"Letter of the Law": Ministry of Economy say legal entities may be granted land property but not all of them are familiar with the procedure

10 Aug 2011

What will be the new government strategy of the attraction of foreign investment? When will Multilateral Investment Guarantee Agency (MIGA) start to insure political risks of investors in Belarus? How much will this insurance cost? Will the investors receive land as a property? What will be changed in the investment legislation in the nearest future?
These and other questions were discussed in the framework of another edition of the author program “Letter of the Law” of Denis Aleinikov, the senior of the Law Group “Argument”, by the Head of the General Investment Department of the Ministry of Economy Kirill Koroteev and the Chief Economist of the Department on State Policy on the Foreign Investment Attraction of the General Investment Department of the Ministry of Economy Anastasiya Lyubchenko.

Recently it has become public that our country is finalizing the necessary legal procedures for the full-fledged participation in the activity of Multilateral Investment Guarantee Agency. Why is it important for us to take part in its work?

Kirill Koroteev (К.К.): Indeed, at the moment we are at the final stage of the ratification of all the agreements. Multilateral Investment Guarantee Agency (MIGA) is the autonomous organization of the World Bank Group that deals with foreign direct investment insurance against political (noncommercial) risks, i. e. insurance against expropriation, loss of investment as a result of civil disturbance and war, against non-honoring of sovereign financial obligations, against currency inconvertibility and transfer restrictions. Belarus is a member of MIGA since 1992.


Kirill, if Belarus is a member of MIGA since 1992, why did we start the work on the finalizing the legal formalities, which are necessary for the actual participation in insurance, only now?

К.К.: It is a fair question. Indeed, since 1992 Belarus is a full member of MIGA, and during this period there was only one case of insurance. One year ago, in July 2010 amendments to the basic agreement of MIGA were made. Therefore, the procedure of approval by the MIGA Member States was launched. At the same time Belarus till recently and to the date of the introduction of the amendments had not ratified with MIGA two agreements - “Agreement on the Local Currency” and “Agreement on the Legal Protection of Investment”.

This process started in 2004, when the corresponding edict of the Head of the State was adopted which contained the approval of the text of these agreements in Belarusian version. We wanted to agree on certain provisions, our own position, however as a result of the negotiations with MIGA we came to the conclusion that the agreements which the Agency suggested for ratification are basic and standard for all the Member States. That is why this process was relaunched and actively started in 2010, and nowadays we are approaching the final stage.

What is the value of the investment covered by the MIGA guarantees?

Anastasiya Lyubchenko (A.L.): As a rule, MIGA covers the value of the investment of up to 180 millions USD. The larger value is possible. It is decided by the qualified majority of MIGA Board of Directors and depends on the project, the sphere of investment and the level of the country risk. This analysis is conducted by the Agency itself following the receipt of the preliminary application from the prospective investor. The Agency analyses the project according to the certain factors, approves it and presents to the Board of Directors. Afterwards the agreement is ready for the signature. The project can be insured for a more significant sum. For example, there is a project in Russia, which was insured by the Agency for more than 300 millions USD.

Surely, the amount of the insurance premiums also depends on country risk. What is the country risk of Belarus today, according to MIGA , and how much can the guarantee for the investors willing to invest in our country cost?

A.L.: Since the necessary procedures are not completed at the moment, we did not pose such a question to MIGA: in our opinion, it is not correct. Moreover, it is difficult to talk about this because Belarus does not have much experience in cooperation with the Agency – only one project – investment of Raiffeisen Bank in PriorBank. The guarantee for about 28 millions USD was given. According to the MIGA report, it can be said that the insurance premium interest for 2010 was 0,98 per cent. It is much lower than the cost of the guarantee of the Republic of Belarus – 1,5 per cent. And it is much more advantageous than in any private organizations which also cover political and noncommercial risks. Furthermore, the advantage of MIGA is that private organizations can cover the project of up to 1 million USD, in MIGA the value is much more significant.

There is an opinion that the full-fledged participation in MIGA will allow to reduce the national debt. How is it linked?

A.L.: According to the Ministry of Economy, when the project is insured in MIGA, there is no necessity to grant the guarantees of the Republic of Belarus to the interested person and the national debt does not grow.

Is an investor entitled to insure the risks in MIGA without the consent of Belarus?

