The Executive Director of the European Business Association speaks of the prospects for common rules of the game for the business
The largest and most influential business association in Ukraine, European Business Association (EBA), has been tackling important issues of investment and business climate for over 20 years. The EBA prioritizes in 2020: the fight against the shadow economy, a decrease in tax pressure on legal businesses, application of circular economy principles, harmonization of Ukraine’s legislation with the EU standards, updated labor framework, health care, facilitation of international trade, support to innovation, and promotion of Ukraine’s investment potential.
A GMK Center journalist asked Anna Derevyanko, the EBA Executive Director since 2003, about economic policy of the new government, regulatory activities of the state and prospects for investment climate improvement in Ukraine.
How would you characterize the economic policy of the new government? Does it contribute the country’s sustainable development?
— Sometimes it is difficult to monitor what exactly the government economic policy is. Now I would describe it rather as focused on liberal economic relations in the economy and maximum elimination of unnecessary regulatory impediments. If this policy continues, it should encourage the development of both the business community and entrepreneurship in general in our country.
If members of the European Business Association are asked how they perceive the conditions for doing business in our country, their today’s assessment will most likely be neutral, as companies are neither super-negative nor super-positive about the conditions for doing business.
What factors are negative in their opinion?
— First and foremost, it is an unfair justice system and not quite effective law enforcement agencies. As a matter of fact, these two main problems distort the conditions for doing business in our country. They do not allow setting equal rules of the game. This obviously creates additional problems and poses barriers preventing the business from fulfilling its potential to the full.
Let’s take, for example, the problem of the shadow economy. It’s share reaches 60–70% in some sectors, but not exceed 10–15% in others. Even according to national statistics, a total of 33–35% of Ukraine’s economy is in the ‘shadow.’ And this, of course, concerns the problem of paying ‘salaries in envelopes.’
It is impossible to say that the rules of the game are equal when one company pays taxes, which implies an increase of at least 40% in the cost of its products or services, whereas another one evades them. When it comes to services, taxes definitely play a more significant role in this sector. As far as production is concerned, the share of these taxes in the cost of production may be smaller. But anyway, a company that pays taxes will not be on a par with a company that evades them.
Do you think Ukraine has a chance to set equal rules of the game?
— There is always a chance. Desire and due control most important.
Who should exercise control in this area: the government or the business community?
— I’ll give you an example of our business community. All member companies of the European Business Association sign the Code of Ethics and the Code of Conduct. If the EBA is aware of violations of these Codes by a company, this issue is submitted for consideration by a meeting of board members to make a relevant decision. We however presume that the Association is not in fact a controlling body. We are neither a prosecutor’s office, nor a law enforcement agency.
There are many public authorities tasked to restore order and exercise control in this area. Their ineffective performance creates preconditions for unequal rules of the game.
I guess we have a chance to equalize these conditions. On the one hand, the rules of the game should be comfortable. In other words, these should be the rules facilitating the payment of taxes: taxes must be within the realm of possibility and convenient to pay. On the other hand, the payment of taxes by all should be duly controlled.
What is positive about the economy?
— In the opinion of the European Business Association, macroeconomic stabilization recorded for several years in a row is in particular a positive factor. They also name the ongoing currency liberalization in our country and a gradual reduction of regulatory barriers. These aspects are associated, among other things, with the improvement of our investment climate compared to what it was as far back as 7–10 years ago. And what is the most important is that the business is heard and reckoned with.
How dynamically is Ukraine’s economy integrating into the EU?
— In general, I would describe this movement as progressively positive. As far as the dynamics is concerned, say, Ukraine’s exports to the EU Member States are gradually growing today. We would definitely like to progress faster, but there are certain barriers that impede business.
What needs to be done for this?
— It could be possible to introduce certain incentives in Ukraine that would accelerate the pace of growth. For instance, the current problems with vehicle permits on the EU-Ukraine border should be resolved. This considerably complicates logistics, transportation to the European Union. It would be good if the parliament harmonized as soon as possible Ukraine’s technical regulations with the requirements of the European Union, EU control standards, labeling requirements and the like.
