Today Ukraine lacks foreign direct investments. And this is holding back its economic growth. This opinion was stated by Oleksandr BONDARENKO — director and co-founder of the Bureau of Investment Programs during his exclusive interview for the magazine Gaming Industry. He added that one of the most attractive sectors is the domestic gambling business.
Why are foreign direct investments important for Ukraine’s economy?
— To develop the Ukrainian economy we need an annual GDP growth of at least 5 to 6%. We haven’t it now. Last year it was minus 4%, this year a forecasted is 3.5% and it is not a good figure. By the end of 2021, we shall not even reach the level of 2019. To have rapid economic growth we lack foreign direct investments in a large volume.
What does “a large volume” mean? I’ll remind figures. For 30 years of independence, our country has attracted, according to various estimates, from $ 42 to 45 billion of foreign direct investments. It is far from enough. For example, during the same period, Poland itself earned (and it is the right word!) $ 200 to 220 billion of such investments. This is five times more than Ukraine. And if we take into account that our neighbor has a smaller population it means that one Pole has from 6.5 to 7 times more additional capital entered into the national economy than it was received in Ukraine.
There is another example. The city-state of Singapore with a population of about 6 million people attract $ 50 billion as investments in 2020. It was a difficult year of the COVID‑19 pandemic when many businesses closed for 3 to 4 months there. That is, Singapore has surpassed us hundreds of times in the amount of foreign direct investments per capita.
We are speaking about an additional source to finance state and private projects. Because investments can support the state sector, for example, the infrastructure — airports, roads and tunnels, though, according to statistics, 70% go to private businesses which buy factories, modernize old enterprises, build solar or wind power plants, biogas plants and more. Each sector of the economy needs investments. The economy will not grow without additional investments. This is a scientific theory and practice.
What are the prospects for investing in the Ukrainian gambling industry?
— This sector is interesting for investments because for more than 10 years it was officially absent in the economy of Ukraine. One day Professor Chan Kim wrote a book “Blue Ocean Strategy”. He said that the blue ocean — is when you enter or create a new niche with no competition. It is extremely attractive for any investor to work under such conditions.
In our country, the gambling business was legalized only at the end of 2020. Since then only one foreign investor has come here — the British company Storm International with the Shangri La casino network so here there is room for innovations and attraction of the latest technologies.
We also have potential customers for this type of business. According to world statistics, from 5 to 10% of the population of any country gamble. So, we do not differ significantly from the United States, the Netherlands, Germany, Luxembourg, or Switzerland. Therefore, investors should be interested in working in Ukraine.
One more factor of our investment attractiveness is the initial costs to enter this industry. Compared with those in Germany or Switzerland they are lower. It is still cheaper to equip a classic casino establishment in a 4‑star and 5‑star hotel in Ukraine than in Europe so the return on investments will be faster. If in Europe a casino pays off in 12 to 14 years, in America — in 10 to 12, in our country it will be in 6 to 8 years.
But. We have a certain “but”. Speaking about the same size of the market of consumers of gambling services of 5 to 7% of the population of Ukraine one should keep in mind that they have much lower purchasing power. In Germany, people come to a casino just to relax and they are ready to spend a certain amount of money for it. Ukrainian players often lack necessary earnings and this is an objective reality.
So there is a niche for this business. According to our calculations in each Ukrainian city with a population of one million and more foreign or Ukrainian investors could open 3 to 5 or even 6 new gambling establishments. In Kyiv, of course, there is a larger market since it has a larger population whose purchasing power is higher. Here you can open 10 to 15 and even 20 casinos with multi-game zones. At the very beginning, one needs to invest $ 3 to 5 million in each casino. Therefore, potentially a total of up to $ 100 to 150 million can be raised here only to build and equip these gambling centers within a year or two. In cities with a population of millions, there can be a total of up to 20 institutions — modern and powerful and this is also about $ 60 to 70 million of investments. And this is the only arrangement of provisions — without licenses, without any taxes, etc.
Which sectors of the gambling industry may be most interesting for foreign investors?
— The demand for certain types of games changes with time. Blackjack which used to be very popular now is less played. Some time ago casinos were considered as something incomprehensible but now they as well as poker are more and more favored. Therefore, investors in the first place are interested in casinos and gambling halls and then in online games. There are different target audiences there, different costs because it is one thing to invest $ 5 to 7 million in a casino in the center of Kyiv and another thing to develop an online platform where a state-of-the-art complex costs hundreds of thousands of dollars. In this case, a payback of investments, a business model and sources of income are different because online they earn more from advertising than from their customers’ payments.
But foreign investors are interested in a systematic approach when you can enter into one segment, for example, to organize a casino and then in the same building to arrange a separate poker club and later to install slot machines. That is they are interested in a cross-functional business construction to earn with it.
As an investment specialist, I would be interested if we become, say, the center of the gambling business in Eastern Europe and shall attract “gambling” tourists from Poland, the Czech Republic, Belarus and the Baltics. There are also casino centers there but let’s set an ambitious goal to be the first for gamblers to come to us and for Ukrainians to earn more in this industry.
Do the Ukrainian gambling laws meet the standard requirements of foreign investors?
— We can say that today 70 to 80% of our legislation does not differ from Asian, European, or Baltic one. The country has established the basic rules of the game.