A.L.: No, it is impossible, as it is regulated by the Convention Establishing the Multilateral Investment Guarantee Agency, in particular by Article 15. It precisely indicates that the Agency should send a request to the host country to receive the approval. As a rule, when an investor submits the application to MIGA, it sends a request to the government to receive the approval of the project insurance.

Full-fledged participation in MIGA is an indicative event for our country, indeed. There is no doubt that it should stimulate FDI growth. It is important that MIGA should have actual resources for the coverage of the projects in the Republic of Belarus…

К.К.: These resources exist. According to MIGA, lately the applications for insurance have reached more than 1 billion USD. Those are the projects that could exist but the investors are waiting. In 2010 MIGA conducted the world survey on the factors that alert investors when they enter developing countries and markets. First of all, it is the protection against noncommercial risks that is important for investors. It is typical for all developing countries and we are eliminating this gap.

Foreign investors very often put forward an opinion that investment in our country is limited because of the absence of the the right of private ownership of land for legal entities. In Europe grandfathers build factories on their own land and then pass them by inheritance and so on…the family business is growing. According to these criteria investors do not see long-term perspective in Belarus. Land lease for 99 years or 33 years – what is the future of this investment – this is what is important for an investor. There are only prerequisites for introduction of private ownership of land for legal entities. What do you think, do we need private ownership of land for legal entities? When can it be introduced?

К.К.: There is private ownership of land for legal entities. It is prescribed by the Code on Land and the Edict № 667. There is a right of use with a fixed term or with no fixed term, lease and right of private ownership. At the same time, there is no right of private ownership for foreign companies. However, this practice exists in many countries.

I agree. But how often does it exist for local companies? We are aware only of one case when the organization established by a foreign investor was granted the land as a property.

К.К.: In general granting the right of private ownership is the right of executive committees. Nowadays they can grant the right of private ownership via auction by counting the cadastral value of a land plot. There is such a procedure but it is not publicly known. There are complaints from investors about the procedure, however at the moment the amendments to the procedure are entering into force. These amendments will eliminate some restrictions which are burdensome for investors.

Probably this procedure should become more publicly known, so that investors are aware of it? The possibility of receiving the land for private ownership is one of the key advantages of investment climate. In Belarus nobody puts forward the idea that through the establishment of a subsidiary a foreign investor can acquire the right of private ownership for land.

К.К.: According to the recommendations of the World Bank and IFC we use this idea and such a rule in the project of the draft law “On Investment Activity”. They made an overview of investment policy and gave their recommendations on the basic documents which regulate investment policy. We will introduce the rule on the guarantee of the private ownership for land and it will be widely presented.

Does the institution of private ownership have enough legal guarantees nowadays or should we work more?

К.К.: According to the recommendations of the World Bank and IFC we use this idea and such a rule in the project of the draft law “On Investment Activity”. They made an overview of investment policy and gave their recommendations on the basic documents which regulate investment policy. We will introduce the rule on the guarantee of the private ownership for land and it will be widely presented.

Does the institution of private ownership have enough legal guarantees nowadays or should we work more?

К.К.: The work never stops. There is a number of provisions on investment agreements which were introduced in Decree №10. The possibilities of investors’ recourse to international courts were widened. The number of the bilateral investment treaties is growing – the treaties have been signed with more than 50 countries. We constantly work on new agreements with other countries. I am not aware of any complaints on the legal protection of investment in Belarus.

There were no complaints?

К.К.: There were no complaints on the guarantees contained in the documents.

In the previous program “Letter of the Law” the representative of the Ministry of Economy Tatiana Mantsevich pointed out that according to the survey conducted by the Ministry among the investors working in Belarus the negative feature of our investment climate is the instability of the legislation. If Belarus wants to attract investment, we have to solve this issue. How are you going to deal with it?

К.К.: We have to admit that the conducted work on the changes in the legislation is focused in its liberalization. It is stated in Directive №4, in the plan of the measures adopted for its fulfillment and in the acts adopted to reduce the number of cases of licensing, to facilitate the administrative procedures. There are plans of measures, as a rule, they are yearly or mid-term ones. It is different when we change something not within the plan. This is what investors complain about. For instance, the notorious Decision № 911, Decision of the National Bank and the Government № 240/5. They were provoked by the objective situation, which existed at that moment.

