Editor’s Note: The following is a speech by Thomas Mirow, president of the European Bank for Reconstruction and Development, to the Domestic and Foreign Investors’ Advisory Council on June 23 in Kyiv, chaired by President Viktor Yanukovych.
President, Excellencies, Ladies and Gentlemen!
I have the honor to speak on behalf of the foreign investors around this table.
I would like to start by thanking President [Viktor] Yanukovych for establishing this Domestic and Foreign Investors’ Advisory Council. This initiative can play a leading role in helping to unleash Ukraine’s untapped growth potential.
The focus of the activities of this council will be on making Ukraine a competitive and successful country in which to live, work and invest. We are all honored to be part of this endeavor.
The challenges facing Ukraine are immense, and the ambitious goal the president has set for the country – becoming a member of G-20 at the end of the current decade – is only achievable through the adherence to market-based economic principles.
On behalf of foreign investors, I would like to highlight seven key priorities that we believe should be addressed quickly to ensure that Ukraine regains the competitive edge that has been eroded somewhat during the recent global financial turbulence.
The most important element is to create and sustain a favorable investment climate that applies equally to domestic and foreign investors.
Ukraine is a country of huge opportunities, but to innovate its economy it needs to attract investment and expertise.
After the dramatic slump in 2009, Ukraine returned to growth in 2010 largely due to higher commodity prices and stronger external demand. Re-engaging with the IMF [International Monetary Fund] sent a strong message of stability.
This demonstrates the crucial importance of maintaining an open economy and further developing trade partnerships in all directions and in accordance with the WTO rules.
On behalf of foreign investors, I would like to highlight seven key priorities that we believe should be addressed quickly to ensure that Ukraine regains the competitive edge that has been eroded somewhat during the recent global financial turbulence.
1. Fighting corruption
Addressing the systemic and pervasive corruption that plagues the Ukrainian society will be the most challenging but also the most important task. Corruption touches the lives of every citizen at every level from education and health care, to business and government.
In the years since Ukraine’s independence many laudable things have been said about combating corruption. In this context, we welcome the recent adoption of the legislative anti-corruption package, but the key issue, and I cannot stress this enough, is its determined implementation.
New rules to protect citizens and businesses from corruption will need to be developed and people who are engaged in corrupt activities need to be prosecuted, especially those who are in elected office and who are abusing the trust of the people. Corruption is undoubtedly the biggest impediment to Ukraine moving forward in economic development, becoming more competitive and attracting much needed investment.
There are numerous ambiguities in existing legislation that leave room for interpretation and open the door to corruption.
Through ongoing administrative reform, it will be essential to undertake a full operational and organisational review of the public services – ensuring a clear separation of the regulatory and commercial functions of each governmental body and state-owned company, the abolishment of inefficient functions and establishment of strict mechanisms to control the proper execution of the civil service functions as prescribed by the law.
2. Judiciary reform, strengthening law
The rule of law is the cornerstone to all successful and competitive economies. To achieve the primacy of the rule of law in Ukraine, the judicial branch must be transparent and staffed with well qualified professionals who understand the importance of their role in strengthening rule of law.
3. Tax administration, VAT refund
We welcome the adoption of the new tax code, and are closely following the amendments that are now under consideration at the Verkhovna Rada.
Addressing the inconsistencies of tax administration, and the overdue VAT [value-added tax] debt in particular should now be the key issue on the agenda.
To enable Ukraine’s export oriented industries to compete in the global markets, the state must meet its obligations for VAT refund in accordance with the law.
The automatic VAT refund system must really be operational not only available for the “chosen few” but rather for all companies, both domestic and international.
Further improvements should include abolishing the use of the so-called principle of joint responsibility, through which honest taxpayers can be made responsible for the tax evasion of third parties.
4. Simplification of trade, customs
An efficient, transparent system of customs clearance that used the highest standards of integrity is an important precondition to foster trade, investment and development. Making progress in this clearly defined area could go a long way in improving the business climate.
