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Embrasure of possibilities: What immediate support investors need during the war

The day of the big hunt has not yet come, but all those wishing to invest in Ukraine should receive maximum support and respect from the state

The good news is that Ukrainian business continues to operate despite the war as the Armed Forces of Ukraine are doing everything to make this possible. Another good news is that domestic and even foreign businesses are looking for new opportunities in Ukraine.
However, there is an issue of poor support from public institutions. Yet even amid the full-scale Russian aggression against Ukraine, there is a chance for change for the better. Although the window of new investment opportunities during the war is not that wide, it is more like an embrasure, we must take the following steps immediately to avoid losing these opportunities and make 2023 a year of growth.

10.01.2023, Liga.Business

Protecting competition from its protector

“Big companies will be hunting for business opportunities in Ukraine soon,” said one of the clients during the negotiations on a new investment project. The day of the big hunt has not yet come, but all those wishing to invest in Ukraine should receive maximum support and respect from the state. In reality, investors have to deal with the Antimonopoly Committee of Ukraine (AMCU).

Since 2014, we have been constantly talking about the need to liberalize financial indicators for business concentration as much as possible, just like Poland did during “shock therapy” in the early 90s. The 2016 reform of the AMCU was ill-timed and incomplete. It provided a lot of work for the AMCU and lawyers, while leaving monopolies to the oligarchs and creating obstacles for ordinary business.

After the outbreak of full-scale war, the AMCU officially announced suspension of its operation. In simple terms, this meant: “We don’t have the resources to make decisions. You can go ahead with your mergers and acquisitions without us, violating the law, and one day we will review these deals and still impose fines on you.” A symptomatic desire to fulfill the function of coercion no matter what. A while later, thanks to the efforts of the Armed Forces, the AMCU was able to resume its work. But why? How many applications have been piled up, how many people have returned to their jobs, and how long will it take to approve merger and acquisition deals of our brave investor who has not been frightened by the war?

Why should the AMCU allow business concentration during martial law and post-war recovery, collect money from investors for it, waste their resources on mountains of paperwork (which can be easily burnt down by shelling) and make them wait in uncertainty for months?

The first thing a competition protector should be concerned about is the Russian trail and the oligarchs. Leave the investors alone, liberalize the thresholds as much as possible. Moreover, abolish the permits for mergers and acquisitions in the military-industrial complex altogether. We need a dynamic and high-tech military-industrial complex with foreign capital.

The state needs a triage

If talking about the options to build new in place of the old and to rebuild the destroyed, the first one sounds better to us. It may be a slight semantic difference, but it is fundamental. We have a historic chance for a complete modernization, because the old, soviet and ugly cannot be rebuilt, it can only be forgotten.

This applies to most state-owned enterprises (SOEs). If a private enterprise has its windows smashed during a shelling, it will either install new ones or relocate to a safer region, and either of these decisions will be implemented quickly. SOEs are unable to survive, let alone recover, during the war due to the budget shortfalls, corruption, bureaucracy, and lack of commercial motivation. Replacing windows will take months, or even years.

There is a broad debate between “sell everything” and “only the public sector will save the situation.” We are in favor of denationalization, although it is obvious that some strategic SOEs and national security sectors should remain under the state control. However, if it is an actual business and not just a resource, the approach should be businesslike: clear criteria for maintaining the state status, ownership policy, separation of the owner and regulatory functions, abolition of outdated organizational and legal forms, business plans, professional management of state assets, and performance indicators.

Even after the state chooses the best, there still will be more than 3,000 state-owned and 14,000 municipal companies, including assets seized from the enemy. This is an overwhelming load for a country exhausted by war and, at the same time, an enormous hidden resource for its post-war recovery. All of this should undergo a triage assessment or sorting, after which certain decisions should be made, such as the privatization of an enterprise immediately or after corporatization, sale of individual property, public-private partnership, leasing, liquidation, or bankruptcy.

Only a couple of concessions operating in the whole country doesn’t add to the faith in public-private partnerships. There is a need for a radical reduction in the project preparation time, differentiation into “large” and “small” projects, and introduction of model concessions based on a standard feasibility study.

Historical, backed by considerable investments private leasing of state property should be given a chance to be transformed into concessions in a simplified way. If it remains as lease, it will require criteria for confirming integral improvements, automatic renewal of contracts, and simple procedure for lessee replacement in case of reorganization.

Long-term (over five years) lease with investment obligations also looks promising. Investors show their interest and ask how to determine investment obligations, how to link the payback period to the lease term, what parameters should be used to compete, how ownership rights will be distributed, and what guarantees and compensation will be provided if the contract is terminated.

Some of these matters will be addressed during the international technical assistance projects in which we are honored to be involved.

Electronic and indestructible

Today, paperless format means security, uninterrupted operation, and flexibility of remote document management. An entire archive of corporate documents may be destroyed by a rocket and fire – these are the terrible realities of today. It is noteworthy that the state is digitalizing much faster than the private sector. The latter is hampered by the uncertainty of tax audits of electronic document management (EDM), archaic archival legislation and discrepancies with the EU standards in the field of trust services.