Do you consider these measures to be relevant?

К.К.: I do not want to interfere with the work of the colleagues who work on these issues. However, nowadays these measures are being criticized.

Indeed, there is different understanding of these issues by the state agencies and investors: different philosophy and thinking. When the National Bank adopts three guiding documents in a short period and each of them substitutes the strategy of the preceding, the National Bank claims that in the end it seeks an optimal decision. Whereas, investors think that if the regulation is changed three times in a row, it is instability.

К.К.: This is exactly what the complaints revealed by the surveys are about. However, those are the unplanned changes, which took place due to the objective reasons and the macroeconomic situation. In general, the changes in the legislation are systematic.

I agree that they are systematic and the fact that there are positive changes can be seen in Doing Business. For instance, every year the progress of our country according to the criteria of Starting Business and others can be noted. However, I am not talking about liberalization but about the guarantee of the stability of legislation. An investor enters the country and sees the normative conditions. They can be good or not that much. Investors assess them and on this basis estimate their business risks and decide whether they want to work in these conditions or not. And if they decide to stay, they want to know that in three, five years the conditions will stay the same and their business risks will not rise. Before there was a 5-year moratorium in the Investment Code on the worsening of the conditions of economic activity for foreign investors. However, there was a problem - this moratorium actually did not work since the sense of this rule was understood in a different way by the state agencies and foreign investors. In the end, it was abolished. Do you plan to go back to something similar and introduce a stabilization clause?

К.К.: We wanted to introduce such a clause. There was an attempt to revive this mechanism. At the beginning of this year a draft decree comprising such a norm was prepared by our initiative. However, later on we renounced it. Why did not the mechanism in the Investment Code work? First of all, because it is aimed at foreign investors exclusively, those who just entered from the moment of the registration of the commercial organization with foreign investment. Thus, we automatically created unequal conditions. From the moment of exclusion of certain privileges for foreign investors from the Investment Code we made the rights of domestic and foreign investors equal since our idea is to create a level playing field.
Secondly, practical application of this rule in the courts and other bodies is extremely problematic. What does the non-worsening mean? We abolished one tax, but raised the rate of another one. In general, we improved the conditions of the residents; the tax burden has been reduced. However, they might claim that it was more advantageous to pay the old tax and might ask for consistence since they believe that the situation has worsened for them. There were many cases like that. We set the task to lower the tax rate, to reduce the number of preferences. In the mid-term, we should come to adjustment of the taxes with our neighbors, members of the Custom Union. It is not a secret that the Belarusian profit tax rate is higher than the Russian rate. Please, take notice that if many residents have different tax rates fixed for 5 years it will lead to high costs of the tax management.

I agree that there are problematic issues. Did you analyze how the similar mechanisms work in other countries?

К.К.:In other countries, according to the information received at that time, such rules existed, but nobody applied them. In the developed countries particular legislation has been created and frequently such a problem does not arise at all.

OK, you renounced such a mechanism in the draft decree. What will be introduced as a substitute?

К.К.: There will be nothing new, since these issues were partly solved by the bilateral investment treaties concluded by the Republic of Belarus. Moreover, the stabilization clause remains valid for the residents of the free economic zones.

On the forum to our program the users write that the Ministry of Economy is trying to attract foreign investors and to create the conditions for their activity. However, it should deal with domestic investors and stimulate their investment. How can you comment on this?

K.К.: The legislation does not create any preferences for foreign investors. In all the regimes, which exist nowadays – investment agreement, free economic zone, the regime of small and medium towns – the legislation is the same. In the Investment Code foreign and domestic investors have the same rights and preferences. According to the number of the investment agreements, there are around 700 of them, it can be seen that domestic investors prevail. According to the value of the capital a small part of the agreements concluded with foreign investors prevails and makes up to 30 per cent of the total value. Those are larger projects since frequently it is transnational capital, world brands. Domestic investors realize less significant projects. We create the incentives for their support. Not long ago Edict of the President №231 was adopted; it allows all legal entities that meet the requirements of the Edict to reimburse the interest for the credits received for the realization of those projects. This is refinancing of one hundred per cent in BLR or foreign currency without the increase of the share of the state in the statutory fund.

Some time ago we were very proud to be the only country in the CIS which has the Investment Code. Later it became outdated and around two years ago the working group on the introduction of changes and preparation of a new edition was established. The work is still not completed. What are the prospects?

