5.5. Reconstruction and production at factories with foreign investments

About 80% of investments were used to purchase the property rights and purchase the equipment. Thus, the opportunities to use domestic mechanical engineering were ignored. Instead, practically all of the equipment was second-hand equipment from the Western-European factories of the investors. "The Kharkiv factory is equipped not by new equipment, but by that which already has worked its term at Philip Morris factories." (Mirror of the Week, 15.03.1997). Thus, TTC bought the equipment from themselves and nominated their own prices for it. In effect, TTC used the investments to re-equip their factories outside of Ukraine with minimal expenses. Mechanical engineering in England and Germany also had reason to be pleased with the TTC investments. In Ukraine, the machine-building industry even lost the opportunity to manufacture spare parts.

However, the machines for non-filter cigarettes remained seeing as how they were running at fairly high levels of efficiency. Up until 1998, more than half of every TTC factory production was non-filter cigarettes (Fig. 5.1).

One could argue that even old western equipment is better than the domestic version. If so, all re-equipped joint ventures should increase production, while the Ukrainian factories with the old equipment should decrease production. In these cases, there were generally so many exceptions that equipment did not play a critical role. For example, in 1993-1996 RJR-Kremenchuk reduced production almost 3 times (Table 1.6), whereas for the same period the Kamenets-Podolsky factory has increased it almost twice. In 1993-1999, production both at BAT Pryluki factory and at Pheodosia factory has decreased equally by 36%. Thus, not all of the "new" equipment from western investors has appeared to be competitive.

During all of these years, the investors have constructed only one factory. Reemtsma has constructed the enterprise near Kiev in order to close their old factory, which was located downtown and had an annual project capacity of only 7 billions cigarettes. The annual project capacity of the new factory is 30 billion cigarettes. In 1999, this factory produced 15.5 billion cigarettes, and in 2000, production manufacturing decreased up to 11.9 billion cigarettes.

Thus, re-equipping the tobacco factories with investments was not the optimal option. It was possible to get established equipment of the same quality for a lower market price that would have been quickly be paid back by income. That way, the government or domestic manufacturers are able to keep full control over tobacco factories.

The reason for attracting investments was the manufacturing crisis in Ukrainian factories in the early 1990s, when manufacturing decreased from 80 billions pieces in the late 1980s up to 57,7 billion pieces in 1992. The result of the investments was that the "crisis" level of 1992 was exceeded only in 1998 (Fig 1.2). In reality, the production crisis was caused by two factors (which investments could hardly affect): 1) the opportunities to sell cigarettes made in Ukraine to the former USSR countries decreased; 2) because of the poor economic conditions a significant number of consumers made a healthy choice and quit or decreased smoking in order to have money for their basic needs. Therefore, the expectation that foreign investments could return the production level of the 1980s has appeared groundless.