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Legislative Framework of Industrial Parks in Ukraine: Quo Vadis?
According to the United Nations Industrial Development Organization, the development of industrial parks can stimulate innovation, promote investment and foster industrial development. No wonder that over the last few years Ukraine has considered industrial parks as one of the most effective tools for attracting investment and boosting its further industrial development.
Ukraine has developed a certain legislative framework, largely based around Law of Ukraine No. 5018-VI On Industrial Parks of 21 June 2012 and promoted the establishment of industrial parks. Now, almost 10 years after the Industrial Parks Law was adopted, there are 49 industrial parks registered in Ukraine, most of them in Kyiv Region and Western Ukraine. However, only 8 industrial parks actually operate.
The reasons behind the lack of operating industrial parks in Ukraine are further analyzed in this article. We also focus on exploring the requirements for establishing an industrial park and the prospects of investing in Ukraine via the establishment of industrial parks.
Requirements for Establishing an Industrial Park
The Industrial Parks Law identifies an industrial park as a land plot equipped with relevant infrastructure where its stakeholders can perform business activity in process manufacturing, science and research, and information and telecommunications. On the basis of this definition, the essential elements in any industrial park are its stakeholders, land plot and infrastructure. These three elements are typical for the majority of industrial parks in most countries.
The most common approach is that there are four key stakeholders in an industrial park: the regulator, developer, operator and the owner. In Ukraine, this approach of four stakeholders is also preserved. In particular, the Industrial Parks Law provides for the following stakeholders in the industrial park:
- The regulator is the Ministry of Economy of Ukraine. It is responsible for the governance of all industrial parks, their registration and the monitoring of their activities, etc.
- The developer is the Initiator of establishment of an industrial park. It is a state or municipal body, legal entity or individual owning or using a land plot(s) where an industrial park will be located. The Initiator also develops the concept of an industrial park prior to its establishment. The concept provides for the purpose of establishing an industrial park, its development plan, location, term of establishment, requirements for its members, etc.
- The operator is the Managing Company of the industrial park in question. It is a legal entity selected by the initiator and responsible for managing, arranging and maintaining an industrial park (Managing Company). The Managing Company enters into an agreement on the establishment and operation of an industrial park with the Initiator.
- The owner is a Member of an industrial park. It is a legal entity or private entrepreneur performing business activity within an industrial park under an agreement with the Managing Company (Member).
The establishment and development of an industrial park requires a land plot. The Industrial Parks Law provides that an industrial park can be established on state, municipal or private land plots. Such a land plot must be designated as industrial land and have a total area of at least 15 ha and no more than 700 ha.
The Initiator or the Managing Company owning or leasing a land plot where an industrial park is located can transfer such a land plot into a lease (or a sublease) to the Member(s). The Member(s) should use the land plot to construct and maintain immovable property necessary to perform its business activity within an industrial park.
The infrastructure for the arrangement and operation of industrial parks can be divided into two groups: basic infrastructure and specific infrastructure.
- Basic infrastructure is necessary for the arrangement and operation of any industrial park. It is mainly engineering and transportation infrastructure (e.g., access routes, utilities like electricity, water and gas, waste management). This kind of infrastructure is critical from the very beginning of establishing an industrial park. For example, suppose it is hardly likely to set up essential utilities within an industrial park or have proper access routes. In that case, it may prevent potential investors from visiting and exploring such an industrial park as a promising investment asset.
- Specific infrastructure may vary from one industrial park to another, depending on the business activities performed in the industrial park under its concept. It is common to establish R&D centers, incubation hubs, logistic centers, factories, laboratories and office premises within industrial parks.
In Ukraine, the infrastructure of industrial parks is a weak point. Along with other factors outlined below, they constitute the main reasons for the lack of operational industrial parks.
Lack of Operating Industrial Parks in Ukraine
The Initiators and Managing Companies struggle with procuring the proper infrastructure in industrial parks. According to the Ministry of Economy of Ukraine, there is no clear regulation at legislative level on the connection of industrial parks to utilities, particularly — electricity networks. Besides, the Initiators and Managing Companies do not have enough state financing to ensure the proper functioning of basic infrastructure.
Another reason behind the lack of operational industrial parks relates to existing state incentives aimed at the financial support of industrial parks. The Industrial Parks Law provides that the Initiator, Managing Company and Members are entitled to specific incentives. These include state incentives (e.g., funding from a state or local budget for the development of industrial parks, provision of interest-free loans, etc.) and tax incentives (e.g., exemption of import duties when importing the equipment necessary to develop industrial parks and perform business activity on their territory). However, in fact, legislative provisions are drafted so that there is a right to obtain state incentives, but there is no legal mechanism to enforce this right.
Consequently, existing industrial parks do not operate as they lack the funds and support necessary for their development and maintenance. On top of that, these issues demonstrate that the conditions for establishing industrial parks in Ukraine are not quite attractive.
Still, Ukraine recognizes issues related to the lack of operational industrial parks. It is actively working to resolve them and establish conditions for attracting investment in this direction.
Prospects of Investing in Ukraine via the Establishment of Industrial Parks
Recent legislative developments relating to industrial parks aim to resolve the issue of non-operational industrial parties and boost the activity of industrial parks in Ukraine. For example, the Ukrainian Parliament recently registered Draft Law No. 4416-1. It provides that the procedure for granting specific state incentives for industrial parks should be determined in separate legislative acts that are yet to be drafted.
Regardless of the lack of operational industrial parks, Ukraine has great potential to develop a powerful network of industrial parks and attract foreign investors to its economy. The country is rich with resources and human capital and has many highly developing industries, such as manufacturing and infrastructure, IT, agriculture and energy. It has also been confirmed that several significant players are now entering the Ukrainian market to establish industrial parks for various purposes — from constructing logistics complexes and processing plants to office and commercial premises.