming co-op societies, and wholesale and retail markets. The latter variety should appear on the district/raion level. Here individual villagers will be able to sell their produce on a par with [organized] farmers. During this year we have been helping with the paperwork for a wholesale/retail market project in Saky raion, in the Autonomous Republic of the Crimea. Another such project is underway in ARC’s Nyzhniohirsky raion. Two markets are being built in Kherson oblast.”