2017/18 Knowledge Sharing Program with Ukraine

2017/18 Knowledge Sharing Program with Ukraine: Mechanisms and Tools of Stimulating National and Foreign Direct Investments 2017/18 Knowledge Sharing Program with Ukraine 2017/18 Knowledge Sharing Program with Ukraine

Project Title Mechanisms and Tools of Stimulating National and Foreign Direct Investments

Prepared by Korea Development Institute (KDI)

Supported by Ministry of Economy and Finance (MOEF), Republic of Korea

Prepared for The Government of Ukraine

In Cooperation with Ministry of Economic Development and Trade (MEDT), Ukraine

Program Directors Youngsun Koh, Executive Director, Center for International Development (CID), KDI Kwangeon Sul, Visiting Professor, KDI School of Public Policy and Management, Former Executive Director, CID, KDI

Project Manager Taihee Lee, Specialist, CID, KDI

Project Officers Yoojin Joung, Research Associate, Division of Policy Consultation, CID, KDI Yoonjung Kim, Senior Research Associate, Division of Policy Consultation, CID, KDI

Senior Advisor Young Kon Chin, Former Commissioner, the Board of Audit and Inspection, Republic of Korea

Principal Investigator Kangsoo Kim, Senior Fellow, KDI

Authors Chapter 1. Kangsoo Kim, Senior Fellow, KDI Tetiana Tavlui, Consultant, Center for Transport Strategies Chapter 2. Guho Eom, Professor, Hanyang University Liudmyla Musina, Member of Public Council, MEDT

English Editor Korea Institute of Culture and Arts Translation

Government Publications Registration Number 11-1051000-000881-01 ISBN 979-11-5932-348-5 ISBN 979-11-5932-302-7(set) Copyright ⓒ 2018 by Ministry of Economy and Finance, Republic of Korea Government Publications Registration Number 11-1051000-000881-01

2017/18 Knowledge Sharing Program with Ukraine: Mechanisms and Tools of Stimulating National and Foreign Direct Investments Preface

Knowledge is a vital ingredient that determines a nation’s economic growth and social development. Its true value was brought to light by the advent of the knowledge economy and a key question policymakers now face, especially in developing countries, is how an environment can be established that encourages and facilitates the creation and dissemination of knowledge across the nation. This need has led many countries to engage themselves in active policy dialogue to share their development experiences and benefit from mutual learning.

Korea’s development has also depended heavily on knowledge. Its remarkable transition from a predominantly agrarian economy to an industrialized country was made possible by its well- rounded and extensive understanding of technology, management, public policy, and other diverse issues acquired from domestic and foreign sources and through trial and error. Building on these rich experiences, the Korean Ministry of Economy and Finance (MOEF) launched the Knowledge Sharing Program (KSP) in 2004 to assist partner countries to improve their policymaking. KSP, as implemented by Korea Development Institute (KDI), focuses on providing solutions customized to each country’s economic, social and administrative settings, building capacity for effective policymaking and strengthening global networks for development cooperation. In 2017/18, KSP policy consultations were organized with 31 partner countries, with Mekong River Commission joining the partnership for the first time.

The 2017/18 KSP with Ukraine was undertaken by the MOEF and the Ministry of Economic Development and Trade (MEDT) with the aim of “Mechanisms and Tools of Stimulating National and Foreign Direct Investments.” To that end, the KDI research team and the Ukraine counterpart made a range of collaborative efforts by exchanging development experiences, conducting joint studies and designing a policy action plan in line with the country’s development targets.

With that, it is with great optimism for the future of Ukraine that the results of the 2017/18 KSP are presented. I firmly believe that KSP will serve as a stepping stone to further elevate the mutual learning and economic cooperation between the two countries and hope it will contribute to Ukraine’s sustainable development in the future. I wish to convey my sincere gratitude to Senior Advisor Dr. Young Kon Chin, Principal Investigator Prof. Kangsoo Kim as well as project consultants Prof. Guho Eom for their extensive contributions to the successful completion of the 2017/18 KSP with Ukraine. I am also grateful to Executive Director Dr. Youngsun Koh, Project Manager Dr. Taihee Lee, Project Officer Ms. Yoojin Joung and all members of the Center for International Development for their hard work and dedication. Lastly, I extend my warmest thanks to the MEDT and related Ukrainian agencies for their active cooperation and great support.

Jeong Pyo Choi President Korea Development Institute (KDI) Contents

2017/18 KSP with Ukraine ...... 012 Executive Summary ...... 015

Chapter 1 Strengthening of Public Investment Management System (PIMs) in Ukraine

Summary ...... 024 1. Introduction ...... 026 2. Structure and Trends of Ukraine State Budget ...... 028 2.1. Fiscal and Budgetary Trends: State and Local Funds ...... 028 2.2. State Budget Trends and Composition ...... 030 3. Public Investment Management Reforms in Ukraine ...... 033 3.1. Evolution of Reforms in Public Investment Project Management ...... 033 3.2. Reforms and Legislative Changes in the Management of Public-Private Partnership Projects ...... 036 4. Public Investment Portfolio in Ukraine ...... 039 4.1. Public Investment Projects Portfolio ...... 039 4.2. Portfolio of Public-Private Partnership Projects ...... 042 5. Public Investment Management Process ...... 043 5.1. Process of Public Investment Projects Management ...... 043 5.2. Public-Private Partnership Project Management Process ...... 049 6. Assessments and Policy Recommendations ...... 056 6.1. Assessments and Policy Recommendations for PIPs Management ...... 056 6.2. Assessments and Policy Recommendations for PPP Management ...... 068 7. Summary and Conclusion ...... 072 References ...... 077 Appendix ...... 079 Abbreviations ...... 082 Chapter 2 FDI Promotion through Development of Industrial Parks

Summary ...... 084 1. Introduction ...... 087 1.1. Purpose of Research ...... 087 1.2. Scope and Method ...... 093 2. Concept of an Industrial Park and Recent Trends ...... 094 2.1. Concept of an Industrial Park ...... 094 2.2. Recent Trend of Industrial Parks ...... 095 3. Current Situation and Performance of IPs in Ukraine ...... 097 3.1. Summary of the Development of Industrial Parks in Ukraine ...... 097 3.2. Evolution of Legal Framework and Government Policy ...... 112 3.3. Barriers and Tasks for Development of Industrial Parks ...... 125 4. Analysis and Implications of Korean Experiences on IP ...... 129 4.1. Development History and Current Situation of IP in Korea ...... 129 4.2. FDI Attraction Policy and Performance in Korean IP and SEZ ...... 134 4.3. The Role of KICOX ...... 142 5. Policy Actions and Recommendation ...... 143 5.1. Policy Actions for Successful Operation of Ukrainian IPs ...... 144 5.2. Policy Actions for Attracting FDI of Ukrainian IP...... 159 References ...... 164 Appendix ...... 166 Contents | List of Tables

Chapter 1

State Budget to GDP Ratio ...... 030 Ukraine State Budget Expenditures by Functional Classification ...... 031 Ukraine State Budget Expenditures by Economic Classification ...... 032 Planned Investments for PIP Implementation ...... 040 Actual Investment Costs ...... 041 Social Discount Rate for CBA ...... 060 Performance Check List ...... 071

Chapter 2

Growth Rate by Region in Ukraine ...... 089 Steps in Industrial Park Development and Potential Failures ...... 096 Full List of Industrial Parks in Ukrainian Regions (As of 2018.05.25) ...... 098 List of Ukrainian Industrial Parks, not Included in the Register of IP...... 104 Current Situation and Performance of IPs in Ukraine ...... 108 Dynamics of the Main Indicators of SEZ and TPD Network Development (2000–2010) .. 116 Dynamics of Economic Indicators of Technological Park Activity in 2001–2008 ...... 119 Key Factors of Developing and Functioning of IP by Types of Initiator ...... 121 Stages of Industrial Park Creation ...... 121 Barriers and Tasks for the Development of IPs in Ukraine ...... 128 History of Korea’s Industrial Location Policies ...... 130 Types of Korean Industrial Parks ...... 132 Other Types of Industrial Parks ...... 133 Situations of Industrial Parks in Korea (as of Q1 of 2018) ...... 133 Performance of Industrial Parks by Types in Korea (as of Q1 of 2018) ...... 134 Situation and Incentives of other Types of Industrial Parks ...... 135 Situation of Foreign Investment Zone in Korea ...... 136 Situation of Foreign Investment Zone in Korea ...... 137 Performance of FIZ in Korea ...... 137 Contents | List of Tables

Comparison of Performance per Company between Industrial Parks and Foreign Investment Zone ...... 138 Comparison of Business Environment Level in Major Asian Special Economic Zones ..... 139 Comparison of Tax Incentives with Major Competitor SEZs ...... 141 Roles of Government and Private Partners in the Framework of PPP ...... 149 Options for Private Sector Involvement in Industrial Parks ...... 149 Location Support in Korean FIZ ...... 152 Tax Exemption in Korean FIZ ...... 152 FEZ Performance Evaluation Indicators and Points ...... 154 Effects of the Technology Roadmap on the Company...... 159 Doing Business Index in Ukraine ...... 161 Contents | List of Figures

Chapter 1 [Figure 1-1] Ukraine Consolidated Budget Revenues Trend ...... 028

[Figure 1-2] Expenditures of the Ukraine Consolidated Budget ...... 028 [Figure 1-3] Capital Expenditures by Source of Funding ...... 029 [Figure 1-4] State Budget Deficit ...... 030 [Figure 1-5] Number of Public Investment Projects Submitted to MEDT and Selected ...... 039 [Figure 1-6] Capital Expenditure Ceiling for PIPs ...... 040 [Figure 1-7] PIP Financed by Sectors, 2015–2016 ...... 041 [Figure 1-8] Number of PPP Projects by Sectors and Sub-sectors ...... 042 [Figure 1-9] Process of Public Investment Projects Management ...... 043 [Figure 1-10] Roles of Actors in Public Investment Projects Management ...... 044 [Figure 1-11] Public-Private Partnership Project Management Process ...... 049 [Figure 1-12] Roles of the Main Actors of PPP Projects Management ...... 050 [Figure 1-13] Korea Transport Data Base ...... 059 [Figure 1-14] Trend of the KTDB Project Budget ...... 060 [Figure 1-15] Organization of PIMAC ...... 064

Chapter 2

[Figure 2-1] Industry as a Whole, Donetsk and Lugansk Regions ...... 088 [Figure 2-2] FDI Volume in Ukraine ...... 091 [Figure 2-3] Foreign Investment Climate by Region in Ukraine ...... 092 [Figure 2-4] Mapping the Industrial Parks in the Regions of Ukraine ...... 105 [Figure 2-5] Mapping of Newly Initiated Industrial Parks in the Regions of Ukraine ...... 107 [Figure 2-6] The Procedure for the Inclusion of Industrial Parks in the Register of Industrial Parks ... 109 [Figure 2-7] Contribution of Industrial Parks to Manufacturing in Korea ...... 134 [Figure 2-8] FDI Amount and Types in Korea ...... 138 [Figure 2-9] FDI Regulatory Restrictiveness Index ...... 140 [Figure 2-10] First Policy Task for Attracting Foreign Investment in Korean SEZ ...... 141 [Figure 2-11] Primary of Duties of KICOX ...... 142 [Figure 2-12] Problems of IPs in Ukraine and Policy Suggestions ...... 144 [Figure 2-13] Conceptual Framework for Cluster Industrial Development Program ...... 146 Contents | List of Figures

[Figure 2-14] Support System for Industrial Parks in Korea ...... 147 [Figure 2-15] Legal System for Industrial Parks in Korea ...... 150 [Figure 2-16] Industrial Park Development Process in Korea ...... 151 [Figure 2-17] Overview Free Economic Zone Performance Evaluation Procedure in Korea ...... 154 [Figure 2-18] Industrial Cluster in Korea ...... 157 [Figure 2-19] Supplier Development Program in the Czech Republic ...... 158 [Figure 2-20] One-stop Service Scheme in Korea ...... 162 2017/18 KSP with Ukraine

Yoojin Joung (Project Officer, Korea Development Institute)

Ukraine is Europe’s second largest country, bordering the 7 countries of Russia, Belarus, Poland, Slovakia, Hungary, Romania and Moldova. After the annexation of Crimea by Russia and armed conflict in the Donbass region in eastern Ukraine, the country suffered from economic crisis. The price of currency in Ukraine has plummeted more than three times and commodity imports and exports also decreased. However, the economy has recently been gradually recovering, as the situation in the eastern region has stabilized and the FTA along with the cooperation agreements with European Union were ratified.

The Knowledge Sharing Program (KSP) with Ukraine was first launched in 2008 under the central theme of “Mid-term Economic Development Strategies for Ukraine.” In 2009, the KSP shared Korea’s development experience under the theme of "Energy Efficiency Improvement and New and Renewable Energy Development Strategies for Ukraine."

In this context, the Ministry of Economic Development and Trade of Ukraine submitted the project proposal to the Ministry of Economy and Finance through the official channel of the Ministry of Foreign Affairs to apply the KSP in 2017/18. At the end of 2014, Ukraine set up the Ukraine 2020 Strategy with the goal of joining the EU in 2020 and is steadily promoting sustainable development and security of the people. In particular, the revitalization of foreign direct investment (FDI) is a priority

012 • 2017/18 Knowledge Sharing Program with Ukraine policy issue for the reconstruction of the economic society for Ukraine. At the same time, the government is attempting to revitalize infrastructure development through reform of the public investment management system. Under this background, the Ministry of Economy and Finance adopted the KSP theme of Ukraine in 2017/18 as “Mechanisms and Tools of Stimulating National and Foreign Direct Investments.”

Considering the project proposal submitted by the Ukrainian government, KDI confirmed a total of two sub-topics for the policy consultation program for the 2017/18 KSP with Ukraine. The description below gives a brief overview of the 2017/18 KSP with Ukraine, including its topics, team of researchers and project progress.

2017/18 KSP Consultation Team and Topics

Project Title: Mechanisms and Tools of Stimulating National and Foreign Direct Investments Senior Advisor: Young Kon Chin (Former Commissioner, the Board of Audit and Inspection of Korea) Project Manager: Taihee Lee (Project Manager, Specialist, Korea Development Institute) Principal Investigator: Kangsoo Kim (Senior Fellow, Korea Development Institute)

Sub-topics Researchers

Strengthening of Public Investment Management System Kangsoo Kim (PIMs) in Ukraine (Korea Development Institute)

Guho Eom FDI Promotion through Development of Industrial Parks (Hanyang University)

In the first stage of the KSP from January 21 to 27, the research team led by Mr. Young-Kon, Chin (Senior Advisor, former Commissioner, the Board of Audit and Inspection of Korea) conducted the Launching Seminar and High-level Meeting in Kiev, Ukraine. The Korean delegation successfully held the Launching Seminar and presented Korean case studies and experiences to Ukraine counterparts, including the minister and policy practitioners of Ministry of Economic Development and Trade. During the meetings with Ukrainian experts, the Korean delegation enhanced their understanding on the current status and policies of Ukraine and acquired relevant data.

In the second stage from March 25 to 31, 2018, the Ukraine KSP research team conducted the KSP Policy Seminar and In-depth Study in Kiev, Ukraine. For the In- depth Study, the Korean researchers held several meetings and conducted in-depth interviews at the Ministry of Economic Development and Trade, Industrial Parks in Kyiv and Odessa to gain in-depth understanding on the current situation of Ukraine in the respective research topics and gathered data and information necessary for KSP research.

2017/18 KSP with Ukraine • 013 In the third stage from July 15 to 21, 2018, a total of eight public officials and local consultants from Ukraine visited Korea to participate in the Interim Reporting and Policy Practitioners' Workshop. During the Interim Reporting Workshop held on February 17, the Korean experts presented the interim results and policy recommendations. In connection with the Interim Reporting Workshop, Korean and Kazakh experts had in-depth discussions on the interim results and policy recommendations to improve research contents and outcomes. For the Policy Practitioners' Workshop, the Ukrainian delegation visited relevant organizations of Republic of Korea including Korea Trade-Investment Promotion Agency, Public and Private Infrastructure Investment Management Center, Ministry of Economy and Finance, Korea Transport DataBase, Korea Polytechnic University, Korea Industrial Complex, and Seoul Beltway. Moreover, the delegation also listened to lectures provided by experts regarding development of eco-industrial parks and the public- private partnership system.

In the final stage of the 2017/18 KSP with Ukraine from September 2 to 6, 2018, the research team led by Mr. Young-Kon Chin, conducted the Final Reporting Workshop and Senior Policy Dialogue in Kiev, Ukraine. The Korean delegation successfully held the Final Reporting Workshop in Kiev including public officials under 2 specific topics. As a result, the presentations of the research team were met with great enthusiasm from the audience, followed by many comments. For the Senior Policy Dialogue, Mr. Stepan Kubiv, the First Vice Prime Minister and high officials from related ministries participated in the meeting. The Ukrainian government showed great interest to continue cooperation with Korea.

014 • 2017/18 Knowledge Sharing Program with Ukraine Executive Summary

Kangsoo Kim (Korea Development Institute)

In recent years, Ukraine has experienced rising macroeconomic imbalances and economic stagnation. This has stemmed from poor macro-fiscal management and declining investment. Poor governance has resulted in wasteful public spending and undermined government capacity to manage public investment. At the same time, a difficult security situation has significantly weakened the investment climate and deterred both foreign and domestic private investment.

Ukraine’s immediate reconstruction and long-term infrastructure development, which can bring economic growth and increase social welfare, are urgently needed. According to an economic strategy, “A Way to Prosperity” prepared by the Ministry of Economic Development and Trade (MEDT), Ukraine needs at least $8 billion annually starting from 2015 for infrastructure reconstruction and development.

Under these circumstances, the 2017/2018 KSP with Ukraine, entitled “Mechanisms and Tools of Stimulating National and Foreign Direct Investments” covers two key policy issues, which were carefully chosen on the basis of policy priority of the Ukraine government. These are: 1) Strengthening of Public Investment Management System (PIMs) in Ukraine, and 2) Mechanisms and Tools of Stimulating National and Foreign Investments: Foreign Direct Investment (FDI) Promotion through Development of Industrial Parks.

Research findings and major policy recommendations for each policy area are as follows.

Executive Summary • 015 1. Strengthening of Public Investment Management System (PIMs) in Ukraine

The objective of this study is to provide policy suggestions to strengthen the framework for public investment management in Ukraine, so as to ensure that the public investment expenditures are consistent with the priorities and cost efficient. To do this, this report is to firstly provide a comprehensive review and analysis of the current public investment management system in Ukraine, highlighting recent reforms. Then, good practices and lessons learned from the Korean cases are provided in terms of the mid-term expenditure framework, provision of database and parameters, projects cost management, a dedicated organization, criteria to assess the suitability of Public Private Partnership (PPP), and transaction process for unsolicited proposals. Major policy suggestions are as follows.

Develop National Investment Strategy

MEDT should develop the National Investment Strategy in order to set up a top- down approach for project prioritization. MEDT should work together with line ministries to define the sectors and subsectors that need investments. The strategy will serve as a guideline for project initiators at the stage of conceptualization of the project. At the same time, key spending units and MEDT will use the strategy to filter the projects, which are not in line with it.

Provide Standard Data and Parameters for Appraisal

It is recommended that standardized data and parameters for project appraisal should be provided. Though MEDT is providing guidelines and methodological explanations on Cost Benefit Analysis (CBA), selection and prioritization of public investment requires reliable data and parameters of the Ukraine.

The adequate parameter values including the operating period of investment facilities, contingency in project cost and more critically, the social discount rate, should be provided to assure transparent and consistent appraisal.

Establish a New Evaluation Unit or Expand the Roles of the Existing Unit in MEDT

Goverment of Ukraine (GoU) should consider either the establishment of a new dedicated unit or the expansion of the roles and functions of the existing review unit in MEDT to support the project appraisal and review the proposals. According to whatever form the organization is established upon, the dedicated unit should be responsible for providing standard data and parameters, and updating and improving methodologies for project appraisal and review.

016 • 2017/18 Knowledge Sharing Program with Ukraine It would be desirable that the unit has a function on performing the evaluation on PIP as well as PPP to establish a unified framework for public investment management resulting in the increase of value for money. GoU should also consider the introduction of the evaluation procedure on State Owned Enterprise (SOE)’s new investment to improve public services through increased transparency in operation.

Enhance Total Project Cost Management

Taking into consideration the economic situation in Ukraine and its lack of capacity to estimate exact project costs in early stage, it is not desirable to update or review the project if the total project increases by only 10% including “inflation”. The inflation can’t be managed by the project initiators and the 10% is too small cost change compared to the GoU’s capacity on the cost estimation of the project. In Korea, the inflation as well as even the increase of land compensation cost are not trigger conditions to conduct the Re-assessment Study of Feasibility (RSF), and the RSF is carried out when the total cost of the project increases by 20%.

MEDT also needs to provide standard data and method to the project initiators for conducting re-evaluation on feasibility.

Develop Criteria to Assess the Suitability of PPP

GoU needs to develop procedures and guidelines to determine whether that project should be implemented as a PPP, or follow Public Investment Project (PIP). Value for Money (VfM) analysis including the feasibility analysis needs to be carried out in accordance with guidelines to keep objectivity, consistency and independence.

It is recommended that, instead of the quantitate VfM test, a qualitative VfM test should be taken place in advance and a specific set of criteria or guidelines to assess the suitability of PPP implementation should be developed.

Develop an Adequate Transaction Process for Unsolicited Proposals

A Special approach should be developed for the selection of potential private partners, in the case of unsolicited project proposals.

When pursuing an unsolicited project, the competent authority must notify the public about the outlined content of the project proposal to allow other private parties to submit alternate proposals for bidding. Minimum days (generally 3 months) from the notification date should be given for accepting alternative proposals to ensure fair competition. Based on the merits of the initial proposal, extra points within some range (for example, 10%) of the total evaluation points can

Executive Summary • 017 be awarded upon the review of the VfM assessment to encourage future unsolicited proposal.

2. FDI Promotion through Development of Industrial Parks

In June 2012, Ukraine established industrial parks with the intent of increasing the investment attractiveness, creating new jobs, stimulating economic development and developing infrastructure for the market and industry. The establishment of industrial parks for ensuring competitiveness of regions and their sustainable development is one of the principal goals as defined by the State Strategy for Regional Development of Ukraine for the period until 2020.

To streamline the procedures for industrial park development and management, Ukraine’s parliament adopted amendments to the above law and other relevant laws (land code, law on land lease) in November 2015. These amendments also exonerate industrial park management companies from rent on leasing state or communal land for the first 3 years of industrial park operations and identified the Ministry of Economic Development and Trade as responsible for registering Industrial Parks.

What is proposed in Ukraine, in fact, is not a “classic” industrial park, but a return of what has already been there — free economic zones and territories of priority development.

The Ukrainian government has to prepare an effective and comprehensive Industrial Park (IP) development program to attract FDI through industrial parks. In this context, the purpose of this research is as follows:

–– Institutional and legal analysis of Ukrainian industrial parks –– Diagnosis of the situation and problems of Ukrainian industrial parks through the performance evaluation model –– Investigation of barriers and major tasks of Ukrainian industrial parks through surveys on foreign companies in the Ukrainian industrial parks –– Finding of factors affecting the success of industrial complexes through case analysis of Ukrainian industrial parks

This research mainly focuses on the policy of attracting foreign investment among policy research to improve industrial park performance in Ukraine. For this purpose, this study develops policies which reflect on the characteristics of the Ukrainian industrial parks by analyzing the major characteristics, operation and management

018 • 2017/18 Knowledge Sharing Program with Ukraine experiences of major industrialized countries (including Korea) that have attracted foreign investment.

Problems of Ukrainian IPs can be summarized as follows. First, the Ukrainian government did not show strong policy capacity on industrial parks. Industrial park policies are not organically linked to long-term industrial policies and regional development policies based on regional characteristics. There is no dedicated public corporation in charge of industrial parks, and the department of MEDT has fewer professional staff. Second, there is a shortage of financial resources for industrial park construction and infrastructure construction. The central government’s budget ratio is less than 25%. Third, laws related to industrial parks are not well arranged. There is no legislation yet on the locations of industrial parks, and there is an overall lack of incentive measures to attract foreign investment. An act on the evaluation procedure for the performance of the industrial parks has not yet been established and there is no R&D tax credit regime in place for encouraging technological innovation. Fourth, the governance of industrial parks is still weak. Management companies do not have high levels of expertise and the government does not have an evaluation system to prevent the clutter of industrial parks. Fifth, although many industrial parks are still under construction, there are still lack of effective economic instruments for making cluster effects and diminishing negative side-effects on the investment climate outside the park (negative spillovers and crowding out).

This research proposes some policy actions and measures for the effective operation of IP and attraction of FDI. For strengthening policy capacity, it recommends strengthened leadership and extensive support by the central government, selection and application of an appropriate development strategy for economic development and the intensification of a government support system. In particular, it suggest the necessity of the establishment of public corporations, or the so-called UICOX like Korea Industrial Complex Development Corporation (KICOX), and creating a comprehensive IP development program and providing incentives which induce technology transfer.

To overcome financial constraints, it stresses the necessity of the activation of public-private partnership. There are a variety of options for private sector involvement in developing industrial parks. It can be proposed that when considering the Ukrainian government’s financial capacity, an on-site (private) and off-site (government) model can be considered. If private partners invest in off- site, a Build-Operate-Transfer (BOT) or Lease-Develop-Operate (LDO) scheme can be recommended. The government would be better off in establishing an infrastructure fund for the financing of off-site infrastructure. Availability Payment (AP) can be a good stimulus for foreign private partners.

Executive Summary • 019 This research also emphasizes a new arrangement of legal framework for IP. Ukraine’s government must establish a law an IP location sites which specify the review process of the development plan stage, implementation plan stage and the evaluation procedure for environmental, traffic and disaster impact assessment. Furthermore, foreign tenants which contribute to Ukraine’s new growth engine should be provided tax exemption and R&D tax credit.

Strengthening the IP governance structure is also a critical task. This study suggests the introduction of the IP performance system and professional management system. Quantitative as well as qualitative indicators of performance evaluation in attracting FDI are proposed specifically. A performance evaluation committee composed of not only public officials but also civilian experts is necessary. For objective and rational evaluation, statistics related to each IP should be produced and managed through system construction. Information on IP activities and future expectations in Ukraine is not enough. Each park should be managed by a specialized private company on the basis of a performance-based management contract with clear and transparent benchmarks and firm performance monitoring indicators. The effectiveness of the park’s board of directors is also an important factor for its success.

For developing economic instruments for increasing cluster effects, this research proposes the strengthening of the Research-Industry Cluster, introduction of a successful supplier development program and technology road mapping, and an innovation and incubation system.

The FDI attraction policy also should be redesigned. First of all, a selection and focusing strategy must be considered. There is a need to first support techno parks in the Kyiv region, where manpower and capital are accessible, and priority investment is needed in the Odessa harbor area and Lviv industrial park which have good access to logistics. The establishment of a Special Governance Zone (SGZ) can also be good a platform for attracting FDI, because the biggest barrier to attracting foreign investment in Ukraine is the bad quality of governance. However, since the SGZ may cause regional conflicts, it is necessary to reach a political consensus on which regions should be designated as priority areas. Improving the legal framework for attracting FDI is also a very urgent issue. The Ukrainian government should carry out reforms on excessive policy regulations and ineffectiveness of its administration services. In particular, Ukraine needs to increase its ranking on the “Doing Business Index” and improve its investment environment. Even though it is difficult to improve infra- related indicators, the Ukrainian government can swiftly improve regulation-related indicators such as construction permission, protecting minority investors, and paying taxes. Moreover, the government can organize and provide a one-stop service for foreign companies wanting to invest in IPs.

020 • 2017/18 Knowledge Sharing Program with Ukraine Effective aftercare services should be implemented. In particular, a grievance resolution process should be introduced. Partnership with FDI-related organizations in targeted countries and improving competitiveness for FDI by attracting more domestic firms is also very helpful. Every IP and MEDT need to develop partnerships and/or create dialogue channels with organizations like Korea Trade-Investment Promotion Agency (KOTRA) in Korea which support Korean firms that want to invest abroad. In particular, IPs need to explore new types of industrial cooperation such as inviting SMEs with advanced technology to Ukrainian IPs.

Ukrainian IPs should attract domestic firms to maximize domestic potential and competitiveness. This can provide the possibility of setting up joint ventures for foreign investors with domestic firms in IPs.

