Competitiveness and Private Sec - OECD

Foreword
Acknowledgements
Table of Contents
Acronyms and abbreviations
Executive summary
Introduction
Part I. Methodology
	Chapter 1. Approach and methodology
		The definition of competitiveness
			Competitiveness is related to productivity and to the maximisation of value-added
			Competitiveness evolves over time
				Figure 1.1. Ukraine needs to move from a factor-led economy to an efficiency-led economy
			Governments can adopt different tools to support competitiveness
			Foreign direct investment can contribute to productivity enhancement and competitiveness
		Identifying sectors for intervention
			Sector identification: The Sector Prioritisation Framework
				Figure 1.2. Sector Prioritisation Framework methodology
				Figure 1.3. Sector Prioritisation Framework, analysis for Ukraine
				Figure 1.4. Results of consultations with private and public sector representatives
			The Sector Performance Review: An in-depth analysis of the selected sectors
				Figure 1.5. Agribusiness example: Comparison of production costs for wheat (USD per metric tonne), 2009
				Figure 1.6. Civilian aircraft industry example: Areas for potential FDI along the supply-chain
				Table 1.1. Sample size of the survey questionnaire
				Figure 1.7. Dairy sub-sector example: Difficult access to finance is partly due to the weak links between farmers and processors
		A prioritisation framework to select policy recommendations for the implementation phase
			Figure 1.8. A framework to prioritise among policy recommendations for Phase II based on the country’s strategic advantage and the areas of intervention
		Notes
		Bibliography
Part II. Economic overview and findingsof the Investment Policy Reviewof Ukraine
	Chapter 2. Economic overview
		A country with abundant natural resources and a well qualified labour force
			Figure 2.1. Ukraine’s labour force has a high level of tertiary education
			Figure 2.2. Female labour participation in Ukraine is high compared to regional peers
		After struggling immediately following independence, the Ukrainian economy enjoyed a period of robust growth
			Figure 2.3. Annual inward FDI flows in the region
		The global financial crisis highlighted existing weaknesses
			Figure 2.4. FDI per capita in Ukraine is lower than in its regional peers
		Economic activity relied mainly on agriculture and highly energy intensive industries
			Figure 2.5. The share of services in GDP has expanded since independence
			Figure 2.6. The current account deficit has widened
			Figure 2.7. The evolution of real GDP has been closely linked with steel prices
			Structural reform priorities need to improve the business climate, consolidate the financial sector and deepen the labour force’s skill set
			A sector-specific approach to investment promotion
		Notes
		Bibliography
	Chapter 3. 2011 OECD Investment Policy Review of Ukraine – Key findings
		General investment policy recommendations include:
		Suggested measures to improve the investment climate:
Part III. Sector-specific analysis
	Chapter 4. Agribusiness
		Summary
		Sector definition and segmentation
			Figure 4.1. The agribusiness supply-chain
		Global trends
			World demand growth will be driven by emerging economies
				Figure 4.2. Consumption of crop and livestock products to increase more rapidly in non-OECD countries
			World agricultural production growth should be driven by emerging economies as well
				Figure 4.3. Agricultural production growth over the last decade was driven by non-OECD countries
				Figure 4.4. Agricultural production in non-OECD countries to grow at a faster pace than OECD countries
			Emerging economies are beginning to resemble OECD countries in their food purchasing patterns
				Figure 4.5. Demand for high value added products in modern retail outlets grows as incomes rise
				Box 4.1. Defining “convergence” in food demand patterns
			Higher prices in real terms are expected, strongly influenced by dynamic global food demand
				Figure 4.6. Price changes for selected commodities in 2005-10
				Figure 4.7. Most commodity prices in real terms to remain above the last decade’s level
			Increasing requirements for food safety and standards to access developed country markets
				Box 4.2. Food safety regulation in developed countries has implications for developing countries
		The role of foreign investors along the agribusiness value-chain
			Figure 4.8. FDI stock in agriculture is rising in CIS countries and South-East Europe but it is much smaller than in Latin America and Africa
		Ukraine agribusiness sector at a glance
			Agriculture plays a significant role in the economy
				Figure 4.9. Arable land in selected European countries, thousand square kilometres
				Figure 4.10. Production of agricultural commodities in Ukraine, millions of USD, 2008
				Figure 4.11. Ukraine: Share of agriculture sector in GDP, 1999-2009
				Figure 4.12. Export structure of Ukraine, 2008
			Agriculture is still recovering from the transition years
			The food-processing industry is developing rapidly
			Agricultural productivity needs to be improved and stabilised
				Figure 4.13. Variation in production of selected commodities in Ukraine, 2006-09, index 100 = 2005
			Dominance of household plots results in a lack of large-scale investment
			WTO membership provides an incentive to improve quality
				Box 4.3. Regulatory system of Ukraine
			Improvements are needed in the field of land ownership, quality standards, access to finance and human capital
			Public private consultations and dialogue could accelerate the reform process
		Why focus on the grain and dairy sub-sectors
			Demand and supply overview
				Figure 4.14. Domestic consumption status and outlook for key agricultural products
				Figure 4.15. Annual world imports of agricultural products, status in 2009 vs. outlook in 2020
		Stakeholder consultations
			Table 4.1. How are domestic agro-climatic conditions favourable to more intensive crop growing?
