27 November 2012 The 9^th Congress of the Federation of Employers of Ukraine

Speech Delivered By The FEU President Dmitry Firtash at the 9^th Congress of the Federation of Employers of Ukraine

Kiev, The Ukrainian House
 
Good morning,
 
Today’s event is quite important not only for the Federation of Employers of Ukraine but also for the whole of Ukraine. I can see quite a few people gathered here in this room. Unfortunately, the Prime Minister is running somewhat late but I am sure he’ll join us soon enough. The Minister of Economy is already with us and I wish to thank him for being with us.
 
What it shows is that there are very important developments rolling out in the country and the presence of such people, the caliber of this gathering including top notch officials from the government, from unions and employers’ community is a proof of the fact that we are unable to autonomously meet the challenges we are all facing. We have to join forces to address these tasks. If we examine the situation we’ll note that the past six months have seen more national strikes than it was recorded over the past 60 years. If one looks at another statistics, it becomes obvious that not even Ukraine – some European countries feature youth unemployment rate exceeding 50 %. Ukraine didn’t stay immune to this problem either: each fifth young person has no job. I mean employment opportunities are just not out there. Therefore, I believe we can’t sit back – business must assume responsibility for these processes. Business has to care about creating jobs.
 
Our top priority now is creating jobs because it is not until jobs are created and not until production is set up that the national budget can be suffused in a sustainable way. Let me cite another bit of statistics which may be somewhat frustrating, and it’s too bad that the Prime Minister is not here, but anyway: in the third quarter of 2012, the total of investments in Ukraine was five times less than in 2011. This means that investments are draining from the country. If the investments are leaving the country, we have to look for solutions. We have to see to it that these investments return because they underlie our stability.
 
I spent quite a bit of time pondering over how to structure my presentation given that we are so short of time, and I decided I would tackle most burning subjects. We may criticize the government, we may complain on numerous problems. I am sure we are all aware of these problems. I have repeatedly argued at many of our gatherings that I don’t mind strikes, it’s a great thing. It’s great to stand up and speak up but what we need is solutions. Just because we are men and women of business. We need to have understanding. We have to be clear on how we address our problems. Therefore, I would suggest that I articulate a concrete proposal explaining what has to be done and what vision the Federation of Employers of Ukraine has with respect to different solutions.
 
We know well enough that the major problem for us is the government’s sweeping out our working capitals. If we sit down to calculate how much cash worth of the working assets has been swept out from our businesses, roughly – I can’t quote an exact figure – it counts something like 40 billion hryvnias worth of non-refunded VAT. Against this backdrop the total of overpaid corporate tax is about 16 billion hryvnias. Looks like a very worrisome figure. Why? Because it is the money that was taken away from the companies’ turnover. All of us present here are aware of the seriousness of this problem. We do appreciate it that it implies indispensability of borrowing money in the market. And mind you – the borrowing which is quite costly indeed – in hryvnia it’s 24 % per annum, in hard currency – it’s 12 %. We, as business and as producers, do experience a lot of difficulty in connection with the working assets shortage.
 
Unfortunately, we have enterprises with a profitability rate of 12, 14 or 15 %. What does it mean? It means that if we take a dollar invested in a finished product, we only get back 80 cents as 20 % is gone for a VAT. Thus, in order to keep our production up and running we go to a bank, borrow a loan thereby encumbering ourselves. This encumbrance aggravates our situation which is grave enough even without it. At the end of the day what we end up with is a lower profitability rate – we have nothing to pledge, nothing to take to the bank which is an absurd situation. Given the circumstances, talking about jobs creation is tough. Therefore, my proposal is simple and concrete. It is in no way a revolutionary one – the history of Ukraine has seen solutions like this many times. This is a very clear proposal that has met with support within the Federation. It did not come easy but it is quite a realistic one.
 
If come to the government today claiming our money, it doesn’t look practicable as there is no money in the budget. No matter what we say, how we comment on the situation, we all realize that the reality is tough. So, here is what we suggest: to issue VAT bonds. This will offer two solutions: first, it’s not going to be the money that companies give away for free any more. I mean we will have some interest on it which will somehow offset our losses. Second of all, we will possess some real instruments which we can make use of, for instance pledge them against some loans. This will be a sort of our ticket to a resource base. It may be not an ideal solution but at least it’s better than sitting idle. This being said, we would encourage the government – and in this context I am addressing the Minister of Economy present here – to seriously consider this suggestion. We have written a letter and had a meeting with the Prime Minister discussing all the major hallmarks of the process in a pretty good detail. We agreed that this issue will be discussed at our Congress and afterwards, at the Cabinet’s sessions where a final decision on how to move forward will be made. Once again, we do count on the government’s support and understanding. I think everyone will benefit from it, especially we as employers. Perhaps, it’s not a hundred percent effective solution but still we will get the whole thing moving.
 