Executive Summary • 021

2017/18 Knowledge Sharing Program with Ukraine: Mechanisms and Tools of Stimulating National and Foreign Direct Investments Chapter 1

Strengthening of Public Investment Management System (PIMs) in Ukraine

1. Introduction 2. Structure and Trends of Ukraine State Budget 3. Public Investment Management Reforms in Ukraine 4. Public Investment Portfolio in Ukraine 5. Public Investment Management Process 6. Assessments and Policy Recommendations 7. Summary and Conclusion ■ Chapter 01

Strengthening of Public Investment Management System (PIMs) in Ukraine

Kangsoo Kim (Korea Development Institute) Tetiana Tavlui (Center for Transport Strategies, Ukraine)

Summary

The purpose of this study is to provide policy suggestions to strengthen the framework for public investment management in Ukraine, so as to ensure that the public investment expenditures are consistent with the priorities and cost efficient. To do this, this report is to firstly provide a comprehensive review and the analysis of the current public investment management system in Ukraine, highlighting recent reforms. Then, good practices and lessons learned from the Korean cases are provided in terms of mid-term expenditure framework, provision of data base and parameters, projects cost management, a dedicated organization, criteria to assess the suitability of Public Private Partnership (PPP), and transaction process for unsolicited proposals. Major policy suggestions are as follows.

Develop National Investment Strategy

Ministry of Economic Development and Trade (MEDT) should develop the National Investment Strategy in order to set up a top-down approach for project prioritization. MEDT should work together with line ministries to define the sectors and subsectors that need investments. The strategy will serve as a guideline for project initiators at

Keywords: Ukraine, MEDT, Public Investment (PI), Public Investment Management (PIM), Public Investment Projects (PIP), Public Private Partnership (PPP)

024 • 2017/18 Knowledge Sharing Program with Ukraine the stage of conceptualization of the project. At the same time key spending units and MEDT will use the strategy to filter the projects, which are not in line with it.

Provide Standard Data and Parameters for Appraisal

It is recommended that standardized data and parameters for project appraisal should be provided. Though MEDT is providing guidelines and methodological explanations on Cost Benefit Analysis (CBA), selection and prioritizations of the public investment requires reliable Ukraine’s data and parameters.

The adequate parameter values including the operating period of the investment facilities, the contingency in project cost and more critically, the social discount rate, should be provided to assure transparent and consistent appraisal.

Establish a New Evaluation Unit or Expand the Roles of the Existing Unit in MEDT

Government of Ukraine (GoU) should consider either the establishment of a new dedicated unit or the expansion of the roles and functions of the existing review unit in MEDT to support the project appraisal and review the proposals. According to whatever form the organizations are established, the dedicated unit should be responsible for providing standard data and parameters, and updating and improving methodologies for project appraisal and review.

It would be desirable that the unit has a function on performing the evaluation on Public Investment Projects (PIP) as well as PPP to establish a unified framework for public investment management resulting in the increase of value for money. GoU should also consider the introduction of the evaluation procedure on State Owned Enterprise (SOE)’s new investment to improve public services through increased transparency in operation.

Enhance Total Project Cost Management

Taking into consideration the economic situation in Ukraine and its lack of capacity to estimate exact project costs in early stage, it is not desirable to update or review the project if the total project increases by only 10% including “inflation.” Inflation cannot be managed by the project initiators and the 10% is too small cost change compared to the GoU’s capacity on the cost estimation of the project. In Korea, the inflation as well as even the increase of land compensation cost do not trigger conditions to conduct the Re-assessment Study of Feasibility (RSF), and the RSF is carried out when the total cost of the project increases by 20%.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 025 MEDT also needs to provide standard data and methodology to the project initiators for conducting re-evaluation on feasibility.

Develop Criteria to Assess the Suitability of PPP

GoU needs to develop procedures and guidelines to determine whether that project should be implemented as a PPP, or follow PIP. A Value for Money (VfM) analysis including the feasibility analysis needs to be carried out in accordance with guidelines to keep objectivity, consistency and independence.

It is recommended that, instead of a quantitative VfM test, a qualitative VfM test should take place in advance and a specific set of criteria or guidelines to assess the suitability of PPP implementation should be developed.

Develop an Adequate Transaction Process for Unsolicited Proposals

A special approach should be developed to the selection of potential private partners, in the case of unsolicited project proposals.

When pursuing an unsolicited project, the competent authority should notify the public about the outlined content of the project proposal to allow other private parties to submit alternative proposals for bidding. Minimum days (generally 3 months) from the notification date should be given for accepting alternate proposals to ensure fair competition. Based on the merits of the initial proposal, extra points within some range (for example, 10%) of the total evaluation points can be awarded upon the review of the VfM assessment to encourage future unsolicited proposal.

1. Introduction

The effective Public Investment Management System (PIM) is crucially important for the economic development of Ukraine, that needs large investments into social, industrial, and transport infrastructure, which have been underfinanced for decades. Lack of economic rationale, strategic approach, and transparency in PIM was undermining efficiency of public funds use until the Government of Ukraine (GoU), namely the Ministry of Economic Development and Trade of Ukraine (MEDT), embarked on the implementation of reforms in 2015. That year was marked by adoption of a number of laws and regulatory acts that introduced a clear procedure for PIP management. Following the successful launch of the PIP reform MEDT proceeded with improvement of laws on Public-Private Partnership.

026 • 2017/18 Knowledge Sharing Program with Ukraine Currently, after most of the necessary PIM laws have been passed, it is important to focus on the progress of the changes in order to tackle the issues promptly, in case they arise. If the ongoing experience shows that a certain aspect of the law on PIM does not work or does not generate expected results, GoU should react fast to eliminate the risks of negative consequences in the form of the new inefficient PIM system.

The objective of this study is to provide policy suggestions to strengthen the framework for public investment management in Ukraine, so as to ensure that the public investment expenditures are consistent with the priorities and are cost efficient.

To do this, this report is to firstly provide a comprehensive review and the analysis of the current public investment management system in Ukraine highlighting recent reforms, the new introduced procedures for appraisal, selection, and monitoring of projects. The focus of PIM in Ukraine is made on the topics of public investment projects financed with the state budget and public-private partnerships as the types of public investments under the responsibility of MEDT. Then, good practices and lessons learned from the Korean cases are provided so that GoU could benchmark Korea’s best practice.

The report consists of 7 sections. Section 2 demonstrates the trends and structure of public investments for the period from 2011 to 2017. Section 3 is focused on PIM reforms in Ukraine covering PIP and PPP projects, their evolution and current state of affairs. Section 4 outlines the main peculiarities of the PIP and PPP portfolio. In Section 5, the procedures for public investment management are described separately for PIP and PPP projects, it also contains the review of the institutions involved in the PIM system and their roles in this process. Section 6 provides assessment of the current PIM procedures in Ukraine; it covers each step of the project cycle described in Section 5. Based on the assessment, the section also provides policy recommendations to strengthen the framework for public investment management in Ukraine, so as to ensure that the public investment expenditures are consistent with the priorities, efficiency of selection of the public investment projects, and are cost efficient. The recommendations are based on the practices and lessons learned from the Korean cases. Finally, the summary and conclusion with the limitation of the report are presented in the Section 7.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 027 2. Structure and Trends of Ukraine State Budget 2.1. Fiscal and Budgetary Trends: State and Local Funds

Recent years have been challenging to Ukraine, as the country faced a period of shock and instability caused by its efforts to change the direction of development in 2013, when the Revolution of Dignity began. The political and economic events inevitably affected the country budget trends, as [Figure 1-1] illustrates the consolidated budget revenues slightly fell and stagnated in 2013 and 2014. This was also the period when the Russian Federation annexed the Crimea and occupied the eastern regions of Ukraine. As a consequence, the political and economic relationship with the largest trade partner of Ukraine at that moment has considerably worsened having a negative impact on the economic and social life of both countries.

[Figure 1-1] Ukraine Consolidated Budget [Figure 1-2] Expenditures of the Ukraine Revenues Trend1) Consolidated Budget (Unit: Billion UAH) (Unit: Billion UAH)

1,000 1,200

1,000 800

800 600 600 400 400

200 200

0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Local Budget State Budget Local Budget State Budget

Source: State Treasury Service of Ukraine. Source: State Treasury Service of Ukraine.

From 2015 onwards the consolidated budget revenues and expenditures, as shown in [Figure 1-1] and [Figure 1-2], demonstrated growth. The increase of budget revenues is explained by gradual recovery of economic activity and geographical reorientation of foreign trade from CIS countries to the European Union.

The budget expenditures increased due to the necessity to spend more on general state functions, debt repayments and defense. High inflation rate and

1) All data regarding state and consolidated budget is provided without inter-budget transfers.

028 • 2017/18 Knowledge Sharing Program with Ukraine currency devaluation has also affected the growth of revenues and expenditures. The composition of the consolidated budget revenues shows that the share the local budget remains at the level of about 20% during the period under analysis. [Figure 1-2] shows that the local budget has a slightly larger share in expenditures than in revenues.

Capital expenditures of the consolidated budget were declining from 2011 to 2014 and started growing in 2015 according to [Figure 1-3]. Compared to 2011 in 2017 the state budget capital expenditures have increased by 30%, while the local budget capital expenditures tripled. It should be noted that the share of capital expenditures in the overall expenditures of both state and local budget were almost the same in 2011, but during the period of crisis the share of state capital expenditures has significantly fell and did not reach the pre-crisis level even in 2017, while the share of local budget capital expenditures grew.

[Figure 1-3] Capital Expenditures by Source of Funding (Unit: Billion UAH) (Unit: %)

80 15 16

70 15 14 60 12

50 10 11 10 8 40 9 7 8

30 7 6 4 6 20 5 4 2 4 10 3 2

0 0 2011 2012 2013 2014 2015 2016 2017 State Budget Local Budget Share of CAPEX in State budget Share of CAPEX in Local budget

Source: State Statistics Service of Ukraine, State Treasury Service of Ukraine.

The breakdown of capital expenditures by source of funding, as demonstrated in [Figure 1-3], shows that during the period of 2011–2013, more capital expenditures were financed with the state budget than with the local budget. However, in 2014, the tendency changed, as the share of capital expenditures financed with the local budget exceeded the state budget capital expenditures.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 029 2.2. State Budget Trends and Composition

Ukraine runs a persistent state budget deficit, and [Figure 1-4] shows that during the period under review the deficit reached its negative peak in 2014, decreased in 2015, but increased again in 2016 by 55%. A positive trend was observed in 2017, when the deficit fell to UAH 48 billion. Fiscal policy in 2016 was stimulating making the economic activity speed up, which resulted in the deficit shrinking in 2017.

[Figure 1-4] State Budget Deficit (Unit: Billion UAH) (Unit: %) 80 60 70 5 50 60 4 40 50 4 3 40 30 30 2 2 20 20 2 10 10 0 0 2011 2012 2013 2014 2015 2016 2017

State Budget Deficit

Source: State Treasury Service of Ukraine.

The ratio of state budget deficit to GDP, as illustrated by [Figure 1-4], was kept within the norm of 3% before and after the Ukraine crisis, while the increase of the indicator to 5% was recorded in 2014 demonstrating critical economic state of the country during the period of 2012–2014.

The ratio of the state budget to GDP, shown in

, remained stable during 2011–2017, as state budget revenues on average accounted for 26% of GDP, while the share of expenditures was 29%. The breakdown of state budget revenues shows that taxes constitute a much larger share of total state budget revenues compared to capital income and grants. The structure of expenditures shows that noninterest expenditures are prevailing in the state budget, nevertheless it must be noted that interest expenditures being only 4% of GDP compared to 25% of noninterest expenditures, have grown significantly since 2011.

State Budget to GDP Ratio (Unit: %) 2011 2012 2013 2014 2015 2016 2017

Total revenues 24.2 24.6 23.2 22.8 26.9 25.9 27.0

030 • 2017/18 Knowledge Sharing Program with Ukraine

Continued

2011 2012 2013 2014 2015 2016 2017

— Tax Revenue 20.1 19.6 17.9 17.9 20.6 21.1 21.0

— Capital Income and Grants, 4.1 5.1 5,2 4,9 6.3 4.7 6.0 Revenue Other than Tax Revenue

Total Expenditures 25.7 28.2 27.5 27.5 29 28.7 28.0

— Noninterest Expenditures 23.8 26.3 25.2 24.2 24.6 24.7 24.0 (Recurrent Expenditure)

— Interest Expenditures 1.9 1.8 2.3 3.3 4.4 4.1 4.0 (Capital Expenditure)

Source: State Treasury Service of Ukraine.

In Ukraine, there are two classifications of the state budget expenditures: functional and economic. According to the functional classification, the budget expenditures are broken down by economic sectors and public services. The economic classification of the state budget distinguishes different types of two major groups of expenditures such as current and capital.

The structure of state budget expenditures by functional classification is shown in

, according to which the state budget transfers, social protection and social security, and general state functions have the largest shares in expenditures. Ukraine spends the least on on housing and utilities infrastructure, natural environment protection, and intellectual and physical development. The dynamics of expenditure types during the period 2011–2017 shows that such items as general state functions and defense have grown in the composition of expenditures. The share of expenditures on economic activity and education have declined significantly.

Ukraine State Budget Expenditures by Functional Classification (Unit: %) Expenditures by Functional 2011 2012 2013 2014 2015 2016 2017 Classification

General State Functions 12 11.1 12.4 15.3 17.9 17.2 17

Defense 4.0 3.7 3.7 6.4 9.0 8.7 9.0

Public Order, Security and 9.7 9.2 9.7 10.4 9.5 10.5 10.5 Judicial Power

Natural Environment Protection 0.9 1.0 1.1 0.6 0.7 0.7 1.0

Housing and Utilities 0.1 0.1 0.02 0.03 0.004 0.002 0.002 Infrastructure

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 031

Continued

Expenditures by Functional 2011 2012 2013 2014 2015 2016 2017 Classification

Health Protection 3.1 2.9 3.2 2.5 2.0 1.8 2.0

Intellectual and Physical 1.1 1.4 1.3 1.1 1.1 0.7 1.0 Development

Education 8.2 7.6 7.7 6.7 5.2 5.1 5.0

Social Protection and Social 19.1 19.0 21.9 18.7 18.0 22.2 17.0 Security

Economic Activity 13.4 12.5 10.2 8.0 6.4 4.6 6.0

Inter-budget Transfers 28.5 31.5 28.7 30.4 30.2 28.5 32.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Inter-budget transfers are the money that is gratuitously and beyond retrieve passed from one budget to other. The main forms of inter-budget transfers are: 1) basic grants (transfer provided from the state budget to local budgets); 2) subvention - inter budgetary transfers for the purposeful use in the order set by the body which made a decision on granting subvention; 3) reverse subsidy (funds transferred to the state budget of local budgets); and 4) additional subsidies. Source: State Treasury Service of Ukraine.

According to

, current expenditures accounted for more than 90% in the state budget during the period under review, moreover, the share was growing from 2011 to 2017 and reached 95% in 2017, which means that capital expenditures accounted for only 4% in the same year. The trend of capital expenditures shows that it decreased by 5.5 percentage points in 2016 compared to 2011, but grew in 2017 to 5%, to the level of 2013.

Ukraine State Budget Expenditures by Economic Classification (Unit: %) Expenditures by Functional 2011 2012 2013 2014 2015 2016 2017 Classification

Current Expenditures 90.6 92.5 95.6 98.3 97.0 96.1 95.1

Direct and Indirect Labor Charges 16.3 15.1 15.9 16.1 13.8 15.4 16.1

Disposition of Goods and Services 17.0 16.6 15.2 15.2 15.1 14.0 14.5

Debt Service 7.4 6.5 8.5 11.9 15.0 14.2 13.3

Current Transfers 30.9 35.6 32.9 34.1 31.7 29.1 32.7

Social Security 18.9 18.8 21.9 18.9 18.0 22.4 17.7

032 • 2017/18 Knowledge Sharing Program with Ukraine

Continued (Unit: %) Expenditures by Functional 2011 2012 2013 2014 2015 2016 2017 Classification

Capital Expenditures 9.4 7.5 4.4 1.7 3.0 3.9 4.9

Capital Transfers 7.0 5.0 2.7 0.7 1.0 1.7 2.7

Total Expenditures 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (Including Inter-budget Transfers)

Source: State Treasury Service of Ukraine.

In order to stimulate economic growth and to attract private investments to Ukraine, the government should increase capital expenditures and provide aid to those economic sectors that have potential to generate budget inflows in the future and overcome the problem of the budget deficit. To achieve a maximum effect from the investments, which involve public funds, the public investment management system should be improved and guided by the objective of economic growth and sustainable development.

3. Public Investment Management Reforms in Ukraine 3.1. Evolution of Reforms in Public Investment Project Management

Before 2015, there was no legislative mechanism for the management of public investments, and clear principles and criteria for the provision of state budget funds for the implementation of investment projects were not defined. Consequently, public funds were channelled into implementation of projects that had not been justified.

The main problem of public investment management was the lack of a clear definition of a public investment project, which allowed the initiators of such projects to receive funds for their implementation in accordance with other, easier procedures. For example, an investment project could be defined as a construction project that legally allowed the project initiator not to justify the project from an economic or financial point of view. The Law of Ukraine "on investment activity" distinguished notions of an investment project and a construction project. The same law and by-laws in the area of investment activity management established a complicated procedure for investment projects appraisal, which required the

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 033 preparation of a feasibility study (FS), while construction projects could go through simpler procedure. Since most public investment projects included an element of construction, they could be classified as construction projects and receive public funds for their implementation without passing through a complicated appraisal procedure.

In 2015, the Verkhovna Rada (parliament of Ukraine) adopted amendments to the Budget Code of Ukraine, which defined the concept of a public investment project. The same year, GOU approved the procedure for the selection of public investment projects, and these laws and by-laws became the basis of the PIM system reform. Since then, the possibility of classifying an investment project as a construction project has disappeared, and the procedure for appraising the projects has become more transparent and focused on the effective use of state budget funds. In 2016, the procedure for monitoring the PIPs was approved, and in 2017 methodological recommendations for project development were issued and published by MEDT.

3.1.1. Budget Code

Changes to the Budget Code have contributed to the introduction of a procedure for the appraisal and selection of PIPs. The most significant change that was introduced into the Budget Code was the definition of the PIP and the public capital investment. In the current version of the Budget Code, the PIP is defined as “an investment project implemented through state investment in state-owned assets using state capital investments and/or loans borrowed by the state or state guaranteed loans”; state capital investments are defined as “capital expenditures of the state budget (granting of loans from the state budget), directed towards the creation (purchase), reconstruction, technical re-equipment of fixed assets of state property, the expected useful life of which exceeds one year.” By providing a clear definition of PIP and capital expenditures, the Budget Code has established criteria according to which project can or cannot be categorized as a public investment project.

The amended Budget Code defines the role of the Ministry of Finance in the process of managing public investments; in particular, it is given the role of approving the total amount of funds available for financing of the PIPs each year. Thus, the financial ceiling is established for selecting only those projects that will bring the most benefits compared to the costs for their implementation.

Changes to the Budget Code also include the definition of the Inter-Agency Commission (hereinafter referred to as “Commission”), which selects public investment projects for inclusion in the state budget. The Commission must ensure transparent selection of projects by voting. The Budget Code regulates the approach

034 • 2017/18 Knowledge Sharing Program with Ukraine to project selection stating that at least 70% of the funds, approved by the Ministry of Finance for financing PIPs, should be directed to projects that have already been started. This rule allows optimizing the existing portfolio of unfinished investment projects.

3.1.2. Law on Investment Activity

Taking into account the changes made to the Budget Code, the corresponding amendments were made also in the Law of Ukraine on Investment Activity in 2017. Th definition of a PIP was added to the general provisions of the law. Article 12-1 states that investment activities should be guided by strategic documents. Clauses regarding the appraisal and selection of PIPs were also added to the law, aligning it with regulatory acts that establish the procedure and methodology for the preparation, appraisal, and selection of public investment projects.

3.1.3. Resolution of the Cabinet of Ministers of Ukraine No. 571 on Some Issues of Public Investment Management

In July 2015 the GoU approved Resolution No. 571 on some issues of public investment management (hereinafter referred to as “Resolution 571”), which defines the principles of the PIM system in Ukraine and contains a detailed explanation of the procedures for the development, appraisal, and selection of PIPs. Resolution 571 provides a list of priority areas in which projects should be implemented; state bodies that are involved in the process of public investment management, and their roles and responsibilities. Resolution 571 describes not only the components of the projects management process, but also gives a detailed explanation of the project analysis.

3.1.4. Monitoring

After selecting the first projects under the new procedure, the issue of monitoring the results of their implementation was raised. In 2016 MEDT developed and approved the monitoring procedure of the PIPs at the investment and operational stages. The monitoring procedure has increased the level of responsibility and accountability of project initiators for the results of projects implementation. In accordance with the Resolution 571, the Commission may decide to terminate funding for projects that are below the level of indicators declared in the project documentation.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 035 3.1.5. Guidelines

Based on Resolution 571, methodological recommendations for the preparation and appraisal of a PIP were developed and approved by MEDT in 2017. These recommendations provide a detailed explanation of the requirements and methodology for carrying out the analysis in the feasibility study of a PIP.

The aforementioned laws and by-laws became a solid foundation for the establishment of an effective and transparent PIM system in Ukraine, they were developed taking into account the best world practices and Ukrainian realities. It is not yet possible to estimate how new procedures will improve the effectiveness of PIPs implementation, as the project is usually implemented during several years and new procedures were implemented during 2015–2016. It will be possible to make such an assessment in a few years, when the first projects selected under the new procedure will be put into operation.

3.2. Reforms and Legislative Changes in the Management of Public-Private Partnership Projects

As of today, there are several laws that establish the rules and conditions of public-private partnership in Ukraine. These laws relate to various types of public- private partnership and various areas in which such initiatives can be implemented. The main problem accompanying a number of these laws is that each of them requires different approaches to the appraisal and approval of PPP projects. The existing legislation in the field of PPP allows choosing different ways to appraise the project, as one and the same project can be implemented according to different procedures depending on its classification. Over the last few years, MEDT has been working on this problem together with consultants, and this year, a new Law on Concessions is expected to be adopted by the Parliament. The new law will put an end to various approaches to the appraisal of PPP projects.

3.2.1. Law on Concessions

The first law, which established the procedures for managing PPP projects, was the Law on Concessions, adopted in 1999. Amendments to the Law on Concessions were being introduced from 2002 to 2018, but the peculiarity of this law has been the lack of requirement to appraise the concession project by developing a feasibility study. However, some laws, which establish a procedure for appraising concession projects in certain sectors and which refer to the Law on Concessions, require the development of a feasibility study. A new Law on Concessions, which is being drafted, will establish a single system for appraising concession projects and PPP projects by developing feasibility studies and assessing their effectiveness.

036 • 2017/18 Knowledge Sharing Program with Ukraine 3.2.2. Law on Concessions of the Roads Construction and Operation

After the adoption of the Law on Concessions in 1999, the Law on Concessions of the Roads Construction and Operation was adopted. According to the law of 1999 on the development of a project, which was to be implemented in the field of transport infrastructure, did not require in-depth appraisal in the form of a feasibility study. The requirement to prepare a feasibility study of a project appeared in 2009, only when the corresponding amendments were made to this law, but references to any methodological recommendations for the preparation of feasibility studies or requirements to it still do not exist. According to this law, the decision on concession project implementation is taken by the Cabinet of Ministers of Ukraine (CMU) on the basis of the feasibility study. The provisions of this law are incorporated into the new Law on Concessions, with the adoption of which the Law on Concessions of the Roads Construction and Operation will expire.

3.2.3. The Law on Public-Private Partnership

In 2010, the Law on Public-Private Partnership (hereinafter referred to as “PPP law” was adopted with subsequent changes in 2013 and 2016. This law defines public-private partnership, its features, principles and areas, in which it can be implemented. The PPP law establishes a comprehensive procedure for the initiation, preparation, appraisal and approval of PPP projects. It is worth noting that these procedures have many common features with the procedures that are applied to public investment projects. The PPP procedures described in the law are more detailed in the Resolution of the CMU of 11.04.2011 No. 384 on Some Issues of the Organization of the Implementation of Public-Private Partnership (hereinafter referred to as “Resolution 384”), Resolution of the CMU of 16.02. 2011 No. 232 on Approval of the Methodology for Identifying the Risks of Public-Private Partnership Implementation, their Evaluation and Definition of their Management, and the Order of MEDT of 27.02. 2012 No. 255 Some Issues of the Analysis of Public-Private Partnership Implementation Effectiveness.

The PPP law defines 3 main types of PPP: concessions, property management, and joint activities. Based on this definition of PPP types, the question was raised regarding the type of law the initiators of concession projects should be guided by, either by the Concession Law or by the PPP Law. This issue should be resolved by the adoption of a new Law on Concessions, which distinguishes the management of concession projects and other types of PPP projects, but the project appraisal procedure will be in line with the PPP Law.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 037 3.2.4. Law on Peculiarities of Leasing or Concession of Municipal Facilities in the Areas of Heat Supply, Water Supply and Sewerage

In 2010, the Law on Peculiarities of Leasing or Concession of Municipal Facilities in the Areas of Heat Supply, Water Supply and Sewerage was adopted. This law does not require appraisal of the transfer of heat supply, water supply and sewage as an investment project. The emphasis of this legislative document is on concessionaire selection. The law does not provide a clear distinction between the concepts of lease and concession, and the concession of assets is more characterized as a lease rather than a project. Therefore, with the adoption of the new Law on Concessions, the relevant amendments to the above-mentioned law will be made, it will become the law solely on lease.

3.2.5. Law of Ukraine on Peculiarities of the Lease or Concession of the Fuel and Energy Complex Assets that are in State Ownership

This law requires appraisal of the concession project based on the feasibility study, the assessment of the feasibility and the efficiency analysis are more harmonized with the PPP Law than other concession laws. The decision on the implementation of the concession project, according to this law, is taken by the central executive body, which implements the state policy in the fuel and energy sectors. However, with the adoption of the new Law on Concessions, this law will be changed into a legislative document that regulates fuel and energy assets leases.

Thus, currently, there are four laws that define a separate procedure for concession projects and one law with by-laws that define PPP procedures, stating that concession is one of its types. In order to address inconsistencies in different laws and harmonize the PPP project management system, MEDT together with the European Bank for Reconstruction and Development (EBRD) and international consultants have prepared a draft law on concessions, which distinguishes the management of concession projects and other PPP projects, but a unified system for appraising and assessing the effectiveness of the projects is established in accordance with the Law on PPP. The draft law was adopted by the Verkhovna Rada in the first reading in April 2018, now the bill is being finalized and prepared for further hearings in the Parliament. Thus, if the draft Concession Law is adopted, the problem of different approaches to appraising PPP projects of various types will disappear, but the delimitation of management of concession projects and other PPP projects will remain.

038 • 2017/18 Knowledge Sharing Program with Ukraine 4. Public Investment Portfolio in Ukraine 4.1. Public Investment Projects Portfolio

Prior to the implementation of PIM reform in 2015, due to the range of inefficiencies in the PIM system, there was no actual PIP portfolio. Most public investment projects were classified as construction projects, since in this way, the project initiators could avoid conducting in-depth appraisal. Therefore, the PIP portfolio per se was established in 2016, when the first PIP project was funded under the new procedure.

Implementation of the PIM reform in 2015 resulted in a growing number of PIPs submitted to MEDT each year. In 2015, 38 projects were submitted, 50 in 2016, and 56 in 2017. This tendency demonstrates an increasing interest of public institutions in implementation of their investment projects by means of public financing. The first year of the reform was tough, as most of the project initiators were unfamiliar with the standard appraisal of investments projects. Some of them did not even attempt to prepare the project proposals, since the appraisal process seemed very sophisticated and different from what they were used to.

Many of submitted projects were screened out in the process of independent review of project proposals and the Commission selected a limited number of projects to include into the state budget. In 2015, ten projects were selected to be funded with the state budget in the following year, in 2016, the overall number of selected projects and the number of projects selected in the preceding year amounted to 24, and 40 projects were selected to be financed from the budget of 2018.

[Figure 1-5] Number of Public Investment Projects Submitted to MEDT and Selected

45 40 40 35 30 25 24 20 15 10 10 5 0 2016 2017 2018

Source: Ministry of Economic Development and Trade of Ukraine.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 039 Each year, the Ministry of Finance (MoF) determines the amount of funds that can be spent on PIP the following year. [Figure 1-6] illustrates the dynamics of funds approved by MoF for PIPs implementation. The investment costs of projects submitted to MEDT substantially exceed the amount of available funds. At the same time, the [Figure 1-6] shows that capital expenditures in 2016, for example, amounted to 27 billion UAH, and 1 billion UAH approved by MoF for the investment projects is a very tiny share in the overall state budget capital expenditures.

[Figure 1-6] Capital Expenditure Ceiling for PIPs (Unit: Billion UAH) 4 3.8

3

2 1.9

1 1

0 2016 2017 2018

Source: Ministry of Economic Development and Trade of Ukraine.

The breakdown of the planned investments by sectors (see Table 1-4) shows that the largest share of funds was approved to finance the transport infrastructure sector, it accounts for 47% for the period of 2016–2018, healthcare ranks the second and accounts for 37%.

Planned Investments for PIP Implementation (Unit: Million UAH) Sector 2016 2017 2018

Healthcare 570 731 1,131

Transport Infrastructure 232 615 2,358

Social and Cultural Sector 120 415 209

Environmental Protection 63 38 44

Public Services 0 51 0

Education 0 0 83

Total 985 1,850 3,825

Source: Ministry of Economic Development and Trade of Ukraine.

