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The problems in the alcohol industry can be solved only by the spirits producers. They should explain to the state what is good and what is bad for them and how the industry should to be reformed. Before WTO accession, the spirits producers do their best to be competitive with the foreign producers. Vitalii Sosnitskii, First Deputy Chairman of concern Ukrspirt, announced the main points to be changed in the operation of spirits distilleries and said what they lack for successful operation.

About changes

"A": According to the results of operation of spirits distilleries last year, it becomes obvious that the alcohol industry has many problems and requires substantial reformation. What should be changed first?

V.S.: The demand for ethyl alcohol in the domestic market is 20-22 mln dal, taking into account the production of organic synthesis products. At this stage, the expediency of spirits export to the European Union should be analysed by experts. After all, raw materials continue increasing in price, and the competitiveness of spirits distilleries in the world market is very low.

Probably, in the near future, spirits will be produced for domestic consumption and export to neighboring countries. Thus, the capacity for the production of spirits should be up to 41 mln dal taking into account the switching of production of a part of the spirits distilleries to bioethanol and spirits for the needs of enterprises of organic synthesis.

According to the requirements of the bill on the mandatory use of bioethanol until 2010, Ukraine will require 1 mln tons of bioethanol. That volume of bioethanol-based additives that our enterprises cannot produce will be produced by newly built private plants (about 720 ths. tons). It is possible that the entire production of bioethanol will be private, and it is possible that part of the plants will be owned by the state. We do not know. The financing for the purchase of equipment in order to convert some spirits distilleries has already been opened (the investor buys membranes in Japan).

There is information that the construction of new private spirits distilleries has already begun in Zolotonosha, Chernivtsi and Kirovograd. God bless them – there will be a market, there will be an offer.

We have analysed the facilities of spirits distilleries and it was found that 20 spirits distilleries can be transferred to the production of other products or closed down as spirits producers. Please, do not think that these companies will be bulldozed – we offer to put them up for an auction.

"A": What does prevent you to liquidate these enterprises right now? What's the hitch?

V.S.: As of today, there is no legal mechanism to conduct such a work. According to our calculations, the liquidation or transfer to the production of other products of 20 unpromising spirits distilleries would reduce losses by 15.6 mln UAH and increase profits of other enterprises of the region by 3.3 mln UAH.

"A": At the meeting it was said that the industry should be reoriented towards the production of industrial spirits. But how can this be done if the market for the sale of industrial spirits does not grow in Ukraine as well as abroad?

V.S.: In Ukraine, the absolute majority of spirits is used for the production of alcoholic beverages. In 2007, 96 percent of the total volume of sold spirits was used to produce alcoholic beverages, low alcohol beverages, wine and wine materials. The only way to increase the production and sale of spirits is to use it for technical needs, including as a fuel. The examples may be found in the neighbouring countries of the European Union. 75-80 percent of ethyl alcohol is used for technical needs. According to the forecast, in 2010 95 percent of the world production of ethyl alcohol will be used for technical needs and as a fuel.

The countries of the European Union exempt from excise duty in the case of observance of the requirements for the prevention of any tax evasion: if such spirit is denatured according to the requirements and is used for the production of any non-human-consumed product or vinegar, health products, as defined by the relevant Directive.

The Ministry of Finance considers that if industrial spirits will be exempt from excise duties, the state will lose revenues to the budget. But it is not so! The excess production capacities in the amount of 35-40 mln dal of spirits cannot be used in Ukraine, as the alcoholic beverages market is almost saturated. That is, spirits with a full excise duty rate are almost exhausted. It can only be used for other purposes than the production of alcoholic beverages. If we reorient towards the production of industrial spirits, we will increase profits and assessments to the budget. Plants will manufacture more products, we will buy raw materials from the agricultural sector. In addition, people will receive a salary, and the state will receive payroll taxes. Such system has a lot of advantages!

"A": Returning to the issue of bioethanol, when will it be finally produced? Why hasn't the bill still adopted?

