Evolution and new opportunities for “investment nannies”
What does the new law on “investment nannies” change and how will it help attract investment in reconstruction? See the joint article by UkraineInvest CEO Sergiy Tsivkach and Chairman of the Subcommittee on State-Business Interaction and Investment of the Verkhovna Rada Committee on Economic Development Igor Marchuk.
In August, the Verkhovna Rada supported the government’s draft law No. 8138 in the second reading and amended the Law of Ukraine “On State Support for Investment Projects with Significant Investments in Ukraine”.
This important event for attracting investment to Ukraine was preceded by many months of coordinated work by the Ministry of Economy, the Parliamentary Committee on Economy and the authorised state agency UkraineInvest to supplement the law with provisions dictated by the realities of today.
The draft law aims to improve the system of investment incentives and expand access to it by reducing the requirements for the threshold investment amount (EUR 12 mln instead of EUR 20 mln) and the number of jobs (10 to 50 jobs instead of 80), allowing projects to start before signing a special investment agreement with the state, introducing new forms of support, and many other important changes.
Why will the law be key to rebuilding Ukraine with the participation of the private sector and how does its adoption change the investment landscape of Ukraine?
“Investment nannies” before the war
The law on “investment nannies” came into force in February 2021, marking establishment of Ukraine’s first comprehensive investment incentive system, similar to those established in the legislation of many neighboring countries.
The adoption of the relevant bylaws by the Cabinet of Ministers in June-August of the same year gave investors the green light to access the investment incentives provided for by the law. It is noteworthy that, despite significant media attention to the statutory opportunity to receive a state appointed investment manager to provide support for project implementation (the so-called “investment nanny”, whose functions are collectively performed by the UkraineInvest team), the business community’s attention was primarily drawn to the opportunity to receive state support of up to 30% of capital investments in a new project, in particular through the construction of engineering and transport infrastructure, exemption from income tax for up to 5 years, as well as VAT and import duties for the import of new equipment.
These and other incentives from the “investment nanny” eventually helped UkraineInvest attract 28 new investment projects for development as of February 2022, totalling about USD 2.29 bln. Two projects, with a total worth of USD 96 mln, supported by the institution, applied for incentives from the Ministry of Economy in December 2021 and passed all the required approval procedures by February 2022.
However, due to the war, the signing of investment agreements scheduled for March 2022 was prevented. The project owners decided to suspend the projects, and some facilities were physically damaged. As of now, UkraineInvest is supporting 10 investment projects worth USD 1.25 bln in accordance with the law on “investment nannies”.
Adapting to new realities
With the start of the full-scale invasion, the issue of developing a comprehensive solution to bring the law in line with the new economic realities arose. Consultations were held with a wide range of stakeholders on how investment nannies could become an effective mechanism for attracting private investors to the post-war reconstruction of various sectors of the economy. The package of proposals previously developed by UkraineInvest and the Verkhovna Rada’s Committee on Economics became the starting point for this effort, outlining several directions for future amendments to the law.
Reducing threshold requirements. The two main requirements of the first iteration of the law were an investment of at least EUR 20 mln by an investor and the creation of at least 80 high-paying jobs.
Draft Law No. 8138 was based on the need to provide access to the system, firstly, for smaller investment projects, and secondly, to projects in less labour-intensive, more technologically advanced industries.
As a result, Parliament supported reducing the investment threshold to €12 mln, as well as the transition to a graduated system of requirements for the number of jobs (more than 10, 30 or 50), which will depend on the level of wages and which should be 50, 30 or 15% higher than the average wage for the relevant type of activity in the region where the project is implemented. These changes were proposed by the Subcommittee on State-Business Interaction and Investment
These changes will not only boost employee incomes and account for 2022’s exchange rate fluctuations but also broaden access to incentives for medium-sized businesses and high-tech enterprises.
New forms of support. The system of “investment nannies” offers a set of universal investment incentives applicable to businesses in various sectors. At the same time, the practice of interacting with investors interested in implementing projects under this system has shown that some incentives can be made more flexible.
Along with the already envisaged opportunity for investors to receive from the state or community an engineering and transport infrastructure facility built at their expense (e.g., access roads and tracks, utilities (electricity, gas, water, etc.), communication lines, etc.), parliamentarians agreed on the possibility for investors to build an engineering facility on their own and receive compensation later.
This approach will be useful for implementing large-scale investment projects, primarily in the construction of production and logistics clusters. The draft law also addresses the well-known issue of power grid connections. After the law is signed by the President, investors will not only have the option to include the connection fee in the total investment amount (thus increasing the basis for receiving 30 percent state support), but also take advantage of the opportunity to receive compensation for the costs of connecting to utilities. Finally, the list of incentives is supplemented by an exemption from compensation for forestry production losses, covering another historically difficult aspect of implementing investment projects in Ukraine.
The ability to start making investments before signing an agreement with the Government. One of the questions that concerned representatives of the investment community was whether it was possible to count CAPEX (capital investments) incurred before the signing of a special investment agreement towards the 20 mln USD limit. The previous version of the law did not allow, for example, the purchase of a land plot or the commencement of preparatory work before the project received the green light.
Importantly, the draft law addresses this issue while maintaining the spirit of the law, namely that an investment project that the applicant has started implementing at this stage and that provides for state support should be implemented exclusively as a new investment project with significant investments, although the investor will be able to apply for state support if the project was started no later than 18 months before submitting the application to the Ministry of Economy. It’s worth noting that preliminary investments should not exceed 30% of the planned project investment.
Other amendments supported by MPs introduce targeted improvements to the state support system as a whole, strengthening Ukraine’s competitiveness in the fight for investors. Among them:
The possibility to implement an investment project with significant investments in the field of electronic communications. This step is in line with the general government policy in this area, which has significantly contributed to improving competition in the relevant market in recent years. Reconstruction will require the restoration of telephone and Internet coverage in the liberated territories of Ukraine, and this law can provide an additional incentive for such restoration.
Simplification of the project approval procedure. The draft law eliminates the requirement to analyse the so-called “economic” indicators of a project, similar to the procedure for analysing public investment projects. The investor will no longer be required to calculate the ENPV indicator when submitting a package of documents, and the Ministry of Economy will focus on the financial component of the assessment. Elimination of the need to create an additional legal entity for project implementation. The draft law allows an investor to implement a project without the mandatory creation of an additional “special purpose vehicle” if an existing company is established solely to implement a project with significant investments. Eliminating this requirement simplifies the corporate structuring process for the investor.
The possibility of a negotiation process between the Government and the investor. Moving away from the practice of “one-sided” communication with the investor, when the latter seeks feedback from government agencies, will allow both parties to interact flexibly at the stage of agreeing on the nuances of the agreement between the investor and the state.
Private sector, reconstruction and “investment nannies”
The investment incentives system, although not the only one, plays a crucial role in Ukraine’s infrastructure for attracting and supporting investment. With the adoption of draft law No. 8138, the continuous improvement of the industrial parks support system, and the launch of SME incentives, Ukraine is gradually strengthening its position to engage the private sector in post-war reconstruction.
UkraineInvest recognizes the strong interest of investors in key manufacturing sectors crucial for recovery, particularly in the production of construction materials.
Most of those who approach the government seeking support to explore Ukraine’s opportunities and compare them with those in other countries point to the investment nanny system as a significant advantage in making a decision in favor of Ukraine.
We invite both Ukrainian and foreign investors to cooperate – Ukraine has done its homework and has a lot to offer to those who are ready to invest in the reconstruction.
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