040 • 2017/18 Knowledge Sharing Program with Ukraine The table above shows the planned investments, but the actual figures are different because the actual implementation of the projects does not always correspond to the planned actions.

shows the actual investment costs, in 2016, a total of UAH 747 million were allocated for PIPs implementation and UAH 1,564 million were allocated in 2017.

Actual Investment Costs (Unit: Million UAH) Sector 2016 2017

Healthcare 422 592

Transport Infrastructure 168 607

Social and Cultural Sector 117 311

Environmental Protection 40 38

Public Services - 16

Total 747 1,564

Source: Ministry of Economic Development and Trade of Ukraine.

[Figure 1-7] PIP Financed by Sectors, 2015–2016

1% 3%

18% Healthcare Transport Infrastructure

44% Social and cultural sector

Environmental protection

34% Public services

Source: Ministry of Economic Development and Trade of Ukraine.

The sectoral breakdown of PIPs financed in 2015–2016 (see Figure 1-7) shows that the major part of funds were directed to the implementation of healthcare projects, namely 44%, 34% of funds were spent on transport infrastructure projects, and 18% were allocated to social and cultural sectors.

and shows that in 2016 on average, the share of actual costs in planned investment costs was 75.8%, while in 2017 the situation improved

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 041 and the average share appeared to be 84.5%. As it was mentioned above, in the first year of the reform project initiators were not skilled enough in project appraisal and planning, most probably for this reason some of them failed to complete the planned activities during a year. But a positive tendency of increasing the level of plan execution indicates that the experience in implementation of the investment projects improves the performance of project initiators and their planning skills.

4.2. Portfolio of Public-Private Partnership Projects

The portfolio of PPP projects is large compared to PIP portfolio in terms of the number of projects being implemented in this form. According to the legislative documents in PPP field, sectors that are traditionally the most suitable for PPPs are mining, energy, transport infrastructure, water and wastewater infrastructure, healthcare, tourism, waste management, real estate management and others. Judging by the sectoral composition of the PPP portfolio (see Figure 1-8), project initiators try to stick to the list of these sectors, though they have the right to implement projects in any other area, if this is not contrary to law.

According to the information provided by MEDT, as of January 2018, 191 public-private partnership contracts were signed, among which 182 are concession contracts, 24 are agreements on joint activities, and 1 PPP project contract. A large number of concession projects in the PPP portfolio can be explained by the fact that the procedure for appraising concession projects is not as complicated as the procedure of appraisal and approval of PPP projects.

[Figure 1-8] Number of PPP Projects by Sectors and Sub-sectors

5% Waste treatment 5% 4% Water collection, purification, and distribution Construction and/ or operation of highways, roads, railways, airstrips, bridges, overpasses, 22% tunnels and subways, sea and river ports and their infrastructure 64% Production, transportation, and distribution of heating

Production, transportation, and distribution of electricity

Source: Ministry of Economic Development and Trade of Ukraine.

As [Figure 1-8] demonstrates the majority of PPP agreements are concluded in the waste treatment sector, which accounts for 64%. The second largest group of project agreements are concluded in the water sector, in particular, water collection,

042 • 2017/18 Knowledge Sharing Program with Ukraine purification, and distribution. Only 4% of projects in the current portfolio are projects implemented in the field of transport infrastructure.

There are no statistics on the amount of funds directed into such projects from the state or local budgets, and this is a drawback of the PPP portfolio, since the state should assess the ratio of financial inflows that come from project initiators in the form of concession or other payments to the investments of the state.

5. Public Investment Management Process 5.1. Process of Public Investment Projects Management

The process of PIPs management is determined by Resolution 571 and includes a series of steps from an idea of project to its implementation. As shown [Figure 1-9], the process begins with conceptualization, that is the articulation of the project idea, its purpose, and the ways to achieve it. The next step is a project appraisal, which involves the development of a feasibility study that has to go through state expertise, screening, and review at several government agencies. After having passed through appraisal and verification of compliance with the eligibility criteria, the project is submitted for selection. If the project is selected, the project receives funding from the state budget and is implemented. The implementation process also includes monitoring and the possibility of adjusting the project.

[Figure 1-9] Process of Public Investment Projects Management

Conceptualization Appraisal State Expertise Screening

Independent Selection Implementation Review

Source: Author.

Responsibilities of various public institutions engaged in the process of PIPs management are determined by Resolution 571. The main actors of this process are key spending units, project initiators, MEDT, and the Inter-Agency Commission.

The Key spending unit (KSU) is a public institution (line ministry or the other

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 043 government agency) responsible for managing the process of the state budget allocation to a number of other institutions or state-owned enterprises, which are under its administration.

The project initiator is a state enterprise, a public institution or a structural unit of the KSU that is responsible for the development and implementation of the public investment project. The project initiator is appointed by KSU to implement projects aimed at improving or creating public assets or public services that are owned/ managed or provided by the project initiator.

The Inter-Agency Commission is a collegiate body consisting of the Cabinet of Ministers members, members of the Parliamentary Committee on Budget, representatives of central executive authorities and other state bodies. The composition of the Commission is approved by the Cabinet of Ministers of Ukraine.

The Ministry of Economic Development and Trade is a central executive body that, inter alia, develops and ensures the implementation of state policy in the field of public investments. The role of MEDT is to assure transparent, effective, and efficient management of public investments by conducting an independent review of project proposals and providing guidance on the management of investment projects.

[Figure 1-10] Roles of Actors in Public Investment Projects Management

Project Appraisal Kev spending Screening Selection Project MEDT Initiator unit Initiator

Project Inter-Agency MEDT Conceptua- Initiator State Independent Commission Implemen- lization Expertise Review tation

Source: Author.

In the process of public investment management, the role of preparing a concept of a project, its development and appraisal is assigned to the project initiator. KSU is involved in this process as a controller and an institution that decides on proceeding with the project. MEDT ensures submission of projects, meeting the criteria specified in the legislation, to the Commission. The selection of projects is the responsibility of the Commission, and the implementation of the project should be managed by the project initiator. In the process of implementing the project KSU, MEDT, and the Commission participate as controllers that monitor the project progress.2)

2) Summary of public institutions roles in each of these procedures is provided in .

044 • 2017/18 Knowledge Sharing Program with Ukraine 5.1.1. Conceptualization

If the project is new, that is, it has not been started and its feasibility study has not been performed yet, the project initiator should prepare a concept note. A concept note is a document that must contain information about the project purpose, costs, effectiveness analysis, and an implementation plan. Justification of the project purpose should include analysis of the problems that will be solved as a result of the project implementation, the demand for the product (services or goods) of the project, alternative solutions to problems and achievement of the goal, and its compliance with the state strategic goals.

The information on projected costs in a concept note should include the cost of development and implementation of the project, the possible sources of funding, the projected costs of maintaining the facility after its commissioning, and the source of these costs. It is also necessary to provide information on the availability of a land plot for project implementation. The project effectiveness analysis involves providing information about its beneficiaries, implementation risks and the impact that a project can have on the economy, social life and the environment. The concept note should also include a plan for the development and implementation of the project, indicating the timing and ways of implementing the plan.

The concept note should be provided by a project initiator to KSU, which, based on the results of its consideration, decides on further detailed elaboration of the project, refusal to support this project or postpone its development. In order to make such a decision, the KSU may create a commission, which cannot include representatives of the project initiator or other related organizations.

If the decision of KSU regarding the project implementation is positive, it must be published on the KSU website along with information on the project, indicating the contacts of the responsible person to receive suggestions and comments. Such an announcement must be kept on the KSU website for at least 15 days. In order to make a final decision on the implementation of the project, the KSU should consider the suggestions or comments received from the civil society, business or other stakeholders.

5.1.2. Appraisal

The appraisal of a project, the concept note of which has been approved by KSU or which was initiated in previous years, is carried out by its initiator that prepares a project proposal in accordance with Resolution 571. The project proposal consists of three parts: the project summary, technical and economic analysis (feasibility study) and the plan of implementation and financing (hereinafter referred to as the

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 045 “Implementation Plan”).

The project summary contains key indicators and conclusions of the feasibility study; this document is necessary for the possibility to quickly review the results of the analysis. The feasibility study should include a financial and economic justification of the project, an environmental and social impact assessment. In a feasibility study, the project should be justified in terms of its contribution to the achievement of state strategic goals. It must also contain a marketing plan or analysis of the demand for services that will be created as a result of the project implementation. If the construction is planned within the project, this document should also contain engineering and technical solutions.

Resolution 571 requires the development of a financial model of the project and the calculation of such indicators as net present value, internal rate of return, profitability index and payback period of the project. Projects, the investment costs of which is less than UAH 30 million must be analyzed in terms of cost effectiveness. For projects with investment costs of over UAH 30 million a Cost Benefit Analysis (CBA) should be applied, within which the calculation of indicators such as the economic net present value, the economic internal rate of return and the ratio of benefits to costs should be performed. CBA should be carried out in accordance with the MEDT guidelines, which are based on the recommendations of the European Commission.3)

The Implementation Plan should include a table of planned yearly project costs. This part of the project proposal must contain a detailed project implementation plan, including a procurement plan. If the implementation and financing plan is prepared for a project started in previous years, this part of the project proposal should contain information on the current status of the project implementation and the results that have already been achieved. If the implementation of the initiated project has been stopped or if the project implementation deviates from the previously submitted plan, the project initiator must provide the reasons for which it occurred.

The project proposal should be provided to KSU by the project initiator in paper and electronic form, which must contain excel files with financial models and cost- benefit analysis models. Annexes such as the financial statements of the project initiator at the last reporting date and for the previous year, information on debt, any permit documents related to the construction or the right to use the land plot, etc., should be attached to the project proposal.

3) Guidelines to Cost-Benefit Analysis of Investment Projects, 2014, European Commission.

046 • 2017/18 Knowledge Sharing Program with Ukraine 5.1.3. State Expertise

Upon receipt of a project proposal from the project initiator, the KSU should consider them and give a conclusion (conclusion of the state expertise) regarding the justification of the project. The KSU must prepare a conclusion in accordance with Resolution 571, in the annexes to which there is a form of this document. In accordance with the form of the conclusion, the KSU must confirm the availability of all the necessary information required to be included into the project proposal. KSU can create a commission to make a decision on the project. The conclusion of state expertise may be positive, if the project proposal is correct, all data is reliable and the project has positive results. The conclusion may also be negative, if the project proposal is incorrect, contains inaccurate data or the project does not generate sufficient benefits for the country. The KSU cannot give a positive conclusion in case the project initiator is declared bankrupt or bankruptcy case is filed against it, or if the project initiator is in liquidation.

If the KSU makes a negative conclusion after the state expertise, it must return the project proposal to the project initiator, justifying the impossibility of implementing the project or requesting the appropriate changes and resubmission of the project proposal for reconsideration.

If the conclusion of the KSU is positive, the project is then sent to MEDT, the experts who carry out an independent review of the project. Project documents should be submitted to MEDT in the same form as they are provided by the project initiator to the KSU, except for the conclusion of the state expertise that should be added to the project proposal by the KSU.

5.1.4. Screening

Screening is a process of checking the compliance of a PIP with certain criteria, as the results of which a project is allowed or not allowed to participate in selection. The function of screening is attributed to the dedicated unit of MEDT. After the project has been submitted to MEDT, the ministry specialists review it. First, the project should be checked for compliance with the criteria set out in Resolution 571. For example, the project should be implemented in one of the priority areas, such as transport infrastructure, healthcare, public services, social sphere, culture or industry. All calculations must be correct and correspond to the real state of affairs. In addition, project results should contribute to the achievement of state strategic goals. For this reason, project initiators should indicate the clear link of the project to the strategic document of the state. The main strategic document in Ukraine is the Sustainable Development Strategy by 2020, and the PIP must correspond to what is indicated in it, as well as correspond to the sectoral strategies, in which it is

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 047 implemented.

If the project does not meet one of these requirements, it must be returned to the KSU with a detailed written explanation of the reasons as to why it has not gone through screening at MEDT. Project initiators have the opportunity to re-submit a revised project in accordance with the terms established by the ministry.

5.1.5. Independent Review

If a project meets the main criteria of screening, its contents are thoroughly reviewed. All statements and conclusions made in the documents are verified. If some indicators or statements seem ambiguous, the MEDT specialist has the right to ask the KSU and the project initiator to provide additional detailed explanations.

As a result of consideration to project documents, MEDT specialists prepare materials for the Commission in the form of a brief overview of the main indicators of the feasibility study and send this information to the members of the Commission before the meeting. Specialists of MEDT do not give their opinion on the project appraisal, they provide only a review of it.

5.1.6. Selection

Projects are selected by members of the Commission on the basis of projects proposals and information prepared by MEDT. Project initiators, projects of which have been selected for consideration by the Commission, select a representative who must make the presentation of the project at the Commission meeting, members of the Commission may pose questions to the representative of the project initiator in the case that something is unclear about the project.

After reviewing the project materials and listening to presentations, Commission members vote for project funding. Members of the Commission should take into account the availability of funds approved by MoF for public investment projects. In some cases, the Commission may decide to grant partial financing to the project to complete particular works, and not the entire project. The Commission may also advise the project initiator to try finding funds to finance the project from other sources or to finance it through other mechanisms such as PPP, private funding or investments.

5.1.7. Implementation

If the project is selected by the Commission, it is included in the state budget, and the MoF should allocate the necessary funds for its implementation. The project initiators receive funding from the state budget on the basis of the Passports of

048 • 2017/18 Knowledge Sharing Program with Ukraine Budget Programs4) that indicate the necessary amounts and objectives of the project for which funding is requested. MoF checks the compliance of the Passports of Budget Program with the project implementation plan.

If the Commission selects a project, the project initiator goes through all budget procedures and issues calls for tenders for the implementation of the project. The project initiator is the institution responsible for its implementation. The project must be implemented in accordance with the plan provided in the project proposal. Monitoring reports and procedures are developed by MEDT and stipulated by the legislative acts. KSUs send the monitoring reports to MEDT every six months, the results of monitoring are presented at a meeting of the Commission, which not only selects the projects, but also monitors the projects being implemented. Together with monitoring reports, project initiators must send an updated project implementation plan to KSUs, which submit them to MEDT. If the updated implementation plan differs significantly from the original implementation plan, for example, if the total cost of a project has changed by more than 10%, the project initiator must provide an updated project proposal and resubmit it to MEDT.

5.2. Public-Private Partnership Project Management Process

The PPP project management process includes several stages (see Figure 1-11), beginning with conceptualization of a project and the development of a feasibility study. The next step in the process is to analyze the effectiveness of the project and make a decision on its implementation. After the decision on the project implementation is taken, a tender for the selection of a private partner is announced. The implementation of the project can be started after the private partner is selected and a contract is signed.

[Figure 1-11] Public-Private Partnership Project Management Process

Project Conceptualization Project Appraisal Effectiveness Analysis

Decision on Selection of a Project Project Private Partner Implementation Implementation

Source: Author.

4) A form of the budget request to MoF.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 049 The main actors of the PPP project management process are project initiator, an authorized central or local executive body, and the Ministry of Economic Development and Trade.

A project initiator may be a public institution or a private partner. A private partner is a legal entity or an individual entrepreneur5) that would like to implement the PPP project and therefore initiates and undertakes its development. If the initiator of the PPP project is a public institution, the development of such a project is under its responsibility.

An authorized body is an institution of central or local executive authorities that performs an analysis of the project effectiveness and takes decision on its implementation, if the project implementation involves an asset or a service that is subject to control and management by this authority. If an asset involved in a project is state-owned, the effectiveness analysis is carried out by the central executive body. If an asset involved in a project is the communal property, the analysis of the effectiveness is carried out by the local executive body or local self-government body. If an asset of the project belongs to the Autonomous Republic of Crimea, its executive authority manages PPP projects.

[Figure 1-12] Roles of the Main Actors of PPP Projects Management

Decision on Project Project Project Project Appraisal Authorized Authorized Implementation Implementation Initiator Body Body Project Initiator Project Authorized Project and the Conceptua- Selection of a Initiator Effectiveness Body Parther(Public lization Private Partner Analysis or Private)

Source: Author.

Conceptualization of a project and development of a feasibility study is under the responsibility of a project initiator, which may be both a public and a private partner. Project effectiveness analysis is carried out by an authorized body. The decision on implementation of the PPP projects and the announcement of the tender for the selection of a private partner are the stages of a project cycle performed by an authorized body as well.6)

5) The possibility of individual entrepreneurs to be private partners will be abolished, if the new Law on Concessions is adopted. 6) Summary of public institutions’ roles in this process is provided in .

050 • 2017/18 Knowledge Sharing Program with Ukraine 5.2.1. Conceptualization

If the project initiator would like its idea to be implemented by means of PPP, it must prepare a project proposal consisting of a concept note and a feasibility study. These documents are further submitted to an authorized body for consideration. Preparation of a concept note, as a separate stage of a project management, is carried out in case the initiator of the project is a public institution. Further development of the project depends on the results of concept note analysis by an authorized body. If the initiator of the project is a private partner, it has the right to prepare a project proposal in one step, providing concept note and feasibility study together to an authorized body without separate submission of the concept note.

In the concept note, the project initiator provides detailed information on the project idea, costs, social, economic, and environmental impacts. A concept note, which is prepared for public investment projects and PPP projects, does not differ in requirements to its contents. It should contain information on the project purpose, costs for its implementation, results of the analysis of PPP effectiveness, implementation plan and justification of project development activities.

In particular, the concept note should highlight issues that will be prevented or eliminated by the implementation of the project and alternative methods to reach the same result. The concept note should include analyses of the demand for services or products that will be created or improved as a result of the project implementation. In addition, the project initiator should indicate whether the PPP project is in line with the national strategy. Expenditure information should include projected investment and maintenance costs. The project's effectiveness is proved by demonstrating an analysis of the positive impact of PPP results on the economy, social life, the environment and the absence of significant risks.

A prepared concept note is submitted for consideration to the authorized body (separately from the feasibility study, if the project proposal is prepared in two stages) that analyzes it and makes a decision on further development of the project.

5.2.2. Project Appraisal

The project appraisal is performed in the form of a feasibility study, which should be developed by the project initiator. FS is required to provide the results of socio- economic and financial analysis of the project and its impact on the environment. During the development and appraisal of PPP projects particular attention is paid to the quality of services or works that will be provided or performed as a result of the project implementation. It is essential to prove that the implementation of the

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 051 initiative involving the private partner will bring better results with a private partner rather than without it.

FS should also include an analysis of the PPP project risks and their possible sharing by the partners. The project appraisal should cover the issue of determining the type of PPP and justifying the effectiveness of the selected type for a private and public partner. The initiator of the project must also submit a project analysis for a period after the term of the contract between him and the state is terminated. Having prepared the feasibility study, the project initiator submits it together with a concept note to the authorized body to conduct an analysis of the project's effectiveness.

5.2.3. Project Proposal Screening

Upon receipt of a project proposal, an authorized body conducts its review in order to determine the compliance with the conditions, the satisfaction of which is necessary for further analysis of the project. The authorized body has the right to refuse to consider a project, if the project proposal contains inaccurate information and does not meet the requirements of Resolution 384, which specifies all components of the concept note and the feasibility study.

5.2.4. Project Effectiveness Analysis

If there are no grounds for refusal to consider the project, the authorized body conducts an analysis of its effectiveness. The analysis of the project effectiveness is carried out in accordance with the methodology developed by MEDT.7) For such an analysis, the authorized body may create a commission, the members of which may be representatives of state bodies, state and municipal enterprises, as well as independent experts. If more than one public partner plans to participate in the project, it is mandatory to create a joint commission for the analysis of the project's effectiveness.

Based on the results of the project review, an opinion is drawn on its effectiveness, which should contain general information about the project. That is its purpose; the problems that will be solved as a result of the project implementation, the project's compliance with the state priorities, the timing of the implementation, and the information on interested investors. The conclusion should also provide information on the socio-economic and environmental impacts of the project implementation, as well as the arguments in favor of implementing the project through PPP, rather than other mechanisms. An important part of the conclusion about the effectiveness of

7) Order 255 as of 02/27/2012 Some issues of the effectiveness analysis of public-private partnership implementation.

052 • 2017/18 Knowledge Sharing Program with Ukraine the project is the provision of risk analysis, which should be carried out in accordance with the methodological recommendations developed by MEDT.

The authorized body, as a result of the analysis of the project effectiveness, must conclude whether the implementation of such a project is justified or not. Conclusion regarding PPP projects, the implementation of which involves state-owned assets or projects, for implementation of which it is planned to attract state budget funds, are sent to MEDT for approval.

MEDT agrees or does not agree with the conclusion. However, MEDT makes a decision taking into account the opinion of other bodies, and the conclusion and the project proposal is also sent to MoF for the assessment of fiscal risks as well as other central executive authorities to assess the impact of the project on the areas that are within their competence and organizers of scientific and technical expertise.

MEDT cannot agree with the conclusion if it does not contain complete information in accordance with the requirements; if the content of the opinion does not correspond to the project proposal; if the socioeconomic and ecological effects have negative consequences; if there are significant fiscal risks for the state partner; if the investments are not paid back to a private partner during the term of the contract; if the implementation of the PPP violates the rights of the public or private partner or the law; and if the project is more effective without involvement of a private partner.

If the effectiveness analysis is carried out by MEDT, this ministry sends project proposals with the conclusion to MoF, other central executive bodies and organizers of scientific and technical expertise in order to take their opinion into account when drawing up a conclusion on the effectiveness of the project. CMU shall be informed about the results of the analysis for its decision on the implementation of the project.

5.2.5. Decision on PPP Implementation

The decision on implementation of the PPP project must be taken by the authorized body. The decision on proceeding with a PPP project, the implementation of which involves a state-owned asset, or if the funds of the state budget are necessary for the project implementation regardless of the asset ownership, may be taken by the authorized body only if the MEDT has approved the conclusion on its effectiveness. The decision on the implementation of projects the effectiveness of which is assessed by MEDT, is taken by CMU.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 053 5.2.6. Selection of a Private Partner

A private partner for implementing a PPP project should be selected according to the results of the tender.8) A private partner may be a legal entity or a private entrepreneur; the contract can also be concluded with several private partners. The tender is announced by the body that has decided to implement the PPP project. If the project proposal has been prepared by a private partner, it will not be in the priority in the process of selection.

The winner of the tender is selected by a tender commission, which is formed with representatives of central executive authorities, if the project involves a state- owned asset and with representatives of local executive authorities and local self- government, and if the project involves communal property. If the decision on the implementation of the project is taken by the CMU, it approves the results of the tender. Once the results of the tender are approved, a contract with the private partner that won the tender is signed. The contract can be concluded for a term of 5 to 50 years.9)

5.2.7. Project Implementation

Implementation of the project is monitored and controlled by MEDT and other bodies of central and local executive authorities. Private partners provide information on the implementation of contract terms and conditions to MEDT, which should assess potential risks. If one of the parties of the PPP agreement does not comply with its terms, the contract may be terminated ahead of schedule.

5.2.8. Concessions: Current Process

In accordance with the current Law on Concessions, the procedure begins with the central executive body making proposals on state-owned assets that may be a concessioner. The list of such assets is approved by the CMU. Lists of municipal property assets are approved at the meetings of the relevant councils.

Once the list is approved, a tender for the selection of the concessionaire is announced. The conditions and terms of the competition are determined by the public agency that is responsible for management of the asset. Such public agency accepts the applications and determines whether the applicant can be admitted to the competition. An application submitted by the applicant for a concession must contain proposals on the concession project implementation, data on the availability

8) According to the new Law on Concessions, the selection of a partner may also be carried out through direct negotiations. 9) 3 to 50 years in accordance with the new law on Concession.

054 • 2017/18 Knowledge Sharing Program with Ukraine of funds to ensure the performance of works/services in the framework of the concession agreement, information on the availability of experience in implementing such projects and the availability of all necessary resources. The executive agency shall form a commission that examines the applications of potential private partners and gives conclusions on them.

The winner of the tender should be the applicant that offered the best conditions for the concession implementation. The decision on the winner is taken by the executive agency on the basis of the conclusions of the competition commission. After making a decision on the winner, the conditions of the concession contract (the contract is signed for a period from 10 to 50 years) are agreed and the contract is signed. The contract specifies the conditions for the execution of works or the provision of services and the amount of concession payments.

According to the Law on Concessions, the implementation of public-private partnerships in the fields for which there are other legislative documents establishing the terms and conditions of a concession, must also be guided by those laws and by- laws.

5.2.9. Concessions: New Process

Under the new Concession Law, the concession project management process will be changed in order to unify it with the procedures established by the Public-Private Partnership Law. Procedures for conceptualization, project appraisal, analysis of project effectiveness, approval of the conclusion and approval of the feasibility of the project are carried out in accordance with the Law on Public-Private Partnership.

The selection of a private partner can be carried out both on the basis of the competition and through direct negotiations. The terms of the competition are determined by the executive agency. The tender proposal should consist of two parts: financial and technical. The Tender Commission shall consider and assess the proposals submitted by the applicants. At the first stage, the technical side of the proposal is considered, on the second - financial. The Tender Commission evaluates the offers and scores each proposal. The participant, the score of which is the highest is invited to the negotiations. If no agreement is reached during the negotiations, the following participant with the highest score is invited. Under the new procedure, the concession contract is concluded for a period of 3 to 50 years.

The law provides for the creation of a legal entity to assist public partners in the development of feasibility studies of projects. It also creates the possibility of involving advisers at the stage of concept note and feasibility study development.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 055 6. Assessments and Policy Recommendations

The objective of this section is to provide policy suggestions to strengthen the framework for public investment management in Ukraine. To do this, this section provides assessments and policy recommendations based on good practices and lessons learned from the Korean cases. The assessments and recommendations are provided separately to the procedures in PIM and PPP.

6.1. Assessments and Policy Recommendations for PIPs Management

6.1.1. Conceptualization

A concept note is a tool that allows avoiding time spending and financial resources on development of projects that are not in the national priority, or do not bring enough of benefits to cover the costs. Such a stage of a project cycle is an important prerequisite for the efficiency of the public funds use and characterizes the Ukraine PIM system processes as effective.

However, it is difficult to assess how the process of the concept note development and review improves the effectiveness of PIM system, since there are no statistics on the number of concept notes rejected at KSUs. The stage of conceptualization would be more transparent if KSUs disclosed information on the number and content of rejected concept notes and maintained statistics on this process. Moreover, to assure the objectivity of decision-making regarding the concept note, MEDT and the Commission could be involved in it. Therefore, it is recommended that KSUs should maintain publicly available statistics on concept notes both accepted and rejected. The KSUs should at least report to the Commission on concept notes that were rejected in order to avoid biased or political decision-making on project implementation.

One of the other problems of the conceptualization stage is related to the public involvement of the project. Information about new projects is not widely discussed, the public attention is not sufficiently drawn to projects, and often they remain in the shadow. Though a concept note is published on the website of the KSU and everyone has the opportunity to express their views on the project, the public does not know where exactly to look for the concept note and not every citizen checks the websites of public institutions to become familiar with planned investments.

It is recommended that public attention should be drawn to new projects, and information about them at the level of conceptualization should be accessible to the general public. A concept note should be published not only on the KSU website, but

056 • 2017/18 Knowledge Sharing Program with Ukraine on other online resources or other types of media, with the help of more members of the society to discuss the project and express their opinion on its implementation.

The concept note must be developed in accordance with the country's strategic documents. In the concept note, the project initiators substantiate the need to implement their projects and indicate the linkages of project results with strategic documents. In most cases, project initiators refer to the Sustainable Development Strategy of Ukraine by 2020, the Action Plan of the Cabinet of Ministers of Ukraine by 2020, the annual action plan of the CMU and sectoral strategic documents. However, the main problem of the listed strategic documents is that they are short- term, while the time horizon of most projects is about 30 years. In addition, there are various sectoral strategies, but there is no mid or long-term global strategy for economic and social development of Ukraine. Another problem with linking projects to strategic documents is that they do not contain clear measurable indicators, and as a consequence, the impact of projects on the achievement of the country's identified goals is impossible to assess.

According to the Public Finance Management Reform Strategy by 2020, Ukraine should develop the National Investment Strategy that will become a strategic guideline for public investment projects. Currently, it is difficult for all actors of the PIM system to prioritize investment projects and to structure them in the way, which will contribute into socio-economic development of Ukraine.

It is recommended that GoU should develop a mid-term investment strategy for economic and social development, which would include measurable concrete indicators that would help assess the impact of the project on the country's development. At the same time, the government should undertake the development of National Investment Strategy as soon as possible to help project initiators prioritizing their investment initiatives to serve as a guideline for project initiators at the stage of conceptualization of the project. In addition, it is recommended for GoU to develop the national budget management information system encompassing the fiscal activities from budget formulation, execution and reporting. The system can play an important role in managing and monitoring the progress of PIP and assessing the effectiveness of the PIM system.

To develop a mid-term investment strategy for economic and social development, and to coordinate the budgeting process with current and future investment priorities, GoU could benchmark the Korea’s mid-term expenditure framework. The following are practices based on the mid-term national investment strategy framework in Korea.