Another painful issue is, in my opinion, distribution markets. We have discussed this problem at many of our Board meetings and we all express our concern with the situation over state procurements. The state procurement budget today is 300 billion hryvnias but if you consider the domestic producers’ proportion in this total it appears to be just miserable – in the range of 20 to 25 percent. The budget therefore makes it possible for foreigners rather than for Ukrainians to make earnings. I don’t mind foreigners but don’t we have to protect our market, indeed? In the US, for instance, the share of imported items in state procurements is just 32 percent, in Japan it’s 28 percent. Russia has been giving a very thorough thought to this question so why can’t we, as the Ukrainian state, treat it accordingly giving priority to our enterprises? If we could reach an at least 50 percent improvement of the situation, it would enhance our position very significantly. It would significantly increase budget revenues and help create lots of new jobs.
 
As we talk about creating new jobs we have to remember that we are faced with another challenge – to retain the jobs we have today. This again leads us to the question of the domestic market – we do have to do our best to sustain and care about it, and it concerns both private and public companies alike. I would like to send the following message to all employers in Ukraine: at the Federation meetings, we tried to create something like our own in-house exchange to make sure that we not only count on some share of the 300-billion state procurements pie, but we also try to help our producers network with each other and source the products domestically on a priority basis. If the value for money is good, it will only be right for all of us. This is an utmost importance priority!
 
The next point is foreign markets which is a very serious question too. What’s going on in the world today? We have the EU, the Customs Union and many other things around us. We are not completely sure what this Customs Union is about – they approve loads of different resolutions… Just the other day we had a meeting of the International Coordination Council attended by delegates of many countries. All of them commented that they could barely understand a half of the arrangement. However, we have our Russian friends present here, maybe they could tell us in detail what it’s all about and answer the questions we don’t quite understand. Anyway, it seems to me we could set up a sort of coordination group that might mediate between entrepreneurs and the government which would help achieve the fastest possible response to our challenges and secure our utmost awareness.
 
The third important imperative, to my mind, is the legislation improvement. The laws we live with today work not in our producers’ favor but perfectly contrary to their interests. Under these laws, producing goods in Ukraine is not advantageous – it’s a lot more advantageous to import them from abroad. The Ukrainian laws work against the Ukrainian producers and it is a perfectly obvious fact of life. I can see Mr. Guirshfeld sitting here who owns a production facility. He can confirm that he has been thinking hard about where to move his production. Why? Because import duties levied on equipment and technologies importation are high whereas finished products importation is free of any duties. Could you tell me what’s going on? Why can’t we change the situation? I do appreciate it that we are a WTO member and we are bound with our commitments but we can’t afford neglecting this problem. We have to protect our market, we are just bound to do it.
 
I could have picked ten or twenty questions for discussion but it seems to me that we would be better-off with fewer priorities yet with better quality solutions. Thus, the first priority is the VAT. The second one is the state procurements. And, sure thing, if somebody asks me where I see the most promising potential I would say that our strongest capacity is in two areas: agriculture and small and medium business. If we look at today’s budget revenue breakdown we’ll see that 350 companies account for 85 % of the budget receipts whereas small and medium business contributes as little as 15 %. In European countries the index of SME’s share in the national budget is 40 – 50 percent and more.
 
I am sure that we have a pretty remarkable capacity for developing our capabilities and restructuring them internally. The large businesses indeed bear the heaviest burden but their resources have exhausted by now. They don’t have the reserves to pillar the national budget. Therefore, if we are looking into the growth potential enhancement, we have no alternative to promoting small and medium enterprise. Suffice it to compare the cost of a job creation at a big enterprise and at a small company – it will be multifold cheaper with the latter, let alone the procedure ease.
 
Therefore I think that we have to pay adequate attention to SMEs. What does this adequate attention imply? It certainly would be great if small and medium businesses could have tax holidays and other preferences. However, it’s not the most important thing. Just take a look at how many inspecting authorities we have in our country today. Let me speak about myself: we have whole departments at our enterprises charged with relations with inspections and they are busy with this function days and nights. I am totally lost in their multitude. So, let me reiterate what I have already said at the Federation’s Board: let’s put together an inspection registry, let’s play around what they are and how frequently they may come along.
 
Some people in the room are showing to me that it’s a matter of money but I won’t comment on it at this time. I will just say that it steals a whole lot of time and every time you have to explain something to someone.
 
Now, let’s try to imagine what these guys contemplating their business launch or just having launched it think. Instead of giving a thought to how they might create jobs, pay wages and compete in the marketplace they spend time proving to different inspectors that two by two isn’t five.
 
It is my profound conviction that we have to focus our attention on this issue. If we find a solution, it will be a win-win situation. As far as agriculture is concerned, let’s see what this sector is like today and where its potential is.
 
