Study: Kyiv best place for foreign investments
By Vitaly Sych, Kyiv Post Staff Writer

Kharviv oblast the worst area for realizing its investment potential according to recent study

Investors interested in Ukraine need look no further than the capital to dump their cash, according to a recent study of Ukraine’s business climate. The survey showed that Kyiv remains the nation’s top spot for capital investment, while Kharkiv oblast is the nation’s worst area for realizing its investment potential.

The study recommended that areas rated as having a poor business climate may improve their standing by reducing the ratio of bureaucrats to citizens.

The study, compiled by the Kyiv?based think tank Institute of Reforms, rated Ukraine’s regions in terms of their investment appeal. It assigned scores in the areas of economic development, market and financial infrastructure, human?resources development and the cooperation of business and local authorities.

Officials at the Institute of Reforms said they would provide the results of their study to the central government and to top regional officials.

Kyiv topped the ranking in 2003 for the third consecutive year, with the city’s total score twice that of the nearest runner up.

Viktor Pynzenyk, a member of parliament who heads the institute said Kyiv’s actual record in attracting foreign investment backs up its top place on the list. The city has drawn $1.3 billion in foreign capital since independence, one?third of the $3.9 billion in foreign capital that Ukraine has attracted in the past decade.

Kyiv bested the regions in every indicator used in the survey. Pynzenyk said Kyiv’s relatively good performance is also due to the large incentives the city offers businesses.

“The State Tax Administration is here, customs is here and politicians are here,” he said. “Companies have to keep an office in Kyiv to lobby and have access to the government.”

Kyiv is followed on the list by Ukraine’s industrial regions. Dnipropetrovsk oblast took second place, despite the relatively poor development of its small businesses and the country’s highest crime rate. Ukraine’s most heavily industrialized and densely populated area, Donetsk oblast, placed third in the overall ranking, followed by Kharkiv and Zaporizhya oblasts.

Its high level of entrepreneurial activity and business?friendly authorities pulled Lviv oblast into the sixth spot on the list. Odessa oblast and Crimea were ranked seventh and eighth respectively.

The survey also revealed wide discrepancies in some of the regions’ investment potential compared with the amount of foreign direct investment they have actually attracted.

Dnipropetrovsk oblast, for instance, named by the survey as Ukraine’s second?most attractive region to investment overall, drew only $186 million in foreign capital over the last 10 years, less than the $207 million boasted by the Odessa region, which placed seventh.

Fourth?place Kharkiv has attracted a meager $98 million in foreign cash over the past decade, half as much as the Zaporizhya oblast, which was ranked lower overall.

In all, the study concluded that Lviv, Kharkiv and Dnipropetrovsk oblasts are failing to use their potential.

The survey suggested that reducing the number of bureaucrats may be a key to improving regions’ investment climate. Ukraine’s two regions with the lowest investment appeal in the ranking, Kirovohrad and Zhytomyr oblasts, had the highest ratio of government officials per 1,000 residents.

International investors and foreign companies doing business in Ukraine may have noticed that too.

The International Private Capital Task Force organized by SigmaBleyzer, an investment company, named administrative reform as one of the nine measures Ukraine urgently needs to increase the inflow of foreign investment. Others suggested measures including business deregulation, creation of stable and predictable laws and lifting limitations on foreign investment. IPCTF’s members included AGCO, Coca?Cola, PricewaterhouseCoopers, Commerzbank, the U.S. Embassy and a number of international donor organizations.

IPCTF’s study predicted that Ukraine could continue to attract foreign investment of about $1 billion annually without making significant changes in its regulations. If Ukraine implemented half the measures suggested by IPSTF’s study, annual foreign direct investment could increase to as much as $3.4 billion. Moreover, the study said, if 80 percent of the recommendations were implemented, Ukraine’s economy could be propelled by an annual infusion of $6.4 billion in FDI.

Until that happens, foreign investment in the country will largely be limited to Kyiv and a handful of other areas. Institute of Reforms data shows that the city of Kyiv and six of Ukraine’s 25 regions have accounted for 75 percent of all the foreign investment brought to the country over the past 10 years.

That means that 19 regions combined have attracted less than $1 billion since independence – less than $5 million per oblast per year.

Pynzenyk said that Ukraine’s regional authorities spend too little time informing businesses of investment opportunities in their regions. He said few oblasts have investment projects listed on their Web sites, and that those that do often offer bizarre opportunities: Zhytomyr oblast’s site, for example, invites investors to fund the region’s jails.

According to government data, foreign investment in Ukraine was just $70 per capita over 10 years, the second?lowest figure among 15 former Soviet republics, after Belarus.