The Korean government set up a mid-term investment strategy framework

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 057 based on a five-year rolling plan called the National Fiscal Management Plan (NFMP) to deliver a more coherent public investment strategy and to synchronize the expenditure process with current and future investment priorities in public investment. The mid-term investment expenditure framework, the NFMP, contains the national vision and national priorities and it contributes the strategic allocation of resource (Ministry of Strategy and Finance and Yonsei University, 2013). NFMP also allows KSU to utilize their strategies for policymaking and implement projects with acceptably secure budget and prepare the development plans.

At the end of each year, the mid-term investment plans are presented by line ministries, and task forces which are composed of government officials and private experts are organized to examine the policy directions and major issues in the investment plan. Then afterwards, all cabinet members attend the “Meeting for Financial Resource Allocation” and discuss their plans for investment. The President chairs the ministerial Fiscal Strategy Meeting to establish a draft NFMP. In June, opinions on the drafted NFMP are collected through a series of public hearings. Afterwards, the NFMP is established for the following five years, and in October, the government submits the draft budget to the National Assembly with the NFMP. The budget and NFMP are published to the public, in accordance with National Finance Act.

6.1.2. Appraisal

The process of project appraisal is elaborated in detail in Resolution 571; a form of a project proposal with a detailed description of each item is also provided as an annex to the Resolution. Moreover, MEDT provides guidelines for project appraisal and methodological explanations on its website, which are based on the recommendations of the European Commission. MEDT specialists also provide consultations to project initiators and KSUs regarding the development of a project proposal.

Although much effort has been made to improve the PIM system, the problem of the lack of qualified resources at the project initiators institutions remains. Due to the fact that the project initiators do not always have sufficient funds to order a project development, in most cases the feasibility study is developed by the project initiators themselves. As a consequence, the quality of the feasibility study is low; in 2015, 52% of the submitted project proposals were returned to the project initiators for revision, in 2016 this percentage was 44 and in 2017, 29% of the submitted project proposals were returned. Despite the fact that the tendency of the feasibility study quality to improvement is positive, 29% - it's still a significant share. Therefore, it is recommended that Ukraine’s Ministry of Finance (MoF) should provide financial resources from the state budget for ordering project development by professional institutions specializing in such activities.

058 • 2017/18 Knowledge Sharing Program with Ukraine In addition, it is recommended that standardized data and parameters for project appraisal should be developed and provided by the dedicated unit. Though MEDT is providing guidelines and methodological explanations on CBA, selection and prioritization of the investment requires reliable data and parameters of Ukraine for reliable and consistent appraisal.

Regarding the standard data provision, GoU could benchmark Korea’s practices on the National Transport Database project. In 1998, the Korean government commenced the project which aimed to improve reliable, transparent and consistent appraisals in transport investment, and produced standardized data and parameters called the Korea Transport Database (KTDB). KTDB center which was established by the Korea Transport Institute, was mandated to conduct tasks such as traffic survey analysis, database building, and data providing services.

The following figure shows the KTDB consisting of present and future demand (Origin/Destination) and supply (network) data for transportation.

[Figure 1-13] Korea Transport Data Base

● Passengers : total travel, dis. of travel time, by trip purpose & mode Passenger Traffic ● Area, Point, & Freight ● Freight : No. of trucks, Counting Timeline transport by item, O/D transport by mode

● ● Facilities Maritime land Traffic Maritime ● Units freight O/D KTDB Attractive ● Travel ● Characteristics of Patterns of maritime Unit travel traffic attractiveness ● Transport of maritime travel Trans. Trans. ● Emme/2 Analysis Thematic ● TAZs ● Tranplan NW Map ● Facilities ● TransCAD ● Administration ● Cube Boundary etc.

Source: The Korea Transport Institute.

The KTDB project enabled the improvement of decision making process and the efficiency of the transport investment. A reasonable, consistent and transparent evaluation on the transport investment could be performed through the establishment of the national transport DB.

In 2016, the KTDB center had spent about 7.2 billion won on conducting surveys, analyzing the survey data and managing the National Transportation DB. The following figure shows the budget trends which have been allocated to the KTDB project since 1998. Approximately 6.2 billion won had been funded by the government each year. Currently, all feasibility studies on public investment in

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 059 transport in Korea must use the KTDB under the Transportation System Efficiency Act.

[Figure 1-14] Trend of the KTDB Project Budget (Unit: Billion Won)

12.00 10.91 10.00 7.75 8.00 7.00 7.00 7.36 7.23 6.50 6.70 6.82 6.42 5.85 6.14 6.03 6.17 6.00 5.70 5.34 3.84 4.04 4.00 3.14 3.50 2.00

0.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 AVERAGE

Source: The Korea Transport Institute. Adopted and augmented from 23. Ministry of Strategy and Finance and KDI (2017), p.46, [Figure 1-2].

Regarding parameters, the adequate and realistic parameter values including the operating period10) of the facilities, the contingency in project cost11) and more critically, the social discount rate should be provided. When establishing the parameter values, they have to be realistic and appropriate to Ukraine.

The following table provides the various social discount rates adopted in selected countries. In Korea, the social discount rate is set as 4.5% in real term for PIP and PPP projects, while Ukraine 5% is set for projects in a non-competitive market, which is somewhat relatively low; 12% for projects in a competitive market. There is no recommendation on the social discount rate for PPP projects and initiators choose the rate on their own, which can lead to a distortion in the appraisal.

Social Discount Rate for CBA

Country SDR Country SDR

Before ‘92: 10% 7% (‘78) → 3.5% (‘98) US (OMB) Norway After ‘92: 7% → 4% (‘05)

6% (transport), US Interest rate for Spain 5% (environment), (CBO & GAO) financial debt 4% (water management)

US (EPA) 3% or rate of return Italy 5%

10) It is set to be 30 years for most types of projects except water resources projects (50 years) and railway projects (40 years) in Korea. 11) It is assumed to be 10 percent of all other costs in Korea.

060 • 2017/18 Knowledge Sharing Program with Ukraine

Continued

Country SDR Country SDR

8% (‘67) → 10% (‘69) 8%, 5% (construction), New UK → 5% (‘78) → 6% (‘89) 7% (SOC), Zealand → 3.5% (‘03) 9% (technology)

8% (short/midterm), Germany 4% (‘99) → 3% (‘04) China < 8% (longterm)

France 8% (‘85) → 4% (‘05) India 12%

Canada 10% (‘76) → 8% (‘07) Pakistan 12%

NSW: 7%, VIC: 4% Australia Philippines 15% or 7%

5% for projects in a non-competitive market; 12 % for projects in a competitive 7.5% (‘99) → 6.5% (‘04) Korea Ukraine market → 5.5% (‘08) → 4.5%(‘17) (there is no recommendation on for PPP projects, initiators chose the rate on their own)

Source: Adopted and augmented from KDI (2015), p. 33, Table III-4, KDI, Evaluation of Public Investment Management System (PIMS) in Kuwait, 2015.

6.1.3. State Expertise

The purpose of the state expertise of the project proposals is to assure submission of those projects to MEDT that meet the criteria and requirements for accessing the selection process. However, as practice shows, some of the projects submitted to MEDT are returned for refinement as a result of screening or a review of the feasibility study. If the project is returned by MEDT for further development or is not allowed to access the selection process, this means that the conclusion of the state expertise could not have been positive. It follows that the KSUs either do not have sufficiently qualified resources to prepare the conclusion of the state expertise, or do not consider this document to be of great importance and prepare it in a short time or prepare a positive conclusion in spite of the project's non-compliance with the criteria expecting the project to “slip” into the budget.

It is recommended that the level of responsibility of KSUs for the conclusion of the state expertise should be increased and a simpler and more precise form of the state expertise opinion need to be developed not to allow a KSU to submit projects that do not meet the eligibility criteria.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 061 6.1.4. Independent Review

Independent review of projects proposals by MEDT is organized and stipulated by Resolution 571, but at this stage, the same problems pertaining to the project appraisal exist. The department responsible for this task is limited by the number of specialists who, besides the PIM, are engaged in other duties, including administrative ones.

In 2015 and 2016, World Bank consultants provided technical assistance to MEDT in this process, but now, only specialists of the ministry are working on this. The number of projects submitted to MEDT is growing every year. In 2015, 38 projects were submitted, 50 in 2016, and 56 in 2017. Thus, in 2017, taking into account that 4 specialists worked in the department, there were 14 projects per person. Moreover, Resolution 571 establishes only 10 working days for a project review, after which it must be returned to the initiator of the project, if it does not meet the screening criteria. Therefore, the short timeframe for project consideration and a small number of specialists pose the risk of inadequate project review and incorrect conclusions. However, according to MEDT, the number of specialists at the dedicated unit was recently increased to ten, and the question as to whether such amount is sufficient remains undetermined.

Therefore, as for the short term solution, it is recommended that the number of specialists of the review unit needs to be increased and temporary consultants or independent experts need to be involved to meet the short timeframe for project review. Furthermore, the review period should be significantly increased to a more realistic time period, perhaps to several months.

For the relatively long term solution, GoU should consider either the establishment of the new dedicated unit or the expansion of the roles and functions of the existing review unit in MEDT to support the project appraisal and review the proposals. As described above, there are lack of capacity, standardized data/ parameters, and insufficient human resources in the appraisal and proposal review stages, leading to the inadequate project review and incorrect conclusions on the feasibility of the projects.

When considering a new unit or expansion of the existing unit’s roles and functions, the unit should perform the tasks providing standard data and parameters, and updating and improving methodologies for project appraisal.

It is necessary to benchmark the roles and functions of the Public and Private Infrastructure Management Center (PIMAC), an independent evaluation agency in Korea. Note that the roles and function of the unit do not necessarily have to be

062 • 2017/18 Knowledge Sharing Program with Ukraine the same as the functions and roles of PIMAC, but the establishment needs to be referenced for objectivity, transparency and consistency of the appraisal and review.

PIMAC is an affiliated body of KDI and is a statutory organization established as a merger of the Private Infrastructure Investment Center of Korea (PICKO)12) and the Public Investment Management Center (PIMAC)13) by the amendment of “The Act on Private Participation in Infrastructure” in January 2005. With 20 years of experience in evaluating public investment projects, PIMAC has accumulated methodological knowledge on the evaluation on PIM and PPP, and the following are its roles and functions.

PIMAC is an evaluator and/or researcher in PIM. PIMAC conducts preliminary feasibility study (PFS), re-assessment study of feasibility (RSF) and re-assessment of demand forecast (RDF), and supports for new initiatives of better PIM and carries out policy studies on PIM.

The roles of PIMAC are also stipulated by the PPP Act. PIMAC supports the formulation of the Basic Plan for PPP, and carries out theoretical and policy studies on PPP programs. PIMAC also presents implementation guidelines. PIMAC is an advisor and/or government agency in PPP project management. PIMAC is required to develop PPP projects and execute and review of Value for Money test. In addition, PIMAC supports and reviews the formulation of Requests for Proposal (RFPs) and the concession agreement, and is supposed to assist in tendering and negotiation. PIMAC is also a PPP market promoter. Training programs and seminars on PPP for public officials are supposed to hold, and international cooperation as well as database management are important functions of PIMAC.

Note that PIMAC is also an evaluator in SOE’s new investment. PIMAC carries out preliminary feasibility study (PFS) on the SOE’s new investment according to the Act on the Management of Public Institutions.

The following figure shows the organization of PIMAC. It consists of three divisions and nine teams, and currently, there are more than 90 specialists in fields including economics, finance, engineering, accounting and law.

12) The PICKO (Private Infrastructure Investment Center of Korea) of KRIHS (Korea Research Institute for Human Settlements), founded in April 1999, centered on research and management of PPI projects. 13) The PIMA (Public Investment Management Center) of KDI, founded in Jan 2000, centered on research and management of public investment projects.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 063 [Figure 1-15] Organization of PIMAC

Executive Director

Public Investment Evaluation Public-Private Partnerships Policy and Research Division Division Division

SOE Tax PPP PPP PPP Policy PFS 1 PFS 2 RSF Project Expenditure Policy Project Finance Research Evaluation Evaluation

- Conduct and manage PFS - Formulate PPP Annual Plan and - Research on methodology of - Policy research on PIM develop PPP guidelines project evaluation - Conduct and manage RSF - Conduct evaluation of PPP Projects - Appraisal for SOE Projects - Research on PPP - Int'l Cooperation - Financing and refinancing of PPP - Tax Expenditure Appraisal and - Capacity building and training Evaluation - Infrastructure DB management

Source: PIMAC in KDI.

The establishment of the new dedicated unit or the expansion of the existing review unit in MEDT can bring additional advantages. Firstly, the unit can accelerate the shifting toward quantitative analysis such as cost-benefit from the subjective approach, and improving the quality of feasibility studies. It will help to bring in new knowledge, skills and experience in project appraisal and review.

Secondly, the unit can be an office for coordination and quality control in feasibility studies, and accelerate the reform of public investment, which are ongoing in Ukraine, by increasing the speed and transparency of the prioritization and selection of the projects. It could enhance more effective and reliable decision making and better articulate the decisions of different agencies in Ukraine.

To maximize the benefits of the establishment of the unit, the process and way of the public investment decisions need to be improved in advance, and the institutional framework for actual implementation is required. Related operations involve multiple ministries in the government, some of which may view the unit as a threat to their ownership and unique expertise. The coordination and communication are essential and legal/regulatory arrangements are important.

Establishment of the dedicated unit takes a significant amount of time and requires sufficient human resources equipped with knowledge and experience. In the meantime, utilizing international organizations or consulting firms that have gained credibility with their accumulated knowledge and experience may well be an effective interim alternative.

064 • 2017/18 Knowledge Sharing Program with Ukraine 6.1.5. Selection

The selection of the PIPs in Ukraine possesses the strengths such as in selection based on competition, selection by voting, but not the individual arrangements, and public disclosure of the results of this process. An important role in ensuring objective selection of projects is played by the simplicity and conciseness of the analytical notes, which are provided to the members of the Commission by specialists of MEDT, and with which one can get an idea of the project in a quick and easy manner.

However, the process of PIP selection has the same problems and drawbacks in Ukraine as elsewhere in the world. If members of the government or policy-makers are involved in the process, there is a risk of making politically motivated decisions. Everything is done to ensure that objective decisions are made, including providing all the necessary information to the members of the Commission, but the objectivity of voting cannot be guaranteed. At the same time, members of the Commission fulfill their responsibilities as the extra activities to the core professional ones, so they need an easy and simple tool to assess the projects.

It is recommended that a scoring system for project assessment be developed to maintain its independence and allow members of the Commission to quickly become acquainted with the rating of projects. The quantitative assessment of projects should be based on financial, economic, social and environmental indicators.

The use of the Analytic Hierarchy Process (AHP), which is a multi-criteria decision- making method, can be a reference in scoring and selecting PIPs. In Korea, AHP produces a score indicating overall feasibility of the project by considering the comprehensive and various aspects. Korean government improved the decision making on the selection of the project by incorporating the social and political values. In AHP, the overall feasibility decision criteria include economic, policy and balanced regional development components and the three components are combined after weighing the components by participants. The AHP score indicates whether the proposed project is worth implementing, and it is recommended the project needs to be implemented if the score is higher than 0.5 in the range of 0 to 1. The basic structure, participants and application using AHP as well as limitations of AHP are described in KDI 2008 p166-177 and more details can be founded.

6.1.6. Implementation

The financing system, which includes the preparation of a Passport of the Budget Program, proved costly in terms of time for all parties involved in the PIM. The project implementation and financing plan, which is part of a project proposal,

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 065 should be checked for compliance with the Passport of the Budget Program, which contains indicators absolutely different from those in the feasibility study.

If the project is selected by the Commission and included into the state budget, MoF must prepare a monthly plan of expenditure. Typically, MoF’s cost plan differs from the plan prepared by the project initiator in the project documentation, since the ministry is guided by its own forecast of expenditures and revenues of the budget in its planning. This leads to failures to meet the planned deadlines during implementation of projects. In some cases, projects initiators are very focused on project selection results and are trying to develop a very good feasibility study paper to get funding, forgetting about the technical moments of project implementation, often overestimating their capabilities. As a result, the initiator of the project may develop an unreliable (unrealistic) timetable for project implementation.

All this can hinder the successful implementation of the project. For the reasons outlined above, the actual budget allocation to PIPs are usually lower than the planned or requested budgets from project initiators. In 2016, actual allocated budgets ranged from 64% to 74% of the planned or requested budgets, depending on the project, in 2017 these figures improved, but in some cases they were 32%.

As suggested earlier in the “conceptualization” stage, GoU could benchmark the Korea’s mid-term expenditure framework. Korean government had introduced the National Fiscal Management Plan (NFMP) to synchronize the project implementation plan from the project initiators with the project proposal with the actual project implementations.

Regarding to the project cost increase during the planning stage, the project proposal needs to be updated if its total project cost has been changed by more than 10% including inflation in accordance with Resolution 571 in Ukraine. In this case, the project initiator should review and update the project proposal to resubmit it to MEDT for reconsideration of its implementation. However, given the economic instability and high inflation rate in Ukraine, such a rule of adjustment for a project may increase the administrative burden of PIM actors.

Korean government also has an expenditure monitoring system14) with the introduction of the intermediate evaluation devices on the feasibility of the project, the Re-assessment Study of Feasibility (RSF). In Korea, an RSF is conducted if 1) total project cost has increased by more than 20% (excluding price escalation and increase in land acquisition cost) of the cost endorsed by the MOSF at the initial phase of the project, or 2) the preliminary feasibility study (PFS) has not been conducted or

14) It is a device by which the budget ministry monitors expenditures on public investment and checks increases in project cost throughout the project cycle from planning to construction completed.

066 • 2017/18 Knowledge Sharing Program with Ukraine 3) the demand forecast for a project has decreased by 30% or more or 4) the Board of Audit and Inspection or the National Assembly requests.

Taking into consideration the economic situation in Ukraine and its lack of capacity to estimate exact project costs in early stage, it is not desirable to update or review the project if the total project increases by only 10% including “inflation.” Note that inflation cannot be managed by the project initiators and the 10% is too small cost increase range compared to the GoU’ s capacity on the cost estimation of the project.

It should be noted that the general inflation rate in Ukraine is already about 10%. While, in Korea, the inflation15) as well as even the increase of land compensation cost are not trigger conditions to conduct the RSF.

Apart from the trigger rules for conducing review on the projects, MEDT needs to provide standard data and method to the project initiators for conducting re- evaluation on feasibility. There is no guideline in defining the scope of review and in carrying out the review at the moment. Though finding alternatives are emphasized to adjust or cut down size and cost of a project in the RSF. the same methodology and data as the pre-feasibility study, need to be applied.

15) Note that the inflation rate in 2017 is 1.9% in Korea.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 067 6.2. Assessments and Policy Recommendations for PPP Management16)

6.2.1. Conceptualization

The peculiarity of the PPP conceptualization is in different rules for a project initiator depending on whether it is a public or a private partner. A project initiated by a government agency should be prepared in two stages: first, the project initiator prepares a concept note, submits it to the authorized body, and only then can proceed with the development of the feasibility study. If a project is initiated by a potential private partner, the project can be developed in both two stages and one, that is the initiator of the project does not necessarily have to submit the concept note, but can prepare a concept note and a feasibility study at once.

The approach to develop a project in two stages makes it possible to avoid unnecessary waste of time and financial resources for thorough project analysis, if its preliminary assessment indicates the inappropriateness of further development. Therefore, the mandatory phase of project conceptualization is a prerequisite for ensuring the effectiveness of the PPP project management process.

It is recommended that the approach to the stage of conceptualization of the project need to unify regardless of what institution or an enterprise is its initiator by introducing a mandatory two-stage project development.

6.2.2. Project Appraisal

Resolution 384 clearly specifies the structural components of the feasibility study for the PPP project, and this must be very helpful to the project initiator, which can get a general idea of what information and analysis is necessary to include into the project proposal. However, there is a gap in guidelines for project initiators; in fact, there are no methodological recommendations. It is important to give guidance to project initiators, especially in terms of developing a financial model and cost-benefit analysis.

In addition, the feasibility study may be carried out by both a public partner and a potential private partner (unsolicited proposals). However, the project's preparation by the potential private partner calls into question the objectivity of the feasibility study, and there is a risk of an over-optimistic projection of the project benefits with a view to obtaining a positive conclusion on its effectiveness. It is recommended

16) This assessment is related to the PPP projects procedures, except for concession projects management according to current legislation. The adoption of the new law will be standardized for all forms of PPP projects on concessions, the process of project appraisal and partner selection.

068 • 2017/18 Knowledge Sharing Program with Ukraine that an independent unit should carry out the feasibility study, for the unsolicited proposals in particular. As suggested earlier, it would be desirable that the dedicated unit has the function of performing the evaluation on PIP as well as PPP to establish a unified framework for public investment management resulting in the increase of value for money.

The following can be benchmarked by the GoU. In Korea, PIMAC of KDI, an independent evaluation institution, is in charge of the VfM test as stipulated by the PPP Act, and the VfM test is carried out under the “Guidelines for implementation of VfM Test/Review of Proposal” which is prepared by PIMAC to maintain objectivity, consistency and independence.

To determine whether that project should be implemented as a PPP, or follow PIP, the competent authority uses VfM reports as the basic material to make a decision on whether or not to move forward with the PPP project. The scope and process of the quantitative VfM test are as follows.

In phase 1 of the VfM test, a feasibility study is carried out to decide whether projects should be implemented. Economic feasibility is examined and policy analysis is performed to determine the feasibility of the project from a national economic perspective. In phase 2, once a project is feasible and selected as an investment project, it must be determined whether that project should be implemented as a PPP, or follow the PIP, and a VfM assessment is applied to assess the suitability of PPP implementation for a project. A comparative analysis is performed between a public sector comparator and the PPP proposal to examine VfM of the PPP option. Government payment of Public Sector Comparator (PSC) is compared against that of Private Finance Initiative (PFI) to assess whether the PFI has VfM. In phase 3, PFI alternatives are formulated if that project has value for money for the PPP implementation. An additional financial analysis is performed to calculate an appropriate level of project cost, government subsidy, user fee, if applicable, etc., from the public sector perspective. Alternative options using the PPP approach are developed. In phase 4, based on the merits of the initial proposal, additional points within 10% of the total evaluation points are awarded upon the review of the VfM assessment for the unsolicited projects.

Korea uses quantitative assessment to compare the estimated costs of a proposed PPP structure, which is PFI, with those of traditional procurement, a Public Sector Comparator (PSC). While the quantitative assessment can offer advantages, its implementation can be difficult, as a PSC requires a lot of data and has a number of methodological limitations. Because of this, it is recommended for Ukraine that a qualitative assessment should take place in advance and a specific set of criteria or guidelines should be developed to assess the suitability of PPP implementation

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 069 for a project. Once data is accumulated and the methodology is established, the quantitative VfM assessment can be applied. The qualitative assessment for identifying the suitability of PPP projects can refer to the website (https://ppp.unescap.org/).

6.2.3. Project Effectiveness Analysis

Project effectiveness analysis includes approval of the conclusion on effectiveness by MEDT if a state-owned asset is involved into the project or if it is planned to finance the project with state budget funds. Approval of such projects by MEDT increases the objectivity of decision-making and definitely strengthens the PIM system in the area of PPP.

The project effectiveness results, according to the methodology, are in the form of a extensive document that covers all of the information about the project and largely duplicates what has already been written in the project itself. In order to avoid unnecessary expenses for the formulation of a conclusion, it is necessary to reduce it and standardize its form. The concise form of the conclusion on the project effectiveness analysis needs to be developed to avoid a detailed description of the information that has already been provided in the project proposal.

6.2.4. Decision on Project Implementation

Projects that have been under the effectiveness analysis and, if necessary, approved by MEDT, as a result, do not have a guarantee for implementation. An additional procedure is carried out to determine whether a project should be implemented or not. However, how exactly this decision is made is unclear in accordance with the legislative acts. It is, therefore, recommended to detail the criteria or principles according to which such decisions are made and supply the existing legislation with explanation of the decision-making procedure for the implementation of the project.

6.2.5. Selection of a Private Partner

The tender procedure is detailed in the legislative documents, but there are certain features of the private partner selection that may entail the risks for unsolicited projects, since the private initiator might expose tender to the risk of corruption. A special approach should be developed for the selection of potential private partners after benchmarking Korea’s unsolicited project’s implementation procedure. The procedures are as follows.

A private sector proposes a PPP project to the competent authority rather than respond to a public sector Request for Proposal (RFP). The proposal for an unsolicited

070 • 2017/18 Knowledge Sharing Program with Ukraine project is thoroughly examined by the public sector regarding various aspects, such as whether the project corresponds with the government investment plans and priorities. Then, PIMAC conducts VfM analysis to identify economic feasibility and commercial viability and submits its result to the competent authority. If the unsolicited proposal is accepted for PPP implementation, then the competent authority should inform the public about the outlined content of the project proposal to invite other private parties’ proposals. To accept an alternate proposal for fair competition, at least 90 days from the date of notification should be given. Based on the merits of the initial proposal, additional points within 10% of the total evaluation points can be awarded to the initial proposer upon the review of the VfM assessment. The rate of extra points is included in the RFP. Should there be alternate proposals responding to the notification, the competent authority, through an evaluation team, evaluates all the proposals, including the initial proposal, according to the evaluation criteria specified in the request for alternate proposals, and selects a preferred bidder. If there is no other proposal submitted, the initial proponent is designated as the potential concessionaire for negotiation. It should be noted that additional points within 10% of the total evaluation points can be awarded to the initial proposer based on the merits of the initial proposal to encourage future unsolicited proposal.

6.2.6. Project Implementation

For a successful PPP project, clear procedures for project management must be developed. Monitoring and management by the competent authority help to enhance the quality of service which is provided by PPP facilities. It is recommended for Ukraine that procedures and measurable performance indicators should be developed and included in the agreement. To monitor and manage the PPP facilities, the performance indicators should be measurable and they must be included in the agreement. In Korea, evaluation criteria include the degree of user satisfaction (safety, customer service, kindness, etc.), cooperation with component authority (feedback and improvement, timely reporting) and operation cost efficiency (operation cost management, organization management, public relationship). The following table shows the performance measuring and reporting checklist being carried out in Korea.

Performance Check List

Performance Measuring and Category Performance Check Reporting

• Once every month (monthly • Regular check: within 7 days after Time business report): within first 10 receiving monthly report days of following month • Random check: at random times

Body • Project company • Competent authority

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 071

Continued

Performance Measuring and Category Performance Check Reporting

• Standard Performance Quality • Standard Performance Requirement Document • Quality Requirement • Operation and Maintenance Plan • Operation and Maintenance Plan • Performance Measurement Report (monthly report)

• The level of operation and • Whether provided operation and Scope maintenance provided by maintenance level satisfies equirementr operator

• Check documents and facts supporting report. • Self-measurement • Visit facility, supervise work Method • Prepare report of measurement results • Demand for data and/or explanation, on-site (demand financial status report if necessary)

• Check measurement device Additional • Check measurement devices • Sampling Measures • Sampling test • Unannounced on-site check When Necessary • Customer satisfaction survey • Receive complaints from users • Customer satisfaction survey

• Performance Confirmation Result • Performance Report Output and (monthly report) • Corrective order if performance fails to Follow-up be requirement • Self-correction if necessary • Contract termination if failure continues

Source: KDI (2006).

7. Summary and Conclusion

Public investment management in Ukraine has gone through major reforms in recent years. The amendments to the legislation enabled the central government to develop a new approach for the processes of public investment and public-private partnership projects. The improvement in the relevant legislation systematized the roles of institutions assigning responsibilities according to the main functions of agencies and stakeholders of the public and PPP investment system.

However, there are still inefficiencies in the public and PPP management system that need to be tackled as soon as possible in order to avoid the accrual of blocking points in the management of public and PPP investments.

072 • 2017/18 Knowledge Sharing Program with Ukraine This report provided policy suggestions to strengthen the framework for public investment management in Ukraine. A comprehensive review and the analysis of the current public and PPP investment management system in Ukraine were presented highlighting recent reforms. Good practices and lessons learned from the Korean cases were provided.

Major policy suggestions that were provided in accordance with the PIM and PPP implementation process are as follows.

National Investment Strategy

The Ukrainian PIM system suffers from a lack of mid-term strategic guidelines that project initiators can follow. One of the most important steps in the PIM system reform should be the development of the National Investment Strategy that will help prioritize investment decisions.

MEDT should develop the National Investment Strategy in order to set up a top- down approach to project prioritization. MEDT should work together with line ministries to define the sectors and subsectors that need investments. The strategy will serve as a guideline for project initiators at the stage of conceptualization of the project. At the same time, key spending units and MEDT will use the strategy to filter the projects, which are not in line with it. This recommendation is a necessary and feasible option for MEDT and the short-term perspective, because it can be implemented without lengthy preparation and investment.

