Investment Climate in Ukraine: Opportunities and Infrastructural Problems

Yaryna Skorokhod
Logistics Committee Coordinator,
European Business Association (EBA)

Each state views a good inflow of investments as one of its main tasks. Following the decline of GDP in 2014, the efforts of the state should be focused, to the fullest extent, on reanimation of the economy. However, how can we measure the successes achieved by our country?

Should we analyse the official performance indices of Ukraine in the transport sector, it appears that the Logistics Performance Index (LPI) that is defined annually by the World Bank is the most relevant one. This index has been developed so as to assist the countries to identify the problems they face in their logistics sphere and understand what they can do to improve their performance efficiency. In addition, this index provides for qualitative and quantitative evaluation of the country by domestic logistics experts. It accounts for detailed information about logistics media, main logistic processes, involved institutions and the time consumption data

In 2016 Ukraine rated the 80th position out of 160 evaluated countries. This is just the midpoint of the rating, Germany is the top-performer of this index and the leaders are also Sweden, Luxemburg, Hong Kong, the USA and Great Britain.  To illustrate where Ukraine has to move, it is sufficient to look at a comparative diagram of the Ukrainian and top-performers (a) indices:

Apart of the countries that occupy the lowest positions – Syria, Haiti, Somalia, there are also the so-called ”the movers” who show stable and positive development  trend as compared with the past periods: India, South America and China. In the case of Ukraine the comparison of the infrastructural quality for the last 5 years looks like this:

What can we elicit from such evaluation of performance?

The index is calculated according to 6 criteria: customs procedures, quality of the infrastructure, easiness of logistical organization, possibility of tracking, competence and quality of logistic services and timely shipments. All evaluation criteria form a unified system: is one criterion is evaluated high while the others are not, then the average point is lower accordingly. The value of each criterion reflects understanding of the problems and tasks both for an individual state and for the transport brunch as a whole. For instance, having analysed the general calculation methodology of points, it is possible to come to a conclusion: reliability matters. Reliable supply chain is the key factor that determines the index. It is much more significant than the speed of delivery as the majority of consignors all over the world say that they are ready to pay “on top” of the transportation cost if they are have a high level of confidence in the time and quality of the delivery.   

Why logistics is so important for the economic attractiveness of the country?

The World Bank compared European countries and the countries of North America and concluded that logistics in Ukraine is by 40%-50% more expensive, which, certainly, is bad for the economy and population of Ukraine. Trade expenditure can be decreased by cheaper logistics, as a result, the self-cost of goods will be lower and the prices on the international markets more attractive.

In its turn, the lower logistic cost component can contribute to the economic advance and integration with the global added value chains which will enable us to change the concept of the economic development of the country and depart from the primarily resource-based economy.  

As a consequence, Ukraine will become more competitive on the global markets and the supply chains more reliable and predictable, which also impacts the investment attractiveness and image of the state.

Since 2013 the Logistics Committee of the European Business Association works actively at creation of the positive image of the logistics business and consolidation of its best practices in Ukraine. One of our main tools is implementation of qualitative changes in the effective legislation in all infrastructural spheres. And we see nowadays that the state faces a lot of tasks associated with reformation of the branch.

First, our export grows – every year the indicators show a stable increment; and this is considered to be an unmistakable advantage. That is true, but this fact poses challenges to the state with respect of diverse infrastructural aspects because the stable growth of the infrastructure reveals the main problems of the branch.  The approximate “to do list” of the most pressing tasks and issues which the Committee works at now includes claims as to performance of “Ukrzaliznytsya” (Ukrainian Railroads), high rates of port dues, (despite -20% rebates initiated by the EBA, absence of the law on inland water transport and size and weight checking on the motorways which implementation should contribute to preservation of the Ukrainian roads but not be just an additional source of corruption.  

Besides, a separate set of issues concerns safety at roads and railroads. In roads it means regular patrolling of unsafe road sections, video surveillance and provision and equipping of the guarded parking areas because the situation has been deteriorating since 2014. The safety measures to ensure safety at railroads that the Committee has developed can be subdivided into two parts:

1) Safeguarding of cargo in transit which is particularly topical for agricultural business.

2) Cannibalization problem with the rolling stock.  

Third, it is required to implement the public-private partnership because the state occupies too much space on the country markets. The infrastructure can become the first platform for accomplishing concession projects in ports, railroads, airports and roads. It is of importance as well to realize the mechanism described in the recently adopted laws and do it transparently to the maximum extent.

No less than business the state must preserve its image in the eyes of investors and partners of our country and try to attract new global players to the market of Ukraine. What is to be done to achieve this goal?

Efficiency comes first. The situation with “Ukrzaliznytsya” is very indicative in terms of this criterion. High load on the railroad – 82% of all cargo transportation in Ukraine (in other countries this percentage is much less) greatly aggravates all problems which existed since Ukraine had gained sovereignty – deficit of wagons and locomotives, low turnaround of wagons, non-fulfilment or partial fulfilment of the capital investment plans, pilferage and corruption – all these lead to considerable financial losses of exporters and negatively influence competitiveness of manufacturers.

Second is transparency of the processes associated with all kinds of services at ports and railroads. Scandalous incidents with environmental inspection in ports, profit-making with truck permits in the end of the year and various shadow schemes in the railroads – all these explicitly impair attractiveness of Ukraine for the potential investors.   

Summing up, our country definitely has great resources and can present plenty of opportunities for accomplishing medium-size and big investment projects, and the infrastructure is the most advantageous sphere to achieve all these goals. Having said all that, it is paramount to understand that the global international companies and our domestic investors can accomplish all these projects on condition of comprehensible and transparent rules of the game and a possibility to defend their interests and investments.

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