Borys Shestopalov: “Investing in Ukraine is considered a great thing, but it should be common practice”
Boris Shestopalov, co-owner of the “HD-group” group of companies (until recently – “Hlibodar”), investor and philanthropist, about changes in his business, in the country and the minds of people.
In December 2019, the “Hlibodar” group of companies announced its transformation into “HD-group”. In January 2020, “HD-group” joined the Promprylad.Renovation investment project, the first project in Ukraine meant to attract private investments to turn an abandoned Soviet plant in Ivano-Frankivsk into a modern business cluster. And in February, “HD-group” announced the creation of its own $20 million investment fund to expand its business across the country. 5-10 years ago nobody could have been predicted how successful this, still regional at the time, the company will become in expanding the area and profile of its operations. More about the transformation of “HD-group”, changes the business climate in the regions should undergo, “Prozorro for business” and Khortytsia Island as a sacred place told Boris Shestopalov in the interview to Getman Media.
— The transformation of “Hlibodar” into “HD-group” took more than 2 years – from 2017. What has happened to the companies during this time?
If someone has taken the difficult path of transformation and thinks that this road has its end, they are strongly mistaken. Transformational processes never end. There are no limits to finding operational performance …
When a company has more than just one core business, it becomes clear that there is a basis for separating similar businesses into one cluster. Today, the speed of decision making in business is constantly increasing, so cluster development is impossible without giving it sufficient independence. The transfer of rights and powers also requires the establishment of a framework of authority, limits of responsibility. And these boundaries and frameworks are the set of operating indicators. Thus, we are working on the creation of an econometric model to get this up-to-date data. There are many of them and each indicator shows either operational efficiency or inefficiency.
Moreover, today we are delving deeper into operating processes to turn our expenses into profit centers. For example, a logistics business unit has always been expensive, and today it is also profitable. This unit has all the necessary tools and indicators for both – delivering our products and making money.
— What let you to these changes?
First of all, these changes were driven by the need to comply with time and changes in conventional hierarchical structures. On the one hand, the growth of companies and the demands of the digital age, on the other, have led us to believe that there is a need for transformation. It became obvious for us that we could no longer grow in the outdated framework of a simple hierarchical model, with just one CEO. Thus, a cluster-matrix structure emerged. It was the result of the first phase of transformation.
Apart from that, for some time already we were ready to grow from a regional company into a national one. And this factor has also led us to transformation.
To build a business in other regions, and then effectively manage them, requires high autonomy of enterprises in different regions. When we bought a company producing toppings and fillings in another region, we hoped that it would extend our production chain as there was a demand for products with various fillers. However, the company turned out to be a self-sufficient business with its own challenges, specificities, and markets. So, on the base of this enterprise, we began to test the tools of managing “related” production – through econometrics and external services.
For example, to increase procurement efficiency, we first created a centralized unit. It was difficult to manage it without the IT platform that we use today to make all of our purchases. Yet, soon enough, this platform has become a tool that is actively used by other businesses, not even in our industry and is called Trade Hub.
They come here because it is transparent and profitable. It is like a ProZorro public procurement site, but for business.
Afterward, we started creating various procurement pools: when we hold a large tender, our partners can join it – and get the product at a better price. We also test factoring services (simplified: crediting of sales transactions, – editor’s note).
— What are the next plans for the group of companies?
We plan to acquire some enterprises in our segment or sites for the development of such enterprises. I think that by the end of this year we will be able to confidently call ourselves a national company since the companies belonging to “HD-group” will be located throughout Ukraine.
— The news reports on the creation of “HD-group” were about shifting focus to the B2B segment. Does this mean that you will be getting out of retail?
In such a way, we are honestly formalizing what is already a reality. We are just calling things by their names. We could say that we work in B2C if we sold our products directly to end consumers through our own retail network. But our retail network has limited capacity and it has a more marketing role in this communication with consumers. And more than 90% of our sales are sales to non-end customers. In fact, only national retailers have “access” to a consumer who directly puts the money in the till and makes a conscious or unconscious choice of product. Our “client”, on the contrary, is more likely to be a market shelf.