Standard Data and Parameters for Appraisal

Creation of databases to be used in project appraisal is necessary in Ukraine. Currently, data can be retrieved from the State Statistical Service, databases of international organizations, or can be bought from private companies. However, to assure the improvement of reliable and transparent appraisals in public and PPP investment, standard data and parameters should be provided.

It was recommended that the new evaluation unit or the existing review unit in MEDT should provide standard data for appraisal. However, the establishment of a database is in a long-term perspective, though it needs to be implemented urgently because implementation will require thorough and long term development and investment.

The important parameter values such as the social discount rate should be provided to assure consistent appraisal. This recommendation needs to be implemented urgently and is feasible in the short-term because the parameters plays

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 073 a critical role in the feasibility of the project. GoU can decide on the appropriate parameter values reflecting the situation in Ukraine such as the needs and priorities of investment projects, etc.

Establish a New Evaluation Unit or Expand the Functions of the Unit in MEDT

GoU should consider either establishing the new dedicated unit or expanding the roles and functions of the existing review unit in MEDT to support the project appraisal and review the proposals. The dedicated unit should be responsible for providing standard data and parameters, and updating and improving methodologies for project appraisal and review. In addition, it would be desirable that the unit has a function on performing the evaluation on PIP as well as PPP to establish a unified framework for public investment management resulting in the increase of value for money.

It should be noted that SOE’s new investment follows the standard procedure for a public investment project in Korea to improve public services through increased transparency in operation. PIMAC carries out a preliminary feasibility study (PFS) on the SOE’s new investment with total projects costs of more than 100 billion KRW. However, in Ukraine, if SOE finances their project with their own funds or a loan, they make an internal decision. To control the SOE towards a tighter and streamlined management system, and to improve public services through increased transparency in operation, the SOE’s new investment should follow the standard procedure for a public investment project whether or not the SOE requests state budget.

All these actions are necessary in the short-term perspective. However, the establishment of the dedicated unit takes a significant amount of time and requires sufficient human resources equipped with knowledge and experience. In the meantime, utilizing international organizations or consulting firms that have gained credibility through accumulated knowledge and experience may be an effective interim alternative.

Enhance Total Project Cost Management

In the Ukrainian system, the project feasibility study has to be re-assessed, if the project cost changes by more than 10% including inflation. So, in fact, Ukraine has a Total Project Cost Management (TPCM) system. However, taking into consideration the economic situation in Ukraine and its lack of capacity to forecast the costs in the early stage of the project, it is not desirable to update or review the project if the total project increases by only 10% including “inflation.”17)

17) Annual inflation rate in Ukraine is 9 percent in August of 2018 from 8.9 percent in the previous month (https://tradingeconomics.com/ukraine/inflation-cpi).

074 • 2017/18 Knowledge Sharing Program with Ukraine Inflation cannot be managed by the project initiators and the 10% is too small of a cost increase range compared to the GoU’s capacity for the cost estimation of the project. It should be noted that the general inflation rate in Ukraine is already about 10%.

Meanwhile, in Korea, the inflation as well as the increase of land compensation cost do not trigger conditions to conduct the RSF, and the RSF is carried out only when the total cost of the project increases by 20% excluding the price escalation and increase in land acquisition cost.

MEDT also needs to provide standard data and methods to the project initiators for conducting re-evaluation on feasibility. There are no guidelines on defining the scope of review and carrying out the review. Though finding alternatives are emphasized to adjust or cut down the size and cost of a project in re-assessment, the same methodology and data as the pre-feasibility study needs to be applied.

The change of the trigger rules for conducting RSF can be feasible and implemented in the short-term, however, provision of data and methodology is in the long-term perspective.

Develop Criteria to Assess the Suitability of PPP

GoU needs to develop procedures and guidelines for VfM assessment to determine whether or not the project should be implemented as a PPP, or follow PIP. VfM assessment including the feasibility analysis needs to be carried out in accordance with the guidelines to maintain objectivity, consistency and independence.

Korea uses quantitative VfM assessment to compare the estimated costs of a proposed PPP structure, which is PFI, with those of traditional procurement, a Public Sector Comparator (PSC). While a quantitative assessment can offer advantages, its implementation can be difficult, as a PSC requires a lot of data and has a number of methodological limitations. It is recommended that a qualitative VfM assessment should take place in advance and a specific set of criteria or guidelines need to be developed to assess the suitability of PPP implementation.

An Adequate Transaction Process for Unsolicited Proposals

A special approach should be developed for the selection of potential private partners, in the case of unsolicited project proposals. When pursuing an unsolicited project, the competent authority should announce to the public the outlined content of the project proposal to invite alternate proposals of other private parties. To

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 075 accept alternate proposals for fair competition, a minimum amount of days (generally 3 months) from the notification date should be guaranteed. Based on the merits of the initial proposal, an additional point within some range (for example, 10%) of the total evaluation points is recommended to be awarded upon the review of the VfM assessment to encourage future unsolicited proposal.

076 • 2017/18 Knowledge Sharing Program with Ukraine References

European Commission, Guidelines to Cost-Benefit Analysis of Investment Projects, 2014. Government of Ukraine, Budget Code of Ukraine No. 2456-VI, 2018. ———, Draft Law of Ukraine on Concessions No. 8125, 2018. ———, Law of Ukraine on Peculiarities of Leasing or Concession of Municipal Facilities in the Areas of Heat Supply, Water Supply and Sewerage No. 2624‑VI, 2014. ———, Law of Ukraine on Peculiarities of the Lease or Concession of the Fuel and Energy Complex Assets that are in State Ownership No. 3687‑VI, 2014. ———, Law of Ukraine on Investment Activity No. 1560-XII, 2017. ———, Law of Ukraine on Concessions No. 997-XIV, 2018. ———, Law on Concessions of the Roads Construction and Operation No. 1286-XIV, 2018 ———, Law of Ukraine on Public-Private Partnership No. 2404-VI, 2018. ———, Order of the Ministry of Economic Development and Trade on Approval of the Procedure for Monitoring the Development (Implementation) of Public Investment Projects No. 1785, 2016. ———, Order of the Ministry of Economic Development and Trade on Approval of Methodological Recommendations for Preparation and Appraisal of a Public Investment Project No. 1865, 2017. ———, Order of the Ministry of Economic Development of Ukraine Some issues of the analysis of the effectiveness of the implementation of public-private partnership No. 255, 2018. ———, Resolution of the Cabinet of Ministers of Ukraine on Approval of the Methodology for Identifying the Risks of Public-Private Partnership Implementation, Assessment and Definition of their Management Form No. 232, 2015. ———, Resolution of the Cabinet of Ministers of Ukraine Some issues of the organization of the implementation of public-private partnership No. 384, 2016. ———, Resolution of the Cabinet of Ministers of Ukraine on Some Issues of Public Investment Management No. 571, 2017. Korea Development Institute, Guidelines for Formulation of Request for Proposal for BTL projects, 2006. ———, General Guidelines for Preliminary Feasibility Studies (fifth edition), 2008. ———, Modularization of Korea’s Development Experience: Public Investment Management Reform in Korea: Efforts for Enhancing Efficiency and Sustainability of Public Expenditure, 2012.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 077 ———, The Preliminary Feasibility Study in South Korea: An Assessment and International Comparison for Future Development, 2014. ———, A Study on Determining the Social Discount Rate, 2015 (in Korean). Ministry of Strategy and Finance, 2014 Operational Guidelines for the Preliminary Feasibility Study, 2014. Ministry of Strategy and Finance and Yonsei University, Modularization of Korea’s Development Experience: Korean Experience of Financial Management Information System: Construction, Operation, and Results, 2013. Ministry of Strategy and Finance and Korea Development Institute, 2015/2016 Knowledge Sharing Program with Kuwait: Evaluation of Public Investment Management System (PIMS) in Kuwait, 2015. ———, 2016/2017 Knowledge Sharing Program with Costa Rica: Policy Consultation for Economic Development of Costa Rica: Focusing on Science and Technology Human Resources, National Transport System and Healthcare Industry, 2017. Ministry of Strategy and Finance and Korea Development Institute and PIMAC, 2015 PPP Basic Plans, 2015. Rajaram, A., Minh, Le T., and Kaiser, K., “The Power of Public Investment Management”, World Bank, 2014, 157 – 164. The International Bank for Reconstruction and Development and the World Bank, Ukraine, Public Investment Management Performance Assessment 2012, 2013 The World Bank, Public-Private Partnership in the Context of Public Investment Management in Ukraine – Assessment -, 2015.

078 • 2017/18 Knowledge Sharing Program with Ukraine Appendix

Institutions Involved in PIP Management and their Roles

Institution Role and Responsibilities

• Initiating development of the investment project • Preparation of the project concept note and feasibility study Project Initiator • Performing all the necessary researches to justify the importance of the project • Implementing projects if financed

• Reviewing project concept notes and deciding on the further project development • Defining investment strategy for the area under the responsibility of the ministry Key Spending Unit • Reviewing and appraising project proposals (feasibility studies) (Line Ministry) submitted by project initiators • Issuing expert opinion on the results of projects appraisal • Selecting projects that can be submitted to MEDT • Submitting projects to MEDT • Monitoring and evaluating projects implementation

• Defining areas of the strategic importance within which the projects can be implemented (strictly according to the National Strategy of Ukraine) • Consulting line ministries and project initiators on legislative, procedural, and technical issues of project preparation • Providing methodological guidelines to the projects proposal elaboration Ministry of • Reviewing project proposals and their appraisal submitted by Economic Line ministries Development • Checking compliance of project proposals to the criteria defined and Trade in the Resolution • Approving or rejecting project’s eligibility to be considered by the Inter-Agency Commission based on the objective criteria • Submitting analytical notes, statistical reviews and project proposals to the Inter-Agency Commission • Monitoring project implementation and providing the results to the Inter-Agency Commission • Maintaining database of public investment projects

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 079 Continued

Institution Role and Responsibilities

• Taking decision on capital expenditures available for public in- vestment projects Ministry of Finance • Approving allocation of funds for the projects • Controlling the target use of funds

• Reviewing project proposals, analytical notes, and presentation Inter-Agency of projects Commission for • Selecting projects by voting Public Investments • Recommending options for projects implementation (alternative ideas for achieving project goal; alternative sources of finance)

Accounting • Auditing projects implementation (external audit) Chamber

Anti-Monopoly • Dealing with complaints about procurement within project Commission implementation

State Financial • Controlling of projects implementation compliance to the rules Inspection and norms of public funds usage

Source: Author.

080 • 2017/18 Knowledge Sharing Program with Ukraine Institutions Involved in PPP Management and their Roles

Institution Role and Responsibilities

Initiator of the Project (Private • Preparation of the PPP concept note and feasibility study, Partner or State performing their technical and economic appraisal Body Initiating the • Submitting PPP projects to MEDT PPP project)

Authorized Body • Reviewing concept note and feasibility study of the project, (Central or Local formulation of the conclusion on project effectiveness Body of Executive • Submission of conclusion on project effectiveness to MEDT (if Authority) necessary)

• Acting as a project initiator in particular cases MEDT • Approval of the conclusion on project effectiveness, if necessary

• Checking PPP project proposals within fiscal risks Ministry of Finance • Calculation and control of concession payments • Allocation of capital expenditures for project implementation

Source: Author.

Chapter 1 _ Strengthening of Public Investment Management System (PIMs) in Ukraine • 081 Abbreviations

CBA: Cost Benefit Analysis CMU: Cabinet of Ministers of Ukraine EBRD: European Bank for Reconstruction and Development FS: Feasibility Study GDP: Gross Domestic Product GoU: Government of Ukraine KSU: Key Spending Unit MEDT: Ministry of Economic Development and Trade MoF: Ministry of Finance PIM: Public Investment Management PIP: Public Investment Project PPP: Public Private Partnership SOE: State Owned Enterprise

082 • 2017/18 Knowledge Sharing Program with Ukraine 2017/18 Knowledge Sharing Program with Ukraine: Mechanisms and Tools of Stimulating National and Foreign Direct Investments Chapter 2

FDI Promotion through Development of Industrial Parks

1. Introduction 2. Concept of an Industrial Park and Recent Trends 3. Current Situation and Performance of IPs in Ukraine 4. Analysis and Implications of Korean Experiences on IP 5. Policy Actions and Recommendation ■ Chapter 02

FDI Promotion through Development of Industrial Parks

Guho Eom (Hanyang University) Liudmyla Musina (Ministry of Economic Development and Trade, Ukraine)

Summary

In June 2012, Ukraine established industrial parks with the intent of increasing investment attractiveness, creating new jobs, stimulating economic development and developing infrastructure for the market and industry. The establishment of industrial parks for ensuring regional competitiveness of regions and their sustainable development is one of the principal goals as defined by the State Strategy for Regional Development of Ukraine for the period until 2020.

To streamline the procedures for the development and management of industrial parks, Ukraine’s parliament adopted amendments to the above law and other relevant laws (Land code, Law on land lease) in November 2015. These amendments also exonerate the industrial park management companies from rent on leasing state or communal land for the first 3 years of the industrial park operations and identified the Ministry of Economic Development and Trade as responsible for registering IPs.

What is proposed in Ukraine, in fact, is not a “classic” industrial park, but a return of what has already been there — free economic zones and territories of priority development.

Keywords: Ukraine, Industrial Park, Foreign Direct Investment, Public-Private Partnership (PPP), Industrial Cluster

084 • 2017/18 Knowledge Sharing Program with Ukraine The Ukrainian government has to prepare an effective and comprehensive Industrial Park (IP) development program to attract Foreign Direct Investment (FDI) through industrial parks. In this context, the purposes of this research are as follows:

–– Institutional and legal analysis of Ukrainian industrial parks –– Diagnosis of the situation and problems of Ukrainian industrial parks through the performance evaluation model –– Investigation of barriers and major tasks of Ukrainian industrial parks through surveys on foreign companies in the Ukrainian industrial parks –– Finding of factors affecting the success of industrial complexes through case analysis of Ukrainian industrial parks

The research mainly focuses on the policy of attracting foreign investment among policy research to improve industrial park performance in Ukraine. For this purpose, this study develops policies which reflect on the characteristics of the Ukrainian industrial parks by analyzing the major characteristics, operation and management experiences of major industrialized countries (including Korea) that have attracted foreign investment.

Problems of Ukrainian IPs can be summarized as follows. First, the Ukrainian government did not show strong policy capacity on industrial parks. Industrial park policies are not organically linked to long-term industrial policies and regional development policies based on regional characteristics. There is no dedicated public corporation in charge of industrial parks, and the department of Ministry of Economic Development and Trade (MEDT) has fewer professional staff. Second, there is a shortage of financial resources for industrial park construction and infrastructure construction. The central government’s budget ratio is less than 25%. Third, laws related to industrial parks are not well arranged. There is no legislation yet on the locations of industrial parks, and there is an overall lack of incentive measures to attract foreign investment. An act on the evaluation procedure for the performance of the industrial parks has not yet been established and there is no R&D tax credit regime in place for encouraging technological innovation. Fourth, the governance of industrial parks is still weak. Management companies do not have high levels of expertise and the government does not have an evaluation system to prevent the clutter of industrial parks. Fifth, although many industrial parks are still under construction, there are still lack of effective economic instruments for making cluster effects and diminishing negative side-effects on the investment climate outside the park (negative spillovers and crowding out).

This research proposes some policy actions and measures for the effective operation of IP and attraction of FDI. For strengthening policy capacity, it recommends strengthened leadership and extensive support by the central

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 085 government, selection and application of an appropriate development strategy for economic development and the intensification of a government support system. In particular, it suggest the necessity of the establishment of public corporations, or the so-called UICOX like Korea Industrial Complex Development Corporation (KICOX), and creating a comprehensive IP development program and providing incentives which induce technology transfer.

To overcome financial constraints, it stresses the necessity of the activation of public-private partnership. There are a variety of options for private sector involvement in developing industrial parks. It can be proposed that when considering the Ukrainian government’s financial capacity, an on-site (private) and off-site (government) model can be considered. If private partners invest in off- site, a Build-Operate-Transfer (BOT) or Lease-Develop-Operate (LDO) scheme can be recommended. The government would be better off in establishing an infrastructure fund for the financing of off-site infrastructure. Availability Payment (AP) can be a good stimulus for foreign private partners.

This research also emphasizes a new arrangement of legal framework for IP. Ukraine’s government must establish a law an IP location sites which specify the review process of the development plan stage, implementation plan stage and the evaluation procedure for environmental, traffic and disaster impact assessment. Furthermore, foreign tenants which contribute to Ukraine’s new growth engine should be provided tax exemption and R&D tax credit.

Strengthening the IP governance structure is also a critical task. This study suggests the introduction of the IP performance system and professional management system. Quantitative as well as qualitative indicators of performance evaluation in attracting FDI are proposed specifically. A performance evaluation committee composed of not only public officials but also civilian experts is necessary. For objective and rational evaluation, statistics related to each IP should be produced and managed through system construction. Information on IP activities and future expectations in Ukraine is not enough. Each park should be managed by a specialized private company on the basis of a performance-based management contract with clear and transparent benchmarks and firm performance monitoring indicators. The effectiveness of the park’s board of directors is also an important factor for its success.

For developing economic instruments for increasing cluster effects, this research proposes the strengthening of the Research-Industry Cluster, introduction of a successful supplier development program and technology road mapping, and an innovation and incubation system.

086 • 2017/18 Knowledge Sharing Program with Ukraine The FDI attraction policy also should be redesigned. First of all, a selection and focusing strategy must be considered. There is a need to first support techno parks in the Kyiv region, where manpower and capital are accessible, and priority investment is needed in the Odessa harbor area and Lviv industrial park which have good access to logistics. The establishment of a Special Governance Zone (SGZ) can also be good a platform for attracting FDI, because the biggest barrier to attracting foreign investment in Ukraine is the bad quality of governance. However, since the SGZ may cause regional conflicts, it is necessary to reach a political consensus on which regions should be designated as priority areas. Improving the legal framework for attracting FDI is also a very urgent issue. The Ukrainian government should carry out reforms on excessive policy regulations and ineffectiveness of its administration services. In particular, Ukraine needs to increase its ranking on the “Doing Business Index” and improve its investment environment. Even though it is difficult to improve infra- related indicators, the Ukrainian government can swiftly improve regulation-related indicators such as construction permission, protecting minority investors, and paying taxes. Moreover, the government can organize and provide a one-stop service for foreign companies wanting to invest in IPs.

Effective aftercare services should be implemented. In particular, a grievance resolution process should be introduced. Partnership with FDI-related organizations in targeted countries and improving competitiveness for FDI by attracting more domestic firms is also very helpful. Every IP and MEDT need to develop partnerships and/or create dialogue channels with organizations like KOTRA in Korea which support Korean firms that want to invest abroad. In particular, IPs need to explore new types of industrial cooperation such as inviting SMEs with advanced technology to Ukrainian IPs.

Ukrainian IPs should attract domestic firms to maximize domestic potential and competitiveness. This can provide the possibility of setting up joint ventures for foreign investors with domestic firms in IPs.

1. Introduction 1.1. Purpose of Research

Ukraine is a lower middle-income country having a GNI per capita 2,388 USD and 8,900 USD at PPP in 2017 (WB, World Development Indicators).1) Ukraine is facing the so-called "middle-income trap," relying on the export of raw materials and products with low added value, despite the availability of rather high innovative and scientific potential.

1) World Development Indicators. - http://wdi.worldbank.org/table/WV.1.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 087 The country suffers from a low level of industrial competitiveness, having manufacturing value added (MVA) per capita at 350 USD (in constant 2,010 USD) and 12.3% MVA share of GDP in 2016.2) Ukraine ranked 65 out of 148 countries according to the UNIDO Competitive Industrial Index (CIP) in 2016, down eight places since 2015, and 81 out of 137 countries according to the WEForum Global Competitiveness Index (GCI) in 2017.3)

Today, Ukraine is facing a number of serious problems caused by the escalating conflict in the eastern part of the country in early 2014, the occupation of the Crimea and loss of a significant share of industrial potential due to such events. Coupled with accumulated structural problems, in 2015, this led to a 9.8% slump in GDP and a 13% decline in industrial production.

The economy is on a slow path of recovery after two years of recession. Real output grew by 2.4% in 2016 and 2.5% in 2017, following a cumulative 16% decline in 2014–15. Industrial output grew by 2.8% in 2016 and 0.4% in 2017, after a cumulative 22% decline in 2014–15 (see Figure 2-1).

[Figure 2-1] Industry as a Whole, Donetsk and Lugansk Regions (Unit: %, y/y cumulative growth) 8.0 130

6.0

4.0

30 2.0

0.0

-70 -2.0 1M-16 2M-16 3M-16 4M-16 5M-16 6M-16 7M-16 8M-16 9M-16 1M-18 2M-18 3M-18 1M-17 2M-17 3M-17 4M-17 5M-17 6M-17 7M-17 8M-17 9M-17 10M-17 11M-17 12M-17 10M-16 11M-16 12M-16 Industrial output(right scale) Donetsk region(left scale) Lugansk region(left scale)

Source: Ukrstat, Ministry of Economic Development and Trade of Ukraine.

In the Donetsk region, for the first time since 2016, growth was at 0.8% due to increased coal production and the production of coke. Meanwhile in the Luhansk region, there was a reduction of 42%. The main constraints in the Donetsk and Lugansk regions are the permanent military operations, transport restrictions on the movement of goods, and the loss of control over enterprises in an uncontrolled area.

2) Competitive Industrial Performance Index 2017. - www.unido.org. 3) The Global Competitiveness report. WEForum, 2017-2018. – p. 296. – www.weforum.org.

088 • 2017/18 Knowledge Sharing Program with Ukraine In Q1 in 2018, industrial output grew in Ukraine by 2.4% comparatively with 0.1% in Q1 2017. Growth rates showed 14 regions with the highest rates in Ivano- Frankivsk, Sumy, Kyiv, Chernivtst and Lviv regions (their share in the industry output is 12.5%). The largest rates of decline showed Lugansk, Chernigiv, Rivne, Khmelnitsky regions and Kyiv (city). Their share in industry output is 15% (see Table 2-1).

Growth Rate by Region in Ukraine

The Highest Growth Rates The Largest Rates of Decline

Share Share 3M in the Contributions, 3M in the Contributions, Regions Regions 2018 structure, p.p. 2018 structure, p.p. 3M 2017 3M 2017

Ivano- Lugansk Frankivsk 20.0 2.0 0.4 -42 1.7 -0.7 Region Region

Sumy Chernigiv 11.9 1.9 0.2 -60 1.1 -0.1 Region Region

Kyiv 11.6 4.4 0.5 Kyiv (City) -3.8 8.7 -0.3 Region

Chernivtsy Rivne 10.1 0.6 0.1 -3.5 1.6 -0.05 Region Region

Lviv Khmelnitsky 8.7 3.6 0.3 -3.1 1.9 -0.1 Region Region

Source: Ukrstat, Ministry of Economic Development and Trade of Ukraine.

Thus, Ukraine needs to use appropriate economic tools to attract domestic and foreign investments to support economic growth and structural transformation and as a result, to increase industrial performance in the regions and in the country as a whole.

The appropriate growth strategy for any country, region, or city depends on where it is located relative to its stage of competitive development. Technological catch-up by building industrial parks and Special Ecnomic Zone (SEZ) are easy solutions for low-income countries to achieve rapid economic growth. According to UNIDO, industrial parks are the simplest form of planned estates and will appeal to countries that are at a low stage of economic development.4) For developing countries, the three main objectives of IP are: 1) to foster economic growth and employment at the national, regional and local level; 2) to attract Foreign Direct Investments (FDI); 3) to spur an industrial dynamic.

4) Economic Zones in the ASEAN. Industrial Parks, Special Economic Zones, Eco Industrial Parks, Innovation Districts as Strategies for industrial competitiveness. UNIDO Country Office in Viet Nam. August 2015. – www.unido.org.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 089 As countries achieve a higher stage of economic development, they are more integrated within trade blocks and MNC, which as a result, make the benefits stemming from SEZs dissipate. In particular, the most advanced countries have eco- industrial parks, technology parks, eco-innovation parks and zones, and innovation districts because of strict environmental regulations and increasing market variability.

In June 2012, Ukraine established industrial parks with the intent of increasing investment attractiveness, creating new jobs, stimulating economic development and building infrastructure for the market and industry. In 2013, the order of registering the industrial parks (IPs) was adopted by the Cabinet of Ministries of Ukraine (CMU).

In the framework of this new instrument, foreign and domestic investors were to benefit from tax incentives and ready infrastructure with a view to reducing operating costs and cutting the time it takes projects to reach the market. The proposed tax benefits included duty-free import of equipment not produced in Ukraine. In practice, although 12 industrial parks have been registered with the national authorities after the adoption of the law, given the existence of administrative barriers and insufficient support from the central authorities, only four of them were operational5) as of January 2016.

To streamline the procedures for the development and management of industrial parks, Ukraine’s parliament adopted amendments to the above law and other relevant laws (Land code, Law on land lease) in November 2015.6) These amendments also exonerate the industrial park management companies from rent on leasing state or communal land for the first 3 years of industrial park operations and identified the Ministry of Economic Development and Trade as responsible for registering IPs.

What is proposed in Ukraine, in fact, is not a “classic” industrial park, but a return of what has already been there — free economic zones and territories of priority development. Verkhovna Rada adopted a Law on Special Economic Zones in 1997, and 12 Special Economic Zones (SEZs) and 9 Priority Development Territories (PDT), which is 10% of Ukraine Territory, are designated by this law.

However, all existing projects of SEZ and PDT were cancelled because the law on SEZ abolished both the custom regulations and the special tax regime because of a very poor record in 2005. In 2010, the Ukrainian government announced the restoration of SEZ and PDT in 2010 but none of them went forward.

5) OECD Investment Policy Reviews: Ukraine 2016, OECD (2016), www.oecd.org. 6) Law of Ukraine No. 818-VIII “On amendments to certain normative acts to lift existing obstacles to the development of a network of industrial parks in Ukraine” (of 24 November 2015), www.rada.gov.ua.

090 • 2017/18 Knowledge Sharing Program with Ukraine In June 2012, Ukraine established industrial parks with the intent of increasing investment attractiveness, creating new jobs, stimulating economic development and developing infrastructure for the market and industry. The establishment of industrial parks for ensuring competitiveness of regions and their sustainable development is one of the principal goals as defined by the State Strategy for Regional Development of Ukraine for the period until 2020.

Verkhovna Rada amended the Law on IP and adopted the Law on PPP in November, 2015. It includes the exoneration of IP management companies from rent on leasing state or communal land for the first 3 years of IP operations and in particular, the burdensome procedures for the selection of the managing company and lease of objects to the participants of the park by the initiator or managing company were cancelled.

Ukraine’s economy is characterized by multiple market imperfections and barriers, including poor infrastructure, limited access to information and inadequate financing opportunities. In addition, rampant corruption and weak institutions contribute to high transaction costs. Industrial parks can be used to overcome these hurdles and accelerate economic development. If successfully established, the parks have the potential to become growth hubs, creating high growth regions that drive national economic development.

In particular, Ukrainian industrial parks should contribute to attracting FDI instead of SEZ and PDT. However, it is not easy to increase FDI volume in a short period. Even with the introduction of IP in 2012, the amount of FDI volume has not increased (see Figure 2-2). The Ukraine government has implemented a set of measures to create a more favorable business environment. Owing to this, the ranking on the “Easiness of Doing Business Index of the World Bank” has been improving steadily.

[Figure 2-2] FDI Volume in Ukraine (Unit: Million UAH)

1,500 Ukranie - Foreign Direct Investment 1,000

500

0

-500 2017/3 2013/1 2017/8 2015/2 2018/1 2015/7 2014/4 2013/6 2016/5 2014/9 2013 /11 2015/12 2016/10

Source: TheGlobalEconomy.com, National Bank of Ukraine.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 091 However, the overall climate for foreign investment is not still good. According to the Index of the Institute for Economic Research and Policy Consulting,7) Ukraine’s western and some central oblasts are the best at attracting investment. But even in Vinnytsia Oblast, where the investment index is the highest, it is only at 0.25 points out of 1.

[Figure 2-3] Foreign Investment Climate by Region in Ukraine

Source: Institute for Economic Research and Policy Consulting, Regional Business Index in Ukraine (2017).

Thus Ukrainian government has to prepare an effective and comprehensive IP development program to attract FDI through industrial parks. In this context, the purposes of this research are as follows.

–– Institutional and legal analysis of Ukrainian industrial parks –– Diagnosis of the situation and problems of Ukrainian industrial parks through the performance evaluation model –– Investigation of barriers and major tasks of Ukrainian industrial parks through surveys on foreign companies in the Ukrainian industrial parks –– Finding of factors affecting the success of industrial complexes through case analysis of Ukrainian industrial parks –– Suggesting policy based on experience of industrial complex operation in Korea and analysis of investment attraction policy

7) The rating of the regional business climate index was based on the entrepreneurs’ poll on 4 criteria: business environment quality, current business activity, long-term business activity and evaluation of the 3 main regulatory procedures (registration, tax administration, inspections).