		Bibliography
	Chapter 5. Focus on the grain value chain
		Summary
		Sub-sector definition and segmentation
			Table 5.1. World grain production and harvest area, 2009
			Figure 5.1. Example of the wheat value chain
			Ukraine’s grain value chain is highly fragmented upstream
				Figure 5.2. Ukraine’s grain production has rebounded in recent years
				Figure 5.3. Ukraine’s production of wheat and coarse grains
				Figure 5.4. Ukraine is amongst the top exporters of wheat and coarse grains
		Global trends
			Grain consumption will grow steadily, driven by emerging economies
				Figure 5.5. Growth of world grain consumption is projected to be higher in non-OECD countries
				Figure 5.6. Africa, Middle-East and East Asia will drive the additional grain imports over the coming decade
			Ukraine has become an important wheat exporter, although quality remains an issue
				Box 5.1. Diversifying into high-quality grain: Australia’s best practice
			Prices in real terms are expected to be relatively high, turning food security into a major concern
		Sources of competitiveness
			Favourable natural endowment has driven a long tradition in grain production
				Box 5.2. Ukraine has favourable climatic conditions for grain growing
			Cost-competitiveness
				Figure 5.7. Grain production costs are competitive, while yield still offers opportunity to improve efficiency of production
				Table 5.2. Black Sea ports have a cost advantage for grain exports to middle-eastern countries
			Grain production could increase significantly over the coming years
				Figure 5.8. Ukraine could apply more fertiliser to increase yields
		The role of foreign investors in the grain value chain
			Lease or acquisition of farmland
			Grain marketing infrastructure
				Table 5.3. Foreign companies are sizeable grain exports
			Deep processing of grain
				Figure 5.9. Major importers of starch and gluten, millions of USD, 2007
		Key issues and policy barriers
			Lack of access to finance results in low input use and insufficient capital investment
				Figure 5.10. Percentage of farmers having difficulty in obtaining credit
				Figure 5.11. Limited access to long-term loans results in very low use of agricultural machinery
			Non-completion of land reform and moratorium on land transactions
			Quality standards are still an important issue
				Box 5.3. Challenges faced by the current system of warehouse receipts for grain
			Transportation and storage infrastructures are still a bottleneck and increase costs
				Figure 5.12. Cargo handling volume is near to maximum capacity of Ukrainian ports
			State regulation of grain trade flows is detrimental to private investment
				Box 5.4. The 2010-11 grain export restrictions
			Support measures distort production and trade
		Policy recommendations
			Improving access to finance
			Completing the land reform
			Removing restrictions to grain trade
			Improving transport and storage infrastructure
		Notes
		Bibliography
	Chapter 6. Focus on the dairy value chain
		Summary
		Sub-sector definition and segmentation
			Figure 6.1. Cow’s milk dominates the global raw milk output
			Figure 6.2. The dairy value chain
		Global trends
			Increasing world consumption of dairy products with fastest pace in developing countries
				Figure 6.3. World consumption growth of dairy products driven by non-OECD countries
			Consumption of processed products in non-OECD countries will drive dairy sector growth
				Figure 6.4. World dairy production value and structure, recent trends and forecasts, 2005-19
				Figure 6.5. Key importers of selected dairy products globally
			World dairy price trends should prompt a supply response from investors
		Sources of competitiveness
			A highly fragmented production segment which involves households and small farmers
				Figure 6.6. Annual dairy, food and meat price indices, 2002-04 = 100
				Figure 6.7. Millions of cows producing milk in Ukraine, 1990-2006
				Figure 6.8. Milk yield, tonnes of fluid milk per cow per year, 1990-2006
			Cost-competitiveness of raw milk production
			Access to fast-growing markets, high domestic demand and advantageous geographic position
				Figure 6.9. Cost of milk production in selected countries, US dollars per 100 kg, 2007
				Figure 6.10. Domestic demand for processed dairy products is expected to increase by 30% over the coming decade
				Figure 6.11. The Ukrainian dairy industry exports significant volumes of its production
				Figure 6.12. CIS countries and Middle-East already key importers of Ukrainian dairy products
		The role of foreign investors in the dairy sector
			Table 6.1. Turnover of the largest global dairy processing companies, 2009
			Attraction of FDI into the dairy processing sector
		Key issues and policy barriers
			Shortages of human capital
				Figure 6.13. Workforce skills are seen as an area for improvement where government action is called on
