Ukrainian regions are widely engaged in developing their business strategies. Yet, the investors are still unaware of such activity of the local governments. There are five reasons for this.
Over past two years Ukraine has seen a great number of investment forums. Half of Ukraine regions took up the challenge of devising their own development agendas and investment plans. Donetsk and Lviv Oblasts invited the leading international consultants to improve their investment climate. However, such activity of local governments didn’t bring investment inflows and this can’t be chalked up to the crisis alone. The reason is that some view the investment forums as a cover and a good imitation of real actions, while others don’t really understand dos and don’ts in dealing with investors. What are key mistakes made by regional governments in their attempts to raise investment?
MISTAKE No.1
Poor awareness of own capabilities
In most regions the officials have no idea how to deal with investors, develop investment projects and what areas need investment. “The concept of the project management hardly exists in the regions,” said Valeriy Bessarab, Deputy Director, Department of Regional Development, the Ministry of Economy.
Having started to look widely for investors, local governments rushed to develop investment projects for different industries. However, they hardly thought what projects had good chances for success and often put stake on industries that upon closer examination appeared to be unnecessary and uncompetitive.
They should clearly understand what regional industries have capabilities. When Donetsk chose to look for investors, the regional government turned to the local business for assistance. Rinat Akhmetov’s Foundation for Effective Governance in partnership with international consultancy Monitor Group analyzed the regional economy and selected steel industry and agriculture as the locomotives of the region’s economic growth. Developing these industries can ignite development of neighboring areas and ensure high employment rates. Another “experimental” region is city of Lviv where tourism and business services have been selected as the most promising industries (the in-depth analysis of the regional economy was done by local administration as back as 2004). Now these sectors are building clusters characterized by close cooperation of the government, business and research centers specializing in certain industries. This cooperation aims at building environment for a rapid economic development.
When students stepped over the threshold of Agricultural High School in Krasnogorovka town on
1 September, they saw with their own eyes how the industry cluster works. As a lack of highly skilled specialists is one of the main problems faced by the companies willing to invest into the agriculture in Donetsk region (and Ukraine in whole), it was one of the priorities here. So, to compensate for the lack of skilled specialists, they initiated cooperation of the government, business and educational institutions to enhance level of training students in agriculture. Foundation for Effective Governance expects that thanks to the project the qualification of agriculture students in Donetsk region will meet 80-90% of business needs as early as 2025, contrary to 15% met today. In Lviv they work on enhancing level of IT education under the similar project.
In fact, all regions need such monitoring. The Department of Regional Development at the Ministry of Economy of Ukraine, where Mr Bessarab works have been engaged for several years in the project on boosting regional competitiveness. To this effect it has been analyzing city economies and arranging project management training courses for local officials. However, the project has insufficient technical resources to study all regions. So, they analyzed only two pilot regions, Feodosia and Poltava region, and hope to adopt the practices in other regions.
MISTAKE No.2
Hope for tax benefits
The local governments, for example the mayor of Zaporizhzhya or the governor of Kharkiv Oblast can do nothing with the fact that Ukraine ranks 181st out of 183 countries by ease of taxation. The taxation issues fall exclusively within the competence of the central government. “Everything we can do for an investor in terms of taxation is to exempt him from small community taxes we are in charge of. But they are infinitesimal and won’t help the investor,” said Sergey Kiral, Director, Department of Foreign Relations and Investment in Lviv Oblast. According to his words, the government in our neighboring Poland not only provides tax benefits to the business, but also pays compensation of every job created.
Still, Ukrainian governments understate other ways to incentivize investment. Małopolska Province (Województwo Małopolskie) in Poland is one of the most successful regions to raise investment. They have learnt how to fight for investment without any tax benefits. Stanisław Kracik, Małopolska Province Governor, former Mayor of Niepołomice, one of the most successful cities to raise investment, said that they managed to attract their first big investors, including but not limited to Coca-Cola and Man without any tax privileges. Here the tax benefits are an exception made under a special resolution of Polish government. Business operates at maximum tax rates in this industrial zone.
Nevertheless, Niepołomice mayor’s office came up with an initiative: it bought scattered land plots from citizens, made them into industrial ownership and executed all necessary documents. As a result, Coca-Cola, Man and four dozens of other companies chose Niepołomice as an investment destination, although in the neighboring Slovakia the land price is sometimes four times less than in Poland.