092 • 2017/18 Knowledge Sharing Program with Ukraine 1.2. Scope and Method

1.2.1. Scope

This research mainly focuses on the policy of attracting foreign investment among policy research to improve industrial park performance in Ukraine. For this purpose, this study develops policies which reflect on the characteristics of the Ukrainian industrial parks by analyzing the major characteristics, operation and management experiences of major industrialized countries (including Korea) that have attracted foreign investment.

1.2.2. Method

• Data analysis method

–– Questionnaire survey of management companies in the industrial parks in Ukraine –– Performance analysis using indicators such as the number of enterprises in Ukraine industrial parks, investment amount, tax payment amount, job creation and budget expenditure –– Identify success factors by analyzing success as well as failure cases

• Cooperation with local consultants

–– Detailed information on the current status of registered industrial parks and unregistered private industrial parks and related statistical data –– Related regulations and changes to the creation and operation of industrial complexes after the amendment of the Industrial Park Act in 2015. Analyzes and provides important regulations of relevant laws such as industrial park law and foreign investment law –– Case studies of successful industrial complexes and failed industrial complexes. –– Analysis of obstacles and future policy tasks of development of a Ukrainian industrial complex

• Field research and workshop with experts

–– Visits to relevant government agencies, major industrial parks and management companies –– Analysis of major laws and regulations related to Ukrainian industrial complexes such as "Law on Industrial Complexes (June 25, 2012 No. 5018-IV)" –– Investigation of major Ukrainian experts on industrial parks –– Holding workshops on industrial parks and joint seminars with related experts in Korea during Ukrainian delegation visits to Korea.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 093 2. Concept of an Industrial Park and Recent Trends 2.1. Concept of an Industrial Park

The term “industrial park” is used interchangeably to define a number of very different initiatives. Often it is (misleadingly) used to define “free trade zones” (or “commercial free zones”), which are essentially fenced-in, duty-free areas, that offer warehousing, storage, and distribution facilities for trade, trans-shipment, and re- export operations; or alternatively to define “export processing zones,” which are industrial land plots established primarily to attract export-oriented manufacturing or extractive industry investments.

The term is used also in reference to “special economic zones,” which are large industrial plots that host a variety of industrial and service sectors, targeting both foreign and domestic markets and providing, to a varying degree, special tax or regulatory incentives.

Similar initiatives are the “specialized investment zones,” which target specific sectors or economic activities and these include science/technology parks, petrochemical zones, logistics parks, and airport-based zones, etc. What defines these parks/zones is their sectorial focus (e.g. no access to companies in non-priority sectors) and for this reason the infrastructure they offer to tenant companies is tailored according to the needs of the targeted sectors.

An industrial park is a “tract of land developed and subdivided into plots according to a comprehensive plan with or without built-up factories, sometimes with common facilities for the use of a group of industries.”8) The rationale for industrial parks has traditionally been two-fold. First, the provision of functional infrastructure is much easier to plan in a geographically limited space, particularly for delivery-constrained governments. Second, the concentration of firms can provide significant spillover effects both inside and outside the park: information spillovers, including knowledge and technology; the specialization and division of labor among enterprises; the development of skilled labor markets; and the development of markets around the parks.9)

The Korean law defines an industrial park as any plot of land to be designated and developed under a comprehensive plan to collectively install factories; facilities

8) UNIDO’s definition. 9) Yannick Saleman and Luke Jordan, “The Implementation of Industrial Parks: Some Lessons Learned in India,” World Bank Policy Research Working Paper 6799, p. 6, (2014).

094 • 2017/18 Knowledge Sharing Program with Ukraine related to the knowledge industry, the cultural industry, the information and communications industry and the recycling industry; resources warehousing facilities; logistics facilities; and educational, research, business, support, data processing, and distribution facilities thereto; residential, cultural, environmental, and green areas and parks; and medical, tourism, sports, and welfare facilities; in order to enhance the functions.10)

2.2. Recent Trend of Industrial Parks

An industrial complex is composed of the geographical concentration of companies and related organizations that are interconnected in a specific industry sector, a functional aggregation of industrial facilities such as industrial production systems, science and technology systems, business service systems and industrial complexes, and connections between geographically adjacent innovation entities.11)

There are generally two kinds of models for analysis of industrial park development: the structure model and process model. In the structural model, the relations of individual domains are represented statically, which describes the transaction process in which the structural relationships are determined. In the process model, time is considered as a factor that determines one important relationship, and it has the advantage that it can define the effect of the person concerned and its continuous influence according to the time flow. It also has the advantage of finding the elements that define the flow of actors, the structure and the success of the relationship. Fundamentally, the difference between the structural model and the process model is that the structure model focuses on the situation structure, while the process model focuses on the behavioral structure.

Korea's industrial network model has a three-stage model developed from an industrial park to an innovative industrial network.12) The first phase is the start of the industrial network in the industrial park from 2005 to 2007. The second phase is the growth phase of the industrial network from 2008 to 2011. The third phase is from 2011 onwards to the present, expanding into a global industrial network.

In the first stage, each industrial park systematically expanded their research technology development field in the production process. It is to program the industrial network process and make it together with local industries, academia and research institutes. Through these efforts, the key element of management has been

10) KICOX, Industrial Park Development in Korean Economy – A Guideline for Development and Management of Industrial Parks, (2011), p. 44. 11) Menzel, M. and Fornalh, D, “Network Life Cycle: Dimensions and Rationales of Network Evolution," Industrial and Corporate Change, Vol. 19, No. 1, pp. 205-238, (2010). 12) Jin Suk Kim, “A Study on Korean Industrial Network Development via Process Modeling,” Journal of the Korea Academia-Industrial cooperation Society, Vol. 18, No. 4, 2017, pp. 648-652.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 095 developed. In the second phase, the other five industrial parks were re-selected for the conversion process along with these existing industrial networks. If the program for the park is successful, the program is extended to other national industrial parks. In the process, priority is given to the selected industrial network areas to deal with the growth engines or core technologies adopted by the government, and these industrial networks have been developed in specific technology fields.

In phase 3, Korea, like other countries, had to overcome competitive pressures internationally and be fundamentally self-sufficient to be internationalized. The issue of internationalization was not only a problem for large corporations, but also for the small and medium-sized enterprises in the whole country.

Recent trend of industrial park development mainly focuses on cluster effect and innovation network of industrial parks. In this context, government has to prepare IP development policy which increase cluster effects and diminish negative spillovers and crowding out by stage of industrial development.

Saleman and Jordan provide an indication of how the different functions or steps map with the different types of failures mentioned earlier in some instances.

Steps in Industrial Park Development and Potential Failures

(ii) Not (iii) Limited Function (i) Park does (iv) Negative enough cluster vs. Failures not get built spillovers demand effects

(1) Location Selection X X

(2) Demand Identification X X

(3) Land Procurement X X X

(4) Design & Dimensioning X X X X

(5) Financing and Structuring X X

(6) Infrastructure Procurement X

(7) Infrastructure Construction X

(8) Operation & Maintenance X X

(9) Monitoring & Evaluation (M&E) X X

Source : Yannick Saleman, Luke Jordan, “The Implementation of Industrial Parks: Some Lessons Learned in India, World Bank Policy Research Working Paper 6799, p. 9, (2014).

096 • 2017/18 Knowledge Sharing Program with Ukraine Generally we can classify the failure types of promotion of industrial parks into the following four categories: 1) the parks do not get built; 2) the parks are built but there is little demand from firms to locate and invest in them; 3) the parks are built and generate demand, but with few “cluster effects”; 4) the parks are successful but have neutral or negative side-effects on investment climate outside the park (“negative spillovers” and “crowding out”). The industrial parks are currently saturated in developed counties, thus IP policy should focus more at maximizing of cluster effects and minimizing negative spillover. In order to achieve this, proper stakeholders and their function should be reflected in the process of building and operating industrial parks.

Even though many industrial parks in Ukraine are now in construction or not successful yet in performance, the Ukrainian government should make a long-term plan to maximize cluster effects and minimizing negative spillover.

3. Current Situation and Performance of IPs in Ukraine 3.1. Summary of the Development of Industrial Parks in Ukraine

According to the Law of Ukraine “On Industrial Parks” Industrial (Production) Park (hereinafter referred to as “industrial park” or IP) refers to a territory, identified by the initiator of the IP creation according to the town-planning documents and equipped with the appropriate infrastructure. The tenants of IP may perform their economic activities within the boundaries of the IP in the spheres:

–– Processing industry, –– Research activities, –– Information and telecommunication.

According to the above law, an initiator of IP creation means:

–– the public authorities, –– the local government bodies which shall enjoy the rights of the land owner, –– a legal or a physical persons – the owner or the lease holder of the land parcel, which may be used and proposed by him for creation of the industrial park;

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 097 Requirements to the land parcel within the boundaries of the industrial park are the following:

–– the land parcel, planned to be used for IP, should belong to the industrial lands –– be suitable for industrial use regarding conditions and restrictions specified in the town-planning documents –– area of the land parcel or a total area of a cluster of the adjacent land parcels shall be at least 15 ha and not more than 700 ha –– IP to be created for a period of at least 30 years –– IP land parcels of state and local public property may be sold to IP management company and IP participants –– at the time of IP inclusion into the Register should be no integral property complex that allows to producing goods –– use of the land parcels within industrial park should meet sanitary- epidemiological and ecological requirements.

Since 2013, the establishment of more than 37 IPs was initiated according to the above law. 31 of them are included in the register of industrial parks as of 13 June 2018.

presents the full list of the 41 active industrial parks in Ukraine, independently of their inclusion or not inclusion into the Register, with additional information on their status and functional purposes. Parks received their numbers taking into account their location in the regions of Ukraine. The regions are arranged according their names in English language in alphabetical order. This provides a systematic approach to the monitoring and analysis of the parks.

Full List of Industrial Parks in Ukrainian Regions (As of 2018.05.25)

Name of Data of Square, Functional Purpose. Region Status of IP Industrial Park Registration ha Type of Activity

Support to enterprises in the organization Chernihiv Not 1 “Cheksil” IP 15 ha of production, Operating Region registered marketing, financial, logistics.

Manufacture of auto parts and components Chernivtsi 15.36 Under 2. Novodnistrovsk 13.01.2017 for cars; electric Region ha Construction equipment; food production.

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Continued

Name of Data of Square, Functional Purpose. Region Status of IP Industrial Park Registration ha Type of Activity

Sustainable city development. Auto parts and components Cherkasy 39.93 Under 3. "Zolotonosha" 18.05.2017 for agricultural Region ha Construction machinery, food production, electrical equipment.

Site for machine 26.03 Under 4. "Kryvbas" 01.09.2014 building, construction ha Construction materials, logistics. Dnipro Region Industrial areas for objects of innovation, Under 5. "Pavlograd" 14.02.2017 250 ha industry, construction, Construction logistics.

Production of building 27.52 and insulating Under 6. "Limansky" 30.06.2017 ha materials; equipment Construction for alternative energy. Donetsk Region Mechanical engineering, spare 34.02 7. Tekhnocity 22.02.2018 parts production, Planned ha utilization of computer electronic equipment.

Production facilities: chemical, Donetsk 8. "Chemical- metallurgical mixtures; Region, Not metallurgical 270 ha powder wire; Operating Village registered plant" welding electrodes; Donskoe metal structures; infrastructure.

Light, food, 27.14 9. "Dolyna" 03.02.2014 woodworking and Operating ha automotive industry. Ivano- Frankivsk Modern high-tech Region industrial complex 10. Industrial park Not 32.45 with developed Planned “Burshtyn” registered ha engineering infrastructure.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 099

Continued

Name of Data of Square, Functional Purpose. Region Status of IP Industrial Park Registration ha Type of Activity

Various food products, 11. private organic products, Kharkiv Technological Not n/d beverages, bottles, Operating Region park registered cans, cable products, "Malynivka" biofuels.

Medium and small engineering, Khmelnyt- 12. "Slavuta" 07.02.2014 52 ha woodworking, Operating Sky Region pharmaceutical industries.

Production of spare parts and accessories Kropivnitskii 13. Industrial park 24.48 Under 13.04.2018 for agricultural Region "Oleksandriya" ha Construction machinery, food, furniture.

Creating industrial infrastructure for Under 14. BIONIC HILL 01.09.2014 56.74 innovative high- Construction tech and intellectual Kyiv (City) businesses.

Creating industrial 15. "Kyiv business Not 106 ha facilities, wholesale & Planned harbor" registered retail complex.

Mechanical 16."First Ukrainian engineering& metal Industrial 08.07.2014 105 ha working; food, light, Operating Park" printing, microbiologic industry.

Light, food, pharmaceutical Under 17. "Fastindastry" 13.01.2017 15 ha industry; Construction Kyiv electronics and IT. Region Placement of industrial 36.67 Under 18. “Mirotske" 30.05.2016 production facilities, ha Construction logistics centers.

Agricultural 19. Industrial- processing, light technological 150.43 Under 25.10.2017 industry, machinery Park ha Construction and equipment, "KYIVSCHYNA" logistics.

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Continued

Name of Data of Square, Functional Purpose. Region Status of IP Industrial Park Registration ha Type of Activity

Production facilities 20. IP in the City and infrastructure of Not of Bila Tserkva 250 ha Bila Tserkva Cargo Operating registered (BCAC) Aviation Complex BCAC. Kyiv Region Machine building, light, food 21. Private IP "Bila 24.1419 and furniture Under 13.04.2018 Tserkva" ha industry; metal & Construction woodworking; other industries.

Developing modern Under 22. "Ryasne-2" 07.02.2014 23. 49 production and Construction market infrastructure.

Instrumentation, 23. “Yavoriv machine building, Under Industrial 26.04.2017 40 ha metalworking, Construction Park” logistics, trade and services.

Lviv 24. “Kamyanka- Agricultural Region Buzka 24.47 machinery, food, Under 31.05.2017 Industrial ha electronic industry, Construction Park” combined logistics.

Production of eco- 25. Novorozdilsky Under 15.06.2017 46.4 ha saving products, Industrial Park Construction resource efficiency.

Production for export 26. "Sigma Park 15.71 Under 04.09.2017 to EU, for substitution Yarychiv" ha Construction of imports from EU.

To build a modern Odessa Under 27. "iPark" 01.09.2014 16 ha industrial complex Region Construction with infrastructure.

28. "Central" in Machine building, IT, 168.55 Under Kremenchug 01.04.2014 logistics, electronics, ha Construction city alternative energy. Poltava Region Processing of 29. Lannivsky 30.71 agricultural raw 12.09.2017 Operating industrial park ha materials, machinery, services, food industry.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 101

Continued

Name of Data of Square, Functional Purpose. Region Status of IP Industrial Park Registration ha Type of Activity

Attracting investments in the region's Rivne 30. Kostopilskyi Not 145.13 Under economy, by letting Region industrial park registered ha Construction the sites to companies for rent.

Agricultural products processing, woodworking, Under 31. "Trostyanets" 14.10.2014 39.96 automotive and Construction instrument-making industries.

Sumy Chemical, Region pharmaceutical 32. "Svema" in 06.06.2014 92.0 products, construction Operating Shostka city materials, wood processing, logistics.

Providing facilities and Not 98.9681 33. IP "Patriot" logistics for more Operating registered ha than 130 tenants.

Medium and precise mechanical Trans- engineering Carpathian 34. "Solomonovo" 06.06.2014 66.2 ha Operating (instrumentation, Region automotive, electronic industry).

35. “Vinnitsa Various: food, Under Industrial 15.07.2016 60.7 ha textile, machinery, Construction park” logistics.

Vinnitsa To build a modern Region 36. “Vinnitsa industrial complex refrigeration 19.27 Under 31.05.2017 with developed engi-neering ha Construction engineering cluster” infrastructure.

Providing Volyn infrastructure for new Under 37. Novovolynsk” 30.06.2017 20 ha Region objects of industry, Construction innovation.

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Continued

Name of Data of Square, Functional Purpose. Region Status of IP Industrial Park Registration ha Type of Activity

Based on the Zaporizhkrain PJSC Zaporizhia 38. Zaporizhia Not with the support of Operating Region Industrial Park registered the Finnish company Konecranes.

Instrument-making, 39. "Korosten" 01.04.2014 42.2 ha light industry, wood Operating industry.

Instrument-making, 40. ZHYTOMIR- Under 27.10.2016 24.7 ha goods for light & Zhitomir EAST" Construction food industry; IT. Region The technologically 41. "Ukrekolain," advanced platform Novograd- Not 40 ha for companies at Operating Volynsky registered any stage of their town development.

Source: Ministry of Economic Development and Trade of Ukraine, Web sites of Industrial parks (if available).

The majority of these 41 parks are under construction (24 IPs), 14 IPs are operating and 3 IPs are planned. 12 of 31 industrial parks have been registered by former State Agency for National Projects during 2014, the rest 19 IP - by MEDT: 3 of them - in 2016, 13 – in 2017, 3 – in 2018.

Besides those 31 registered IPs there are ten acting parks, initiated by regional authorities or private companies, which are not included in the Register of IP (see Table 2-4 below). Seven of them are operating, and tree parks are under construction according to their concepts.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 103

List of Ukrainian Industrial Parks, not Included in the Register of IP

Name of Date of Square, Region Type of activity Status of IP industrial park creation ha

Support to enterprises in the organization Chernihiv Operating, 1. “ChekSil” IP 2010 15 ha of production, Region 46 tenants marketing, financial, logistics

Production facilities: Donetsk 20.04.2016 chemical and 8. "Chemical- Region, Based on metallurgical mixtures; Operating, metallurgical 270 ha Village NIOCHEM powder wire; 4 tenants Plant" Donskoe Branch electrodes. Donskoe Thermal Network

Modern high-tech industrial complex 10. Industrial Ivano- 32.45 with developed Under Park Frankivsk 2016 ha engineering Construction “Burshtyn” Region and transport infrastructure

Various food products, 11. “Malynovka" Kharkiv beverages, bottles, private Region, Operating, 5 2002 n/a cans, cable products, Techno- Village of Participants biofuels, organic logical Park Malynivka products.

15. "Kyiv Creating industrial 106.68 Business Kyiv (City) 2017 facilities, wholesale & Planned ha Harbor" retail complex

Cargo-repair works, 20. IP in the City Kyiv Region, logistic services on Operating, of Bila Tserkva City of Bila 2000 250 ha Bila Tserkva Cargo 70 tenants (BCAC) Tserkva Aviation Complex

30. Kostopilskyi Initiator: the Rivne Rivne 145.13 Under Industrial 2013 Regional State Region ha Construction Park Administration

33. Industrial Providing facilities and Sumy 8.9681 Operating, Park 2008 logistics for more than Region ha 130 tenants "Patriot" 130 tenants

Based on the 38. Zaporizhia Zaporizhkrain PJSC Zaporizhia 50,000 Operating, Industrial 2011 with the support of Region sq. m 5 tenants Park the Finnish company Konecranes

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Continued

Name of Date of Square, Region Type of activity Status of IP industrial park creation ha

41.“Ukrekolain” Zhytomyr The modern industrial Novograd- 2013 40 ha Operating Region and logistic complex Volynsk

Source: MEDT of Ukraine. Department for Attracting Investments. Websites of industrial parks (if available).

[Figure 2-4] Mapping the Industrial Parks in the Regions of Ukraine

not in the register included in the register goo.gl/swUH

Source: MEDT.

The main reasons of not including those industrial parks into the register may be:

1) the existence of industrial complex or former plant within the boundaries of IP, or 2) no need for state support for the development of IP infrastructure, or 3) the absence of an approved concept for the development of IP.

3.1.1. Initiation of New Industrial Parks

Dnipro region: Local authorities decided to place Industrial Park on Slobozhansky Prospect. The chosen area is 5 km from the city center. All the necessary communication exists. New objects have to be built on the basis of old existing enterprises.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 105 Donetsk region: During 2017–2019, it is planned to create 5 industrial parks (in the cities of Mariupol, Konstyantynivka, Toretsk, Bakhmut and Slavyansk).

Ivano-Frankivsk region: work is being carried out on the IP creation in the cities of Kalush, Kolomyia and Ivano-Frankivsk. In particular:

–– Kolomyya City Council developed and approved the concept of the industrial park "Kolomyya," the work on determining the land plot for an industrial park is underway; –– Kalush City Council in June 2013 approved the concept of IP "Kalush"; 18 ha it is planned to develop powerful enterprises of innovative industries; work is continuing to find investors.

Kherson region: the project of IP "Kherson Industrial Park" is developing since 2016 on the basis of LLC “Ukrsilgospmash." Measures are being undertaken to create an IP on the territory PJSC "Kherson Cotton Combine," as well as in the city of Kakhovka and Nova Kakhovka.

Khmelnitsky region: according to the decision of Khmelnytsky City Council No. 61, dated July 12, 2017, 52 hectares of industrial land were allocated for the creation of an industrial park on the street Vinnytsia highway, 18.

Lugansk region: in January 2018, the Rubizhne City Council issued a draft decision on the creation and concept of the Rubindustry Industrial Park within an area of 35 hectares. The priority areas of activity to be: the production of construction materials, pharmaceutical products, machine building, environmentally friendly solid waste recycling, wood processing, electronics and IT manufacturing, light and food industries.

Lviv region: Lviv City Council approved in 2017 the concept of the IP "Sigivivka" on a land plot of 51.4 hectares. Also, company P.R. Development intends to create industrial parks in the Pustomyty district on a land plot of 123 hectares; in the Sokalsky district on a land plot of 55 hectares and in the Drohobych district on a land plot of 62 hectares.

Mykolaiv region: the creation of the IP "Mykolaiv" is being discussed in Mykolaiv.

Poltava region: Kremenchug district, within the bounds of the Omelnitsky United Territorial Community: the initiator of the IP creation in the total area is the Omelnitsky village council.

106 • 2017/18 Knowledge Sharing Program with Ukraine Rivne region: large IP "Sigma Park" will be located in the Radivylivskyi district on the land plot of 560 hectares. Development company P.R. Development is launching the development and preparation of a concept for the IP creation.

Sumy region: according to a draft town planning document "Detailed plan of the territory near the plant" Tsentrolit, " the development of IP on 30 hectares is planned in 2018.

Ternopil region: it is planned to create an industrial park in the city of Ternopil and two more industrial parks in the Ternopil region: the industrial park "Processing of agricultural products" in a village Lanivtsi, ul. Vyshnivetska, 29 (on the land plot of 19.2 hectares); Industrial park "Chortkiv-smart" in a town of Chortkiv, Yagilnitskaya Str. (on the land plot of 98.5 hectares).

Transcarpathian region: in the Khust district the preparatory work is under way to organize the industrial park "Narcissus" in the village of Kireshi.

Zaporizhia region: the draft concepts of five industrial parks are being developed for Berdyansk (21.98 ha), Energodar (100 ha), Vasilivsky parks (27.776 ha) and Mikhailovsky (24.32 ha), with the subsequent inclusion in the Register of IP. The draft project of IP in Melitopol involves placing a complex of industrial enterprises on an area of 198 hectares using the developed transport infrastructure.

[Figure 2-5] Mapping of Newly Initiated Industrial Parks in the Regions of Ukraine

Source: Author. modified Institute for Economic Research and Policy Consulting (2017).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 107

Current Situation and Performance of IPs in Ukraine

Gov’t Planned Numbers Budget Tenants Space Jobs Ratio

Operating 7 n/a 661) 5,3002) 35ha

Under Registered 22 27%3) n/a 2,1874) 58ha5) Construction

Planned 2 90.7% n/a 1,300 34ha

Operating 7 n/a 26 1,000 144ha6)

Under Not Registered 2 15%7) 28) 6009) 89ha Construction

Planned 1 n/a n/a n/a 106ha

Total 41 94 10,387 466ha

Note: 1) Solomonovo not included 2) Patriot not included 3) First Ukranian, Mirotske, Ryasne-2, Yaroviv, Kamyanka-Buzka, Novorozdilsky, Sigma, iPark, Novovolynsk, Zhytomir-East not included 4,5) Ryasne-2, Kamyanka-Buzka, Sigma, Novovolynsk, Zhytomir-East not included 6) Malynivka, Zaporizhia not included 7) Kostopilskyi not included 8) Burshtyn not included 9)Burshtyn not included. Source: Author.

At present, the Ukrainian industrial parks are in the construction phase, and the industrial parks in operation include only 3 registered industrial parks and 6 unregistered industrial parks. The government financial support is not large, so overall, it is less than 30%.

Main industries of registered IPs in operation, Dolyna IP, Slavuta IP, First Ukrainian Industrial Park, are metal industry, medium and small engineering, light industry (food, textile) and the bio- pharmaceutical industry while those of unregistered IPs in operation, ChekSil IP, Chemical-metallurgical plant IP, Malynovka private technological park, IP in the city of Bila Tserkva, Industrial park "Patriot," Zaporizhia IP, Ukrekolain” Novograd-Volynsk IP, are light industry and logistics.

Registered industrial parks are easier to support through the government budget and tax incentives than unregistered industrial parks. Article 12 and 34 of Law on Industrial Parks stipulate on state support for construction of industrial parks and article 34 and 36 stipulate on the exemption from share participation in the development of local infrastructure. Article 287 of the custom code of Ukraine defines exemption payment of import duties upon the import of goods. The registration procedure is shown in the following (see Figure 2-6).

108 • 2017/18 Knowledge Sharing Program with Ukraine [Figure 2-6] The Procedure for the Inclusion of Industrial Parks in the Register of Industrial Parks

INDICATOR FOR THE ESTABLISHMENT OF INDUSTRIAL PARK

Notice of 1 registration of a Interdepartmental commission under the and package of 1 Within Within Ministry of Economic Development and Trade documents 5 business 10 calendar Package of Within 7 business days, consideration of documents days days, documents or and information from the authorities, decision-making package of information 1 Return of documents 2 from the 1. Within 2 working a package of authorities days of the adoption of documents the order for inclusion in case of Within 2 working non-compliance 2. Issuance of the initiator? 2 2 days the notice of with Article Extract from the Register 15 of 2 the Law a?? refusal to include in the Register on the Within 3 days of the basis of the decision publication of the extract of the commission Interested central and local from the Register on the Ministry of Economic executive authorities official web site of the Development and Trade Ministry of Economic of Ukraine Development and Trade I STAGE II STAGE III STAGE

Source: Approved by the Resolution of the Cabinet of Ministers of Ukraine dated January 16, 2013 No. 216.

Interdepartmental commission takes into account the following criteria:

1) availability of labor resources necessary for the development of an industrial park in accordance with the concept; 2) the presence and/or the possibility of initiating the creation of the financial and logistical resources necessary for the development of an industrial park in accordance with the concept; 3) support of the industrial park by local authorities and local executive bodies; 4) the expected results of the functioning of the industrial park in accordance with the concept of attracting investments, creating new jobs, exporting products, attracting small and medium enterprises; 5) the existence of signed memorandums of intent and/or agreements with potential participants of the industrial park.13)

3.1.2. Conclusions from the More Detailed Review of Industrial Parks in Ukraine

1. As of June 2018, in 21 regions of Ukraine, there are 41 industrial parks at different stages of development, including 14 operating parks (34%), 24 parks (59%) under development, and 3 parks (7%) in the process of planning their territory and preparing the necessary documentation (see Table 2-6). The area of industrial parks ranges from 15 hectares (4 parks) to 250-270 hectares (3 parks). Expected term of their activity is 30 to 50 years.

13) Law on Industrial Parks from June 21, 2012 of No. 5018-VI (In edition of the Law of Ukraine from 7/4/2013 of No. 406-VII; the Law of Ukraine from 24/11/2015 of No. 818-VIII) article 16.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 109 2. The majority of IPs were created during 2014-2018 due to the enacting in 2012 of the Law "On Industrial Parks" (with changes dated 2015), which regulates the conditions for obtaining the state support for developing the park infrastructure. Integrating the tasks for creating a regional network of scientific, technological and industrial parks to the priority areas of the State Strategy for Regional Development of Ukraine for the period up to 2020 (adopted in August 2014) contributed to IP development.

3. The development strategies of majority regions of Ukraine up to 2020 and action plans for their implementation include measures to support the development of industrial parks on their territories. However, these documents do not provide localizing the funds for the implementation of planned activities. The financing of such activities is carried out from the State Fund for Regional Development (SFRD) and local budgets in a competitive manner (regulated by the Cabinet of Ministers normative act) and is a complex procedure that slows down the process of setting up the parks. According to the MEDTU, in 2016, for the 8 parks, budget funds were allocated in the amount of 6855.4 thousand UAH, including 65% of the State Fund for Regional Development (SFRD) and 35% of local budgets. In 2017, funds were not allocated.

4. Of the total 41 parks, 31 IP are included in the IP Register by the MEDTU, 10 parks are not included, since they are either created by private owners at their own expense and before the adoption of the Law "On Industrial Parks" (IPs No. 11, 41) or created on the territory of existing industrial facilities (IPs No. 1, 8, 20, 33, 38), or are created based on the decisions of local authorities, but do not yet have approved development concepts (IPs No. 10, 15).

