5.4. Amount of investments

TTC started out with rather low investments (in comparison with their profits). They have control over the 6 largest tobacco factories with an annual joint project capacity of 55 billion cigarettes and an actual production of 48.5 billion cigarettes in 1992 for 66 million dollars (17 from RJR, 6 from Philip Morris, 16 from Reemtsma and 25 from BAT). In 1993, in order to get the Torbali tobacco factory in Turkey running at at a production rate of 12 billion cigarettes, Philip Morris had to invest 230 million dollars. In the year 2000, the profit of TTC factories in Ukraine was 62 million dollars, so they have returned their investments with a big surplus.

They promised that it is just the beginning. In the Deloitte and Touche report of 1995, which was paid by TTCs, they stated: "It is expected that in 1995-1999 the amount of tobacco investments will be over 520 million dollars." In reality, in 2001 their investments are about USD 210 million (RJR - 50, BAT - 28, Philip Morris - 62 and Reemtsma - 150DM). The market price of the Liggett-Ducat factory in Moscow in 2000 was USD 390 million, which is much more than total amount of tobacco investments in Ukraine.

The TTC did not buy shares in tobacco factories from the state. They have a controlling interest for promises to develop factories. There were no direct payments to the state budget. It was expected that renovated factories would increase production (and pay more taxes) and provide employment, and that the national economy would eventually benefit.

To encourage cigarette production in accordance with the law, companies with foreign investments were freed from paying a 30% profit tax imposed on other enterprises for 5 years. This law was cancelled in 1997, but for 4 years TTC benefited from this "tax holiday". Part of the foreign investments was actually governmental investment in form of unpaid taxes (in 2000 the total tobacco industry profit tax was about 20 million dollars). Profit tax holidays have involved very large amounts of foregone revenue for governments.

According to the agreement, the TTC had no right to take profits abroad, but had to re-invest them. They did that, and used their profits (including non-paid profit tax) to buy additional shares from the state or local shareholders in order to not pay benefits to them in the future. For example, in 2000 Philip Morris-Ukraine had profit of 96.3 million UAH, but local shareholders have saw only 0,1% of that sum instead of 49% in the beginning. A substantial part of the new investments was used for a distribution network and other items. For example, RJR-JTI used only 26 from 50 million dollars for direct factory investments. To escape profit tax, BAT-Priluky factory became "non-profit": they used all of their income for advertising, development of a distribution network, etc. TTC have many ways to hide profits, for example, they can buy some materials from a foreign division of the same company for a higher price than in the market and make a profit in other countries.

However, the main issue is not the amount of investments, but the ways they were used. The government needs investments that: (1) increase governmental revenues; (2) generate more employment - not only in the industry of investments, but also in co-operating industries; and (3) increase public health and welfare and economic growth. Consumers wish to have access to safer and appealing products at affordable prices.