			Outdated and excessive dairy safety regulation is ineffective and burdensome
				Figure 6.14. Quality of state controls and regulation are debated
			Milk quality standards: design and enforcement
				Box 6.1. Duplication of procedures and inefficiency in enforcing standards
			Fragmentation in raw milk production has a negative impact on quality, efficiency and productivity
				Table 6.2. Quality standards for raw cow milk for food production in Ukraine and the EU
				Figure 6.15. Milk yields in Ukraine’s large dairy farms are half of the European Union average
			Lack of financing affects the level of investments and therefore productivity
				Figure 6.16. Lack of financing affects the level of investments and therefore productivity
			Imperfect information and price heterogeneity affect farmers’ profitability
			Taxation of inputs via tariff and non-tariff import barriers
		Policy recommendations
			Human capacity building policies would have a positive impact on productivity
				Figure 6.17. A summary of policy options to enhance initial and VET education
				Figure 6.18. Extension programmes are an example of a policy option to develop producers’ skills
			Improving safety regulations and streamlining administrative controls
			Strengthening the role of producer co-operatives
			Improving access to credit
				Figure 6.19. Credit guarantee schemes are a way to foster access to finance for mid-size farmers
				Figure 6.20. Supply chain financing brings the financial means of large or foreign firms to small-scale producers
		Bibliography
	Chapter 7. Energy-efficiency and renewable technologies: Focus on production of energy based on biomass
		Summary
		Why focus on production of energy based on biomass
			The need for energy efficiency
			Traditional energy production, transmission and distribution activities are still dominated by state ownership
				Figure 7.1. Energy intensity, a cross country comparison
				Figure 7.2. Opportunities to reduce energy-intensity and to develop alternative sources of energy along the value chain
				Figure 7.3. Naftogaz (100% owned by the state) dominates the gas-value-chain in Ukraine
				Figure 7.4. State-owned Naftogaz dominates exploration and production, as well as the main oil pipelines
				Table 7.1. The distribution of Ukraine’s coal mines
				Figure 7.5. State and private ownership of power transmission and distribution assets until mid-2011
			Alternative sources were selected with a focus on production of energy based on biomass
		Sector definition and segmentation
			Figure 7.6. Biomass residue supply chain for energy production
		Global trends
			Renewable sources of energy play an increasingly important role and biomass is amongst the most dynamic segments
				Table 7.2. Energy uses of biomass
				Figure 7.7. Structure of the global total primary energy supply, 2007
				Figure 7.8. Structure of world renewable energy sources supply, 2007
				Box 7.1. The case of biomass adoption in district heating in Sweden
			Proximity of resources and stability of supply are key to ensuring profitability of a biomass project
				Figure 7.9. Key success factors for a bio-energy project
		Sources of competitiveness
			Biomass resources are widely available in Ukraine
				Table 7.3. Straw, wood, husk and manure as primary biomass sources are promising in Ukraine
			Biomass residue use is cost competitive for production of heat and power
				Figure 7.10. Economic potential of biomass sources in 2008, breakdown by type of agricultural residue, millions of tonnes of coal equivalent
				Box 7.2. Assessing the biomass potential of a country: From “theoretical” to “economic” potential
				Figure 7.11. Production costs of heat by straw-based boilers are lower than by gas-fired boilers
				Figure 7.12. Operating costs and profits of a hot water boiler based on wood biomass for supply of a middle-size city, thousands EUR
				Figure 7.13. Net cash-flow plan in the five first years of the project, thousands EUR
			Increasing prices of natural gas in Ukraine should make biomass an even more attractive fuel to utilities
				Figure 7.14. Fuel used for power and heat production in Ukraine, 2006
				Figure 7.15. Price of natural gas for utilities in Ukraine, past trends according to IMF requirements
		The role of foreign investors in the biomass value chain
			Figure 7.16. Potential opportunities for FDI along the value-chain
		Key issues and policy barriers
			Regulatory framework and administrative complexity limit access to utilities companies
				Box 7.3. Example of foreign direct investment by AlterEnergyGroup
					Company structure and activities
				Box 7.4. The application of feed-in tariff regulations
			Biomass sector is not promoted enough as an area for foreign investment
				Figure 7.17. Lack of public support and awareness for the biomass industry was pointed out
			Power and heat payment arrears