New rules to protect citizens and businesses from corruption will need to be developed and people who are engaged in corrupt activities need to be prosecuted, especially those who are in elected office and who are abusing the trust of the people.
On behalf of the foreign investors I propose three practical steps:
Move to electronic documentation for customs clearance and control.
Use transparent definitions of customs value and improve the procedure for the definition of royalties and inclusion into customs value.
Adopt the new Customs Code harmonized with WTO [World Trade Organization] principles and EU [European Union] best practices.
To remove further barriers in trade, Ukraine would benefits from recognizing European certificates without additional inspections, including for the food safety system based on the similar EU norms.
Mr. President, I would now like to make a few points concerning specific sectors that my colleagues will surely elaborate on in their own interventions.
5. Developing more efficient, competitive agricultural sector
A growing global population is raising a food security problem but also provides an opportunity to Ukraine to double its agricultural production in the next 10 years by attracting investment to introduce new technologies, better equipment and inputs.
The sector needs significant private investment that will only materialize if Ukraine provides a predictable, transparent and market-based environment.
Recent developments towards the monopolization of grain exports have raised serious concerns. These measures seriously threaten Ukraine’s opportunity to become one of the major global food suppliers. Equal treatment is of the essence, irrespective of how well-connected they are or how close to the state.
Furthermore, creating reliable legislation for Ukraine’s land market is of the essence to unlock Ukraine’s agricultural potential. Farmers need to be allowed to own and trade their land in order to access to financing.
An important step would be to cancel the moratorium on the sale of agricultural land and to adopt the laws on land market, on state land cadastre and on land auctions.
This would contribute to the development of an efficient and highly productive agricultural sector that would, in turn, become one of the main engines of Ukraine’s economic development and improved international competitiveness.
6. Improving energy security, efficiency
We welcome the improved dialogue and the easing of tensions with Russia, which caused serious disruptions to gas supplies in 2009. The task now is to build on this progress and address the crucial issues of energy efficiency and security in Ukraine.
We believe that now is a historic window of opportunity through which the country can embark upon systemic and comprehensive reforms and, in turn, attract investments which will support the development of a more competitive economy.
I would suggest to give first priority to improving energy efficiency, because this will at the same time improve energy security, reduce costs, and protect people’s health and the environment.
Secondly, it will be important to stimulate investment in the oil and gas sector. As a first step, transparent licensing for domestic exploration of hydrocarbons needs to be introduced, both onshore and offshore, giving investors all the information necessary for assessing the offered fields.
A consistent legislative platform is needed to encourage investment. The current situation, in which conditions for exploration and production are governed by the annual budget law, does not facilitate the much needed investment.
7. Strengthening banking, developing local capital markets
Renewed stability and trust in the banking system is critical for the economy to recover from the crisis. This can be accomplished through consistent enforcement for all banks of the minimum capital and capital adequacy ratio levels.
Compulsory IFRS [International Financial Reporting Standards] accounting standards in the financial sector will give confidence in the integrity and comparability of financial statements and will harmonize the provisioning rules at banks.
Ensuring independence of the regulators and supervisors as well as improving relevant laws and regulations should be another priority.
Lending remains subdued: the banking system is yet to generate sustainable loan growth.
Structural reform in the banking sector is a key challenge going forward. Liberalising foreign exchange rules, developing foreign exchange hedging instruments and developing long term local currency instruments should remain as priorities in the financial sector.
To summarize, Mr. President: By improving the political and institutional stability in the country, your administration has fulfilled an important condition for further progress.
Now the opportunity exists to build on this vigorously and determinedly and to create the conditions for unlocking investments – foreign and domestic – to make Ukraine flourish.
We believe that now is a historic window of opportunity through which the country can embark upon systemic and comprehensive reforms and, in turn, attract investments which will support the development of a more competitive economy.
Thank you for your attention.