Ukraine gradually started adopting the Niepołomice’s approach. For example, Dnipropetrovsk region’s administration jointly with the business representatives analyzed roadblocks to investment inflows and put ways to overcome them into two categories. The first one included the issues to be addressed by the central government; the second category included those that can be addressed by the regional administration itself. Now among issues of the second category they try addressing the problem of obtaining permission documents, including construction permits (according to the World Bank, at the end of 2009 it took not less than 476 days for a company to get a construction permit in Ukraine). To this effect some cities, eg Kryvy Rih, have been introducing the electronic document management system. “I think that addressing the permission-related issues isn’t that difficult, all you need is the political will of the government and world’s best practices,” stated Aleksandr Vilkul, Governor of Dnipropetrovsk Oblast. He confirmed that the political will is in place in the region. But it’s rather an exception than a rule. In most regions the permission-related issues are deemed to be addressed by the business, not the local government.
MISTAKE No. 3
“Bare” investment projects
When in spring 2008 Peugeot Citroen added Ukraine to the list of potential countries for construction of its two engine production plants, Ukrainian government got wild with joy. The car maker promised €700m in investment and 15,000 new jobs. Lviv Oblast could have “won” the business as the company had liked the territory of former airfield in Gorodokskiy district. It didn’t work out. Peugeot Citroen was not happy with the tax regulations, difficulties with water supply at the suggested site, lack of road infrastructure and gas. Instead they decided to build the plant in Poland.
Ukrainian mayors and governors can chalk all failures up to the current tax laws as much as they wish. But they often lose potential investment for a far simpler reason. “The French want us to build a road and ensure gas supply to the site. That’s a way too much, they should do it themselves”, Nikolay Kmit, then governor of Lviv Oblast, commented on the complaints of frustrated investors. He didn’t realize that the infrastructure is one of key incentives to invest into a project. An investor will not spend money in a “bare” place, where before starting construction he will have to wait long for the land allocation decision, bid in construction tender, lay utility lines and gas supply or build roads.
MISTAKE No.4
Working “manually”
In 2008 Polish investment fund Abris Capital Partners bought a chain of discount shops, Barvynok, from a hypermarket network which was on the verge of bankruptcy. Two successful years of operation in the country gave place to big problems. The new tax administration didn’t like that Barvynok enjoyed VAT-credits and the future of the fund with 24m investment planned for the nearest future hung in the air. Sergey Kiral says that Lviv mayor’s office is trying hard to help the company so that it does not stop investing.
Local government cannot be blamed for this situation. “We are ready to apply all the instruments to attract investors and all the legal methods to facilitate their work,” says Mr Kiral. The problem is “that when these conditions are guaranteed by certain officials and not legal standards it means that an investor can lose support and appealing working conditions if the team changes.” This was the case with Cargill a while ago. Ten years ago, in April 2000 Donetsk Oblast had a big win – they attracted the company through a special economic zone (SEZ). Then SEZs were cancelled in March 2005 by the new government and Cargill just like Knauf Gips Donbass could only take a legal action over breach of investment conditions.
In general, the current practice of “touting” investors by regional authorities often boils down to promising personal support and assistance to the investment project. But it does not set a wise investor at ease; on the contrary, it may raise his concerns. “The logic the investors follow is that if a governor today promises to take a project under a personal patronage, a new governor may deprive it of this patronage,” Sergey Khoperskiy, acting Director, InvestUkraine (Centre for Foreign Investment Promotion) said once. Especially since every new governor takes it as a rule to review the land development plan devised by his predecessor and make a new one.
MISTAKE No.5
Poor motivation
When a regional official in China goes to get his wages, he definitely knows what influences its amount. His career and monthly bonus depend on how well his region develops.
Ukraine ensures no connection between the oblast or city economic growth rates, raised investment and salary of oblast administration or mayor’s office employees. So, governors or mayors can make loud statements, while their subordinates would quietly sabotage these initiatives or simply imitate activity instead of working hard to attract investors. When the team of Viktor Yanukovych came to power, the oblast administrations got the task to develop strategies for ensuring growth and raising investment into regions. Though, while some of them set ambitious goals, others preferred to be nothing but formal. For example, the objective in the development project of Zhytomyr Oblast for 2010-2015 is to increase foreign investments into the economy by 1.6 times over the next six years (from $215m today to $344m). The fact is that the investments into the region have gone 1.8 times up over the past four years (2006-2009) without any big efforts from the government. In Ivano-Frankivsk Oblast the volume of investment had grown 3.4 times over the same period (from $183.5m to $615.9m as of 1 January 2010)