Land of opportunities: will the investor come to Ukraine thanks to the improvements of the legislator?

When deciding to enter a new market, investors first of all evaluate the level of development of the legal system of the country in which they may work, guarantees of investor rights protection and guarantees of investment security, regardless of the events "in the background".

Of course, there are also brave people who, understanding the unlimited potential of the Ukrainian market and the prospects of further European integration, are ready to go all-in for the opportunity to invest on attractive "wartime" terms. Currently, we already have quite high-profile projects with the participation of Grain Alliance, Kernel, Nibulon, Nestlé, Bayer, Kingspan Group and many others, the investment terms of which currently remain confidential. However, unfortunately, such investors are unlikely to generate the volume of financial contributions to the budget necessary for the reconstruction of the country. After all, according to the estimates of the World Bank, the recovery of the economy based only on the results of the first year of the war will cost 411 billion dollars.

At the same time, investments, and not direct financial contributions from international donors, should become the cornerstone of Ukraine's further reconstruction. The Ukrainian authorities understand this and continue to work on creating more favorable conditions and preferences for investors, especially when it comes to large investments. As a result, we have amendments to the Law of Ukraine "On State Support of Investment Projects with Significant Investments in Ukraine" (hereinafter - the Law), which entered into force on September 17, 2023. Can we talk about significant improvements? Or only about "minor" changes on paper? Let's figure it out.

What do we have now?

Since the drafting of the Law, state support for projects with significant investments and so-called investment projects have been presented as an absolute game changer. The law actually became the first domestic instrument for stimulating investment activity and at one time gained wide publicity in the press.

However, it did not happen as expected. In practice, the situation turned out to be more complicated, and the general regularity of the procedure raised many questions among investors, especially in the context of the fact that the decision to approve the project should be made by the Ministry for Development of Economy and Trade of Ukraine. Therefore, we are still waiting for successful cases of cooperation between the state and the investor within the framework of the state support procedure, as well as for the conclusion of the first investment contracts.

Of course, in addition to administrative difficulties, the war was a key factor in this. Thus, many investors who aimed to implement large-scale projects and considered the possibility of attracting state support (and even began to prepare a package of necessary documents, like one of our clients), simply refused their further implementation or put the projects on hold waiting for better conditions.

However, as noted by Serhii Tsivkach, executive director of Ukraineinvest (an organization that currently functions as an investment fund), Ukraineinvest currently supports ten investment projects that aim to receive state support. Of course, I would like to talk not about a dozen, but about hundreds of interested investors. Is this possible?

What will change?

Changes to the Law are primarily aimed at eliminating practical obstacles for investors on the way to state support and at easing the requirements for projects. In particular, we are talking about the following:

1) reduction of the entry threshold for investment from 20 to 12 million euros, which should increase the number of potential applicants;

2) expansion of the list of areas in which state support can be provided, due, in particular, to electronic communications and the production of biogas and biomethane;

3) the possibility of attracting state support for already active projects, if the value of private investments already made is no more than 30% for the last 18 months (before the application) compared to the total budget of the project;

4) expansion of the list of investment objects at the expense of engineering and transport infrastructure objects built by the investor, including fees for connecting to networks;

5) a new form of state support in the form of compensation for the costs of building adjacent infrastructure, costs for connecting to engineering and transport networks, as well as exemption from compensation for the use of forest land;

6) certain improvements in the process of communication between the investor and the state at the stage of concluding an investment agreement, in particular due to the possibility of a bilateral negotiation process.

In addition to the mentioned improvements, the changes to the Law also contain certain negative points.

In particular, within ten working days after the changes come into force, all already submitted applications for receiving state support must be returned to the applicants to bring them in line with the new requirements (at the time of publication of this article, they must already be returned). After the finalization, the applicants will of course be able to submit them again under the simplified procedure, but this will still mean a new round of the procedure.

In addition, technically, the Ministry for Development of Economy and Trade of Ukraine does not currently have a practical opportunity to accept new applications, since the sub-legal regulatory framework for this still needs to be brought into line with the new requirements of the Law. It is expected that the Cabinet of Ministers of Ukraine will develop the necessary regulation by March 2024.

What are the expectations?

We hope that the improvements in the Law will also be useful to active investors. However, from a practical point of view, the more important aspects for improving the investment climate are the further fight against corruption, the reduction of the regulatory burden (including regarding certain procedures of the Law) and the implementation of pro-European reforms. In addition, the increase in opportunities for investors to attract debt financing (with which the European Bank for Reconstruction and Development (EBRD) and other financial institutions already significantly help) and insurance (and reinsurance) of investments against political and military risks are also important aspects.

Work on these aspects continues, and we already have certain results. Thus, the MIGA investment guarantee agency, which is part of the World Bank group, and the American International Development Finance Corporation (DFC) are already implementing pilot projects on risk insurance (in which the CMS team was also involved). For example, MIGA has experience in implementing projects in countries where combat and terrorist activities were carried out. And although the situation in Ukraine is much more complicated, such experience significantly speeds up work at all levels.

The second effective tool is the guarantees of foreign partner states for their businesses that have invested or plan to invest in Ukraine. This route is quite effective due to its flexibility and speed, and we are already seeing applications from German, French, English, Danish, Japanese and Polish governments and government agencies.

Although the war still inhibits the further development of a significant number of projects, we can currently speak of a certain revival of investor interest in Ukraine. Many reputable companies (including our clients) are already planning next steps and budgeting for investments, as well as actively exploring available opportunities and looking for partners to limit risks.