К.К.: We are at the final stage. There were difficulties with the format. We were thuinking about which format we should leave: the one of the code or the law. We came to the conclusion that there is no need to have a code. If one divides the Investment Code, which is now in force, one will see that one chapter is on the general provisions, terminology. The next one is on the state support of the investment activity, but the majority of the rules have been moved to the separate edicts on the state support, whether they are subsidies, loans or guarantees of the executive committees on the internal credits. One more chapter is devoted to the so-called state complex expertise. Those are not the norms of the Code but the technical guidelines about where one should submit the documents and in what time. This information will ne moved to the special by-law which will deal with these issues. Investors were scared by the word “expertise.” They did not get into the details that the expertise is conducted only in exceptional cases when an investor requests state support. Nevertheless, the negative reaction occurred and they believed that they had to pass some complicated procedure to be able to invest; that this procedure is conducted by the state bodies and it is not clear what they could decide.

The expertise can be found in other normative acts – Decree №10, for example.

К.К.: In Decree №10 it is the case when an investor requests preferences which are not prescribed by the legislation. It is normal. After lengthy debates among the state bodies we came to the conclusion that the Code should be replaced by the law on investment activity. This is also the opinion of international experts. Such an approach is clear for investors and corresponds to international experience. At the moment the draft law is at the stage of approval. We hope that the government will introduce this draft law in the parliament in autumn session.

Which advanced novels will be introduced in this law?

К.К.: First of all, the range of the guarantees for all investors will be widened: the guarantees of ownership, protection against expropriation and so on. We followed the advice of the experts with international experience in this issue. The annulment of the requirements for the registration of the companies with foreign investment is among the novelties that will have impact on our investment climate. Decree №1 regulates the procedure of the creation of commercial organizations and refers to the Investment Code. It is a lengthy process, the requirement for the minimum statutory fund is 20 thousands USD. Some time is needed to form it.

Will this requirement be abolished?

K.К.: Yes, it will. We will abolish the requirement for the amount of the statutory fund since the very sense of the status of the commercial organization with foreign investment has been lost. When there was the three-year moratorium, it was necessary to receive the preferences for the profit tax. At the moment, since everyone is equal, there is no sense in such a status.

What else is the Ministry planning to attract foreign investment to the country? Is there a strategic vision of this issue? To put it mildly, this problem is not being solved.

К.К.: It is being solved but in evolutionary way. We have an ambitious task – to increase the flow of FDI. FDI is not just money, which came from abroad; it is first of all new technologies, new management, guaranteed sales markets and raw material markets – everything that we lack as a country with a small market.

How do you plan to compete for investment with our neighbors?

K.К.: As for the legislative initiatives for the moment the work on the draft law on the public-private partnership is being conducted. This strategic way is not used in our country at all. It is being developed in all countries. State and private capital is used in large infrastructure projects, which can not be managed by the state. There will be an element of concession in this law – to build, to use, to transfer. It will be transparent and clear so that it could be widely used. We have large infrastructure in which it can be invested, an investor can profit and develop.

I cannot see any legal hindrance for the development of public-private partnership at the moment. All the elements are contained in instrument of the investment agreement with the Republic of Belarus on the basis of Decree № 10.

К.К.: It is true that there are such examples. We are working on two large projects. However, it is necessary to pass the procedure of the approval by the Head of the State. When it is clear how to conduct the tender and how to determine the conditions of the transfer of the object for concession everything will be simpler.

Are you trying to say that the public-private partnership will be possible without the approval of the President?

К.К.: We will determine the mechanisms that will not require the constant request for the approval of the Head of the State.

What are the other initiatives besides the Law on the Public-private Partnership that you are planning to undertake?

К.К.: We are preparing the strategy of the attraction of FDI. Besides the improvement of the legislation in certain spheres, the state priorities will be determined. We are open for the investment in all the spheres, we don’t have any priorities. On one hand, it is good since there are no barriers. On the other hand, there is no specialization.

There are certain spheres, which were suggested by international experts. We analyzed them and sectionized to find out in which spheres we can create interesting clusters. For instance, International Financial Corporation sees a good cluster in the sphere of the vehicle components, in the sphere of ICT and agro-industry. A major emphasis is biotechnology and pharmaceutics. We will present a project of Pharmograd. It is already in the 5-year plan of the social and economic development. This project is potentially interesting.

