Foreign Investment Council strives to make Ukraine business-friendly (10/19/97)

Foreign Investment Council strives to make Ukraine business-friendly

by Roman Woronowycz
Kyiv Press Bureau

KYIV - The President's Foreign Investment Advisory Council met for the first time on October 3 to begin the work of making Ukraine more amicable to foreign businesses. Although Ukraine's president and government officials tried to paint a hopeful picture, representatives of the international business community insisted that more changes are needed.

Problems such as large-scale graft, ever-changing laws and a non-user-friendly corporate tax have made at least one large multi-national firm, Motorola, cancel its contract to provide a billion-dollar mobile phone system for Ukraine, and many others gun-shy about doing business in Ukraine.

Since 1991, Ukraine has attracted only around $1.6 billion in foreign investment, and nothing suggests that a boom is imminent.

Peter Baker, general director of Coca-Cola Amatil - Central Europe, one of the most successful foreign investors in Ukraine, did not mince words when he addressed the council. "The corporate profit tax sends a negative signal to those who are thinking about bringing their money into Ukraine," said Mr. Baker. "We also have concerns about the value-added tax, customs procedures, very unspecified laws and the huge bureaucracy that still exists."

However, Mr. Baker said he was heartened that now there was the chance to improve the investment climate through the council.

The 21 foreign members of the council represent large multi-national firms, including U.S.-based corporations such as the Boeing Corp., Cargill, and Ernst and Young, the British oil conglomerate British Petroleum, the Korean automotive giant Daewoo and the German firms Deutsche Telekom and Daimler-Benz, who have maintained an investment or are about to do so despite a Ukrainian economy that continues to tumble and still has not seen full reform of the marketplace.

What keeps them here is a huge, well-educated and cheap work force and a lucrative market of 51 million people - Europe's second largest.

But it is a harsh business climate in which even medium-sized firms must first obtain in the area of 80 different types of licenses from various tiers of government merely to begin to work, according to Andrew Bihun, senior commercial officer at the United States Embassy here. "Fees on an official level are comparable to Western Europe, but the sheer number of them is enormous," said Mr. Bihun. "Many people say it is the wellspring for graft," he added.

The battle for control of the government between the executive branch, which is more sympathetic to the needs of businesses, and the predominantly leftist legislature has also led to constantly changing statutes that affect the business community. One of Motorola's reasons for abandoning its deal with Ukraine were the "ever-changing rules of the game," said its Ukraine director at the time it canceled its contract with the government. Some observers here say Motorola was actually referring to the numerous and ever-changing officials that must be paid off to receive permits and licenses, while others simply think it was a reference to instability surrounding business laws.

Laws can change in a day, or can be implemented retroactively, as happened with the value-added tax. That tax, which marks up commodities imported into Ukraine by 20 percent, even those needed to build a finished product in the country, are highly constricting on foreign investment.

Then there is the corporate profit tax on joint ventures, which at 30 percent dissuades all but those with the most long-term investment goals to put their money in Ukraine. The Verkhovna Rada has four times rejected bills sponsored by the president to exempt foreign joint ventures from the harsh corporate tax.

But at the kick-off meeting of the foreign investment council, President Leonid Kuchma and Prime Minister Valerii Pustovoitenko both spoke optimistically about Ukraine's future and the foreign investment council's ability to change the investment environment.

President Kuchma, after enumerating his administration's political, foreign and economic accomplishments said, "Besides macroeconomic stabilization, we have put in place controls that reduce risks to investors to a minimum or altogether remove them," said the president.

Mr. Pustovoitenko said the long-awaited surge of investments has already begun. "Lately the investment process has become more active. The appearance on the Ukrainian market of authoritative investors is a sign that [the business world] trusts us and is ready to work with us," said the prime minister.

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