Nearly three years in the making, Ukraine’s strategic sector competitiveness report has finally been unveiled by the Organization of Economic Cooperation and Development.
While taking note of the numerous local troubles, the report identified four highly competitive sectors on which investment in Ukraine should focus.
Ukraine’s OECD sector competitiveness strategy report was launched in early 2009 to identify promising, high-growth areas that could attract high levels of foreign direct investments.
This, the reports organizers hope, will provide a basis for sector-specific policymaking in a second phase of cooperation between the government and the OECD. The selected areas are agriculture, which is divided into two groups – grain and dairy, plane construction and biomass electricity production.
With 31 million hectares of some of the world’s most fertile land, the most of any European country, and proximity to major markets in Europe, Russia and the Middle East, agriculture is Ukraine’s traditional specialty.
This goes not only for grain but also for dairy produce, which the OECD estimates to grow by a quarter in the upcoming decade.
Yet low production costs, roughly half of those of European producers, are stilled outweighed by a lack of financing that could boost productivity. Quality also remains an issue: Of the three quality grades of Ukrainian milk, even the highest falls below the European Union’s standard grade.
This could be addressed by relevant policies, including land market reform, developing institutional support and abstaining from mercurial moves to restrict exports. “Policy has not always been as predictable as investors would want,” said Antonio Somma, head of the Eurasian Competitiveness Program at the OECD.
Ukraine’s membership in the exclusive club of airplane-producing nations should also be turned to the country’s advantage, Somma said.
The country has a strong reputation in aerodynamics, notably wing design. Yet Antonov’s 10 deliveries in 2009 were dwarfed by Boeing’s 498, or even the Brazilian Embraer’s 122. For this to change, the OECD recommends a clear separation of civilian aircraft manufacturing from the military industry and greater promotional activities.
Biomass electricity production is the final pick. The economic potential of Ukraine’s agriculture waste is equivalent 14 million tons of coal, almost a fifth of national output. That makes biomass, which should be used as fuel within 80 kilometers of production, particularly promising in the Ukrainian context, Somma emphasized.
Antonio Somma
The country is mainly flat, he noted, with a roughly uniform spread of agriculture activity, making transportation and utilization by municipal heating companies convenient.
The report highlights the usual suspects when it comes to Ukraine’s competitive edge: strategic location, cheap yet well-educated workforce and abundant natural resources.
The stunning 7.5 percent average growth in 2000-2008 is a clear indicator of the country’s potential. Yet a worsening business climate and high exposure of external shocks may make it difficult to convince foreign capital to come.
But not impossible.
The International Monetary Fund predicts emerging markets will contribute 80 percent to global growth in 2012, a fact well-known to investment funds.
A recent report by international auditor Ernst & Young found that top financial executives are increasingly turning to rapid growth markets for future income if only they can find reliable information on what is happening on the ground.
Deputy Economy Minister Volodymyr Pavlenko said Ukraine has made strides toward becoming more investment friendly and hopes to join the OECD in upcoming years.
But with notoriously low levels of transparency, a deteriorating business environment and a fraction of the per-capita wealth of even the poorest OECD members, this seems unlikely. Programs like the state-run “Invest Ukraine” project are laudable, but have yet to prove their credentials. Meanwhile, current investors complain of growing corporate raidership and lack of government support.
How investors can get exposure to these sectors is another question.
While there is an abundance of listed agricultural companies whose shares can be purchased, biomass and aeronautics are tougher to get into. Plane building, in particular, will likely remain in the state’s preserve.
In turn, biomass electricity production would probably require the privatization of municipally owned utilities. This would be “technically difficult, or even impossible,” according to Ildar Gazizullin, senior economist at the Kyiv-based International Center for Policy Studies. The solution would be some as yet undefined form of public-private partnership.
Government also shows a lack of understanding for its role in the project, Gazizullin said, defining the levels of expected investments rather than implementing policy to encourage them. “Government thinks about how much money to invest, but it’s not them, but [rather] the private sector that should be investing,” he said.
The ball is now clearly in Ukraine’s court. As Mirja Petersen, the country director for the Swedish development agency which financed the study, pointed out: “Sweden finances, the OECD provides expertise, but at the end of the day it has to be Ukraine that initiates the reform process.”
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected]