V.S.: Currently, the bill on biofuels is being finalized in the Verkhovna Rada. It is necessary to provide for in it the mandatory use of bioethanol for the production of motor gasoline. One of the main issues is the sale of bioethanol. Now there are some high-octane oxygen-containing additives (an analog of bioethanol), produced a couple of years ago, at spirits distilleries; there is a problem to sale them. And if the bill fails to codify the mandatory use of bioethanol, then there will be problems with the sale of the product in the domestic market.

The Law of Ukraine "On Excise Duty Rates and Import Duties on Certain Goods" provides for that bioethanol is produced at spirits distilleries, and additives based on biethanol are produced at enterprises, the list of which is determined by the Cabinet of Ministers of Ukraine. In this regard, to settle the issue of production of additives based on biethanol, we have prepared alterations to the Resolution of the Cabinet of Ministers of Ukraine, where the manufacturers of additives are specified.

Abount new ideas

"A": You propose to permit a retail trade of potable spirits. What is it for? What will be its retail price?

V.S.: There is an experience of the countries of the European Union where potable spirit is sold in retail chains for household needs.

Opponents of such actions in Ukraine believe that such a product will be used by population as an alcoholic beverage. Let's make some calculations. If the excise duty is paid in full, the retail price of 1 bottle of spirit will be about 25 UAH. As 1 bottle of spirit is equivalent to 1.25 bottles of vodka with strength of 40 degrees in alcohol content, it will be 10 UAH per 0.5 liter of vodka. It is clear that for booze people can find factory-made vodka at a lower price. A high price per one bottle will interfere with the use of this product as a beverage. We already have facilities for production of such product. The equipment for the production of potable spirit is installed at Karavan spirits distillery SE.

"A": What does the alcohol industry expect from WTO?

V.S.: During the transition period each state protects itself with import taxes. But we do not worry about the expansion of foreign potable spirits to the Ukrainian market – the Ukrainian market is well formed, we have been working steadily with distilleries, so we are not afraid that some kind of "invaders" will come from outside. Most of our concerns are related to industrial spirits. For example, Russia has technologies for the production of ethyl alcohol of nonedible raw materials. We do not have such technologies – we only have technologies for the production of spirits of sugar- or starch-containing raw materials. Besides, gas rises in price constantly. But the faster gas increases in price, the faster the brains of managers of the plants work. And they implement the energy-saving technologies in less time. I cannot say that our leaders have a lack of initiative, rather, they are faced with financial difficulties. Nevertheless, in engineering terms we are gradually preparing for the accession of Ukraine to the WTO. Now, for example, Biosystem and Techinservice have concluded an agreement with our company and provide credit to Ukraine in the amount of 60 mln euro for 30 years at 4%. These funds are supposed to be used for installation of biogas units at spirits distilleries. This will replace natural gas by 52%. Earlier we polluted the environment with wastes, now we will use them for gas production. We will preserve nature and save our money. In Ukraine there are also new technologies for the spirits production, which help to reduce the electricity consumption by 30%. We are also planning to implement them.

"A": Spirits distilleries are recommended to take on loans for the purchase of corn for the whole year. How can it be fulfilled if they have nothing to pledge?

V.S.: Successfully operating plants use credit resources for the purchase of raw materials, equipment and other needs. In general, the loan portfolio of the concern exceeds 140 mln UAH. Of course, financially weak enterprises had and have problems with obtaining of loans.

"A": Why do some plants operate successfully and the others do not? What does it depend on?

V.S.: There are plants in the industry which use their capacity at 100% and some of them use their capacity at 50%, etc. If an enterprise keeps running at a steady pace (for example, a plant operates for 100% of its capacity) and does not discontinue production, then it uses less resources in product unit equivalent, and thus profitability increases.

Significant losses take place when an enterprise does not operate at full capacity and discontinues production. Therefore, enterprises which do not discontinue production save resources.

"A": And what about raw materials? Some enterprises buy them at cheaper prices, the other enterprises buy at more expensive prices. Why?

