Investment nannies in Ukraine

Why do Ukraine need “Investment nannies”?

No matter how developed an economy might be, and in spite of the modernizing nature of the global economy, the production of goods and services remains tied to essential raw materials.

Here the Ukraine has a clear and present advantage, particularly in the agricultural sector. However, margins in primary industries are small as a percentage of overall global profitability, the money lies in the refining and processing of such raw materials and the production and sale of finished goods.

Ukraine would do well to take advantage of this reality, gearing investment incentives towards industries with high added value, such as agri-tech, green energy, the chemical industry, and electronics. In the ever-waging regional battle for crucial foreign investment, the adoption of legislation tailored towards stimulating activity is a prerequisite for remaining competitive.

A law introducing so-called “investment nannies” has already been implemented with the hope that the measure increases Ukraine’s appeal to domestic and foreign investors. This vital law aims to revitalize the Ukrainian economy by boosting employment and increasing government revenues, local budgets, pensions, and other social insurance funds.

The “investment nannies,” who’ll be assigned to anyone bringing in $30 million or more, may be a tough sell.

New investors would be especially welcome as Ukraine grapples with its worst economic slump since 2014. In the longer-term, the pandemic could represent an opportunity for the nation of 43 million people to attract foreign companies keen to safeguard against threats to supply chains stretching to Asia by building up capacity nearer to home.

The Covid-19 pandemic is significantly impacting Ukraine’s private sector,” said Jason Pellmar, the International Finance Corp.’s regional head for Ukraine, Belarus and Moldova. “It’s critical to continue the reform momentum, now more than ever to improve the investment climate and to attract more foreign and domestic investment.”

The nannies’ task will be to take individual investors by the hand, ensuring applications are full and transparent, guiding them through the myriad national and regional bureaucracies and making sure the process is smoother than the gridlock that investors have traditionally faced.

The main legal aspects of the law on “Investment nannies”

Law No. 3760 “On State Assistance to Investment Projects with the Significant Investments in Ukraine”adopted by Ukraine’s parliament in  December 2020.

(Earlier in 2020 President Zelenskiy somewhat mockingly referred to this agency as “investment nanny” hence the name of this law.)

       The law is aimed to stimulate large investments exceeding EUR 20 million into the following sectors:

• processing industry (except for the production and circulation of tobacco products, ethyl alcohol, cognac and fruit alcoholic beverages);
• extraction for further processing and / or enrichment of minerals (except coal and lignite, crude oil and natural gas);
• waste management;
• transport;
• warehousing;
• postal and courier activities;
• logistics;
• education;
• scientific and technical activities;
• health;
• arts;
• culture;
• sports;
• tourism and resort and recreation.

          Exclusion: The law does not apply to PPP (public-private partnerships) and concession projects, privatisations and projects implemented under a production sharing agreement.

State assistance to a qualifying investment project may amount to up to 30% of the planned investment value  and, subject to execution of the special investment agreement with the Cabinet of Ministers of Ukraine, may include the following benefits or subsidies:

• exemption from taxes (VAT, CIT);
• exemption from import customs duty for equipment imported for the purposes of the investment project;
• the preemptive right to lease and buy-out state or municipal land required for the project without a land auction;
• construction of the infrastructure required for the implementation of the project (roads, communication lines, heat-, gas-, water- and electricity-supply networks, utilities, etc.) at the expense of the state or municipal budget;
• assistance connecting built objects to heat, gas, water and electricity supply networks, utilities, etc.;
• assignment of an “investment nanny”, a state body appointed by the Cabinet of Ministers of Ukraine to support an investor in the preparation and implementation of an investment project.

Such state assistance will be provided starting from 1 January 2022.

Who may apply for state assistance?

Foreign and/or Ukrainian entities planning to invest more than EUR 20 million into one of the above-mentioned sectors by means of construction, acquisition, modernisation, technical and/or technological re-equipment of fixed assets may apply for state assistance, provided that the investment project meets the following requirements:

• the implementation term shall not exceed 5 years;
• the project creates at least 80 new jobs with salaries exceeding the average salary in the relevant area in the region by at least 15%;
• the project shall be implemented by the Ukrainian SPV, the activity of which shall be limited to the implementation of the project.

To apply for state assistance and execution of the special investment agreement, investors must first develop a feasibility study of the project and confirm its compliance with the qualification requirements.

Interestingly, the investment agreement can also be concluded under foreign law and a non-Ukrainian arbitration court can be chosen for disputes.

Among others, the law provides the following benefits and guarantees for large investors:

• Stability of law guarantees (grandfathering provisions) may be included into the special investment agreement, in which case the rights and obligations of the investor will be governed by the Ukrainian law effective on the date of its execution;
• Reimbursement of the investor’s losses (except for the lost profit) is guaranteed, if the state’s failure to procure the stability of the business environment for the investor is established by a court or arbitrage;
• The special investment agreement may be governed by the foreign law agreed by the parties. Otherwise, Ukrainian law applies by default;
• The parties of the special investment agreement are free to agree on the dispute resolution mechanism, such as Ukrainian courts, mediation, non-binding expert conclusions, commercial or investment arbitrage, including foreign arbitrage, when the investor is a foreign entity.

Negative aspects of adopting a law

Some critics say that it is the rub . The program risks not only papering over long-standing issues but also leaving  smaller investors at a disadvantage.

“It creates and supports unequal rules of the game,” said Ilona Sologub, chief executive officer of the Vox Ukraine think tank. “Moreover, if such investment offices or ‘investment nannies’ manage to attract some investors, this reduces the sense of urgency for reforms that are beneficial for all investors — large, small, domestic or foreign.”

Of course, all of this is set against the backdrop of all the other challenges faced by Ukraine in attracting investment. All the well-intended steps made, as welcomed as they may be, will be in vain if we cannot tackle the root causes of low investment rates in to Ukraine – namely corruption, our weak judiciary, inconsistent decision making and a general set of fiscal policies that are not as business-friendly as they need to be.

Hence, while important steps were made to attract and aid international investment in entering the Ukrainian market, at this time these improvements remain largely symbolic and perhaps poorly directed. If we want to get serious about attracting global investment, we must first implement reforms that grant the investor enough stability, protection, and confidence to enter the fold.

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