But as I know businessmen are not satisfied with an income tax in the mentioned segment of the economy. Now, this business is taxed twice or even three times. The first time — you have to pay rather high fees for a license but it’s still more or less okay. The second time — you have to pay 10% of a total income, from revenue. In addition, there are 18% of profits. This approach is used only in this industry and it holds back potential investors.
And the second point that does not attract investors is the impossibility to advertise openly. The law prohibits it.
Perhaps such factors are not always critical. They are also present in other countries. But in many of them, the gambling business has already developed and in Ukraine, it has only started. Therefore it reacts painfully to some problems.
When an investor opens a gambling business in our country he must assess the risks. Business margins are reduced by taxes. Another risk is the limited demand for services and so on. But you can make money because now it is the blue ocean here.
Today it is still difficult to determine a business model that will work in the gaming industry in Ukraine because it has been functioning for a short time. I think the first conclusions could be made in the summer of 2022. And one may say: this business model does not work with such taxes or such restrictions. If we want to attract investments into this sector, then let’s make some corrections.
If we build a correct investment policy, more precisely, a policy of attracting foreign investors then, what annual amount of investment funds can we talk about? What share of it is for the gambling industry?
— If we proceed from already mentioned figures of $ 42 to 45 billion of foreign investments over 30 years then on average Ukraine got $ 1.5 billion a year. If it were not a crisis year the figures could be higher — from $ 2 to 3 billion. At the same time, the national economy needs much larger investments. And if we correctly do everything, create a stable legal and economic climate for investors, we will be able to reach $ 7 to 8 billion a year. This is a more or less optimal amount for us so that average Ukrainians feel its advantages — more businesses and various private companies will open, more jobs will appear and wages will increase.
These investments must be real investments of foreign companies and investment funds but not reinvestments of Ukrainians in Ukrainian companies. Today about half of the figures published by the Ministry of Economy are reinvestments of Ukrainian companies from their offshore companies. And we need $ 7 to 8 billion of real foreign direct investments per year.
When we speak about the gambling industry it is necessary to build facilities and buy equipment, which is mostly all foreign, and it can be somewhere between $ 400 and 500 million annually in the first 3 to 4 years when the infrastructure is being built. But there can be much more investments. My favorite example — in Singapore there are casino complexes with shopping malls, hotels, restaurants, bars. One such resort can “weigh” from $ 500 to 600 million. And in Singapore, they have such, probably, 10 or 12. If the same number of institutions is built in Ukraine, it makes $ 5 billion. Even if they are being built over five years, it will be an annual additional investment of $ 1 billion in the resort and entertainment sector of Ukraine’s economy. It will be a super investment. And Ukrainians will work in these establishments — our cleaning companies, catering companies, they will consume Ukrainian products, in particular food. It’s all very profitable.
Your expert opinion: which practical steps should Ukraine take now to attract foreign direct investments?
— It should be a comprehensive program for all executive bodies. The Cabinet of Ministers must not only develop it but also constantly monitor its implementation so that investors come to Ukraine and invest their money here.
The most important thing is to ensure an investor his economic security so that he feels protected and knows that nobody will take from him the resort which he built for $ 500 million. And that no changes in legislation or changes in the leadership of political forces will affect its business model. Political and economic stability and security — this is what an investor needs, the rest he will do himself. There must be the protection of property in a court and in a legislative field. That is the impartiality of the judicial system. Businesses around the world may face unfair competition and there are crooks both in Poland and the United States. But if they encroach on your business, you should be convinced that the rules of property protection function without any mistake.
How will the appearance of foreign investors in Ukraine affect the work of domestic operators of the gambling industry? Are they able to compete with them at the same level?
— Let’s draw an analogy and look at the gas station market. The foreign operator Shell works in Ukraine. It is a royal Dutch fuel company. They have more money than domestic operators. But did they somehow significantly break our market? No. There is SOCAR, the richest Azerbaijani company, now it is international because they work in the EU, Switzerland and so on. Has it destroyed the market of domestic gas station operators? No. I know many Ukrainian gas station owners, they compete with SOCAR, Shell, and other international operators and it is normal. They feel comfortable and tell me privately that it would not be so interesting to work only with Ukrainians. And risks would be greater if we would not have international players here.
If we completely shut ourselves off from international competitors, it is bad because there are risks of internal non-market behavior of Ukrainian operators of either gas stations or casinos. It does not matter which sector we look at. Because it is easier for Ukrainians to concert a certain type of lobbying or some kind of non-market regulation. And when there is an international player, that’s all — the market is more transparent.
Will the recent amendments to the profile law help to attract more foreign direct investments or should it be considered on a larger scale in the context of the national investment policy?
— I believe that we need to look more attentively at the general economic policy and the rules of the game for all investors in Ukraine. Now the law has been corrected. I think that in a year some more amendments will be made and then new ones. This is normal. Legislation should not be ironclad when it comes to the innovation industry and changes that improve regulatory conditions. Regulations as a service component of the state should be constantly improved, simplified, including fewer administrative rules and so on.
And it is important that investors feel that our legislation is developing to make it more comfortable for them to work in Ukraine. Then they will say that everything is fine, they are waiting for us here.