Businesses are concerned about tax audits after switching to EDM as they are uncertain whether tax authorities will recognize the validity of e-documents, how to share such documents or how to respond to a request to print all source documents. The state must ensure that it accepts EDM in B2B transactions and tax audits of EDM must be formalized. For this purpose, we, together with a number of leading companies, have launched the Inspector in Smartphone project designed to establish rules and develop digital competencies of tax authorities.

The state archive requires that paper copies of documents intended for long-term storage be created, which duplicates the electronic process. In addition, there are strict requirements for document naming and cataloging. These should be abolished and simplified.

Ukraine and the EU have not signed an agreement on mutual recognition of trust services. However, the approximation to a digital visa-free regime with the EU has moved forward. Draft Law No. 6173 on the recognition of European signatures in Ukraine and the remote receipt of QES was recently adopted. The Cabinet of Ministers of Ukraine adopted Resolution No. 1311 on the experimental recognition of trust services between Ukraine and the EU. We expect that these regulations will help to launch the cross-border EDM and open up new opportunities for non-residents in Ukraine even without a special agreement with the EU.

Digitalization skeptics see energy crises as a new obstacle for EDM. However, we do not see a decline in interest. Companies are successfully solving power and communication problems. Even during temporary outages, e-documents are processed faster than their paper counterparts, especially in terms of international circulation.

The need for best talent

Foreign entrepreneurs have resumed their visits to Ukraine, although for some of them it is a military tourism. The first opportunity hunters are preparing to start a new business in Ukraine. This will become a trend of the free world. The scale of recovery is such that we will not be able to cope on our own. We need to attract highly skilled foreigners and offer them the most favorable conditions in the Ukrainian labor market.

At the same time, labor liberalization is already underway: recently, the Law on Employment of the Population has simplified the employment of foreigners (electronic submission of documents, cancellation of separate permits for each position in case of holding simultaneously two or more positions, etc.). However, this does not change the situation dramatically.

When setting up a company in Ukraine, it is still not possible to immediately appoint a foreign director. You need a temporary Ukrainian one only to obtain a work permit for a foreigner. The procedure for foreigners in representative offices has survived the Soviet era – the archaic service cards issued by the Ministry of Economy.

Foreign talent, especially top managers, should be given more rights. First, work permits should be electronic, and second, they should be directly available to new companies with foreign directors. It should also replace the service cards issued to employees of representative offices.

To reside in Ukraine, a foreigner and his/her family still need to obtain the type D visa (except for citizens of certain CIS countries) as well as a residence permit and registered place of residence in Ukraine. The whole procedure should be simplified by abolishing the type D visa requirements for friendly countries; providing for simultaneous declaration/registration of a foreigner’s place of residence when obtaining a residence permit, but such registration should be limited to the validity period of the permit; and introducing exchange of permits online. The Ministry of Digital Transformation is already testing e-permits in Diia.

Logistics, industry, and civil servants

Restoring and expanding of supply chains is a matter of national security and ultimately – our victory. The war has changed and increased the demand for new imported goods, namely for goods to meet the needs of the army, as well as the energy, construction, and humanitarian sectors. It is crucial not only to deliver the goods, but also to create value-added products, localize import-dependent industries, especially in the military-industrial complex, and integrate them into new logistics routes. In addition, there is a problem of agricultural exports and global food security. We need multimodal clusters that will combine the production, logistics, and handling capacities.

We observe some signals of legislative support, in particular the introduction of new Article 43 of the Law of Ukraine “On Transport”, which stimulates the development of multimodal terminals during martial law, as well as introduction of tax and customs incentives for participants of industrial parks (law No. 5688 and law No. 5689 on amendments to the Tax and Customs Codes to create favorable conditions for attracting large-scale investments in industrial production dated 22 June 2021).

These laws are useful, but rather for domestic companies that need to relocate and increase their output capacity in the western regions. Instead, we need to compete for new business with neighboring Western countries. They offer the industrial parks not only tax incentives, but also the construction sites under free lease, free of charge connection to utility networks, simplified customs procedures, staff training, and partial compensation of investments.

The only option for us is not to win, but to at least participate in the regional investment race, in particular, with “friendly” Hungary, and to offer better conditions and incentives. If the law on investment nannies, which was promising at the start, does not work out, its rules should be simplified, and incentives should be increased until the law starts working.

Still, even the great laws alone do not resolve the situation. Another big problem is the institutional capacity of regulators to exercise their direct powers to attract investment. Who made the plans to implement all these incentive provisions, who implements them, reports on them, and controls them?

The civil service reform is needed more than ever. After all, investors are still waiting in the corridors (but first, in lines at the border). Professionals and patriots of the civil service, please prove that you are performing useful public functions and come out of your offices to meet with investors.

There will be more good news to come. Ukraine will win!

This column is co-authored with Anton Bychkov, Roman Makarchuk and Anastasiia Soliar

This article was prepared for Liga.Business

Press contact:

Anastasiia Beheza
Senior PR Specialist
Deloitte Ukraine

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