— Just a few weeks ago, “HD-group” announced the creation of a $20 million investment fund. What projects will this fund consider?
As of today, this fund is, conditionally, closed. It only contains money from the shareholders and the company itself. There is only one main goal of the fund, that is to acquire the enterprises of our sector in Ukraine in the next two years. Part of the investment will also go into the development of the service business. About our first acquisitions, I think, we will announce in March.
— “The investment climate in Zaporizhzhya leaves much room for improvement”. These are your words that you said in media communication in the spring of 2013. What has changed since then, for the better? How could this climate be improved?
First of all, I would like to point out that my words were not only about the investment climate of Zaporizhzhya but also about the investment climate in Ukraine at the time. It would be wrong to say that nothing has changed or that it has changed for worse. Only a cynical person would not notice the changes, for example, in the fight against corruption or in reducing the rates of the NBU. Surely, we all want miracles, immediate improvements. But it is impossible to create anything quickly. Therefore, the business climate in the city and the country slowly but is improving.
It seems to me that the history of Zaporizhzhia is rather sad because the city has always been a “trophy” that comes under the influence of one region and another.
We, the citizens of Zaporizhzhia, do not yet have such a strong self-identification as people in many other cities do. These people tend to say with pride: “I am from Dnipro, from Lviv, from Vinnytsia”. And that stands for something.
As for improving the business climate: for quite a long time I treat the authorities more like a service. The business will create itself, but it is important to have favorable conditions for that to happen. It seems to me that the city and regional authorities should focus more on infrastructure development. For locals as well as for business: improve communications, roads, equip the area … The best business climate is when there is street lighting, good roads, greening throughout the city. And I can see that work in these directions is well underway.
— Since we started talking both about the greening of Zaporizhzhia and the business climate in the city, it would be interesting to know your opinion on the events that are unfolding around the so-called “Kaltseva Shopping center”. Especially knowing that you also have your own business in the commercial real estate sector. The city is still in a stalemate situation: there is neither a park nor a mall. And the townspeople are already divided into two camps – those who are “for the park” and those who are “for the development of business”.
It seems to me that there are too many speculations around this project. Is the construction of a shopping mall good in its way? Whatever the case, such projects usually benefit the city: it is difficult to even calculate how much investment will be attracted in general and how many new workplaces will be created. Certainly, any construction will be linked to a change in the ecosystem. But without construction anything, it is impossible to develop!
As far as I am aware of the details of this project, the shopping center includes the creation of a landscaped park, which by the number of trees and plants should completely “offset” that part of the green area where the construction is planned.
Thus, the mall cannot be commissioned until this park is built as promised by the Developer.
The city government has enough tools to meet these public-facing obligations. There must, of course, be dialogue and compromise between government, business, and the public. No speculation on either side. But we still need to understand that construction in the city is good, the implementation of such projects is also good. Investments will take Zaporizhzhia to a new level. For now, as you probably know, major developers are reluctant to consider Zaporizhzhya for their projects. And in the meantime, the city lags behind both the number of commercial and the number of residential real estate per capita.
However, what angers me the most is the constant talk about the possibility of the active development of entertainment zones on Khortytsia Island! I understand that Kyiv is in a “turbo mode”, but legal nihilism is sometimes just off the charts … Everyone knows the status of Khortytsia: it is a protected land on the territory of which economic activity is forbidden. Yes, there are several recreation facilities where it could, theoretically speaking, be possible to create an entertainment business, but once again, only with strict compliance with environmental regulations. You see, you can create or rebuild a park in the city center, but it is impossible to recreate “relic” Khortytsia. Not to mention that Khortytsia has been a ritual and sacred center for about two millennia. Speaking of tourism, there is no tourist amusement parks will surprise you nowadays, unlike the reserve and unique historic site in the city center.
Besides, I don’t quite understand why to invest in the center of a developed city, but not where it is needed. Kyrylivka, Henichesk, Berdiansk – the coast of Azov Sea has a very high potential, but for years the problems could not be solved. With water supply, sewerage, transport infrastructure. There are already created modern recreation facilities, hotels, water parks … Super projects! Why not continue to develop this and not invest there? Take a look at the history of Las Vegas: the money was sent to the “desert”, where there was almost nothing but great potential.
