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WHY LOCALIZATION IS NEEDED?

24.06.2020 Comment of the President - Chairman of the Board of "Electron” Concern , Honored

Economist of Ukraine Yuriy Bubes

 

A few words about the draft resolution of the Cabinet of Ministers on a pilot project in the field of public procurement.

 

I would like to draw your attention to the fact that specialized machine-building enterprises of Ukraine did not have and do not have any benefits and preferences, which allows foreign competitors to apply price dumping, not to pay taxes and import duties, which harms the country's economy.

 

Let's look at the practice of counteracting the expansion of imports in the world. Localization - a very common and effective tool for market regulation by governments in both developed and developing countries - they give preference to national producers.

 

Today it is not a question of granting preferences exclusively to national Ukrainian transport producers. And that our legislation needs to be implemented in the European one. After all, in the developed countries of Europe and the world, the same norms apply that are proposed by the Government of Ukraine today - these are the same requirements that follow from the Association Agreement between Ukraine and the EU!

 

By the way, for some reason opponents refer to price criteria - as if the prices of the Ukrainian producers are inflated and customers will have to buy more expensive production. It is nonsense! The results of auctions in Ukraine, for example, for trams, over the past 5 years show that the price of Ukrainian producers in all cases is much lower than the prices of non-residents. Prices officially provided based on the results of tenders, for example, in Lviv, are almost twice lower! And add to this local service centers, which are extremely important for the convenience of Ukrainian customers.

 

 

 After all, how does localization work in the world? For example, in Japan, foreign firms that are not localized are allowed only up to 2% of trading. In France, even in the presence of competitive products, preference is given to national companies. The rest of the world is similar: in the UAE, the localization requirement is at least 51%, in Australia - 20-25%, similar policies on importers are followed by China, India, Brazil, Turkey and many other countries.

 

 

 

 And what about Europe? Thus, the EU Procurement Directive requires open and competitive bidding, but allows Member States to reject applications containing less than 50% of the local component of EU production for food, energy, urban (rail and non-rail) transport, automated systems, etc. . And in most cases, the EU actually requires opening local production, buying local materials and equipment, providing jobs for EU citizens and paying all taxes.

 

 
And the most illustrative example is the USA. There the requirement to level of localization, for example, rolling stock of public transport only constantly grows: in 2016-2017 made not less than 60%, in 2018-2019 - not less than 65%, after 2020 will reach the mandatory 70% of the national component in the product, and in some cases up to 100%! And in Poland, which they like to set an example, participation in public procurement by foreign companies is not available at all!  

 

 

Governments do this for a simple and understandable reason - to keep existing and create new jobs, ensure tax revenues.

 

The absence of such a criterion as localization leads to the loss of Ukrainian enterprises' share of the national market, reduction of production and loss of jobs, direct losses of the state itself.

 

Is localization needed in Ukraine? 

 

 

For five months of 2020, our state budget did not receive UAH 50 billion, or 11%, from the planned level. In January-May 2020, a total of UAH 381.75 billion was received, or 2.4% less than in the same period of 2019. In May alone, the state budget received revenues 10.8% lower than planned.
Since the beginning of February alone, the number of officially unemployed in Ukraine has increased by 140,000 to 517,000, ie the state has lost 470,000 payers in a few months. Labor migration is growing - employers from other countries have even organized special charter flights to attract skilled workers. !

 

 

Let's return to the mentioned resolution. What is it about?

 

The proposed draft government resolution introduces the obligation to use the customer (buyer) in the evaluation of the tender proposal together with the price of the non-price criterion "localization", which should be 15-30%. In essence, this is the elimination of clear discrimination against Ukrainian producers and the granting of the same preferences that foreign companies have in their countries. In short, it is the Ukrainian origin of raw materials and basic materials, semi-finished and component products, auxiliary and other materials purchased for Ukrainian currency, localization of all financial costs and a certain level of localization of other components of the production cost of the procurement in Ukraine and, finally, location objects of production on our, Ukrainian, territory.

 

The implementation of these systemic measures is an objective necessity for the national economy, as it opposes the uncontrolled expansion of imports, which provokes a weakening of the economic, including currency stability of the country: excessive dependence on imports hinders the development of industry, causes a state where imports do not complement, but suppress production, inhibit innovation activity and economic growth.

 

 

This is a very important step, because it will allow tens of billions of hryvnias of our taxes, which today work on the economy of other countries, to be reoriented to domestic producers.

 And it should be emphasized – it does not contain restrictions on the participation of foreign participants in procurement, including the Law of Ukraine "On Public Procurement", but only provides for other criteria to apply another - the localization of production in engineering, increasing the product life cycle. Moreover, it is a chance for foreign producers to create new and powerful enterprises in Ukraine and for fruitful cooperation with Ukrainian producers.

 

 

 

 

 

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