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Domestic offshores - does Ukraine need industrial parks?

Author : Yuriy Hryhorenko

As of today, 46 industrial parks have been created in Ukraine. Despite this, we are still an “investment outsider” compared to Eastern European countries
11:10, 11 October 2018

All the world countries of compete for investment and jobs. They use various mechanisms and tools in this struggle: industrial parks, technology parks, free economic zones (FEZ), special tax and customs regimes, budget subsidies. Ukraine is a simple observer in this game. After not quite successful experience with the FEZ in Ukraine, it is trying to reanimate the internal offshore in the form of industrial parks. The authorities have a desire to develop this tool for attracting investments, but so far the adoption of the necessary legislation is suspended

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As of today, 46 industrial parks have been created in Ukraine, 16 of which are included in the corresponding Register of Industrial Parks. Despite this, we are still an “investment outsider” compared to Eastern European countries, which have made significant progress in this area.

International experience shows the effectiveness of such a tool to stimulate investment, such as industrial parks. According to Viktor Galasyuk, MP, head of the Parliamentary Committee on Industrial Policy and Entrepreneurship, the Czech Republic has introduced a state program for the development of industrial parks in 1998. For seven years, about a hundred parks were created, 9 billion euros were invested in new production, 70 thousand jobs were created. Another vivid example is South Korea, where 1200 industrial parks are launched, they generate 80% of exports, 70% of industrial production, and 50% of employment. This is how the country turned from a backward agrarian economy into an industrial superpower.

Related: Paradise Papers: 68 Ukrainians siphoned off funds to offshores

According to Volodymyr Khmurych, director of "Bila Tserkva" industrial park (it belongs to the UFuture Investment Group), Ukraine has all the prerequisites for further growth of investment in the production sector and, accordingly, growth in industrial production: a convenient location at the intersection of sea and land transport routes, a free trade zone with the EU, Canada and other countries, cheap but skilled labor, competitive production costs and tax burden, low competition in the local market, devaluation of the national currency, deregulation of the economy.

"Investors are mainly interested in the western and central regions of the country; the primordially industrial east of Ukraine lost its investment appeal due to the military actions and the influence of the Russian Federation on the fate of enterprises. Ukrainian industrial parks and their prospects are connected with qualitative development of the network already created, engaging new participants, setting up logistics mechanisms, cooperation with foreign partners and government agencies, the provision of high-tech jobs, infrastructure development, etc," Ruslan Radishka, partner of the Corporate Law Practice of Juscutum Law Firm, notes.

Imposing investment incentives and guarantees brings new prospects for industrial parks. According to Viktor Galasyuk, they can become one of the main tools for the economic development of territorial communities and the country as a whole. Thanks to industrial parks with ready-made infrastructure and tax incentives, Ukraine could increase investment inflows by $ 1–2 billion a year, which will give more than 4% of annual GDP growth instead of the current 2-3%.

Related: Ukraine ranked 134th in Economic Freedom of the World

It should be noted that the idea of creating industrial parks is maintained at the level of the Cabinet of Ministers, where they are considered an effective tool for creating new jobs and producing quality products. At the same time, the former Minister of Finance of Ukraine, Olexandr Danyliuk, and a number of people's deputies opposed the Ukrainian offshore companies.

The industrial park is, first of all, a business project, and it should be profitable without providing any benefits from the state. If the state focuses on the development of industry in the country as a whole or in a particular region, then the model of industrial parks could be used to increase investment activity by providing various tax incentives. Success depends on the competent administration of tax incentives and focus on the industries that have the greatest chances for growth and are consistent with the state strategy.

“Being a private industrial park, which is owned by one of the leading real estate developers in Ukraine, our industrial park develops regardless of the availability of government benefits and provides customers with the maximum possible range of services and options for investing. It includes helping non-residents to register a company, searching for local partners, hiring staff, obtaining the necessary permits related to doing business in Ukraine. Also, our park can both sell land with engineering networks brought to its borders, as well as build a modern industrial box for renting or selling. We can also act as a minority shareholder of the project. Thus, we are doing everything possible to ensure the safety of working in our park and in the country. We offer maximum openness and comfortable payment terms," says Volodymyr Khmurych.

Related: Negative factors of current Ukrainian economic decline

"Park" issues

The first major problem of the industrial parks is legislation. “There are relevant bills No. 2554a-d and No. 2555a-d adopted by the Parliament as a basis (in October 2016). Now we need to take them as a whole in the wording approved by the Tax Committee of the Verkhovna Rada. They establish tax and customs incentives for placement in Ukraine new industries and research centers. They bring Ukraine closer to the best international practices. Then we can begin to compete for industrial investment with Turkey, Poland, and Slovakia,” Viktor Galasyuk underlined.

It is proposed to establish a special tax regime for the income tax of industrial parks for 10 years (the first 5 years at a 0% rate, the next 5 years at a rate twice as low as the base (today 9%)).

It is offered to provide a possibility of a plan for a period of 5 years of VAT on transactions regarding the import of equipment and components for arranging industrial parks or for carrying out business activities within them.