After all, one should not rely only on the government, the parliament or the President. It is important to bear in mind that each of us has a role to play. If a company wants to export its products or services to the European Union, it must be active, produce a competitive product, and find sales markets for its products or product. Of course, the knowledge of language is needed. Because sometimes even a language could be a barrier in our reality. And what else is needed is to invest time and efforts to go this way, sometimes several-year-long, to administer sales in the European Union.
Yet, many countries around the globe still protect their domestic markets. Should our government somehow help Ukrainian manufacturers?
— For instance, we have recently started talking about industrial policy in general. The state needs a policy targeted at the development of industry that has been declining over the recent months. This trend needs to be reversed.
How should that be done?
— First of all, if the government talks about transparent business, it should not set barriers for industrialists and businessmen in general. Furthermore, we should spare no effort to improve the foundation, that is the economic landscape, in our country and make it more convenient for navigation. We currently have procedures, regulations and regulatory acts that are very hard to understand and to implement.
Yet, what is needed first of all is an effective work of the judiciary. This foundation needs proper repair.
If we want to be a civilized, developed state compared to developed economies of the European Union, the United States or Asian economic giants, we must understand that the foundation in those countries functions properly. As soon as we have a foundation, we will be able to introduce new incentives that are already efficient in other countries.
Could you give examples of such incentives?
— In other countries, there are industrial parks, government subsidies, support of lending, recovery of investment spending, etc. This list could be continued. All this could be done, if we are fully confident that these incentives will be distributed fairly and transparently.
How would you rate the investment climate in Ukraine in general?
— Members of our Association rate the investment climate at 2.95 on a 5-point scale, where 1 is the worst score and 5 is the best. In other words, we are somewhere in between.
Are the government’s efforts enough to improve the investment climate?
— Recently, the government has been attempting to do a lot of what is offered by the business. It pays attention to some initiatives, even tries to implement them. Many progressive things are being introduced. Yet, there is no limit for improvements. And, returning to the previous question, I need to say once again that foundation is a very important element of development.
Of course, some say that the risk-reward ratio equalized in the country. There are a lot of risks today compared to other years, but a reward is also big. Let’s be honest with each other — there is no investor queue so far in our country. Therefore, we need to move on.
Why is there no queue?
— For banal reasons: because there are no fundamental changes regarding protection of rights, effective fight against corruption. Fortunately, no high-profile corruption scandals have been recorded in the country recently. Yet there are no tangible changes in the fight against corruption.
Yes, we have regulatory improvements. There is certain deregulation, we are heard and listened to in many various aspects of taxation, customs procedures, retail, agriculture etc.
Though as an association, we are constantly told by companies that there are no drastic changes in the work of law enforcement agencies and the judiciary. Sometimes they even speak of a deterioration.
Investors that come to Ukraine at the time being are primarily financial investors. The country however needs more specific investors who will invest, say, in production.
What sectors could be interesting for these investors?
— Traditionally, these are agriculture, IT, infrastructure, FMCG. There many free niches in Ukraine compared to other countries, even to the European Union. One may try many options and be successful.
Will the open land market foster the investment growth?
— Business community members believe it is necessary to open the land market. Because the market for land, as it is, is in actual fact a shadow market. In other words, the land market already operates, but it is neither attractive nor open. Meanwhile, in an open land market environment, competition would increase and investment would come to the country.
But the question is how to open this market, on what conditions. How to make the open land market attract investors, not to scare them away.
What is needed for this?
— It seems to me that there is no need to be in haste, so as not to harm. It is necessary to have a very clear land register to avoid numerous conflicts. Again, it is necessary to determine how much land could be sold, to whom, and so on and so forth. All these issues so far remain unsettled.
Have you seen the privatization program for this year? What investment facilities in the program are worth attention?
— We start every year with a privatization program. Yet the question is whether we can implement it. And we do hope that we will this year and the planned objects will still be sold. The business community views privatization of large enterprises firstly as an effective fight against corruption. Besides, this may attract additional investment in the country. The main thing is who will invest in this or that enterprise.
We obviously need striking examples of investment. We lack due promotion of Ukraine’s interests abroad. Even foreigners say that Ukrainians often tend to criticize their state. It seems to me that a focus should be on positive things and practices in our state and on our investment climate.