The National Investment Agency was already created. We were working on it for a long time and finally decided on the format. It is state institutions, which deals with investment, privatization, and will deal with the PR of the country and will take part in investment forums, coordinate a number of projects which are rare and will gather the suggestions from investors. It is a communications body. The active work on the hiring of personnel is being conducted.

A.L.: As a body, which actively participates in drafting normative acts, we should have the feedback from investors. To this effect some years ago a banner was created on our official web site which gives the possibility to access a special form. There anyone, either a Russian speaker or a foreigner, can leave their recommendations on the improvement of the investment climate in the Republic of Belarus with the argumentation of their suggestions. This allows to take the opinion of the business community into account while creating the drafts of the normative acts.

On the forum TUT.BY to our program some feedback can be found among the constructive ideas. For example, representatives of an investor are not happy with the Vitebsk Regional Executive Committee. They point out the red tape, late responses to the proposals of the investor and so on. There were also negative comments on the work of another executive committee.

К.К.: There are cases like that concerning executive committees and sectoral republic government bodies. Investors complain about unconstructive dialog, misunderstanding and even the absence of the attempts to help with solving the problems. We are going to look into all these cases to influence the situation according to the examples. We already have several ones. Indeed, sometimes it is common when there are normative acts, which regulate the issue, but in the reply the body refers to the decision of its board. According to some reason it prevails over the normative act. Even we cannot understand this, not surprising that investors cannot. We will put an end to such cases and submit them for consideration of the government’s panel.

Which key advantages of the investment in our country are we going to use to attract foreign investors?

К.К.: The key advantages are traditional. We often name them. First of all, it is geographical situation. Secondly, it is affordable workforce of high quality. According to the level of education the Republic of Belarus is a leader among the neighboring countries and even some European countries.

I cannot agree that we have affordable workforce of high quality. According to the practice very few people speak English. Foreign investors will not hire people with good education who do not speak any foreign language. It is difficult to terminate an employment contract with an employee nowadays. It is a good policy for an employee from the state’ side, however, there is a problem for investors: they cannot be free to dismiss the personnel if they are not happy with it. Until recently workforce was not too affordable either. Last year the average wage was 500 USD – it is not low-price in comparison with the neighboring Russia and Ukraine. That is why to my mind the idea that the workforce is affordable and of high quality is disputable. I am analyzing what investors say. It is problematic to hire an engineer since in our country almost everyone is a lawyer or an economist. Another problem is to find an engineer who speaks English.

The issue of the advantageous geographical situation also seems to be disputable. Many countries in Europe, for instance the Czech Republic, write in their PR booklets that their country is situated in the centre of Europe. It means that about 5-7 countries besides Belarus claim this advantage.

Can the automobile transit be one of the key factors of the success taking into account that the most popular and the cheapest transport in transportation is marine transport?

К.К.:Certainly we do not have the access to the sea. However, a large number of logistics centers are being built at the moment. Certain investment is being made. A number of projects is linked to the realization and expansion of the National Airport. We are planning to build the second runway. There will be a new modern terminal. Certain emphasis is made on this means of transport. Large investment is attracted into this sphere. According to the statistics around 15-20 per cent is invested in the sphere of transport and logistics. If we mention the advantages, we can take the Doing Business rating as a basis. The low level of bureaucracy and corruption is noted there.

As for corruption, I can agree. However, the level of bureaucracy is still high – it was pointed out in the latest survey among foreign investors conducted by your ministry.

К.К.: These days we are completing the realization of the program on the sequestering of the administrative procedures. There are around 90 events. Some of the procedures were annulled, some were facilitated. I think by the time we conduct the new survey Belarus will the leaders in this indicator.

What else?

К.К.: We should analyze the economy as a complex. In general in Belarus industry is developed in all the sectors, for instance, petrochemistry and machinery. There is internal market and demand. Certain clusters can be created around these sectors and it should not be disregarded. There is developed agriculture in which investors are interested. The potential of the development of deposits is not used. At the moment the active negotiations with the investors on the development of deposits of potassium salt are being conducted. The development of the deposits of brown coal and shale is planned for the end of this year. There is a certain potential of investment which will create a synergistic effect.

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