Small and medium enterprises (SMEs) in Armenia cannot thrive without external capital to make investments. FMO and DEG provided the country’s first investment bank with a long-term US$30m loan. ‘It is our role as a development bank to show them the opportunities of SME financing.’
In December 2009, FMO and Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG) provided Ameriabank with a long-term US$30m loan, equally shared between the two DFIs. Ameriabank is the first investment bank in Armenia and since 2007 has been offering an extensive range of innovative banking products. For FMO this loan agreement represented its first-time presence in the country. US$20m of the loan was destined for small and medium enterprise financing.
About a half hour drive from Armenia’s capital Yerevan is fruit-packaging company Ararat Fruit. The owner of this medium-sized enterprise, which was financed with the SME tranche of the loan to Ameriabank, proudly serves his own grapes and grape juice as if it were a wine tasting. Women in impeccable blue coats neatly package the grapes, tomatoes and other fruit and vegetables. The products will not be transported in the usual wooden crates and pallets, but in polystyrene foam instead, chosen by the company because it weighs less and is therefore much cheaper.
With six shiny refrigerated trucks on the premises and plans to use the company’s residual heat for its own power supply, one might think that entrepreneurs like this can get along very well without the help of banks such as Ameriabank. According to Cornelis van Aerssen, Investment Officer at FMO, this is not the case. ‘These entrepreneurs have limited access to finance and they need external capital to make investments and keep their businesses healthy. Many banks in emerging markets tend to focus their activities mostly on the larger corporates, whereas they have an important part to play in supporting the entrepreneurship that is typical for SMEs. It is our role as a development bank to show them the opportunities of SME financing and provide them with the means to develop products for this specific target group.’
Further inland, in a fairly dry, uninhabited and rocky area, is a fish farm. This company is headed by another exemplary entrepreneur who manages to run a business thanks to the SME tranche of the Ameriabank financing. Levon Arevshatyan, Ameriabank’s director for corporate customers: ‘It is hard to believe that it’s possible to run a decent business in this area, which is basically in the middle of nowhere. But it does provide employment for 27 people (8 of whom are part-time or seasonal) and it supplies the Armenians with homegrown crawfish and trout, which are also exported to the CIS and Europe. The company is planning to start a packaging production line and once the new packaging equipment is installed the number of employees will further increase by five.’
Renewable energy resources
The remaining US$10m of the FMO/DEG loan was destined for renewable energy financing. The vast majority of energy in Armenia is currently being produced with fuel imported from Russia, including gas and nuclear fuel (for its one nuclear power plant). With no fossil fuel resources of its own, Armenia is completely dependent on supplies from outside, which led to an energy collapse in the early 1990s, leaving the country with virtually no energy for three consecutive years. A nuclear and a thermal power plant together generate 80% of Armenia’s energy and will close in 2014 and 2016 respectively. At the same time, Armenia has considerable renewable energy resources such as hydro, solar, wind and geothermal, with hydro as the main domestic energy source.
The search for alternative energy sources in view of global warming has become a pressing issue. Although Armenia’s renewable energy options cannot in the short term match the operating and planned nuclear plants in terms of efficiency and economy, in the long run the future of the energy industry belongs to solar and hydropower. With its many mountains and rivers the country has vast hydropower potential. The legal framework for the development of renewable resources is in place: Armenian law stipulates that the purchase of renewable energy is mandatory at fixed and transparent feed-in tariffs.
The FMO/DEG renewable energy loan is meant specifically for financing small and medium hydro- and wind power stations under construction. About half of the loan will be allocated to greenfield projects and the remainder to existing projects. One of the projects is a small hydropower plant located in the Vayotz Dzor region of Armenia. The installed 2.875 Megawatt capacity of this Small Hydropower Promotion Project (SHPP) is calculated to generate sufficient electricity annually for approximately 1.300 households. The other small hydropower project is located in the Lori region of Armenia. The installed capacity of this SHPP is 4.26 Megawatt, providing an annual electricity supply for approximately 3.000 households.
Environmental and Social Management System
With sustainability being at the core of the development bank’s strategy, FMO asked Ameriabank to consider developing and implementing an Environmental and Social Management System (ESMS). FMO has seen proof that financial returns and E&S-ratings correlate in an almost linear way. That is why the development bank decided to develop the implementation of an ESMS into a business case. Ameriabank has set an example by implementing an Environmental and Social Management System (ESMS) within a record time of three months. As a result, FMO and DEG granted Ameriabank a reduction in the interest rate of the facility signed between the three institutions in December 2009.
Implementation of an ESMS means committing to comply with local and international environmental and social regulations, and with worldwide best practices applicable to its operations and business services. With the assistance of a grant from FMO’s Capacity Development (CD) Program, which it manages on behalf of the Dutch government (Ministry of Foreign Affairs, Directorate General International Cooperation), Ameriabank selected external consultant FI Konsult s.r.o (from the Czech Republic) to help build the ESMS. Van Aerssen comments: ‘This is the first time a “margin-reduction-incentive” scheme has been implemented by FMO. Ameriabank exceeded all expectations and implemented all requirements within a record three months. The appointed environmental and social consultant even called Ameriabank: “The best organisation I have ever worked with, with the most committed persons within any financial institution I have ever worked with.” In the meantime, FMO’s client Supervielle in Argentina has also received a margin reduction due to the implementation of an ESMS and we hope these examples will help spread this best practice throughout all regions.’
The Armenian economy relies heavily on investment and support from Armenians working abroad. Cash remittances sent home by Armenians abroad account for 15% to 30% of GDP. On the other hand, many entrepreneurs of Armenian origin (an estimated 8 million in total, which greatly exceeds the 3 million population of Armenia itself) are now returning and opening businesses in their country of origin. Because the investment climate is still quite rough, with risks such as corruption and lasting conflicts with neighbouring states lurking in the background, it is vital that Armenia’s economy is fed by its own private sector. The Armenian economy is expected to grow by 4%-5% over the next years, which implies that banks are going to need fresh capital and liquidity.