				Figure 7.18. Payment arrears also need to be solved to allow for investment
			Natural gas, heat and electrical power prices are still subsidised
			State ownership of power and heat production assets
		Policy recommendations
			Streamline administrative processes, including a single-window approach and pre-approval for green tariffs
			Align energy costs to market prices, as promised to the IMF
			Draft a national action plan for the production of energy from biomass, including demonstration projects and possible green tariffs for heating
				Figure 7.19. The quick adoption of biomass in Poland has made it a key element in the renewables landscape
			Increase privatisations of energy production and distribution assets to trigger private investment in infrastructures
				Box 7.5. The role of private and foreign investment in the Russian privatisation reforms
			Review of payment mechanisms and market regulation institutions
			Solve existing payment arrears
		Bibliography
	Chapter 8. Machinery and transport equipment: Focus on civilian aircraft manufacturing
		Summary
		Why focus on civilian aircraft manufacturing
			Figure 8.1. Four sub-sectors were identified on the basis of their share in the national domestic turnover
			Table 8.1. Aircraft industry was selected as it presents specific technology and capabilities in Ukraine and high government priority
		Sector definition and segmentation
			Definition
				Figure 8.2. The aircraft manufacturing industry ranges from components to after-sales services
				Figure 8.3. OEMs play a key role in designing, coordinating suppliers, and assembling the final product
			Segmentation
				Table 8.2. Segmentation of civilian aircrafts
				Table 8.3. Distribution of selected aircraft by segments
				Box 8.1. Three distinct duopolies
					Figure 8.4. Number of deliveries of regional turboprops, 2002-10
					Figure 8.5. Number of deliveries of regional jets, 2002-10
					Figure 8.6. Number of deliveries of large or very large aircraft, 2002-10
		Global trends
			Demand forecasts over the coming two decades are promising on every segment
				Figure 8.7. Total expected demand for civilian aircraft by segment over 2011-30
			Demand is shifting to the Asia Pacific region and will be geographically more diversified
				Figure 8.8. Asia Pacific and other emerging economies will drive the growth of demand for civilian aircraft
			Competition is expected to intensify as new players are entering the market
				Box 8.2. Demand dynamics for civilian aircraft
			Minimizing purchase price, operating costs and financial costs
			The supply chain is going global
				Figure 8.9. Example of Airbus A380 global supply-chain
			Aircraft purchases are still influenced by political and strategic factors
				Table 8.4. Active fleet by carrier, Airbus vs. Boeing
		Sources of competitiveness
			Long tradition and existing capabilities in design and manufacturing
				Table 8.5. Total accidents/Total aircraft production % of key aircraft competitors
			A favourable cost position
		The role of foreign investors in the civilian aircraft value chain
			Box 8.3. A world-class integrator strategy – Russia’s Sukhoi Superjet 100
			Box 8.4. Focusing on low-end tier-2 and tier-3 components – Romania and EADS
		Key issues and policy barriers
			A small domestic market
				Table 8.6. Active fleet by country, selected countries
			Low market share and lagging MRO network are two mutually reinforcing issues
				Box 8.5. A close strategic and industrial relationship with Russia
			Closed governance, burdensome legal status and lack of risk-sharing partnerships with suppliers
				Box 8.6. Issues deriving from the legal status of Antonov – Public procurement and joint ventures
				Table 8.7. Investment in the Boeing 787 programme by Japanese risk-sharing partners
			Sustainability of skills in question
				Figure 8.10. Surveyed entrepreneurs assessed the skill gap in the aircraft segment
		Policy recommendations
			The governance of Antonov needs to be reformed and corporatisation promoted
			Need to improve the investment policy and promotion of the sector
				Box 8.7. Investment policy actions recommended for Ukraine
			Review trade policy
			Skills sustainability
			State support to the industry and its clients needs to be reviewed
				Box 8.8. Brazil – An array of educational, training and research institutions for competitiveness in aeronautics
		Bibliography
	Conclusion and roadmap for implementation phase
		A roadmap for creating a favourable business environment and attracting investment
			Economy-wide measures are the keystone of the reform agenda
		Targeted interventions are recommended to build long-term capabilities in promising sectors
			Figure 9.1. Selected areas of interventions in the Agribusiness sector
			Figure 9.2. Selected areas of interventions in the Energy production from alternative sources sector
		Bibliography