Economic sovereignty: why the localization industry is vitally important for Ukraine

Экономический суверенитет: почему локализация в промышленности жизненно важна для Украины

The Verkhovna Rada Committee on economic development July 15, 2020 recommended that the Parliament adopt as a basis the draft law №3739 “On amendments to the Law of Ukraine “On public procurement”. The bill of localization.

This document has already caused a lot of controversy, and understand how the localization will be implemented in Ukrainian reality that thinks about business and how to solve problems that may arise in the case that international partners will see there are some violations of agreements.

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In short, the essence of bill No. 3739 is quite simple. Now to state the main and only criterion in public procurements is the price. MPs chose four sub-sectors of mechanical engineering, rail transport, urban passenger transport, municipal and special machinery and power engineering – which is added another criterion. It is, in fact, the localization level will make up 25-40%.

This means that every car that was bought by the railroad, each drilling rig, which buy state gas companies, each fire truck for the DSNs must be 25 to 40 percent of Ukrainian production. This can be details that can be the work of our workers, but without localization to the auctions will not allow.

Opponents believe that this measure is protectionist and may violate existing agreements, particularly the Agreement on government procurement of the world trade organization and the Association Agreement with the EU. But here’s the thing: our partners at the WTO and the EU has long defended its own production of similar measures. So the situation is rather confusing, because there is a situation in the style of “what is allowed to Jupiter is not permitted to a bull”. Try to understand.

Disappointing figures

Doctor of economic Sciences, expert CMD-Ukraine Ihor Guzhva , the study shows the challenges faced by Ukraine. Thus, the share of processing industry in GDP of Ukraine for 2012-19 decreased from 17.6 to 10.8 per cent. Decreased and the share of domestic engineering in domestic export – from 18.6% to 10.7%. At the same time, the share of import penetration in public procurement in Ukraine is 38%. In the engineering sector it is even higher – 46.4 percent.

Much easier to look at the percentages in terms of money. Over the past five years, Ukraine has spent on public procurement of 120 billion UAH. At the same time, says the scientist, in the EU the share of imports in public procurement within 7.9%, US 4.6%, respectively.

The Director of GP “ukrpromvneshekspertiza” Vladimir Vlasyuk results even more close to the people indicators. If in 2013 the average Ukrainian in the year earned 5383 dollars, in 2018 began to 3298 dollars. In this case, the nearest neighbors can boast of a much more serious amounts. For example, in Turkey, the average annual income is $10380, Romania – $11290, in Poland – more than 14 thousand, in Slovakia – almost 18.5 thousand dollars.

To solve the situation with economic decline, which led to poverty, can the development of the processing industry. Only here’s the problem: in fact, Ukraine, which is a developed country, are unable to take advantage of it, resulting in industry decreased from 91 to a whopping four times.

Now we have, in fact, to reinitiate the process of industrialization, which requires a huge investment, particularly in infrastructure. Where can I get these tools? Vlasyuk relentless: another strategic resource for these investments than the money that generates the Ukrainian economy, in Ukraine. This resource can stimulate employment and economic growth of our country. Or other countries, if you spend it on imports. So it turns out that the localization for us is a necessary step.

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How come other countries

In a study of GP “ukrpromvneshekspertiza” given interesting information. Today in the U.S. there are 108 acts on the implementation of containment in public procurement. In Russia – 16. IN SOUTH AFRICA – 10. In India, which, like Ukraine, is building its industry – eight. Australia, Belarus, Canada, UK, Argentina, Nigeria – they all protect their industry. If we take the industries that most of all protect just mechanical engineering and transport.

Consider specific examples. In the USA the famous American Recovery and Reinvestment Act, including an article “Buy American”. If you do not use American steel or equipment – financing will not. Or “project of the development of the Railways” for $270 million with the same rule, “Buy American”.

Project of the Turkish railroad development provides 51% of local components and materials. Canadian shipbuilders should localize 40% of the total cost of the project. Their development project green energy provides 30% of localization in the sun and 70% in wind. It’s all motivated by “social needs”.

“Child labour”

Commenting on bill No. 3739, head of the economic development Committee are Pleased Dmitry Nataluha resorted to an unusual metaphor. “The majority of those present are children. When they were six years old, you provided them all, housing, education. So they could grow up to be surgeons or physicists. But there were millions of children who were already working and thus, as it put itself on the global labor market, – says the MP. Theorists claim that the rapid liberalization of the business is good. It competition, it will allow us to understand the predatory world economy, it is in your interest to leave them there. The protectionism is for the lazy. But there are incentives, but there are opportunities. If a six year old would say to go to do the operation or to prove the theory of relativity, he was able to do it? No, because he has no education or experience. Similarly, the infant industries are unable to take advantage of the open market, because they can not compete with developed countries on equal terms.”