— You are the owner of the “Gamma” plant in Zaporizhzhia, future of which (more precisely: the future of the real estate complex in the city center) is of a great interest to many local citizens. What renovation plan are you preparing for these buildings?
“HD-group” has recently joined the Promprylad.Renovation investment project. This initiative is very inspiring: an innovation center on the premises of an old plant in Ivano-Frankivsk, which will integrate business and social projects in IT, urbanism, education, and the creative economy. It is certainly a business project and investors will receive dividends. However, the project itself will also work for the development of the territory.
Another reason why this project is interesting for us, that is a similar renovation should take place in the territory of the “Gamma” plant in Zaporizhzhia. The renovation concept has already been developed by “Forma Architect”, the company that worked on Promprylad.Renovation. Yet, the concept still requires some details. As of now, I can tell that as a first step we plan to open the plant area and make a landscaped park where events like a food festival or a concert can be held. In the future, we will develop the project in basic directions: IT, education, etc. I can assure you that it will not be just a business center.
For example, we want to create an ecological cluster. Here can businesses in the environmental field (recycling, eco-production, etc.) be situated. Not to mention that different environmental public hearings, meetings, and lectures can also be held here.
I believe that it can be implemented within three years. There are all the possibilities for this. We would like to make this renovation in close cooperation with the city and, therefore, we will present our concept of the city.
— You are currently heading the Honorary Consulate of Austria in Zaporizhzhia as Honorary Consul. What “success stories” in this institution could you highlight?
Let’s primarily highlight the main functions of the Honorary Consul. First of all, it is to help the citizens of the country of consul you are, in this case, Austria. Fortunately, there were few such critical situations among Austrian citizens in Zaporizhzhia. Another function is to facilitate the work of the Austrian ambassador. It is worth noting that, on the one hand, the consulate in Zaporizhzhia is the last Austrian consulate in the east of the country. And, on the other hand, the territory around Mariupol is a focus of close attention of the Austrian Republic. Besides, Austria is a country of major importance for the OSCE: the OSCE Secretariat is located in Vienna, many of the organization’s staff are Austrians. Therefore, some of my activities as a consul are related to the Donbas, such as escorting or delivering humanitarian aid.
In general, the consulate is a bridge between the two countries on very different matters. Last year, with the support of our institution, the documentary “Austria: Civilized and Decentralized” was filmed, where we showed real decentralization in Austria through the eyes of ordinary Austrians and Ukrainians who moved to this country. We visited very small Austrian towns, even with a population of less than a thousand people, who still have their cultural centers, museums and more.
It shows that true decentralization does not occur in the laws, but in the minds of the people. When they realize that they are the masters of their destiny, they understand that the vote for the mayor is the vote for their destiny.
From the consulate’s cases that I would like to highlight, I would tell about the assistance to the Zaporizhzhia military hospital in 2014. At that time, the hospitals had to be equipped with everything necessary. And in a very short time, we managed to get humanitarian aid from Austria: several dozen beds, mattresses, blankets, and other furniture needed for the medical establishment. Then I truly experienced that the international connections were working.
There were often requests from Austrian businessmen for contacts with the previous city authorities. At that time, I personally made efforts to arrange negotiations on both the creation of temporary settlements for displaced persons and the construction of a garbage processing plant… Although at the time everyone, who only could, used these projects to promote themselves. Yet, for various reasons, these contacts and initiatives have been put on hold.
And here we can return to the topic of investment. In 2014-2016, there was a real “trend on Ukraine” in the world. But if we had promoted reforms quickly and had not put private interests above social, we would have attracted much more investment. Now, after having spoken to various investors, I can state that there is “tiredness” from Ukrainian woes and uncertainty. And because of many factors, it is difficult to expect foreign investment today. But we should not forget about the domestic investor. It is necessary to demonstrate that the local authorities are doing their best for this inward investor to invest in his|her region and country. So far, “Investing in Ukraine is considered a great thing, but it should be common practice”.