Investors are attracted both by industrial regions of Ukraine (Donetsk, Kharkov and Dnepropetrovsk Oblasts) and the regions which lack major industries (Lvov and Zakarpatye Oblasts). Availability of raw materials tends to fall by the wayside while readiness of the region to provide favorable business environment for investors is brought to the forefront.

Poorly fitted plasterboard ceilings, which were intended to give protection from rain and wind, broken dirty blinds on windows of shops, mismatching crockery in a tired airport cafe and polyethylene checked table-cloths with patches were the features of Donetsk airport…Two years ago Donetsk airport made a depressing impression, especially on investors arriving from Amsterdam Airport Schiphol or Paris-Charles de Gaulle Airport. Even simple Borispol Airport looked like a bright idea in architecture. While the cafes still constitute an integral part of the airport there are works in place to construct the airport runway and Donestk Governor Anatoliy Bliznyuk promises to complete construction of the new terminal with the capacity 3100 people per hour by the year 2011.

Donetsk is carrying out works to become a leader on the infrastructure pillar, which is believed to be the key element for raising investments. According to the Ukraine’s Competitiveness Report compiled by the World Economic Forum and the Foundation for Effective Governance Donetsk Oblast ranked 10th among the Ukrainian regions on infrastructure development last year while this year it ranks 5th. Still, it will be harder for Donetsk to move forward as the top five regions and cities attractive for investors are Kiev, Dnepropetrovsk Oblast, the Crimea, Kharkov and quite surprisingly Lvov and Zakarpatye also managed to get into the top five.

THE MAGNIFICENT SEVEN

“To bring investments into the region it is necessary to create the right environment. The region should have a large internal market and have good access to adjacent markets such as the Black Sea states, CIS and EU. The region should be a good communication and transportation hub and be reachable from any part of the world. In addition, it is necessary to provide high standards of living in the city”, said Jock Mendoza-Wilson, Director of International and Investor Relations. A classical expatriate Jock Mendoza-Wilson comes from Great Britain but he lives and works in Donetsk. And he knows what the region needs for increasing investments. The key factors for success are: infrastructure, good staff, support of local government and a possibility to enjoy good quality lifestyle. In this connection there are five leaders in Ukraine today.

The cities which are to host EURO-2012 are developing the infrastructure projects with the same energy as Donetsk. Dnepropetrovsk and Lvov businesses complain about poor quality of roads. Still, airport and railway facilities are very well developed in the regions. Kiev is ranked 3rd on the level of infrastructure. Among the regions with good performance indicators Kharkov and Zakarpatye suffer from weakness in the area of infrastructure. Uzhgorod can boast good roads and railway and airport facilities. Still, companies in the city complain about poorly developed telephone network.

In terms of access to latest technologies Zakarpatye is doing better than other regions. Latest technologies and innovations are the key to regional competitiveness. On these indicators the above mentioned seven regions are ahead of others. According to the Ukraine’s Competitiveness Report covering 20 out of 27 regions, which account for 90% of Ukraine’s GDP, Ukrainian capital wins in the indicators for the third successive year. Dnepropetrovsk is also among leaders on the innovation pillar (just think about the April launch of Dnepr booster rocket constructed on the basis of the most powerful intercontinental ballistic missile SS-18).In general, companies in the region spend significant funds and big volumes of FDI on R&D. Donetsk is better assessed on sophistication of financial market and use of technological innovations. The region even has success stories through the investments in the technical facilities of Brewery Sarmat and Confectionery Manufacturer Konti.

Availability of a highly-skilled workforce is another element, which accounts for the region’s ability to compete for investments. Kiev is an absolute leader on the pillar. Six out of ten universities which are in the list of top Ukrainian universities are located in Kiev as it was proved by Compass University ranking-2010, which took into account the opinion of businesses. Other Oblasts are also quite good at the level of training specialists. Kharkov has always been strong at IT sector and it is still now. “Kharkov is deemed to be a third IT center after Moscow and Saint-Petersburg on the post-Soviet space”, said Vladimir Byek, CEO of a Swiss IT company Sigma. “Annually Kharkov universities produce about 30,000 young graduates with 10% of graduates being specialists in the area of IT and related areas. So, the city has the potential for further development, which is quite huge”. If universities are not able to produce the required specialists then local governments and business get engaged. Just recently the decision was made to create a food technology and agricultural college on the basis of Krasnogorovka Agricultural Vocational School in Donetsk Oblast. To this end the vocational school was equipped with the latest equipment and students were provided with an opportunity to take internship at different agricultural firms, for example Agrotech Company. Still, Lvov is an absolute leader among the regions in terms of cooperation between universities and business. As far back as in July Nestle announced its intention to cooperate with universities in the city. “We plan to conclude agreements with Lvov universities to educate staff for the company”, stated the CFO of Nestle in Ukraine James Singh. Lvov managed to slow down the brain drain to Europe. To a large extent it became possible due to cooperation with such companies.

BASIC CONDITION...

