If the government wants to play a constructive role in helping Ukraine out of the economic crisis, it should develop a better strategy than the current one. It should create a world-class business environment for both domestic and foreign investors.
In October, the Cabinet of Ministers approved a series of investment projects that the government thinks are strategically important to Ukraine’s economy. The idea behind this is that government experts are capable of selecting priority investment projects, whose business plans would then be approved by the Cabinet of Ministers, and marketed to international investors by a special government agency, UkrZovnishInvest. By doing so, the government hopes to raise $7 billion, or roughly 60 percent of the $11 billion in foreign investment anticipated in 2010.
Specifically, the government plans to market its “priority” projects by means of conducting road shows in “42 global financial centers” (Dzerkalo Tyzhnia, Dec. 25, 2009.) The goal is set to attract as much as $5 billion in foreign direct investment in 2010. They also plan to create a government-run “investment-project exchange,” where investors could select from among 5,000 projects. Finally, the Cabinet of Ministers plans to create a special monitoring service, to guide foreign investors through Ukraine’s bureaucracy. The service is called “the single window.”
These plans are naive. They are based on the assumption that, should the government try just a bit harder, foreign investment would flood in. The planners lack any understanding as to how and why investors would renew investing in Ukraine. In fact, once the global financial crisis is over, the rules for credit and investment in emerging markets are expected to be much tougher than in the past. To attract capital, the government will have to make fundamental improvements to make Ukraine a globally-competitive place for doing business.
According to Vladyslav Kaskiv, a senior economic advisor to the prime minister, Ukraine has “reached a precipice, where trying to fix problems makes no sense.” It has a destroyed and depreciated political, legal, military, transport, and academic infrastructure.” (Dzerkalo Tyzhnia, Dec. 25, 2009.) He adds that, in 2010, Ukraine “will not have any systemic improvement in the investment climate.”
However, there are numerous opportunities for the government to roll up its sleeves and start cleaning up the Ukrainian business environment, beginning with basic government services – a job that does not require any legislative action, political support or additional funding. For example, the government might start with improving basic government services, such as customer service at tax-collecting centers.
In modern Ukraine, paying taxes is a difficult endeavor. If you pass by a local tax administration building on the 20th of any month - a reporting deadline - you would see a swarm of busy people standing outside the premises. These are accountants and finance directors of Ukrainian companies, a large portion of whose work deals with figuring out the logistics of filing their many tax reports with numerous government agencies. If you entered the building, you could see a line of accountants preparing “an electronic file,” since all company representatives are required to manually input their report data themselves on a floppy diskette first, and only then submit the diskette along with their printed tax report. The lines are everywhere. Tax administrations’ premises are usually small, crowded, unventilated, cold in winter and hot in summer.
Other tax-collecting government agencies, the state funds, do not have customer service counters at all. For example, in Kyiv’s Holosiyeve district, the state fund for insurance against temporary disabilities of employees is located in an unventilated 30 square meter room, where both the fund’s officers and each of the fund’s 30,000 corporate clients jam into every month.
The fact is that the more difficult it is to pay taxes, the less willing are Ukrainian businesses to pay them.
Ukraine does have expertise in world-class customer service. In the private sector, tens of thousands of trained customer service professionals make their businesses and products a success every day.
There is no justification for why Ukraine’s tax collection should not run their customer service as well as McDonald’s does: quickly, efficiently, and with a smile.
I was part of a team that brought first McDonald’s restaurants to the Ukrainian market. There was a lot of skepticism then about whether a friendly quick-service dining practice would ever take root in Ukraine. Some argued that Ukrainian employees would never adopt a serious attitude to customer service. A decade later, the country has thousands of companies with great customer service across many sectors: retail, telecommunications, trade, industrial, and even municipal services, to name a few.
As in the past, many skeptics still believe that the government can only provide window dressing. They might be surprised how the country could change to the better, should the political leadership bring the right people in to take on the hard work.
Attracting investment is not only about business plans, presentations and promotional clips placed on international channel networks. It is also about making the country truly attractive for both foreign and internal investment.
The problem with the quality of customer service provided by the government is just one of the critical drawbacks that hurt the investment climate. The government should also be providing Ukrainian and foreign businesses and investors with more and better information, and developing more efficient and more competitive markets for capital and goods.
The government should help the private sector implement better accounting and reporting standards, and make presently scarce information about Ukraine’s public companies more comprehensive and more accessible. The government should also require public companies to make full disclosure according to international financial reporting standards. These disclosures should come in the annual and quarterly reports filed with the Ukrainian Commission on Securities and Exchanges. Presently, such reports are available irregularly and are vague. They also lack the proper detail desired by investors.
The government should help the private sector in creating and maintaining competitive capital and commodity markets. As one of the world’s largest producers and exporter of agricultural and basic industrial products, Ukraine should have sophisticated commodity exchanges, which should be transparent and fair and which should partner or fully integrate with one or several of the world’s most efficient commodity exchanges.
Likewise, the government should force Ukraine’s security exchanges to become more efficient. The trading volumes at Ukraine’s leading exchanges, such as PFTS, are insufficient to make those exchanges meaningful operations. The state could enforce stricter and more transparent trading rules, with the goal to bring more quality assets and more competent traders to the market, and decrease trading margins. The government should also make it easy for participating institutional traders to integrate Ukraine’s security exchanges into the global infrastructure for capital flows.
International investors are very smart. When investing, they are seeking a proper business environment and the highest-quality financial products for their investments. It is high time that the Ukrainian government join the private sector in making Ukraine an attractive place for both Ukrainian and foreigner investors.
It should start with reforming basic government services.
Andriy Ignatov is vice president of the ProInvest Association, a Ukrainian national association of professionals in investment promotion at www.proinvest.in.ua, and can be reached at firstname.lastname@example.org .
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