We are talking about 15 million people which is one third of the nation. There are quite a few big agribusinesses out in the village that own land plots of 10 thousand hectares and more. In fact, we have about 80 companies controlling 5 million plus hectares of land.
 
These people and these companies have to be credited for a good pace of agriculture development. These people borrow loans, they attract funding and otherwise reduce the burden on the national budget. Yet, they fail to address the core problem: today, the company owning 10, 50, up to 100 thousand hectares of land employs up to 100 people. These companies have new equipment, new machines, they get active in the fall, plow their plots, saw the seeds, then return next summer to reap the harvest, ship it to the port and sell it. Yes, they do feature great financial performance which translates into good revenues for the government. But what is there in it for the rural communities? Absolutely nothing.
 
Looking at rural communities, there are two things that catch the eye. First – at best, what they earn is the land rent and that’s it as there are no jobs, no cash to sustain local governments. Here is my personal example: we have been supporting some villages and some cities but let’s talk villages. We have built a school, a kindergarten, a culture club, a stadium, you name it, but they aren’t happy with it. Why? Look at our budgets, they say, it’s just a couple of dozen hryvnias, how are we supposed to keep all these facilities up and running? You’ve done it all but it is now falling apart because we can’t finance its operation. And I think that we – and I mean both the employers and the government – ought to pay serious attention to this: creating jobs in the village depends on agricultural produce processing. I am not sure how it can be achieved – given our legislation it’s not that easy to make it happen today. Nevertheless, there definitely must be an incentive for agricultural producers to deepen the degree of produce processing as what dominates today is a kind of “light” processing: you reap and you’re gone. Having long money is critical. But in order to have this long money, two challenges have to be addressed: there must be public lending against affordable rates, and there has to be a good incentive stimulating agribusinesses’ interest in it. What I suggest is this: to revisit the country’s stance and to move from pure grains export to deeper processing. If we do so, we will enhance our farming and fill village councils’ budgets. There will be no huge gap between the quality of living in urban and rural communities like it is the case today. After all, we’ve seen around 300 villages vanishing from the map of Ukraine in 20 years of independence. I am sure that agriculture and SMEs represent the only avenues for Ukraine to open good prospects for Ukraine and afford it with the necessary toolbox for unveiling its potential.
 
These are the questions which I have highlighted with an intention to trigger your discussion. The fact of our gathering in this composition is a manifestation of our inability to tackle the challenging we are facing separately – just because we all pursue different priorities. Alongside this however we have a very good body – the Tripartite Council which, as life proves, is not a mere tribute to the European tradition, it is a vital necessity. It appears to me that the operation of this Council must be intensified seeing to it that no party tries to hog the covers on itself – neither employers, nor unions, nor the government. We want to avoid an “elder-to-junior brother” situation, we want to share both wins and losses on equal terms. We all work for the sake of our state, for our nation. 50 % of the economy today is private business, it’s a very powerful force and it seems to me that we can and must lend a helping hand to the government in pursuit of these objectives.
 
I want us all to take these things with utmost seriousness, I want it to be more than just a nice word “employers”. We have to be part of all kinds of committees, partake in all relevant processes. The national budget may not be approved without us, the infrastructure cannot evolve without us. We don’t understand how this infrastructure is evolving, where decision making starts and where it ends. On the one hand, we keep hearing about infrastructure development, while on the other hand we can’t build a new production facility because it can’t be reached and can’t be connected to gas, water and energy supplies.
 
All these things must be taken care of today. We realize that otherwise it will remain nothing other than an empty talk and we will stay where we are. For that matter, I think that forming a working group would be a good idea. A workgroup involving Mr. Oliynyk and possibly Mr. Tigipko representing the Cabinet of Ministers. I am sure this idea deserves a good thought.
 
For example, who in this room knows what decision was made in respect of the next year’s budget? We’ve talked a lot, we’ve asked a lot of questions but my question is simple enough: who has read this budget and who knows what income and expenditure entries are incorporated in it? I think no one. I am being prompted that the draft budget does not exist. That’s right. Now, here is my question: if the draft budget does not exist how are we going to live next year?
 
Next year, we’ll convene for the next Congress. We’ll run meetings, briefings, roundtables. How are we going to do all this in the absence of the fundamental document guiding the life of the entire nation? I mean we don’t see ourselves being part of it, we don’t see a solution. I therefore believe that these issues must be a cornerstone for us, they are immensely important. In principle, we should have had this draft budget ready back in June, start discussing it in September so that it be finalized by October. In that case, it indeed would have been a comprehensive document for the country, drafted cooperatively by the government, unions and employers.
 
These are the important things I wanted to present for our discussion. And I would very much encourage you not to just listen but to get actively involved in these processes. Display your initiative, get actively involved!
 
We have a very good platform and you can see it helps address many issues. So far though we are talking a lot and decide very little. Yet, we have to be involved in a way to make sure that nothing works without us. We simply must do it.
 
Thank you very much!