It is also proposed to provide local authorities with the opportunity to establish benefits and reduced rates for the payment of real estate tax, land tax and rent for the use of a state or municipal land plot on which an industrial park has been created.

The second key challenge is the low investment attractiveness of the country and high risks. This obstacle can be removed only by carrying out systemic reforms, building an effective legislative and judicial system, etc.

"Another problem I would call high-interest rates and the lack of bank project financing. This situation arose due to a complex of reasons, including the imperfect regulatory framework of the National Bank for banks to identify credit risks for active operations, which essentially makes long-term lending impossible projects," Volodymyr Khmurych noted.

Related: How the level of Ukraine's shadow economy has changed over the past year

In addition, experts call one more challenge of the state of the infrastructure - worn-out engineering networks and highways, the lack of sufficient capacity to connect industrial facilities. “There are few parks with ready-made infrastructure. The state and municipalities must bring roads, electricity, gas, and water to the most promising industrial sites,” Viktor Galasyuk explains.

Also, according to the MP, the investors must organize capable management companies, attract solid international partners to manage the parks, and organize full support and protection of investors. Investor’s confidence is the most expensive asset, which could not be created on the ground level.

As Ruslan Redka notes, a problematic issue is the participants filling in the already created parks. This leads to a lack of competitive environment to attract investment potential. The root of the problem lies in the inefficient management of management companies, the lack of awareness of the business environment about all the benefits of working in an industrial park, the poor quality of PR activities, and the lack of coordination of the mechanism of interaction with a government partner. It is all because of the lack of practical experience in managing industrial parks.

In addition, it is necessary to organize a system of training and informing officials, local authorities, small and medium businesses about the opportunities, advantages, and features of industrial parks. It is also necessary to study and implement the experience of our neighbors abroad, who are already successful in the industrial sector - the Czech Republic, Poland, Hungary. We should also improve legislation regulating relations in this area, and take care of tax incentives that will make this area attractive for investors.

Related: Simplified taxation – is it beneficial or detrimental to Ukraine's economy?

New FEZ?

Industrial parks are a kind of FEZ, they stimulate economic growth by attracting investment. But against the background of the experience of the operation of the FEZ and the territories of priority development (TPD) (canceled in 2005), the question arises: will the industrial parks become another “tax hole?”

According to VoxUkraine, all Ukrainian FEZs and TPDs received 375 million USD of tax benefits, of which 321 million USD came in a form of tax incentives in the FEZ "Donetsk" and TPDs of Donetsk region. If you don’t take Donbas into account, then the average tax ratio for all Ukrainian FEZs was 5.4, i.e. FEZ residents paid taxes 5.4 times more than they received tax breaks. For example, the FEZ "Zakarpattia," having received from the state only 18 million USD of preferences, brought twice as much to the budget - more than 38 million USD in taxes and fees.

Related: Ukrainian seaport: Balancing between economy and geopolitics

“The FEZ in Ukraine (except Donbas) did not just work successfully but brought significant benefits to the economy. Thanks to the special tax regime for the FEZ, such manufacturers as Jazz, Flextronics, Yadzaki, Skoda, Volkswagen, Philips, Leoni, Sumitomo came to Ukraine. After eliminating tax incentives for free economic zones, many of them remained in the country, but their loss of confidence in the Ukrainian government turned into non-receipt of many billions of investments for Ukraine. For example, due to lack of state support, the investment project of the Japanese concern Mitsubishi failed to realize the production cycle of electronic equipment in Ukraine. For me as an economist, it’s quite obvious that the elimination of investment incentives for Ukrainian free economic zones in 2005 was a gross managerial mistake. Instead of eliminating free economic zones and TPD in the Donbas, where there were huge abuses of meat processing enterprises, The authorities have eliminated an effective mechanism for attracting investment and developing production throughout the country,” Viktor Galasyuk underlines.

According to Ruslan Redka, there is a risk of ineffective and inappropriate use of state-provided benefits. We are talking about the duty-free import of equipment, exemption from share participation in the development of the infrastructure of a settlement, exemption from taxes and taxes at lower rates, installment payments for VAT, etc.

Viktor Galasyuk assures that the draft laws on industrial parks contain not only powerful incentives, but also high demands and responsibilities, as well as clear and transparent control mechanisms.

Related: Labor force migration slows economic growth, increases price rates, - National Bank of Ukraine

As Volodymyr Khmurych notes, there are many ways to minimize abuses, for example, to provide tax concessions that are easy to administer (share, land / real estate taxes, etc.), to provide them against already made and proven investments. Instead of tax breaks, the state can invest in the development of logistics infrastructure (roads, bridges, etc.), in the development of engineering networks or, for example, provide connection to engineering networks on a preferential basis.

Creating an attractive investment climate at the legislative level is the key to the success of industrial parks in the country. But for now, given the economic instability, the level of corruption going off the scale, the difficult political situation, imperfect legislation, military operations in the country, investment risks are too great for an active influx of the foreign capital.

Read the original text at 112.ua.

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