Foreign investors bullish on Ukraine (06/25/00)

Foreign investors bullish on Ukraine

Government's reform efforts earn a passing grade

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Major foreign investors in Ukraine gave the government's reform efforts an overall passing grade during a meeting with President Leonid Kuchma on June 14, but pointed out that deficiencies still exist, while emphasizing that the president and the government must stay the course. Many agreed that the business and investment climate in Ukraine is the best it has ever been.

"This is the best time yet since independence," said James Temerty, president of Northland Powers, a Canadian energy production firm based in Toronto.

Northland Power is one of 23 foreign corporations which, along with representatives of the Ukrainian government, make up the Foreign Investment Advisory Council (FIAC) chaired by President Leonid Kuchma.

The FIAC, which was formed in 1997 and meets annually, expended much of its efforts in the first years to addressing specific complaints by foreign investors, most of them today resolved. Council members said this year's meeting was the most productive yet and expressed optimism that Ukraine had finally turned the tide in its fight to lift the economy.

"There was an atmosphere not just of hope but of positive expectations, said Patrick Bracken, country director for the Cargill Corp., a U.S.-based multinational agricultural corporation.

The investors praised not only President Kuchma and the Ukrainian government led by Prime Minister Viktor Yuschenko for the changes that have taken place in the investment climate, but also the Verkhovna Rada, whose new majority coalition has begun to move key pieces of needed reform legislation forward.

In a 15-minute address to FIAC members, Mr. Kuchma emphasized that everything possible is being done in Ukraine to make it "one of the most attractive countries for investment in the world."

He explained that there is legislation in the works for new land, tax, customs and civil codes, and that major overhauls are under way in the agricultural and energy sectors. He pointed out that the Ukrainian economy is sprouting to life and gave figures to support his assertion: a more than 10 percent increase in manufacturing production in the first five months of this year; a 5.4 percent rise in GDP in the first quarter of 2000 over the same period of last year; a 70 percent increase in foreign investments in the first quarter over the same period of last year.

Although admittedly taken by Mr. Kuchma's words, some of the businessmen said more still needs to be done. Mr. Bracken emphasized that the discussions with the president were "frank, open and honest," but noted as well that the foreign businessmen were not bashful in telling the Ukrainian president that conditions are still far from the best.

One of the main concerns expressed by some was that the reformers are buckling to pressure and failing to ensure that the changes are properly implemented. Ukraine faces mounting opposition to key reforms as it moves into the most difficult phase of the process with the privatization and reorganization of the energy sector and the effort to make land a commodity in the agricultural sector. Prominent lawmakers and influential businessmen whose private interests are in conflict with the intent of the reforms are offering strong resistance to many of the efforts.

"There is a general feeling that the executive government in Ukraine and the function of implementing policies and reforms is not functioning properly" said FIAC member Andrew Seton, country director for the European Bank for Reconstruction and Development.

"There is too much interference in the private sector, too much regulation. The tax collectors at the local level do not perform in a way that is consistent with our understanding of the tax regulations in Ukraine or the law in Ukraine," he added.

Mr. Seton was alluding to drastic steps taken by the government in the last two years to increase tax revenues. Determined to find badly needed funds for its coffers in a country whose businessmen have become experts at avoiding astronomically high tax levels, it has released an army of "tax police" who aggressively pursue and often harass businessmen into paying what is owed.

In another criticism, Mr. Temerty of Northland Power said the government often has moved too haphazardly on reforms and needs to concentrate on consistency and steadiness in its current efforts. He gave as an example the electricity sector, in which reforms took place several years ago but were followed by more changes earlier this year, leaving his company uncertain about whether to proceed on a power-generation project for Kyiv, which has been long planned and is ready to go.

"In my own project a major problem that is holding us up is that the government is tinkering with reforms. Until we see that they are done, we can't move forward," said Mr. Temerty. "Ukraine needs a steady hand at the wheel right now."

Mr. Bracken of Cargill said he is satisfied with reforms in the agricultural sector thus far, but called the changes merely the beginning. While admitting that the ideal tax for an investor is no tax, he said the government must develop a tax policy that will not be a burden on them. Without such legislation he said Ukraine would have a difficult time drawing foreign businessmen and their money to the country.

Nonetheless, he explained that he is bullish on Ukraine and believed that it would become "one of the most competitive agricultural providers in the world."

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