News Article development economy industrial logistics Ukraine
by Property Forum | Report

Industrial parks should become a powerful driver of the economy and a driving force for the development of the Ukrainian industry and its inclusion in the European system. The state has created the prerequisites for this: in addition to tax incentives, the draft budget for 2024 provides UAH 1 billion (€26 million) for a program to support industrial parks. Iryna Nastych summarised the situation in an article prepared by the Ukrainian Real Estate Club for Property Forum. She analysed how the segment of industrial parks has received a boost in development despite the war, what is the synergy between the state, business and local communities, and what prevents more active development of this area.

The “law on industrial parks" came into force on September 4, 2012, preceded by many years of work in the Parliament. The first Ukrainian industrial parks were registered in 2013. Despite a fairly lively start, the industrial park market has not been fully operational, and most of them remain on paper.

As of October 25, 69 parks were included in the Register of Industrial Parks (while the material was being prepared for publication, another industrial park was added to the Register). "In the last four months alone, we have registered 5 parks. A third of all IPs, namely 24 parks, are located in the regions bordering the EU," the Ministry of Economy told Property Times at the request of the Ministry of Economy.

"80% of all registered industrial parks are currently on the holding: at the conceptual stage or just registered (this also includes parks in the temporarily occupied territories)," comments Maksym Lozovsky, commercial director of Formatsiya Industrial Parks.

"48 IPs currently have a management company, five parks have built and commissioned facilities and employ residents. About 5 more IPs are parks that were created based on former industrial zones, they have premises, but not of very high quality, and they are currently actively attracting residents," says Valeriy Kyrylko, Industrial Parks of Ukraine, a group of companies.

The Ministry of Economy acknowledges that the development of industrial parks is hampered by the high cost of their arrangement and construction of related infrastructure (roads, communication lines, heat, gas, water and electricity supply, utilities, etc.).

The main problem, according to Mykhailo Sakun, investment director at Dragon Capital, is financing and a high barrier to entry. "There is a war in the country and, of course, capital programs are not a priority for companies now," he explains.

"The cost of connecting to electricity, water, and sewerage is currently a headache for management companies. Because the local budgets of the cities and communities where the industrial park is located usually do not have much money. To understand, it takes an average of UAH 10 to 40 million to connect the park's territory to electricity and water. "The amount of investment depends on how far the power lines will be extended from the distribution transformer and how they will be laid - overhead or underground," explains Oleksandr Bondarenko, managing partner of Bureau of Investment Programs, the management company of NOVO industrial parks. "And then the price may increase, because most of the components for connecting to electricity are, unfortunately, imported. The same estimate also includes the installation of water supply sewage, and sewage systems. There are many examples when an industrial park is located in a good location, with highways for convenient logistics or railroad tracks nearby, but they are empty and overgrown with grass because there is no electricity and water supply."

Special government programs that facilitate access to capital could partially solve this problem, but they are currently lacking.

Another factor hindering development is the lack of management companies.

"One-third of industrial parks do not yet have management companies. Accordingly, without a professional management company, it is impossible to develop the park and attract investment. In most industrial parks, the nominal management company does not have a qualified team, vision and understanding of the industrial hub development strategy," comments Oleksandr Bondarenko.

"We have not yet formed a culture of industrial parks. There are not enough professional management companies. After all, a management company is an investor-developer who develops this industrial park. By signing an agreement with a management company, the initiator of an IP should receive not just technical assistance, but also financial, organizational, brokerage, etc.," adds Valeriy Kyrylko. "It is also bad that many IPs in Ukraine are communal.

This is a disadvantage for development because communities are very tightly constrained by the budget, do not understand how to develop these industrial parks, what to do with them, how to attract residents, how to work with investors."

Experts also note that the government is not making enough promotional efforts to attract foreign investors to the industrial parks segment.

The state agency UkraineInvest is currently developing an interactive map of Ukraine's industrial parks. "And when communicating with potential investors, it shows interesting locations, especially industrial parks, for foreign factories," says Bondarenko, "Of course, foreign entrepreneurs are more interested in building factories in industrial parks near the borders with the EU and having all the tax benefits for accelerated payback of business projects.

The Draft Law No. 5688 amending the Law of Ukraine No. 5018-VI "On Industrial Parks", signed by the President of Ukraine on June 21, 22, became a powerful driver for the development of IP in Ukraine. "Unprecedented incentives for the development of industrial parks have been adopted at the legislative level. Investments in the infrastructure of a developer building an industrial park are compensated, and participants are provided with tangible tax incentives," said Mikhail Sakun.

Another important step on the part of the state is the increase in funding for IP, which is planned for 2024. The draft budget for 2024 provides UAH 1 billion for the program to support industrial parks. This is the first time in the history of Ukraine. This program was supposed to start in 2022, but the war has made adjustments to the priorities, the Ministry of Economy noted.

"These funds can be used by the management companies of industrial parks by certain limits, provided that there is a management company, reports on the work of the IP, acts of completion for the supply of networks and arrangement of plots for the entrance of investors. "In fact, it is a subvention for IPs," explains Bondarenko, "I would like to note that the management companies of industrial parks have never received money from the state. Let's see how this UAH 1 billion program will work in 2024."

Another important step that should stimulate the market is war risk insurance from the Export Credit Agency of Ukraine, as well as programs from international insurance institutions - American, Japanese, and European countries. "France has announced that it will ensure its entrepreneurs investing in Ukraine against military risks. Bpifrance Assurance Export, the state-owned insurance company of France, will provide insurance. This decision was also made by the authorities of Germany and Poland," says Bondarenko. "Here, Germany is setting the tone and example for other EU countries. Of course, this will have a positive impact on attracting foreign investment. About €0.5-1 billion of investments can be expected in 2024 if French and German entrepreneurs start actively developing their business and building factories in Ukraine, using these government guarantees."