How to stimulate growth of IT industry in Ukraine

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27.03.2014 Posted in News No Comments

English translation of the Forbes.ua article 

March 24, 2014

Author: Sergey Mishko

A special working group has been called to study the experience of Israel, USA and other countries and propose a reform program for the government

As mentioned in the Open Letter (link http://www.slideshare.net/YevgenSysoyev/national-project-innovative-ukraine) addressed to the Ukrainian politicians and ministers, “Created from scratch, IT industry became one of the key industries in Ukraine, which added more than 100,000 jobs for well-paid specialists”. 

The authors of the program want to use the opportunity of the government rotation to propose some initiatives for growth stimulation of the IT industry in Ukraine. Among the authors are also representatives of the initiative group of the IT community, including a number of well-known entrepreneurs, top managers and heads of the industry associations.

As Yevgen Sysoyev, Managing Director of AVentures Capital and one of the ideologists of the program for innovations development, explained the reason for the failure of the necessary reforms, “IT industry in Ukraine lacks attention and in some cases experiences even some kind of opposition from the government. There has been lack of political will. Everyone has been concerned only about how to get richer”. Vladimir Sharov, Managing Director of GlobalLogic, gives one of the examples of possible legislative initiatives based on the successful experience of some Central and Eastern European counties. For instance, income tax rate for the employees of the companies from the National High Tech Park is only 9% in Belarus. Another example is from Romania where income tax rate for the software developers is 0%. The meeting with Arseniy Yatsenyuk, Prime Minister of Ukraine, and Pavlo Sheremeta, Minister of Economic Development and Trade of Ukraine, kick-started the industry with joined efforts of the market players and created “cheat sheet” for the government. It was clear after that meeting that our politicians do not fully acknowledge the importance of the IT industry in Ukraine, although IT is ranked the 5th largest exporter in the country. Despite the distressed economy, the industry grew at 25% CAGR in 10 years, based on the estimates of the World Bank. Market players tend to believe that the growth rate could be much higher with the government support. Members of the working group are very enthusiastic right now but they do not exclude the negative scenario. As Ilya Kenigshtein, Business Development Director of LR Group in Central Europe, stated, “I see that Ukraine is looking for a new development path. If the government needs my help, I am ready to help as much as I can. But if I see favoritism and nepotism again, I will quit the same day”.

Forbes has done an analysis of the working group’s suggestions and selected six priority areas of reform for the short and long terms. What remains unclear is whether the declared action plan will be implemented.

Several attempts to change the situation were also made earlier, e.g. the law on subsidies for the IT and the draft law on e-commerce. However, so far nothing has been done to solve the most fundamental problems. The most illustrative example is 3G/4G connection, which the operators have been discussing for almost 10 years!

IT outsourcing

Ukraine is competing quite successfully with India, China, Russia, and the Western Europe in IT outsourcing. In order to maintain the planned growth rates and, more importantly, to expedite the growth, the authors of the Program plan to train more than 100,000 specialists in the next 5-7 years with the support from the Government. It is necessary to modernize and upgrade the education system, as well as the number of students based on the market needs.

Although Yuriy Antonyuk, Head of EPAM Systems Ukraine, does not participate in the working group, his view on the industry development correlates with the proposed initiatives. As Yuriy said, “In particular, it is important to provide political and PR support to the IT on the international market, i.e. to promote the idea that Ukraine is building innovative post-industrial economy and that the government is fully supporting the industry”. According to the authors of the IT Reform Program, one of the key tasks now is to improve the image of Ukraine as one of the technological leaders in the world.

R&D Centers

There are more than 100 R&D centers in Ukraine that belong to the well-known international companies. Their business model is no different from the model of the IT outsourcing, except that our specialists are working for the projects of particular companies. According to dou.ua, Samsung Electronics has 1200 employees in Kyiv and Kharkov, which is the largest number for Ukraine. Only the offices of the largest outsourcing companies (in descending order: Luxoft, SoftServe, EPAM Systems, GlobalLogic, Ciklum) have more staff.

As Sharov told us, “Countries, rather than companies, compete on the R&D outsourcing market. Success and competitiveness of Ukraine depend on tax incentives for the industry development, which is a basic requirement”. Authors of the IT Reform Program focus on the successful experience of Israel and Singapore in creating and promoting IT clusters. Public-private partnerships can help establish such centers, with the private companies responsible for the financing.

E-commerce

Experts estimate the market size of e-commerce in Ukraine at $2B, however market penetration is only 1.8% at the moment. Among the growth constraints are underdevelopment of logistics infrastructure and the fact that owners of internet stores and customers do not use the electronic payments. Cash remains a dominant payment method.

The authors of the IT Reform Program insist on fast adoption of the law on e-commerce, which will regulate e-commerce and electronic payments. In addition, it is necessary to make it easier or to abandon licensing electronic money and control over it. In the long run the largest foreign producers could have customs bonded warehouses on the territory of Ukraine.

 Startups

There are quite a number of startups in Ukraine which became popular in Ukraine (for example, Rozetka and Ukr.net) and even globally (Grammarly, InvisibleCRM, Jooble and others). In the majority of cases the companies specializing in online services or e-commerce are also focusing on mobile platforms or software development. According to the estimates of the authors of the IT Reform Program, all these companies generate a $1B worth separate important IT sector in Ukraine. Antonyuk believes that Ukraine needs to create the enabling environment for startups and product companies development with the purpose to minimize business migration abroad.

Kenigshtein thinks that our country has a couple of similarities with Israel, which gives us an opportunity to repeat their success story in venture business. Among the similarities are lack of internal markets, intention to integrate in the developed societies, great experience in IT industry and rapid growth of youth entrepreneurship. Kenigshtein wants to launch the project in Ukraine similar to that of the Israeli Government called Yozma (means “Initiative”) and implemented in 1993.

Within 3 years Yozma managed to use the budget of $100M to establish 10 funds with the capital of $20M+ and the share of private capital at 60%. This triggered the growth of professional venture capital market in Israel. In addition to that, the Government of Israel launched the project on establishing R&D centers technological universities and institutes. Those have little in common with the existing private business accelerators because the lifespan of projects is 1-2 years and they usually require $0.5M investments. The Government finances around 85% of projects, while the other 15% are contributed by the incubator.

IT in public sector  

 It is a known fact that Ukrainian government agencies hardly ever use even basic IT tools which are usually used by the least innovative private company. Large investments are needed in the development of IT infrastructure of the public sector, from modernization of customs and procurement to implementation of the idea of e-government.

In the future this complex of measures will enable computerization of the majority of processes, thus making operations of the public sector more efficient. All parties will benefit from this, including citizens who will spend less time and efforts to get various certificates, register a company etc. Moreover, computerization of the processes will improve the transparency of these processes.

Telecommunication

Introducing new telecommunication technologies, improving their quality and accessibility will make it possible to cut the “digital gap” and to make money for the budget. Among the necessary measures will be changing inefficient government policy, especially in distribution of radio frequency. As the authors believe, the first step should be a tender for 3G/4G organized for all operators. Winners of the tender should be responsible for expanding the internet coverage to the most territories of the country.

In the future, it is necessary to simplify the procedures for licenses and permits. All market players should have equal rights in accessing the telecommunication infrastructure, including cable channels for telecommunication, residential building and others. It is important to think of protection mechanisms for the critically important infrastructure elements to eliminate the possibility of forced seizure of servers or networks cutoff.

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