V.S.: If spirits distilleries buy local raw materials during the harvest season, it will cost them less. And there are regions where grain is not cultivated. For example, Lviv region. Spirits distilleries from such regions are forced to carry raw materials from other regions and this increases the cost of them. For example, by convention, if corn costs 1,000 UAH in Donetsk region, then it will cost 1,050 UAH in Vinnytsia region and 1300 UAH in Lviv region. So, the transportation costs significantly influence the raw materials cost.

"A": Taking into account that fact that spirits can only be produced by state-owned plants, it turns out that spirits supplied by your enterprises become shadow, doesn't they? What about enhancing control, or what is the way to deal with it?

V.S.: There is a tax post at each spirits distillery, which every hour records the consumption of water, fuel and the release of spirit. It also provides permission to send products. At some enterprises that have been idle for a long time, the tax posts stay and secure some scanty amount of goods. What other controls should be provided? We support the initiative of the Ministry of Finance to introduce the electronic record for spirits production at the plants. This will permit to avoid the human factor, and not a person, but a machine will keep records. It is necessary to introduce the electronic record not only at the spirits distilleries but also at alcoholic beverage enterprises.

"A": Where do shadow spirits come from if the control is so strict?

V.S.: Theoretically, there are two ways: one way is re-export. In addition, in 2007 there were facts of detection of spirits thefts for 60 ths. dal at Karapchiv spirits distillery and for 100 ths. dal from the State Reserve. These are products for the shadow production of vodka. I remember the wise words of Yurii Zhikharev, the Vice-President of SOVAT Association, who said: if there is a demand, there will be a supply. It is not necessary to assume that the state is a bad manager. It's just that such conditions have been created in the market that it is profitable to produce shadow spirits. If alcoholic beverage enterprises had not bought shadow spirits, no one would have produced it. Or if spirits were sent abroad, and they would not return. Moreover, it is not our fault that spirits return back. The product is accompanied by customs security to the border. How else can we control where it is supplied to? Our task is to produce and send. The same situation is observed with the spirits turnover in the domestic market. When we have shipped alcohol, it would be accompanied by the tax service to the customer.

"A": What does prevent VAT recovery for exporting spirits distilleries? Why do such problems arise? How can the State Tax Administration of Ukraine be forced to pay due amounts?

V.S.: This question should be addressed to the tax authorities. As of today, the State Tax Administration of Ukraine owes the alcohol industry 26 mln UAH. Lokhvitsa Spirits Distillery can serve as an example. Very large arrears of salaries are observed and the company did not get the VAT recovery. The same situation is observed at many enterprises. The Ministry of Agrarian Policy and the concern have repeatedly appealed to various competent authorities, but the issue has not been resolved

"A": What's your attitude towards privatization of spirits distilleries?

V.S.: A change of ownership will not have a significant effect on the alcohol field. The problem is of another kind. The ranking of the best enterprises in the region upon financial and economic coefficients showed that according to the results of 2007, 27 of 30 enterprises, which in 2006 ranked from 1 to 30, retained their leading positions. That is, a list of successful enterprises has been formed in the region and there are enterprises which move to the group of the best or worst ones. To settle the question, it is sufficient to reduce the number of plants which produce spirits. Spirit is the main component of the wonderful Ukrainian vodka. There are shadow spirits in the market. I am convinced that private structures are more adapted to the elaboration of tax evasion schemes, and therefore the feasibility of privatization is possible under the condition of unshadowing the alcohol market. Therefore, discussions on privatization are in a political plane. By the way, the question regarding the liquidation of unpromising spirits distilleries is also in this plane.

And in conclusion, I would like to note that in spite of difficulties, the spirits manufacturers take measures aimed at resources saving, introduce into production new types of products and have embarked upon a program for the production of bioethanol and biogas. I can safely say that we will keep on ensuring the proper quality of spirits, which will bring more than one distinction to the Ukrainian vodka.

Source: Excise duty