Other Oblasts have competitive strengths as well. For example, Zaporozhye, similar to Dnepropetrovsk, displays strength in heavy engineering. Zhitomir Oblast displays lower level of government favorism when making decisions about business projects. Odessa attracts investors by its tourism side. This was the reason which made Sigma choose Odessa to open its second office in Ukraine. “The IT sector is quite developed here and the status of a tourist city also influenced our decision. This is the reason why the city attracts customers from Europe and the USA”, said Vladimir Byek. Still, to ensure competitiveness of an individual region several strengths are not enough. With regard to weaknesses Zaporozhye suffers from the brain drain to other countries and Kiev. Odessa is not harnessing new technologies. As a result, the regions are less competitive to compete for foreign investments. The leading regions also have their weaknesses.

Nevertheless, the less advanced regions are much behind the leading regions on the level of support provided to new investors by the local governments. Two years ago Ukraine saw a wave of regional investment forums thanks to executives of Lvov Oblast. In October 2008 Lvov hosted the 8th International Economic Forum, which targeted to attract the attention of foreign investors to the Oblast potential. In a month Donetsk City took up the torch. Lemahn Brothers had just failed and financial markets were jittery worldwide, but Donetsk Investment Summit opened by Rinat Akhmetov was quite a success. “Such forums help business learn to understand the foreign investors while officials start better understand the problems of business and the regions form their own brand, which is different from others”, said Alexey Kreditov, the Managing Partner at Ernst & Young.

After the event most Ukrainian governors were eager to have their photo placed on the Investment Forum stand. At the end of 2008 and the first six months of 2009 at least five similar events took place in Ukraine. But only Donetsk and Lvov and to a lesser extent Kharkov demonstrated that they are ready to turn words into reality.

In Kharkov it was Aleksandr Yarorslvaskiy who became the driving force of investment climate improvement. For example, he initiated the Routes CIS International Aeroforum, which was held in June and attended by representatives from 35 countries. More than 400 negotiations took place during the Forum. Lvov and Donetsk have developed and are implementing the strategies for regional economic development. The President of IDS Holding and a former Lvov Governor Mykola Kmit promised to focus the efforts on the city tourism potential and stiffen the entry regulations for environmentally unfriendly facilities (for instance, chemical plants).

Consultations between Donetsk business and local governments have ended up with a cluster-based regional development project. In October 2008 Donetsk Oblast and Lvov City started an ambitious cooperation project with the Foundation for Effective Governance –coauthor of the “Report on Competitiveness of Ukraine and Ukrainian Regions”

The project is not new for Ukraine, yet the approach to its implementation is quite innovative. The Foundation proposed a cluster-based programme of development – close cooperation between power, business and scientific centers in a specific industry. The goal of cooperation is to find the locomotives or in other words the sectors which can trigger the growth of adjacent industries in the region and contribute most to the regional economic development. In addition, the objective is to create conditions for development of these locomotives. The Foundation has engaged Monitor Group into the project (a world-known consulting firm, which has the expertise in regional economic competitiveness and has worked in 58 countries) to carry out the “audit” of Donetsk Region and Lvov City, which have always had a feeling of antagonism in most issues of economic and cultural development. The survey revealed that metal industry and agriculture can become the drivers of Donetsk Oblast regional development while in Lvov these are tourism and business service clusters. The general idea of the project is to bring together local governments and business to make them hear and listen to each other. Just recently Dnepropetrovsk Region has decided to join the pilot project.

...STILL IT IS NOT ENOUGH

So far these are the best examples of how local governments try to raise investments. In other cases there have been many fine words but few concrete actions. Still, although it is good to have the support of local authorities for specific projects it will not solve all the problems.

Firstly, there are no guarantees that this support will not disappear with new government in power. Secondly, the Governor of Odessa or Kharkov can influence the pressure on the part of tax bodies. Still, none of them can interfere in the general tax legislation of Ukraine. And this is one of the main barriers to any investor in Ukraine. For example, Vladimir Byek from Sigma warns that the new edition of the Tax Code is likely to kill the Ukrainian IT sector. “The Code switches IT experts to the general taxation system. If the tax burden is increased significantly our companies will not be able to compete globally as their competitors receive governmental support and will be in a much better position”, he says. He gives Georgia as an example where the government exempted the industry from taxes. The increased tax burden is the worry for Sigma Company and for Kharkov and Zakarpatye, which depend on IT sector.

The same goes about VAT refunding problem. U.S. Ambassador to Ukraine John Tefft underlined that this is the reason why American producers do not want to come to Ukrainian market. “When you are a big agricultural company as Cargill or Archer Daniels Midland and don’t get back millions of dollars of tax this becomes a problem both for the regional manger and for the global management of the company headquartered in the USA” Tefft said. “And this undermines the trust of business to the whole country”. All these significantly reduce the number of potential investors.

In other words, if the key problems are not settled at the national level all efforts of regional governments to raise investments will be in vain. “To realize the undiscovered potential of Ukraine the country needs a clear and predictable economic policy, which will allow to make long-term business plans”, says Director of European Business Association Anna Derevyanko. Construction of new terminals in the airports of Donestk and Kharkov will make it easier to receive guests in the cities but it will not protect investors from unfair game of state tax authorities.