Few people in Ukraine are as familiar with the country’s investment climate as Yuliya Kovaliv.
The head of the office of the National Investment Council, a non-governmental organization that partners with government to lure investors to Ukraine, Kovaliv works with all of the major investors in Ukraine. Global brands such as General Electric, IKEA, H&M and DP World have all consulted with the young ambitious Ukrainian, who was the country’s first deputy economy minister in 2015-2016.
Sitting in her office in one of Kyiv’s only skyscrapers (which until 2016 used to be owned by Ukrainian tycoon Dmytro Firtash, who is fighting extradition on U.S. bribery charges from exile in Austria) she is tackling the legacy of an old economic system inherited from the Soviet Union, while trying to build a new one by attracting foreign investors. While aware of the practical hurdles an investor might face in Ukraine, she can also list the advantages of coming to Ukraine.
Keep with the program
Kovaliv is convinced Ukraine should stick to the four-year International Monetary Fund’s $17.5 billion bailout program, approved for Ukraine in 2015.
“The crucial thing is the IMF program,” Kovaliv told the Kyiv Post. “It’s a very important trigger for a lot of investors… Commitment to the IMF program to get the next tranche is like a basic, basic, basic thing for increasing FDIs to this country.”
The IMFs requirements include Ukraine finally raising natural gas prices to market levels and establishing the long-awaited anti-corruption court.
The IMF deal came with demands that Ukraine carry out reforms to revitalize the economy and uproot corruption. But Ukraine received the last tranche of IMF money — $1 billion — in April 2017. The next tranche has been delayed because Kyiv has failed to meet the necessary requirements.
Meanwhile, Ukraine is doing a poor job of attracting investments. In 2016, inward FDI amounted to $1.8 trillion globally, according to the Organization for Economic Co-operation and Development. Of that, Ukraine was only able to attract $3.3 billion, or one-hundredth of 1 percent, out of which more than two-thirds went to Ukraine’s banking sector to make sure it did not collapse.
And Ukraine has to act fast, as it soon will have to start paying off its IMF loans, which mature next year.
Privatization and concession
Further steps that Ukraine has to concentrate on are the privatization and concession of state-owned enterprises to shrink the public sector as much as possible.
“It’s everything when you decrease the interference of the public sector in the business,” Kovaliv said. “It is a mixture of giving room for private capital, liberalization and fighting corruption. Because what is the source of corruption – state-owned companies and bureaucracy.”
However, Ukraine’s privatization process stalled for three years. Ukraine still has more than 3,000 state-owned companies, most of which are small- or medium-sized enterprises that are inefficient and cash cows for corruption.
Kovaliv’s former boss, ex-Economy Minister Aivaras Abromavicius, strongly promoted privatization, but resigned two years ago, complaining he was hamstrung by Ukraine’s ingrained corruption and interference from President Petro Poroshenko’s top ally and business partner, Ihor Kononenko.
There was finally movement on Jan. 18, when Ukraine passed a privatization law aimed at boosting investors’ confidence in taking part in tenders for the privatization of Ukraine’s biggest state-owned companies.
But if privatization is not possible, the next best thing would be a concession. Kovaliv has been in charge of developing new concession legislation since the summer of 2016. With this tool, foreign companies will be able to operate state-owned enterprises, modernize them, and collect profit, while the assets are still owned by the government.
The new concession law will attract investors not only to strategic assets such as seaports, but also to the regional level such as utility and waste management sectors.
“Concession is the kind of tool that allows those assets to be left with the government in state ownership, but that will also attract investors that will build, renovate, and operate them for a period of time,” Kovaliv said.
The draft law proposes the maximum concession period to be 50 years, providing stability and predictability for the investor.
Ukraine’s government could learn from its Central European neighbor Serbia, which made a concession deal with French private investors on its Belgrade Nikola Tesla airport back in January.
“They got their upfront payment of around 500 million euros and the concession payment for about 25 years,” she said. “And (that airport is) two times smaller than our Boryspil (International Airport). So we can just compare the potential investment flow that we can get with this kind of tool.”
More changes
Another important step for Ukraine’s private and public sectors is corporate governance reform to make companies more transparent and provide companies with more access to financing from Western banks.
“Unfortunately now the current corporate law does not give shareholders a lot of flexibility,” Kovaliv said.
Kovaliv also keeps a close eye on the country’s World Bank Doing Business rating, since this, in particular, attracts medium-sized businesses. “For medium-sized investors, (it) is just a good indicator of what is happening in the country, what the regulations are like.”
For example, Ukraine’s Doing Business ratings on access to electricity and bankruptcy are some of the worst in the world. Changing the bankruptcy law should be a priority for Ukraine, since it will protect creditors’ rights. At the moment, private banks cannot risk handing out big credits to businesses for development, even though many businesses in Ukraine have a serious lack of investment capital.
And taxation of investments is still a big problem in Ukraine. For instance, businesses that are investing in a new building must pay up to 10 percent of construction costs to the local budget. Kovaliv says this should stop.
Recent success
So far 2018 has been a good year for Ukraine attracting FDI. On Feb 23, General Electric and state-owned enterprise Ukrzaliznytsia signed a $1-billion deal to modernize railway infrastructure. Back in January DP World invested in Port Yuzhniy. And now Ukraine is expecting Hutchinson Port Holdings, IKEA and H&M to invest in the country during this year.
“With iconic flagship companies entering the Ukrainian market, we see that this can all (create) the perception that Ukraine is ready to welcome investors,” Kovaliv said.
For example, many foreign investors from Europe, China and Saudi Arabia are eyeing Ukraine’s alternative energy potential. Others have already entered – in January TIU-Canada officially launched a 10-megawatt solar power plant, China’s TBEA is now developing a $500-million wind power project, and OPIC – the U.S. government’s development finance institution – has approved up to $150 million in financing, along with up to $250 million in political risk insurance and reinsurance, to EuroCape Ukraine, a renewable energy company.
“We see a huge interest for the renewable energy, and especially for the wind and solar power,” Kovaliv said. “We see it is booming, the capacity is doubling from year-to-year.”
Other Ukrainian sectors can learn from this, Kovaliv said. For example, Ukraine should also be attracting global manufacturing companies to set up manufacturing facilities to supply the nearby European market.
Kovaliv points to Hungary as a good example of what could be achieved: Back in 2008, the country attracted China’s Huawei electronics company to build a logistics center. Today it is the company’s second largest logistics and manufacturing plant, with $1.5 billion annual turnover.
“From there, they ship all of their equipment and goods throughout Europe,” Kovaliv said.
“That’s the kind of thing we can do in Ukraine too.”
