Industrial parks: Potential for business development or waiting for a miracle

During the past year and the beginning of 2023, the number of industrial parks in Ukraine has increased. One would think that during times of war, this is excellent news for businesses. However, for some reason, even though parks are being registered and conditions are being established, the attraction of residents to such parks remains sluggish. Currently, just a little over 10% of all registered industrial parks in Ukraine are operational. Oleksandr Dereka, senior associate at TOTUM LF, acting head of construction and capital investment practice, told Mind what an industrial park is in the current environment and what they lack for development.

In November 2022, in Novovolynsk, near the border with Poland, the NOVO industrial park was opened. It covers an area of 20 hectares and is equipped with water, gas, and electricity, as well as a railway track along the site. Moreover, it faces the new R-15 highway Kovel – Volodymyr-Volynsky – Chervonograd – Zhovkva heading towards Lviv.

According to information from the Ministry of Economy, at the time of the park's opening, there were already prior agreements with several companies in fish processing, food production, and logistics, committing to enter it. The ministry's preliminary estimations suggest that the payback period for investments in enterprises within the NOVO territory, considering all available incentives, would be 4–5 years.

Ukrainian and international experts now speak of industrial parks as one of the main instruments for the country's investment development and industrial-economic recovery after victory.

The proper placement of industrial parks in relatively safe zones and close to the European border will further support this endeavour. Therefore, the appearance of NOVO, particularly at this time, is undoubtedly a positive sign. It also serves as a reminder to domestic and international businesses in Ukraine that the foundation of developed countries' economies lies in industry, the real production sector, which, in turn, fosters the growth of services and creative industries.

Industrial parks exist in Ukraine, but only a few are operational

They were created in the world in the late nineteenth and early twentieth centuries. Currently, there are around 15,000 industrial parks globally, with the largest concentration found in China, the United States, Turkey, and Czechia. There are also quite a few, approximately 80, operating in neighbouring Poland.

The "industrial park" concept came to Ukraine a decade ago when the relevant law was adopted in 2013. The law defines an industrial park as a territory designated by its initiator according to urban planning documentation, equipped with appropriate infrastructure, within which participants can engage in economic activities in the field of processing industry, industrial waste processing, and/or household waste processing (excluding waste disposal), as well as scientific and technical activities, and information and electronic communications activities under the conditions specified by the law.

So, these are specialised industrial territories that have transportation infrastructure, a set of necessary services, simplified registration procedures, and a package of investment incentives. In the classical sense, an industrial park is an industrial cluster with shared infrastructure for all residents: there should be at least two or three manufacturing facilities nearby, as well as common warehouses, office spaces, and service enterprises (сanteens, cafés, ATMs, etc.).

The following requirements are imposed on an industrial park (IP):

• the lands of the industrial park must belong to the industrial category, but this does not prevent changing the land plot's designated purpose;
• an industrial park can be located on one or several adjacent land plots;
• the area of the industrial park must be no less than 10 hectares and no more than 1000 hectares;
• at the time of including the industrial park in the Register of Industrial Parks (hereinafter referred to as the Register), there should be no completed construction objects operated within the last 10 years before the decision on the establishment of the industrial park is made, and there should be no manufacturing facilities that have been in operation for the last five years before the decision on creating the park is made.

Changes to the Law of Ukraine On Industrial Parks, introduced in 2021, defined the mechanism of their state stimulation of establishment and functioning, specifically:

• providing full or partial compensation for interest rates on credits (loans) for the establishment and/or conducting economic activities within the industrial parks;
• providing funds on a non-refundable basis for the establishment of industrial parks and/or ensuring the construction of related infrastructure facilities (such as roads, communication lines, utilities like heat, gas, water, and electricity supply, engineering communications, etc.) necessary for their creation and functioning;
• compensation for costs related to connection and access to engineering and transport networks;
• tax and customs incentives in accordance with the legislation (we will consider this in more detail below).

Why is that so?

There are several reasons for this.

1. Firstly, unfortunately, a significant number of industrial parks were created 'for future use' without clear business plans regarding their further development.
2. The second reason is the lack of funds for the development of the territory's infrastructure. Registering an industrial park is the easiest part. Then more complicated tasks arise, especially for those parks initiated by city councils – finding funds for equipping the area with necessary utilities, such as water supply, electricity, and sewage systems. These require substantial investments, around 10–15 million hryvnias.
3. The third reason is insufficient activity in attracting the attention of entrepreneurs, who could become potential participants in industrial parks. Opportunities need to be sold, which takes time and, again, money. As a result, most of the already registered parks, even those with utilities in place, are not fully operational.

However, after Ukraine’s victory, there is a hope that communities will consciously approach reconstruction and development. Specifically, industrial parks are expected to start functioning properly, bringing benefits such as job opportunities, business development, and additional revenues to local budgets.

Advantages of conducting business within an industrial park

Now, let me remind you about the advantages of creating industrial parks and choosing them for business activities in more detail.

Land Issue. Land for industrial parks is not put up for auction. According to Article 134 of the Ukrainian Land Code, land plots of state or municipal ownership, when leased to industrial park management companies, are not subject to sale or transfer on a competitive basis (through land auctions).

Subventions. The government encourages industrial park development  at its own expense. Subventions are allocated to local budgets from the state budget specifically for this purpose. Additionally, funding for the development of industrial parks can be obtained from the State Fund for Regional Development. For example, from 2015 to 2019, the construction of infrastructure for three industrial parks was financed with around 6.8 million hryvnias from the State Fund for Regional Development, and in 2021, another four parks were funded with 57 million hryvnias.

Tax benefits. It is worth noting that the Tax Code of Ukraine (Article 142.4) exempts participants of an industrial park (included in the IP Register) from taxation of income derived from their economic activities in the following areas:

• processing industries;
• waste collection, processing, and disposal;
• material recycling, except for waste disposal;
• scientific research exclusively within the territory of the industrial park.

This tax exemption applies for a period of 10 consecutive years.

According to Article 266.4.2 of the Tax Code of Ukraine, rural and city councils have the right to establish preferential taxes for non-residential real estate located on the territory of an industrial park and owned by its participants.

Another tax incentive is specified in Article 284.6 of the Tax Code. Regarding land payments and land plots that are part of the territories included in the IP Register, local authorities may:

– set a lower land tax rate and rental fee;
– completely exempt from paying the land tax.

Another advantage of operating within an industrial park is that legal entities are exempted from compensating for losses in forestry production when using a land plot for establishing an industrial park.

Participants of an industrial park are also exempted from value-added tax (VAT) when importing new equipment and its components for their exclusive use in the aforementioned areas of activity. The conditions for this exemption are that the equipment and components were manufactured no more than three years before the import date and have not been previously used.

Furthermore, the Cabinet of Ministers approved Resolution No. 1207 on October 28, 2022, setting out the procedure for providing funds on a non-repayable basis for the development of industrial parks and/or the construction of related infrastructure necessary for the creation and functioning of industrial parks.

According to the regulations, initiators of creating IP, business entities, and/or managing companies from the state, local budgets, and other sources are provided with funds, with a total amount not exceeding 60 million hryvnias and 80% of their estimated cost. These funds are intended to be used for arranging and providing the construction of adjacent infrastructure facilities.

We can see that the government is intensively trying to encourage the creation and operation of industrial parks. We hope that these conditions for setting up and conducting business within the IP will soon be utilised by both domestic businesses and international companies' representations.