5. The management of 11 operating industrial parks informs about existing production facilities, infrastructure and vacant premises for the attraction of tenant companies (IPs No. 1, 8, 11, 12, 16, 20, 29, 33, 34, 38, 41). Seven parks inform on the number of participating companies, varying from 2 to 130 (IPs No. 1, 8, 11, 20, 29, 32, 33). The main factors of the success of such parks are, in most cases, the presence of a management company and private investors, as well as placement on former industrial sites, near major settlements, highways of international importance and railways. At the same time, the allocation of polluted industrial zones for the creation of a park may require additional measures and costs from the state to clean up contaminated areas (IP No. 25 Novorozdilsky).

6. The presence of an experienced management company plays an important role in the development of IPs. Of the total list of parks under consideration, 25 IPs have management companies: 16 IPs of 31 parks included in the IP register (IPs No. 2, 5, 6, 9, 12, 16, 18, 22, 27, 28, 31, 32, 34 , 35, 39, 40), and 9 out of 10 IPs not included in the

110 • 2017/18 Knowledge Sharing Program with Ukraine register (IPs No. 1, 8, 11, 20, 21, 29, 33, 38, 41). Selecting a management company in IPs, created by the initiative of local authorities, is carried out more slowly than in IPs created by private companies. This may be due to bureaucratic procedures (complex competitive selection procedure), lack of interest from private business and investors, and dialogue with government authorities. IP No. 10 Burshtyn, No. 4 Kryvbas, No. 17 Fastindustry, No. 25 Novorozdilsky - examples of parks, where slow development is associated with difficulties in choosing a management company.

7. From the point of view of the declared functional goals of development, industrial parks can be divided into three groups: 1) the establishment of production sites and infrastructure for the placement of companies of various profiles, mainly machine building, light industry, food, pharmaceutical, woodworking industry for the purpose of socio-economic development region; 2) optimal use of facilities and infrastructure of existing companies by attracting tenants on the principle of B2B; 3) ensuring the sustainable development of the city/region by focusing on the use of renewable energy sources, resource-saving materials and technologies, international quality standards, environmental and energy management systems.

8. Today, Ukraine is facing a number of serious problems caused by the escalating conflict in the eastern part of the country, the occupation of the Crimea in early 2014 and ongoing economic crises. It accelerated the recession of the entire economy, the closure of a large number of enterprises and the reduction of employment, hampered re-industrialization in many regions and structural transformation. In the absence of a strategic vision of structural changes in industry in the regions there was often a spontaneous search for ways of the enterprises surviving and their adaptation to new conditions. It also affected the slow development of industrial and technological parks. On the other hand, we already see positive examples of industrial parks contribution to the business development in regions in Ukraine.

9. In general, the information base for monitoring and evaluating the effectiveness of industrial parks and their impact on the regional problems is limited. There is a need to introduce a system of key performance indicators for monitoring the parks’ outcomes in accordance with international practice. This will give the background for more appropriate policy decisions towards IP development.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 111 3.2. Evolution of Legal Framework and Government Policy

Starting from the first years of the development of the independent economy of Ukraine after the collapse of the Union of Soviet Socialist Republics (USSR), a search was made on economic instruments that would stimulate the expansion of investment activity at the expense of domestic sources and the attraction of foreign direct investment to be directed to priority areas for technological development and restructuring the industry and the economy.

This happened against the backdrop of the transformational crisis associated with an unexpectedly complex transition from an administrative-planning system to a market economy dominated by competition for markets and resources and market pricing. During 1992–1997, there was a collapse in the volume of capital investments (it consisted about 11 billion USD over the whole period),14) the outflow of funds from the sphere of production and the economy as a whole. The economic crisis was accompanied by a chronic decline in production, the release of workers, increased unemployment in the absence of effective incentives for the development of legal business.

In order to overcome the consequences of the crisis, to intensify entrepreneurship and attract investment in the Ukrainian regions, including foreign ones, since the mid-1990s to the present time in Ukraine, there has been a testing of several institutional instruments and incentives for boosting the entrepreneurial activity: special (free) economic zones (SEZ), territories of priority development (TPD), free customs zones, technological parks (TPs), scientific parks (SPs), industrial parks (IPs). Below, we will examine the experience of implementing SEZ, TPD, technology parks and industrial parks projects in Ukraine since the mid-1990s to this time and the peculiarities of their stimulation policies in Ukraine.

3.2.1. Special Economic Zones and Territories of Priority Development

A Special Economic Zone (SEZ) is defined in accordance with the Basic Law of Ukraine of 1992 "On the General Principles of the Establishment and Functioning of Special (Free) Economic Zones" as "a part of the territory of Ukraine, in which a special legal regime of economic activity and the legal regime of application and the legislation of Ukraine are established and in force."15)

14) Domestic practice and world experience of SEZ and TPD: monograph / O. Chmyr, V. Panchenko, Y. Husev, V. Pyla; sciences ed. O. Chmyr. – D.: Poster Print, 2013. – 252 p. - P. 62. 15) Law of Ukraine, "On general principles of creation and functioning of special (free) economic zones."

112 • 2017/18 Knowledge Sharing Program with Ukraine "The law outlines the main types of economic zones: free customs zones and ports, export zones, transit zones, customs warehouses, technological parks, technopolises, complex production zones, tourist and recreational, etc. In addition to this Law, the regulatory framework includes nine laws and two decrees of the President of Ukraine regarding the creation of separate SEZs, almost 30 normative legal acts.

The purpose of creating the Territories of Priority Development (TPD) with the special regime of investment activity was to attract investments into priority economic activities for solving the problems of depressed territories, in particular, structural unemployment in coal regions (closure of 63 mines in Donetsk, Luhansk and Volyn regions), man-made and environmental catastrophes (in particular, the Chernobyl accident).

However, the basic law that would regulate the general principles of TPD activity, does not exist in Ukraine. The Law of Ukraine "On Employment of the Population" introduces the concept of "the territory of priority development." The legal principles of the TPD are enshrined in the laws "On Local Self-Government," On the Budget System of Ukraine," "On Taxation of Incomes of Enterprises and Organizations," etc. (9 laws) and a number of normative legal acts regulating specific issues of TPD activity, in particular, the procedure for consideration and approval of investment projects for their implementation in the SEZ and TPD.

Experts of the Scientific and Research Institute of Economics (hereinafter SRIE) under MEDT distinguish three stages of SEZ and TPD development:

–– Stage 1 (1997–2000) - formation of the regulatory framework, the establishment and formation of domestic SEZs and TPDs; –– Stage 2 (2001–2004) - period of active development; –– Stage 3 (2005–2010) - phasing out of investment projects in SEZs and TPRs by entrepreneurs as a result of cancellation of privileges, completion of project implementation deadlines, investors' refusal to work in SEZs and TPDs, and termination of project contracts that are not fulfilled investment obligations.

During the period of 1998-, 11 SEZs were established in Ukraine and the TPDs with a special regime of investment activity were created in 9 regions by adopting a separate law for each SEZ and TPD. As of January 1, 2005, SEZs and TPDs operated in 12 regions (oblasts) in the territories of 41 districts and 58 cities. The total area of the territory was 6360 thousand hectares or 10.5% of the territory of Ukraine), including SEZ - by 121 thousand hectares (0.2% of the territory of Ukraine) and TPD - by 6,239 thousand hectares (10.3% of the territory of Ukraine) (SRIE, p. 65, 67).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 113 The special regime was applied to companies registered in the SEZ or TPD in accordance with the approved investment project and the concluded agreement (contract) with the local authorities according to the current legislation. It provided for the following benefits to such companies:

–– Exemption from payment of import duties for materials, raw resources, equipment and accessories to them, for the period of investment projects implementation, but not more than for five years; –– Exemption from payment of value added tax (not more than for 5 years), operations on import (forwarding) to the customs territory of Ukraine of equipment and components to them for the needs of own production in the framework of investment projects; –– Release for a period of 3 years from the payment of income tax (in its part, received from the applying the investments) of the newly created, re- profiled, reconstructed enterprise, as well as taxation of this tax at the rate of 50% of the effective rate in the period from the 4th to the 6th year; –– Exclusion of the received investments from the enterprise’s gross income accrued for the purpose of taxation; –– Exemption from payment for land plot for the period of development of the land plot (planning of the territory, construction of infrastructure, etc.), but not more than for five years.

For the TPDs, an additional condition for the application of preferential regime was the implementation of investment activities in the priority sectors defined by the Cabinet of Ministers. In this case, the lower boundaries of the cost of investment projects were determined by type of activity:

–– 100–500 thousand dollars for investments in agriculture, food, light and mining industry, woodworking, transport, clearing of territories, etc.; –– $500 thousand–$1 million for powder metallurgy and chemical production, oil refining, printing industry, electricity production, gas, water, processing of metal waste; –– $3 million - in metallurgy and metal processing, production of machinery and equipment, in particular electric, electronic, transport [SRIE, p. 68].

For certain SEZs, where the territory was fenced and equipped in accordance with the requirements of the State Customs Service of Ukraine, a special customs zone regime has been established according to international agreements (Annex to the Kyoto Protocol of 1973).

The regime of special (free) economic zones and TPD was groundlessly abolished in March 2005 when the Law of Ukraine "On Amendments to the Law of Ukraine

114 • 2017/18 Knowledge Sharing Program with Ukraine "On the State Budget of Ukraine for 2005" and some other legislative acts were cancelled, while references to privileges were cancelled without determining the term of their renewal.16)

The abolition of preferential regime led to the curtailment of entrepreneurial activity in the mentioned territories, decrease of investors' interest in the organization of business not only in the SEZ and TPD, but also in general in Ukraine. After the adoption of the mentioned political decision in 2005, no investment project was registered in these territories over the next 6 years.

The study conducted by the experts of the Scientific and Research Institute of Economics at the MEDTU shows the ambiguous results of the SEZs and TPDs influence on the economic and social development of Ukrainian regions:

Positive results include:

–– attracting investment resources: a total of about $4.9 billion, including 21.85% of foreign investments, contributed to the new enterprises creation and equipment modernization; –– increasing volumes of production and product sales; –– renewing the fixed assets; –– creating new and preserving existing jobs, reducing social tension; –– attracting the well-known foreign companies and as a result speeding-up the applying new technologies and improvement of the investment image of Ukraine in the world.

During the period of the SEZ and TPDs functioning (2000–2010) the implemented investment projects attracted a total of 4,890 million. USD investments, including 1,065 million USD of foreign investments. They created 88 thousand new jobs and saved 128 thousand of existing ones (see Table 2-5).

16) The Law of Ukraine, "On Amendments to the Law of Ukraine, On the State Budget of Ukraine for 2005 and some other legislative acts of Ukraine," No. 2505 dated March 25, 2005.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 115

Dynamics of the Main Indicators of SEZ and TPD Network Development (2000–2010)

Totally Including (2005–2010)/ Indicators 2000–2010 2000–2004 2005–2010 (2000–2004), %

Number of invest projects (IPs), - 464 354 76.3 implemented (average), units.

Number of enterprises, realized - 414 317 76.6 IP projects. (average), units

Investments attracted, million. 4,890 2,151.6 2,738.4 127.3 USD

Including foreign investments, 1,065 612.3 452.7 73.9 million. USD

Volume of products sold, excluding VAT and excise duty, 177,752.6 51,304.9 126,447.7 246.5 million. UAH, current prices

Including outside the customs 65,404.5 15,985.5 49,419 309.1 territory of Ukraine, million. UAH

Exports, million. USD. 11,863.8 3,009.8 8,854 294.2

Imports, million. USD. 3,970.7 1,718.7 2,252 131.0

The balance of import and 7,893.1 1,291.1 6,602 511.3 export, million. USD.

Jobs entered, ths. units 216.3 173.9 42.3 24.3

Of them the number of newly 88.4 63.2 25.2 39.9 created jobs, thousand units.

Amount of tax benefits received, 13,299.1 8,651.9 4,647.2 53.7 million UAH

Amount of taxes and duties (mandatory payments) paid to 10,999.9 2,110.7 8,889.2 421.1 the budgets, million. UAH.

Fees (Contributions) to the State 4,568.2 1,354.6 3,213.6 237.2 Targeted Funds, million UAH.

Balance of taxes and duties, paid to budgets and state targeted 2,269 -5,186.6 7,455.6 -143.7 funds, and received tax benefits, million. UAH

Source: Domestic practice and world experience of SEZ and TPD: monograph/O. Chmyr, V. Panchenko, Y. Husev, V. Pyla; sciences ed. O. Chmyr. – D.: Poster Print, (2013). – 252 pp. - p. 193-215.

116 • 2017/18 Knowledge Sharing Program with Ukraine The following results of the SEZs and TPDs activity may be considered as negative:

–– non-compliance by companies with their commitments to attract investments, develop production, introduce new jobs and preserve existing ones; –– failure to achieve the declared socio-economic goals (impact); –– abuse of import of goods for the implementation of investment projects from outside the customs territory of Ukraine on preferential terms, as well as of export of finished products; –– not attracting investments in the territory of 11 TPDs in three regions (oblasts); –– low budget efficiency of 14 projects in the meat processing industry in SEZs and TPDs of Donetsk and Zhytomyr regions, which served as a basis for the abolition of preferential treatment of investment activities in all SEZs and TPDs in the country.

This allows us to conclude that there is a lack of consistency and effectiveness of state policy, the inability of the responsible authorities to respond quickly to cases of violation of the regime and tax discipline in the field of SEZs and TPRs by penal sanctions or closure of projects. Instead of suppressing all investment projects SEZ and TPD in Ukraine, it was enough to remove the meat processing from the list of authorized activities and to punish SEZ “Donetsk” and TPDs in Donetsk region, through which 90% of all tax benefits have been accumulated. In an institutionally weak economy with a poor business culture, the implementation of such complex preferential regimes rarely achieve the stated objectives.

This conclusion should be taken into account when working out the tools for activating the development of Ukrainian industrial parks.

3.2.2. Technoparks

In the short history of Ukrainian technological parks, similarly as in SEZ and TPD, there are periods of both take-off (in 2000–2004) and the fall (in 2005–2010). The root cause of this change was the adoption of false decisions on the initiative of the government, which significantly worsed the conditions of the technological parks activity.

The first laws regulating state policy in the field of scientific and technological and innovation activities during the period of market transformation of the Ukrainian economy were adopted at the end of the 1990s. Among them are the Concept of Scientific and Technological and Innovative Development of Ukraine (1999), the Law "On the Special Mode of Investment and Innovative Activity of Technology Parks"

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 117 (1999), the Law "On Priority Areas of Innovation Activity in Ukraine" (2003), etc.

The first edition of the Law "On the Special Treatment of Investment and Innovative Activities of Technological Parks" No. 991 dated 16.07.99 (hereinafter referred to as the Law on TP) provided the following state support measures to the projects of technological parks:

–– exemption from income tax; –– exemption from value added tax on sale in Ukraine; –– exemption from payment of import duties; –– exemption from VAT when importing goods; –– funds received in foreign currency from sales of products are not subject to mandatory sale; –– extension of the export-import payment period from 90 to 150 days.

According to experts (Mazur A., 2009), the results of the work of leading Ukrainian TPs suggest that the Law in its original version is one of the most successful laws of an independent Ukraine.

Today there are 16 TPs, of which 8 really are working. During the period of 2000–2008, 116 innovative projects were implemented and innovation products were produced at 12.3 billion UAH (including 1.7 billion UAH - exports), 3,246 new jobs were created, and UAH 0.9 billion was transferred to the state budget. with the amount of state support for innovative projects at 0.48 billion UAH.

At the same time, accelerated development of production of high-tech products as well as a real support of the domestic producer was provided.

In early 2005, the process of eliminating the state support for innovation activities on the initiative of the Ministry of Finance began. The first step was to abolish stimulating articles of the Law "on Innovation Activity," and in the future, the mentioned law on the special regime of activity of the technological parks (the Law on TP) was blocked.

In March 2006, state support for TPs had been partially restored, but not fully: although the exemption from income tax and the payment of import duties had been in place, financial support and accelerated depreciation of fixed assets had already been abolished. Yes, it was denied in full or partial interest-free lending, in full or in parts compensation of interest, and in the future, the customs in violation of the Law on TP canceled the bill of exchange for VAT on customs clearance of imported supplies for TP projects.

118 • 2017/18 Knowledge Sharing Program with Ukraine As a result, the number of existing TP projects decreased 7-fold; in 2007, only 3% of the allocated state budget funds came to the technoparks (see Table 2-7).

Dynamics of Economic Indicators of Technological Park Activity in 2001–2008

Indicator 2001–2004 2005–2008

Realization of products under the projects Grew 10.2 times Grew 1.3 times of TP (million UAH)

Investment projects realization under the Grew 10.2 times Fell 1.9 times special regime (million UAH)

Supply for export Grew 4 times Fell 3.7 times

Creating new jobs Grew 2.6 times Fell 1.8 times

Transferred to the state budget Grew 16.6 times Fell 2.3 times (million UAH)

State support of technoparks Grew 7.1 times Fell 10.6 times (million UAH)

Source : Techno Parks, World and Ukrainian Experience (2009).

The given data testifies that the choice of the model of industrial parks in Ukraine was correct and the mistakes of some politicians should be corrected as soon as possible so as not to lose a rather high human and entrepreneurial potential. Practice has shown that the Ukrainian model of technology parks, "technology parks without walls" is an effective tool, that is able to fill the budget, raise production and not allow the country to fall to the level of the third world.

However, the innovative development of the national economy can not be based only on technological parks. It is necessary to solve a whole range of problems in creating an effective national innovation mechanism along with changing the mentality of businessmen and society as a whole.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 119 3.2.3. Industrial Parks

In Ukraine, there are heated discussions about the model of state support for industrial parks activity, taking into account the consequences of restricting the special regimes of investment activity for SEZ, TPD and Technoparks in 2005–2006.

Work on the draft law on industrial parks was started back in 2007, but frequent changes of government authorities slowed down this process, and only in 2011 the Verkhovna Rada's Committee for Industrial Policy and Entrepreneurship returned to the draft law, somewhat cut, and in 2012 the Law “on industrial parks” was adopted.

Some experts (VoxUkraine) argued that the IP creation did more harm than good to the country, taking into account that IP incentives are not only the opportunities for not paying taxes and duties to the budget, which reduce government revenues. The IP incentives create unequal rules of the game, which affect the whole economy.

On the other hand, many business persons, deputies and local authorities support the idea of parks as an instrument of de-offshoring the economy and one of the mechanisms for the management decentralization and support of local initiatives Victor Halasiuk, Peoples Deputy Head of the Committee for Industrial Policy and Entrepreneurship of the Verkhovna Rada of Ukraine.

MEDT is trying to use this tool to attract investment and increase business activity by ensuring a transparent and clear regulation of the registration of parks, receiving preferences and reporting on their effectiveness.

The State Strategy of Regional Development for the period up to 2020 determines the creation of a regional network of industrial parks and the provision of state support to actors, that create such parks, as one of the priority directions of the regions development.

The Basic Law of Ukraine "on industrial parks" (2012) defines the requirements for main subjects of the IP and the procedure for their registration, functioning and obtaining preferences. The initiator of the industrial park establishment should be:

–– a body of state power/local self-government or a legal entity or an individual; –– a land plot owner and have the right to dispose it (in case if it is a public authority or local government) or be the owner or tenant of a land plot (in case if it is a legal or fisiсal person); –– be able to use such a plot of land for the creation of an industrial park.

120 • 2017/18 Knowledge Sharing Program with Ukraine The following

shows the differences in development methods, procedures, and incentives according to initiator type in the development of industrial parks.

Key Factors of Developing and Functioning of IP by Types of Initiator

Company that rents Company that Local Private Key Factors/Initiator a land plot of local rents a private Authority Owner or state ownership land plot

Public financing for developing V V VV infrastructure

Ability for selling a land plots V X VX

Possible exemptions for land tax V X VX

Ability for lower rent rates V V XX

Possible exemptions for real estate V V VV tax

Note: V: possible, X: None Source: MEDT, Possible Models of Managing Industrial Parks in Ukraine.

One of the mandatory requirements for the initiator is the possession of the right to own or lease a land plot for the establishment and operation of an industrial park. Such a site must meet the following requirements:

1) belong to the land of industry; 2) be suitable for industrial use; 3) have an area between 15 and 700 ha.

In most cases, when creating industrial parks in Ukraine (for example, "Slavuta" and "Fasindastry"), the initiator as the owner transfers the land plot to the lease of the management company, and in turn - in the sublease to the participants.

Stages of Industrial Park Creation

Second stage: selecting the First stage: the initiation of Third stage: engaging management company and the decision to create participants and concluding concluding the agreement a park agreements with them with the initiator

• The initiator develops and • Open competition for • The company acquires approves the IP concept state/communal land the status of IP participant • Submit the concept to the • Own choice for private from the moment MERT property • May be included in the IP Register by application

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 121

Continued

Second stage: selecting the First stage: the initiation of Third stage: engaging management company and the decision to create participants and concluding concluding the agreement a park agreements with them with the initiator

• The concept of IP includes • A chosen legal entity • Concluding a contract with data: acquires the status of IP the management company –– name, initiator, purpose, management company on the implementation of task, functional purpose only from the moment of economic activities and the term for which it signing the agree-ment on • Acquiring the right to a is created; the IP establishment land plot and/or to another –– the location and size of • The initiator shall notify object (part of the object) the land plot; the Ministry of Economic of real estate within the IP –– development plan, Development and Trade in • The management indicative resources writing company notifies the required, expected MEDT in writing of the sources of their status of the participant involvement; –– organizational model and expected results of park operation and –– other information at the discretion of the initiator. –– requirements for participants; –– information on the estimated total volumes of energy consumption, water, as well as transport infrastructure and a plan for the provision of relevant resources.

Source: MEDT.

3.2.4. State Incentives for Industrial Parks

The initiator, management company and IP participants receive state support only if the park is included in the register of IPs. The main means of such state support are defined in Section VIII of the Law on Industrial Parks, Customs and Budget Codes of Ukraine, as well as in the State Strategy for Regional Development for the period until 2020. Today they are:

1) In the case of the construction of objects within industrial parks, initiators, managing companies and participants are not involved in the share participation in the development of the infrastructure of the settlement (the size of which may amount to 10% of the total estimated cost of construction non-residential and up to 4% - residential building);

122 • 2017/18 Knowledge Sharing Program with Ukraine 2) The law on the State Budget of Ukraine for the relevant year may provide for the initiators and managing companies the interest-free loans, targeted financing on a non-refundable basis for the construction of industrial parks;

3) Importation into the customs territory of Ukraine of equipment and components, materials that are not produced in Ukraine and are not excisable goods (hereinafter referred to as equipment), by initiators and management companies for the construction of industrial parks and by participants for the purpose of carrying out economic activities within their borders are exempt from customs duties;

4) Directing funds from the State Fund for Regional Development established within the State Budget for the implementation of investment programs and projects aimed at creating the infrastructure of industrial parks (subject to co- financing from local budgets at the level of 10%); and

5) The creation of a regional network of industrial parks and the provision of state support to the business entities that create them.

In addition, exemption from shared participation in the development of local infrastructure for the initiators of IP creation - business entities, management companies and participants of the industrial park to be provided. The construction of industrial parks is foreseen at the expense of the state and local budgets (the State Fund for Regional Development, in case if that they co-finance local budgets at the level of 10% of their estimated cost).

IP subjects may also take advantage of other benefits provided by legislation, in particular:

–– exemption from payment of import duties for the purpose of investing on the basis of registered contracts or as a contribution of a foreign investor to the authorized capital of an enterprise with foreign investments;

–– import at preferential rates of import duty (up to 0%) of goods originating from the member-states of the World Trade Organization, or from the states with which Ukraine has concluded bilateral or regional agreements on the most-favored-nation regime, incl. with the EU and Canada;

–– import without payment of import duty onequipment, which operates on renewable energy sources, energy saving equipment and materials, means of measuring, controlling and managing expenses of fuel and energy resources, equipment and materials for the production of alternative fuels or for the production of energy from renewable energy sources;

–– benefits from the payment of local taxes and fees (in accordance with

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 123 Article 266, paragraph 266.4.2, of Article 266, 284.1, 284, 288.5 of Article 288 of the Tax Code of Ukraine):

• from the tax on immovable property, different from the land plot, paid in the respective territory, • from objects of residential and/or non-residential real estate owned by individuals or legal entities by the decision of village, settlement, city councils (taken annually); • from the land tax paid on the respective territory by the decision of the relevant local government bodies (adopted annually); • establishment of the minimum rent for lease of land plots of state and communal property by the decision of the relevant local authorities (are adopted annually).

These incentives are to be provided for in an agreement on the creation and operation of an industrial park.

Thus, the territory of the industrial park can be considered as analogous to the special economic zone (SEZ), similar to the organization of scientific and technological parks.

Subjects of industrial parks, in addition to state support measures provided for in the Law of Ukraine "on industrial parks," can also use other instruments and mechanisms of support provided by the current legislation:

–– acquiring the right, based on the decision of local self-government bodies, on benefits from land tax and real property tax for IP subjects taking into account the public interests reflected in the program documents of economic and social development;

–– the establishment by the state and local governments of the minimum rental rate for the lease of lands of state and communal property;

–– assistance at the local level in the execution of all permits and other documents necessary for realization;

–– allocation of funds from the local budget to finance works on providing engineering infrastructure for certain plots of land or creating conditions for access to these plots;

–– organizational and financial participation of local self-government bodies in the training and organization of training of potential and existing employees of companies-subjects of industrial parks.

124 • 2017/18 Knowledge Sharing Program with Ukraine In addition, in accordance with paragraph 44 of subsection 4 of section XX "Transitional provisions" of the Tax Code of Ukraine for the period until December 31, 2021, the application of the zero rate of corporate income tax for taxpayers whose annual income does not exceed UAH 3 million, the amount accrued for each the month of the reporting period of wages (income) of employees is not less than two minimum wages and if they meet the following criteria:

a) formed in accordance with the procedure established by law after January 1, 2017;

b) those in which, during the three consecutive previous years (or during all preceding periods, if less than three years have elapsed since the date of their education), the annual income is declared in an amount not exceeding UAH 3 million and in which the average number of employees during this period the period ranged from five to 20 people;

c) which were registered by the payers of the single tax in accordance with the procedure established by law in the period up to January 1, 2017 and in which for the last calendar year the volume of proceeds from the sale of products (goods, works, services) amounted to three million hryvnias and the average number of employees was up to 50 people.

The history of the IPs establishment in Ukraine is short, most of the parks are in the stage of development, and information for a thorough analysis of the effectiveness of these processes is still not enough.

3.3. Barriers and Tasks for Development of Industrial Parks

3.3.1. Main Barriers for Doing Business in Industrial Parks

According to World Economic Forum’s Opinion Survey, the most problematic factors for doing business in Ukraine in 2017-2018 are the following: corruption, policy instability, tax rates, tax regulations, government instability/coups, access to financing, inefficient government bureaucracy.17)

Despite the rather higher ranks of technological readiness (81 out of 137), innovation (61 out of 137) and market size (47 out of 137), the Ukrainian environment for business needs to be considerably improved: Ukraine does not have good scores regarding financial market development (120 rank out of 137), protection of minority shareholders’ interests (129 rank out of 137), property rights (128 rank out of 137), efficiency of legal framework in settling disputes (116 rank out of 137).

17) The Global Competitiveness Report. WEForum, 2017-2018. – p. 296. – www.weforum.org.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 125 Additional vision gives the OECD study on SME policy in Ukraine:18) the Ukrainian private sector is confronted with a number of challenges and deep-rooted obstacles, including corruption, a weak investment climate and low levels of innovation and competition. In spite of a well-educated workforce, Ukraine has the lowest labor productivity in the entire Europe and Central Asia. The concentration of economic activity in a limited number of individuals and large conglomerates calls for a proactive approach to competition policy, as well as for SME development initiatives to level the playing field and encourage market contestability. A recent study confirms the low levels of firm entry and exit in the Ukrainian economy. It also reveals that FDI flows are not very different from those of much smaller economies, with limited development of export-oriented investments.”

A key challenge for Ukraine is the actual implementation of its reforms. A SWOT analysis shows some weaknesses and threats for effective SME policy implementation in Ukraine. They could as well negatively affect the opportunities to formulate and implement policy of IP development.

Weakness and Threats of Effective SME Policy Implementation in Ukraine

Weaknesses • Lack of comprehensive SME strategy, implementation agency or structured co-ordination • Outstanding regulation challenges (21 days to start a business; customs regulations; insolvency, up to 20% of management time spent on compliance) • Poor financial access is top constraint for business (e.g. low levels of firms with bank- financed working capital) • Lack of policy co-ordination and funding in the areas of innovation and business support • Weak capacity of justice system; corruption perceptions • Need for quality upgrading by exporting and non-exporting firms in the light of DCFTA opportunities

Threats • Conflict in the east affecting macroeconomic environment (Hryvnia devaluation, inflation, financial stability, etc.) and investment attractiveness • Debt sustainability, negotiations with creditors • Institutional instability in SME policy making (e.g. frequent changes in responsible agencies); initiatives adopted without funding or implementation • Lack of competition in key markets • High levels of informality, weak accounting and corporate governance standards

Source: MEDT.

