Potential hi-tech investors in Ukraine can now regularly discuss their problems at sessions of the Verkhovna Rada, the Ukrainian League of Industrialists and Entrepreneurs, the International Center for Policy Studies, and the Institute for Reforms.
A recent roundtable focused on “Production Prospects for the World’s Leading Hi-Tech Companies in Ukraine.” Participants from abroad enthusiastically discussed the possibilities of hi-tech production in Ukraine. “There are many investors prepared to do business in Ukraine; I personally know of 7-8 companies like ours. So you should focus on them, challenge them with hi-tech requirements, say, $20 million worth of export output investments,” Philippe Costemale, CEO of Jabil Circuit Ukraine, said with conviction. He believes that Ukraine can become “the most attractive investment ground” in the next 5-10 years. Mr. Costemale says that Russia stands much less of a chance because it isn’t prepared to accommodate many investments and is situated farther from the EU: geographic location is a serious investment factor.
Remoteness from hi-tech supply sources explains the leading IT companies’ cautious attitude to the Asian market. This is manageable for the U.S., where shipments of computers from China are delivered in 5-6 days by sea, the most money-saving way. But this is very taxing for Europe, where every such delivery takes 32 days. Nigel Godwin, Intel Europe’s manager of production program support, believes that the “Asian vector’s” other drawback is the need to supply European-made aluminum to China for “production needs.” These and quite a few other considerations have convinced the world’s computer hardware companies to look for customers in Eastern Europe. “We believe that we’ll be able to come to Ukraine as an industry very soon, and that we’ll have qualified manpower here,” Mr. Godwin stated optimistically. Intel experts have already made the necessary calculations, including what Ukraine and their company need to set up computer production in this country. With Ukraine’s easy access to transport “Corridor no. 5” and good raw material base, cooperation with the world’s leading computer manufacturer offers this country an opportunity to create 50,000 jobs, a high level of European integration, and extra added value inside Ukraine.
How soon such investment plans can be realized will depend on this government and its readiness to meet investors halfway. Philippe Costemale formulated the main foreign inland terms and conditions in Ukraine: deregulated customs clearance procedures, lifting VAT and tax on profit payments, along with guarantees from the Ukrainian cabinet. Experts from the International Center for Future Studies also believe that Ukraine’s current importation rates (e.g., 5-10% of the total value of components) are not competitive for encouraging investments. After all, production costs for add-ons are 85-90%, compared to a mere 5% worth of manpower costs involved.
After canceling the SES tax concessions, the Ukrainian government has come up with a legal precedent of investment ambiguity. First Deputy Premier Anatoliy Kinakh criticized this precedent at the roundtable. He believes “it is necessary to fundamentally enhance all investment-attracting regulators, starting with the strengthening of business security and including a legal framework capable of protecting owners and investors’ rights, in keeping with the concept of rule of law, fair business competition, and foreseeable and stable rules of the game.”
Parliament’s Science and Education Committee seems to be heeding his call and has come up with a “technology park” bill. In the past technoparks were exempt from import duties and VAT on importing equipment and materials, and they were also exempt from the land tax. Products made by technoparks were supposed to be exempt from income tax and VAT for five years (the sums were entered in a special technopark account and the money could be used to develop such projects). According to MP Ihor Yukhnovsky, the current bill, which has been coordinated with the ministries of economy and finance, has partially restored some of these preferences. The clause on payments for land, which have nothing to do with the state budget, was left out of the bill. Mr. Yukhnovsky says that this kind of tax can be annulled or reduced by local authorities, depending on their interest in such production.
Mykola Onyshchuk, first deputy chairman of parliament’s Legal Policy Committee, says they have two bills on record, aimed at improving Ukraine’s investment climate and restoring investors’ government-supported guarantees. The first bill makes foreign inland investments VAT-exempt for statutory capital in Ukraine. The second one determines investment procedures in Ukraine and extends all investment agreements with SES entities, technoparks, and Priority Development Territories. All such business projects must be completed in keeping with investment procedures effective as of the date each agreement was signed.
President Viktor Yushchenko recently declared that the cancellation of SES privileges was a “technical mistake” and that it would be corrected soon. But the promised change is long in coming. The idea to create a foreign investment agency in Ukraine has also long been on the cabinet’s agenda, to no avail. Because of its absence, the simple question contained in Nigel Godwin’s speech about the need for 500,000 tons of steel and 17,000 tons of aluminum to start production in Ukraine remains unanswered. The next logical question is, “Who do we have to talk to in order to settle this matter?”
