Institutional reforms versus selective targeting? Comments on the draft law `On state support of investment and encouraging investment activity' drafted by the Ministry of Economy

Elements of the institutional framework, i.e., the rules and regulations of the economy and the institutions that enforce them, are the main long-run criteria for private investment decisions. In particular, it is openness to trade and transparency that increase the chances of enhancing domestic investment and increasing FDI. Against the background of Ukraine’s still rather poor institutional framework, specifically targeted investment incentives for pre-defined sectors, regions, and/or types of investment, can be both costly and ineffective. Leaning towards selective targeting, the draft law does not sufficiently serve to sustainably enhance private investment in the long run. We recommend to consistently re-draft the law to represent Ukraine’s Guidelines for Public Support of Private Investment, in line with private investor preferences and international experience. Compared to the first draft, we specifically suggest: to focus on improvements of the institutional framework and eliminate all specific targeting elements from the law; to eliminate all references to public investment from this draft law, which should concentrate on public support for private domestic and foreign investment; not to revert to state aid in order to support private investment activity; to expand the final provisions of the draft law and explicitly mention supplementary legislation necessary to improve the institutional framework for investment in Ukraine. In particular, we recommend to focus on the adjustment of the tax legislation according to international standards, employment standards, and provisions that define property rights, to improve law enforcement, the transparency of the public sector, and the efficiency of public spending by cutting state aid. This would serve to demonstrate that institutional framework reforms need a broad and concerted effort from all sources of legislative action.