Can Ukraine reverse its outflow of FDI?

Henry Shterenberg

President of the World Trade Center Kyiv

In the distant past of 2008, Ukraine attracted $10.8B in foreign direct investment (FDI). To this day, it was the best year in Ukraine’s history. In 2015, Ukraine actually recorded an outflow of $458M in FDI, the worst until 2020—a year of historic global disruption—when the outflow reached $868M. Can we stop it? One hundred percent!

How do we reverse it?

We need to focus on factors other than the legislation and regulations around investment. In my opinion, the first and most critical leading indicator for FDI is strategic partnerships between international and Ukrainian companies. The second indicator is the number of PPPs being set up in Ukraine. Both are not being tracked, as far as I know, by anyone in Ukraine, including government, but both are critical to securing FDI. Both reduce risk and increase trust for all stakeholders, including the local community.

International Strategic Partners

International strategic partners bring three elements critical to obtaining any type of financing.

1. Management know-how. Financial institutions must be confident in management’s ability to execute at an operational level. The majority of Ukrainian companies, especially at the SME level, do not have this credibility. A world-class and experienced management team is a great risk reducer.
2. Human and financial resources. Strategic partners provide critical resources, including financial credibility, that make a transaction viable for all parties. The experienced know-how of a strategic partner, especially at the executive level, significantly reduces inefficiencies across all operations, thereby reducing overall risk.
3. Guaranteed channels of distribution. Practically all strategic partners enter a new market in order to establish a new supply of a service or product to domestic and international customers. This adds one of the elements most-desired by investors: a guaranteed purchaser.

Public Private Partnerships

Public-private partnerships have delivered growth for economies around the world, from the U.S. to China, but Ukraine is still taking its first steps with this massively underused political, financial and economic instrument.

In a PPP, a government invests one or more assets in the venture, making the government a minority owner of the jointly held company or enterprise. This forces full transparency on all aspects of the deal, thus reducing the risk of corruption. Significantly, it also aligns government interests with the interests of business and the community.

By allowing municipalities to form PPPs to finance local economies, Ukraine’s ongoing decentralization program is key to unlocking the massive liquidity needed for rebuilding the infrastructure of the country. The successful deployment of PPPs, in addition to attracting investment, enlarges a municipality’s tax base and can also provide a completely new source of income in the form of dividends from municipal projects. This income could be used in many ways, for example, to give an annual dividend to the citizens of the municipality or to provide free daycare.

In summary, we need to focus on securing long-term, mutually beneficial relationships with international strategic partners. And if any legislative or regulatory changes are to be made, let’s streamline the PPP process at all levels of government. Then, I promise you, FDI will grow sustainably for years!