Fortunately, says Deputy head of the Committee for economic development, one of the authors of the bill Dmitry Kisilevskiy, the majority in the Parliament understand these metaphors. “We have gathered signatures of the leaders of the parliamentary majority, is faction of the “servant of the people”, “European solidarity”, “Fatherland”, “opsi” group “Dovira”. The bill returns common sense in procurement policies. If the share of imports in the EU is 5-7% and we have 40%, it means that the money of Ukrainian taxpayers go to pay in the EU. At the same time, due to the economic crisis before the end of the year 250 thousand Ukrainians could lose their jobs. We see the decline in industrial production by 8.7%. Processing fell by 15.7%. Can Ukraine, like the developed countries to pour money into the economy? No!” – emphasizes Dmitry Kisilevskiy.

Saving private Ukrainian

According to economists, the localization will allow Ukrainian industry necessary for the development of tools and save jobs that are now under threat. Some more numbers. According to the calculations submitted by Igor Guzhva, in the next five years Ukraine has to spend on public transport, communal and special machinery and power equipment 150 billion. This is a market where you can enter the Ukrainian industry. As a result of localization, we get GDP growth of 3.9%, the increase of production processing industry by 10.7% growth in revenues of 8.2%. And in addition to the 200 thousand jobs that will be able to save, another 62.5 thousand new.

A study of GP “ukrpromvneshekspertiza” consider more distant horizons and expands the market, which can compete Ukrainian Industrialists. It’s 10 years and it’s $143,2 billion, Half the amount of public procurement. In particular, the “Ukrzaliznytsia” the upgrade wagon and locomotive fleet will cost 12 billion, the modernization of public utilities – 12 billion. 25 billion should be spent on the distribution grid of 53.5 billion earmarked for electricity generation.

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Industry ready

According to the Chairman of the Council of Federation of employers of Ukraine Dmytro Oliynyk, the bill of containment is the Declaration of economic sovereignty of Ukraine: “This is the future, it is jobs, growth and opportunity… We are interesting to foreign companies as the market. So they come, will be to teach technology, will sign a consortium and so on. And we will stand on the path of economic independence.”

“The proportion is almost our performance. We manufacture garbage trucks, road equipment, equipment for utilities – pumps, vacuum car, sewer machine. In principle, such a run from 25 to 40%, we are now able to perform localization, – said the Director of “Specbatal” Yury Basyuk. – With the increase of localization we will be more interested to host a manufacturing capacity of components”

“Our company produces fire and rescue equipment, belhospice. The state order our products at UAH 600 million a year, according to the program, which purchased fire fighting equipment, – says the owner of the company “Pozhmashina” Oleg Averyanov. – These 600 million can be given to Polish companies and to buy him the car, but then the money will go abroad. When our company gets the money, we pay about 120 million UAH of wages, UAH 70 million in taxes, buy in millions of hryvnias Ukrainian components. It’s also the salary of other Ukrainian enterprises and taxes to the state budget”.

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Arbitration is not terrible

Most critics of the bill look at the reaction of foreign partners, saying that it may be contrary to our agreements with the WTO and the EU.

The risks of adopting the bill on localizing told Alena Omelchenko, partner, head of international practice of law firm “Ilyashev and partners”. “The law has not been adopted. In what form it will come, it will be clear whether there is a basis of our foreign partners in the framework of the WTO agreement on public procurement to refer to the arbitration of the WTO or not, – explains the lawyer. – However, you should note that the regulatory authority disputes the WTO is now in a distressed condition. Not working its appellate body because the United States blocked the appointment of arbitrators. Therefore, Ukraine will have the right to delay the process.”

However, recalls Olena Omelchenko, the EU proposes to establish an alternative appeal. Ukraine supported the initiative. But it is not yet created and how to develop the practice of this alternative on, will depend on whether the contested issue of the country, which can be seen in a new bill some problems.

And finally, the EU has the opportunity to challenge the law on settlement of disputes, which is spelled out in our Association Agreement. “Have no fear, this is normal, when countries protect their rights, – stressed the lawyer. – The arbitration may determine that Ukraine did not break anything. If it determines that the violation was indicated, in which part, and Ukraine will be obliged to amend the legislation to comply with international obligations.”

The point is that the proceedings will drag on for five years, during this time we will manage to raise the industry that will give her competitive advantage in the free market in case of cancellation of localization.

The conclusion here is fairly simple. The modern world is quite a busy place and all countries are, one way or another, protectionist measures – quotas, duties, and requirements of localization, provide financial support to private enterprises. Ukraine is just embarking on this path. Of course, such decisions do not like lobbyists-Industrialists from other countries, which is beneficial to have a large market. While our country remains, in essence, the raw material base, which in General, is not very conducive to rapid development. “All rich countries got rich the same way… they refused commodities, and diminishing returns for the manufacturing sector and increasing returns,” writes Erik Reinert in his book “How rich countries became rich and why poor countries stay poor”. Maybe it’s time to learn from their example.

Dmitry Bunetsky, especially for

The Verkhovna Rada