18) OECD/European Union/EBRD/ETF (2015), SME Policy Index: Eastern Partner Countries 2016: Assessing the Implementation of the Small Business Act for Europe, OECD Publishing, Paris. – p. 330. http:// dx.doi.org/10.1787/9789264246249-en.

126 • 2017/18 Knowledge Sharing Program with Ukraine It is worth noting that in the absence of a strategic vision of structural changes in industry there was often a spontaneous search for ways of the enterprises surviving and their adaptation to new conditions in the regions. It also affected the slow development of industrial and technological parks.

Many issues have been accumulated in Ukraine regarding the ability of the state authorities to ensure effective regulation of parks (not only industrial, but technological, scientific, SEZ and TPD) and assessing the effectiveness of the implemented measures of IPs support and benefits received. From this point of view, ensuring a fair competitive environment for business as a whole, not only for the park participants, is a very important task.

Among the disadvantages there are: insufficient instruments of fiscal stimulation, minor privileges, no mechanism for direct state support of industrial parks (interest-free loans (loans), targeted financing on a non-reimbursable basis for the construction of industrial parks), and ineffective investment incentives.

3.3.2. Tasks for the Development of Industrial Parks

Recommendations of Baku International Industry Conference “Industrialization in the 21st century: trends, approaches and best practices in industrial policy” (2014) identify 10 guiding principles for governments regarding the development of industrial parks and clusters to ensure social, economic, and environmental sustainability.

1. First, take a long-term approach to assure partners of government commitment. 2. Second, the government should base its strategy on a critical assessment of the country potential, investment potential, and target groups. Countless examples show how clusters fail because of overly ambitious strategies. 3. Third, consider synergies and trade-offs among clusters, zones, and parks. Each has a different focus, and planners should consider carefully which best reflects the national or regional context and government objectives and priorities. 4. Fourth, consider economic, environmental, and social sustainability from the outset. 5. Fifth, maximize use of existing resources and skills. 6. Sixth, align the strategy, incentives, and regulatory framework. For instance, provide incentives that correspond to a park or cluster approach. 7. Seventh, explore different ways to attract investment and innovative businesses, such as custom-made facilities or services and investment in specific skills. 8. Eighth, remember that zones and clusters cannot replace comprehensive economic reform. Zones are, however, an ideal place to test reforms, policies,

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 127 and environmental standards. 9. Ninth, encourage parks and zones to cooperate and learn from each other. 10. Tenth, integrate zones and parks into the wider economy and use them to foster regional integration.

Thus, summarizing the above conclusions, we can propose the following tasks for activating the development of industrial parks in Ukrainian regions.

Barriers and Tasks for the Development of IPs in Ukraine

Barriers for the Development of IP Tasks to Overcome Barriers

Provide synergy between the key priority tasks of Lack of policy co-ordination and funding strategy documents: draft Strategy for Industrial in the areas of innovation and business Development, Strategy for SMEs Development, support Export Strategy, draft Strategy for Innovative Development

Slow upgrading of quality infrastructure Speed-up the adoption of international standards, & standards - an obstacle to entering and improvement of a quality system external markets

Diversifying financial instruments, attract domestic Weak access to financing and foreign investors

Strengthen dialog between regional authorities Inefficient government bureaucracy and business regarding IPs creation and development

Create favorable investment climate, attract well- Lack of investments known foreign companies to work in IPs

Strengthen competition policy. Difficult access to resources Provide accounting of the existing resource base in the regions at real prices as well as resource use

Outdated technologies, business model Strengthen cooperation with scientific and and infrastructure technological institutions

Ensure the selection of management companies Inefficient legal framework of settling that are able to protect the business in the disputes and its implementation industrial parks

Source: Author.

128 • 2017/18 Knowledge Sharing Program with Ukraine 3.3.3. Success Factors and Common Pitfalls of Industrial Parks

Speaking about Ukrainian industrial parks, we tried to assess the key factors of their success, having in mind such six key success factors used in practice in the industrial parks surveys: 1) its location, 2) the presence of leading companies; 3) stable and favorable fiscal system, privileges; 4) large labor force; 5) physical and institutional infrastructure; 6) qualified management.

Experts estimate the presence in Ukraine 3 to 5 success factors of the industrial park activity out of the six above mentioned key factors. There are: 1) location; 2) a large amount of labor force; 3) not so bad fiscal and institutional infrastructure, and 4) in some parks – availability of leading companies and qualified management.

The presence of an experienced management company as well as the cooperation between economics players, management and local stakeholders plays an important role in the development of industrial parks. 26 management companies are chosen in 41 existing IPs (as of June 2018) – thus in order to accelerate this process it is needed to improve regulations on the management company selection in IPs.

Available information on the development of industrial parks to assess the effectiveness of government policy on IP support is not enough. In order to assess the barriers and the drivers of the industrial parks development, it is suggested to conduct an additional survey of managers and participants of the parks in accordance with the developed questionnaire, as well as to expand the list of economic indicators of their activities.

4. Analysis and Implications of Korean Experiences on IP 4.1. Development History and Current Situation of IP in Korea

Industrial parks in Korea have been developed under Korea’s industrial policies. Aligned with economic development policies and changes in industrial structures, industrial parks for export industries were developed in the 1960s to implement the strategy to achieve industrialization through exports, and large-scaled coastal industrial parks were developed in 1970s according to the policy to foster heavy and chemical industries. The “Masan Free Export Area” started in 1970 was one of first successful industrial parks in Korea. In the 1980s, local industrial parks and agricultural industrial parks were established to promote the balanced national

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 129 development, and various types of industrial parks were developed in the 1990s to meet the needs of newly emerged IT and knowledge-based industries. Since 2000s, the government has implemented the policy to foster industrial parks as specialized clusters designed to foster high-tech industries and reinforce the knowledge-based economy.19) The old “Guro Industrial Complex” which is Korea’s first industrial complex, established in 1967 was transformed into an ICT cluster and renamed as “Seoul Digital Industrial Complex” in 2000. Its major businesses also are being changed from textiles and apparel to contents (Game, animation), IT, SW, Mobiles, Electronics, Bio, Medical Applications, Education and Printing.

Overall, the Korean industrial complex was formed mainly in export-oriented heavy industries in the coastal area and in light industries in the inland areas. The development of the Korean industrial parks has been expanded to Gumi, Ulsan and Guro industrial complexes in the area of heavy chemical industry in 1964. Changwon and Gumi have been developed based on steel industry and machine industry development. In the 1970s, industrial parks were formed mainly in the electronics industry, and in the 1980s, after the suppliers for the development of the auto parts industry took their place, Banwol and Sihwa industrial parks followed. In the 1990s, industrial parks such as Gunsan, Daebul and Asan have been formed centering on machinery industry and automobile related industries (see Table 2-11).

History of Korea’s Industrial Location Policies

1960s 1970s 1980s 1990s 2000s

Stage of The formative The stage of The stage of The stage of The stage of Development stage of the expansion of adjustment of acceleration growth and foundation the foundation industrial structure of industrial expansion for industrial for heavy development of industrial development and chemical development industries

Policy –– Government –– Government –– Industrial –– Opening and –– Fostering of the Guidelines -led export -led heavy rationalization the private- knowledge- policy with a and chemical of heavy and led economic based industry focus on light industry chemical operation (the and future industries promotion industries first half) industries –– Expansion of policy –– Development of –– Industrial –– Transformation SOC tech-intensive restructuring into the industries into under IMF innovation-led export industries guidances economy and (the second the balanced half) development of various sectors

19) Hyeyoung Cho, 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, 2012, p. 32.

130 • 2017/18 Knowledge Sharing Program with Ukraine

Continued

1960s 1970s 1980s 1990s 2000s

Key –– Textiles, ports, –– Petrochemical, –– Semiconductors, –– Promotion of –– ICT, gaming Industries electric products steel, electronics and the software and bio and shoes motors and motors industry with industries machinery a focus on industries services –– Development of semiconductors, precision chemistry and automation programs Location –– Planned location –– Development –– Improvement of –– Diversification –– Specialized Policies development of large-scale internal stability of types of clusters program industrial of industrial locations –– Support for the –– Locations for parks as heavy parks –– Eased knowledge- export-centered and chemical –– The balanced regulations on based economy light industries industrial national locations and clustering parks development –– Renaming of –– Improvement of –– Controlled –– Development of industrial parks competitiveness development Agricultural & –– Streamlining of of existing of the Seoul Industrial Parks development parks Metropolitan procedures Area Applicable –– Comprehensive –– The Local –– The Seoul –– The Industrial –– The revised Laws national land Industry Metropolitan Location Act Distribution of development Development Area Planning –– The Distribution Industry Act plan Act Act of Industry Act –– The Cultural –– The Act on –– The Industrial –– The Small-and –– The revised Industry Development of Complex Medium-Sized National Land Promotion Act Export Industrial Development Enterprises Utilization –– The National Parks Promotion Act Promotion Act Control Act Land Planning –– The Machinery –– The –– The Agricultural –– The Act on and Utilization Industry Distribution of and Fishery Special Cases Act (2002) Promotion Act Industry Act Income of Industrial –– The Development and Technical Shipbuilding Promotion Act Complex Industry –– The Industry Support Promotion Act Development –– The Electronics Act Industry Promotion Act Remarks Development of Local Industrial Southwestern Increase of Urban High-Tech Ulsan Industrial Development Large-Scale locations of Industrial Parks Complex Promotion Zones Industrial Complex individual Cultural Industrial Southeastern Development of businesses Parks Large-Scale Agricultural & Development of Foreign Industrial Industrial Parks Techno Parks Investment Zones Complex Construction of High-Tech & Bio Development of Apartment-type Park Free Export Zone Plants (Flatted Factory)

Source: KICOX, 2010 Handbook on the Industrial Location, (2009).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 131 Industrial parks in Korea can be categorized into national industrial parks, ocal industrial parks, urban high-tech industrial parks and agricultural industrial parks (see Table 2-12).

Types of Korean Industrial Parks

Designated Types Authority Purpose of Designation Target Region Holder

National Minister of To promote the nation's key industries Underdeveloped Industrial Land, Transport and high technology industries, etc. regions requiring Parks and Maritime or to develop underdeveloped areas promotion of Affairs requiring promotion of development development, or areas where planned industrial and regions with parks are stretched over two or more infrastructure of Special Metropolitan City and advantages for the Metropolitan Cities high-tech industry

Local Heads of To promote appropriate A region requiring Industrial Regional Local decentralization of industries and to balanced development Parks Governments activate of local economies (at the city and provincial level)

Urban Heads of To foster and promote development Urban regions with High-Tech Regional Local of the knowledge industry, the advantages for fostering Industrial Governments cultural industry, the information the high-tech industry Parks and communications industry and other high-tech industries

Agricultural Mayors or To attract and promote industries A region having an Industrial Governors of for increasing income of farmers/ advantageous location Parks Gun fishermen in agricultural and fishing in cities and counties areas prescribed by Presidential Decree

Source: Hyeyoung Cho, 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, p. 57, (2012).

In addition to the general types of industrial parks, there are planned areas that are constructed for special purposes. Foreign Investment Zones for facilitation of foreign investments; Free Trade Zones that are developed to activate free trades of goods and products by reinforcing logistics functions of industrial parks; and Free Economic Zones that are developed to significantly improve living and investment conditions for foreigners are also classified as planned locations. There are more types of planned locations, including Techno Parks, also dubbed Industrial Parks, which are developed to stimulate local innovation by facilitating cooperation among industry, academia and research (see Table 2-13).20)

20) 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, 2012, p. 58.

132 • 2017/18 Knowledge Sharing Program with Ukraine

Other Types of Industrial Parks

Designation Types Authority Purpose of Designation Target Region Holder

Free Trade Minister of Attract foreign investment, promote A region surrounding a Zone Knowledge trade and promote local development harbor, an airport and Economy an existing industrial park

Foreign Mayors and Promote attraction of foreign An industrial park and Investment governors of investment a region where foreign District provinces investors wish to invest

Free Minister of Improve business and living A region having a Economic Knowledge conditions for foreign investors high possibility of Zone Economy foreign investment and settlement of foreigners

Industrial Minister of Joint technology development and A region having a high Technology Knowledge activation of local economies through possibility of clustering Park Economy clustering industry, academy and and connection of institute industry, university and institute

Source: Hyeyoung Cho, 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, p. 59, (2012).

As of the first quarter of 2018, there are 1,193 industrial parks in Korea and 1,408 km2 of designated areas are occupied. Tenant companies are 96,587 (3.4%, compared with the previous year). Their employments are 2,164 thousand people (0.4%, compared with the previous year), and productions are 261 trillion won (0.6%, compared with the previous year). Exports are USD 101.7 billion (1.0%, compared with the previous year) and parceling-out rate is 94.6%.

Situations of Industrial Parks in Korea (as of Q1 of 2018)

parceling- Tenant Working Production Export Employments out rate companies tenants (100 Mil KW) (Mil USD) (%)

Q1 2018 96,587 88,032 2,163,663 261,217 101,720 94.6

Q1 2017 93,377 85,795 2,155,339 259,712 100,666 94.1

compared with the 3.40% 2.60% 0.40% 0.60% 1.00% 0.50% previous year

Source: KICOX, Statistics of Industrial Parks in Korea, (2018).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 133 The parceling-out rate of the National Industrial Park is the highest at 98.0% and the Urban Hi-tech Industrial Park is only 58%. Employment (51.7%), production (55.3%) and export (51.9%) of the national industrial parks account for more than half of all industrial parks, and local industrial parks accounts for 39.8% of production and 44.3% of export of all industrial parks (see Table 2-15).

Performance of Industrial Parks by Types in Korea (as of Q1 of 2018)

designated parceling Production Employ Export Types Numbers areas Tenants -out rate (100 Mil 2 -ments (Mil USD) (thoum ) (%) KW)

National 44 786,309 51,279 98 1,118,709 144,396 52,822

Local 652 538,219 37,765 91.3 886,050 104,016 45,093

Urban 27 7,348 443 58 9,769 338 1,149 High-Tech

Agricultural 470 76,031 7,100 94.6 149,135 12,472 2,656

Total 1,193 1,407,907 96,587 94.6 2,163,663 261,217 101,720

Note: Among 1,193 industrial parks, KICOX is responsible for 61 parks. Source: KICOX, Statistics of Industrial Parks in Korea, (2018).

4.2. FDI Attraction Policy and Performance in Korean IP and SEZ

Korean industrial parks have contributed to the rapid development of Korean economy. As of 2012, Korea's industrial complex accounted for 69% of the total manufacturing industry, 81% of exports, 47% of employment, and has been increasing steadily since 2000 (see Figure 2-7).

[Figure 2-7] Contribution of Industrial Parks to Manufacturing in Korea (Unit: %)

81 80 79 69 69 59 60 62 51 52 47 42 37 29 31

2000 2003 2006 2009 2012 exports production employment

Source: KICOX, Performance and Development Tasks of 50 years of Industrial Parks, p. 161.

134 • 2017/18 Knowledge Sharing Program with Ukraine Korea enacted the Foreign Investment Promotion Act in 1998 and since then, it has turned its direction from limited and regulated foreign investment policy to open and support oriented policy and has been making efforts to attract foreign capital by promoting foreign direct investment. To this end, we have focused on attracting large-scale foreign investment by focusing on the quantitative expansion of foreign direct investment and implementing incentive policies based on investment amount.

However, as the strategy to attract foreign investment has been gradually shifted in order to improve the quality of investment, the foreign investment has been expanding the global competitiveness and growth potential of the Korean economy by increasing the investment quality through investment attraction of high value- added industries. Korea is making efforts to make Korea a top 10 global investment power, ultimately by creating and operating a foreign investment policy.

The Korean government has also very actively promoted FDI attraction policy in the field of industrial park. Korea has developed many other types of industrial parks to attract foreign investments (see Table 2-16). In particular, since 1989, foreign investment has been rapidly declining due to deterioration of the domestic investment environment. In order to promote investment of foreign companies possessing advanced technology, a foreign-owned enterprise-only complex was introduced in 1994 and foreign investment zones (FIZ) have been introduced for the purpose of designating the region that the investor desires. Both schemes were introduced with different introduction periods and laws, but they had common points for the purpose of promoting foreign investment. As a result, the Foreign Investment Promotion Act was amended (Dec. 31, 2004) to be unified into foreign investment zones. There are 25 park-types and 80 individual-types, and foreign companies in FIZ mainly invested in manufacturing (see Table 2-16).

Situation and Incentives of other Types of Industrial Parks

Foreign Investment Types Numbers Main Incentives Companies

Free 8 164 • Tax Exemption of Corporate, Economic (Incheon 50, Income Tax (7 years), Zone Pusan-Jinhae 58, Custom (Capital Goods 3 years) Gwanyang Bay 39) • Selling in lots (Rent also possible) • Possible to sell less than business site cost, Reduction of Rents of state-owned land • Support in construction of access road, school and subsidy to management authority

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 135

Continued

Foreign Investment Types Numbers Main Incentives Companies

Free Industrial Park 7, 202 • Tax Exemption of Corporate Trade Sea Port (5) & (Industrial Park 110, Income Tax (7years), VAT and tariff Zone Airport (1) Logistics 92) reservation • Reduction of Rent (1% of Land price) • Industrial park: Hi-tech 100% • Land Buy Cost (National Budget support up to 75% • Support in Infra

Foreign Industrial Park 25, 311 • Tax Exemption of Corporate Invest Individual Type 80 (Industrial Park 245, Income Tax (IP 5 years, Individual 7 Zone Individual Type 66) years), Custom (Capital Goods 3 years) • Reduction of Rent (1% of Land price) • IP: Hi-tech 100%, General 75%. Individual: 100% • Land Buy Cost (Capital 30%, Rest 60%) • Support in Employment and Training and Infra

Source: KICOX.

Situation of Foreign Investment Zone in Korea

Sector FDI Volume Number of Companies

More than 1 Billion USD 23

Manufacturing 40–100 Million USD 23

Less than 40 Million USD 22

Tourism More than 20 Million USD 9

Logistics More than 10 Million USD 3

Source: KICOX.

The larger industries in the park-type and individual-type foreign investment areas are 76 petrochemical companies, 60 machinery companies, 56 transportation equipment companies, and 52 electric and electronic companies.

136 • 2017/18 Knowledge Sharing Program with Ukraine

Situation of Foreign Investment Zone in Korea

Designated Used FDI Type Number Space Tenants Employment 2 Space (mil USD) (thous m )

Park 25 8,036.0 5,927.9 211 17,683 2,612.5

Individual 80 8,875.5 8,875.5 80 12,133 6,576.5

Service 1 0.35 0.35 1 7 0.2

Total 106 16,913.85 14,805.75 292 29,823 9,189.2

Source: Ministry of Industry, Trade and Resources (2018), KICOX, Statistics on Current Situation in Industrial Parks in Korea (2018).

The performance of FIZ has been not bad in terms of production, export and volume of FDI, but the production and export has been stagnant since 2012 (see Table 2-19). However, the performance of FIZ is much better than that of industrial parks. The reason why the performance of foreign investment zone is much higher than that of industrial parks in the production, export and employment indicators is that there are many industrial parks and agro-industrial parks with high proportion of SMEs and the investment size of individual type FIZ larger than general IPs (see Table 2-20).

The proportion of FIZ investment relative to Greenfield-type investment was 7.47% in 2007–2016.

Performance of FIZ in Korea

Year 2007 2008 2009 2010 2011

Production (100mil Won) 124,130 176,279 215,545 256,668 200,164

Export (mil USD) 20,454 9,311 13,333 14,890 9,885

FDI (mil USD) 5,229 5,831 6,285 7,085 6,933

Year 2012 2013 2014 2015 2016

Production (100mil Won) 205,006 222,324 222,298 220,641 220,454

Export (mil USD) 10,147 10,904 10,877 9,422 10,235

FDI (mil USD) 6,164 6,687 7,800 9,145 9,189

Source: KICOX, Performance and Tasks for Improvements in Forei\gn Investment Zones in Korea (2017).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 137

Comparison of Performance per Company between Industrial Parks and Foreign Investment Zone

Production (100mil Won) Exports (mil USD) Employments

IP FIZ IP FIZ IP FIZ

106 757 3.9 35.1 23.29 102.5

Source: As of end of 2016, KICOX.

Actually there has been a slump in inviting foreign investment in Korean SEZ. For 10 years since 2004, number of foreign firms and amount of FDI increased 6.9% and 21.2% respectively. The level of Korea’s FDI to GDP was 12.8% in 2014 which is lower than that of Netherlands (76.7%), that of UK (56.5%) and that of USA (31.1%).

[Figure 2-8] FDI Amount and Types in Korea (Unit:million $) 25,000 Manufacturing Service Etc 20,000

15,000

10,000

5,000

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

25,000 Manufacturing M&A Manufacturing Greinfield Service M&A Service Greinfield 20,000

15,000

10,000

5,000

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: KICOX.

138 • 2017/18 Knowledge Sharing Program with Ukraine

Comparison of Business Environment Level in Major Asian Special Economic

Employ Living Geogra Gov’t Admini Land Human -ment Tax Market Industrial Condition -phical Regula -stration Price, Re- condition, Incen- Total Access Infra (Medical, location -tion Service Rents source Labor tive School) relations

Korea (FEZ) 3.73(4) 3.59(4) 2.88(9) 2.96(9) 3.40(5) 3.06(6) 3.33(8) 3.33(7) 2.79(9) 3.18(9) 3.22(6)

Singapore 4.53(1) 4.41(2) 4.16(1) 4.31(2) 4.22(1) 4.47(1) 3.75(1) 4.09(1) 4.06(1) 4.06(1) 4.21(1)

Hong Kong 4.41(2) 4.47(1) 4.06(2) 4.44(1) 4.03(3) 4.19(2) 3.56(3) 4.00(3) 4.00(2) 3.25(6) 4.04(2)

Shanghai 4.31(3) 4.28(3) 3.63(3) 3.59(3) 4.13(2) 3.66(3) 3.84(2) 4.03(2) 3.53(3) 3.47(3) 3.85(3) (FEZ)

Shenzhen 3.63(5) 3.50(5) 3.38(4) 3.22(5) 3.50(4) 3.38(4) 3.50(4) 3.56(4) 3.28(5) 3.25(7) 3.42(4)

Kaohsiung 3.41(6) 3.44(6) 3.38(4) 3.41(4) 3.34(5) 3.31(5) 3.34(7) 3.38(5) 3.38(4) 3.38(4) 3.38(5)

Batam, 3.09(9) 3.06(8) 3.28(6) 3.09(6) 3.00(7) 2.91(8) 3.38(6) 2.88(8) 2.97(7) 3.22(8) 3.09(8) Indonesia

Iskandar, 3.22(7) 3.00(9) 3.16(7) 3.06(7) 2.88(8) 2.94(7) 3.44(5) 2.88(8) 2.88(8) 3.34(5) 3.08(9) Malaysia

Maharashtra, 3.19(8) 3.22(7) 3.13(8) 2.97(8) 2.88(8) 2.88(9) 3.31(9) 3.47(6) 3.16(6) 3.50(2) 3.17(7) India (SEZ)

Source: KOTRA, Invest Korea.

The level of the business environment in Korea's representative economic special zone, the Free Economic Zone, was found to be at the bottom of 6 of 9 major economic special zones in Asia. According to Korea Economy Institute’s research, the business environment of Korea's Free Economic Zone was evaluated to be lower than that of competitors, as a result of a survey of 274 foreign-invested companies and 128 companies in the Special Economic Zones. The highest level of corporate management was in Singapore, followed by Hong Kong, Shanghai Pudong, Shenzhen, China, and Kaohsiung, Taiwan. In particular, Korea ranked the lowest among the nine countries in terms of government regulation, administrative services, employment conditions, labor relations, and tax incentives. Other items were 4th in geographical position, 4th in market accessibility and 5th in industrial infrastructure.

The SEZ is currently saturated, emphasizing the creation of an environment that can efficiently perform the business as a whole, rather than providing incentives as in the past. Currently, there are 4,200 special economic zones in the world (as of the end of 2014), and competition is severe and many cases of failure have occurred due to the saturation of such special economic zones. (Shanghai SEZ is also not successful).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 139 It is not possible to improve the attractiveness of SEZs by providing incentives such as abundant infrastructure construction, industrial park construction and tax reduction.

Therefore, the creation of an environment that enables global companies to conduct their business in the most efficient and effective manner is an important factor. In particular, the deregulation that is close to the regulatory free zone is considered to be necessary.

The reason why FDI Performance of Korean SEZ is not successful are as follows:

–– Over-overlapping designation in terms of Regional Equity –– Lack of Differentiation among SEZs –– Weak comparative advantage of production costs and investment incentives with competitor countries –– Excessive administrative regulation and Poor administrative service –– Inefficient project promotion and management system by public institutions

[Figure 2-9] FDI Regulatory Restrictiveness Index

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00 Italy Peru India Chile Israel Spain Brazil Latvia Japan Egypt Korea Russia France Turkey Jordan Ireland Tunisia Poland Greece Iceland Mexico Estonia Finland Austria Norway Canada Ukraine Sweden Belgium Slovenia Portugal Hungary Vietnam Malaysia Romania Australia Morocco Germany Denmark Lithuania Myanmar Indonesia Mongolia Colombia Argentina Cambodia Costa Rica Philippines Kyrgyzstan Switzerland Kazakhstan Netherlands South Africa Luxembourg Saudi Arabia New Zealand United States Czech Republic Slovak Republic United Kingdom OECD - Average china(peolpe’s republic of) lao people’s democratic republic

Source: Korea Economic Research Institute, Performance Analysis and Investment Activation Tasks in Korean Special Economic Zone (2015).

140 • 2017/18 Knowledge Sharing Program with Ukraine

Comparison of Tax Incentives with Major Competitor SEZs

Korea Hong Shanghai Kaohsiung, Singapore (FEZ) Kong (FEZ) Taiwan

Highest 35% 20% 15% 45% 40% income tax (Foreign companies can (0–20%) rate choose 17% single tax rate or general tax rate)

Corporate 22% 17% 16.5% 25% 17% tax rate (2009: 25% → 2010: (2007: 20% → (High-tech 22%) 2008: 17%) Industry: 15%)

Tax For over a certain size Flexible None 100% 2 years, Corporate exemption of foreign-invested decision by 50% 3 years Tax companies, 100% case (up to Exemption corporate income tax 15 years 5 years on 3 years and 50% exemption) Land tax/ reduction on 2 years Building tax * Large-scale reduction, investment: 7 years Import tax reduction reduction

Targets Foreign companies All domestic Domestic Domestic Domestic of Tax and foreign and Foreign and Foreign and Foreign exemption companies companies companies companies approved by EDB

Sectors Manufacturing, High-tech - High-tech - of Tax Logistics, Tourism, R&D, Industry, R&D, Industry exemption Medical Finance, MNC Operating Headquarters

Source: Korea Economic Research Institute (2015).

[Figure 2-10] First Policy Task for Attracting Foreign Investment in Korean SEZ (Unit: %)

the free zone and One-Stop-Service 18.2%(46)

Differentiating of institution 16.2%(41) reflecting local peculiarities Providing tax incentives and sites at 16.2%(41) competitive level Integration of the management, 15.4%(39) operation and public relations system integrating and linking similar and duplicative 25.7%(65) special zones focusing on competitive special zones Lowering of wage level and enhancement of 6.7%(17) flexibility in labor market

etc 1.4%(4)

Source: Korea Economy Institute Survey (2014).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 141 In order to attract to FDI, Korea adopted a many administrative support service. Firstly, the Ministry of Industry and Trade introduced one stop service for attracting FDI in 1998. Additionally, the Office of the Foreign Investment Ombudsman, which was established in 1999, aims to resolve the grievances of foreign-invested companies operating in Korea.

4.3. The Role of KICOX

The government established Korea Industrial Complex Development Corporation (KICOX) as the wholly owned corporation of the government by investing KRW 100 billion in 1974. The KICOX was granted to take authority to give tax reductions and expropriate land, and to take loans with approval of the Minister. Development of heavy and chemical industrial parks of Korea was financed with development funds recognized as the special account by the central government, and KICOX operated the development projects upon consignment, easing burdens on project operators in relation to the initial investments or return of investments.

Driven by need for a new governance system and the policy to improve the national competitiveness by 10%, which was being implemented at that time, five management organizations were merged as a management body. The task force team for integration of industrial park corporations was organized, and the team coordinated matters related to HR and organization operation, establishing KICOX on January 10, 1997. As of the date of establishment, KICOX consisted of the head office and five regional headquarters.

[Figure 2-11] Primary of Duties of KICOX

Advance of the support Development of industrial services for tenant companies complex and expansion of - Industrial Location Research Institute support facilities - Business support center - Creation of customized industrial space - National factory establishment support center - Construction and operation of apartment-type - Local investment support center factories (Knowledge Industry Center) - Construction and operation of joint logistics center - Foreign investment zone lease service

Academia-industry-research Efficient industrial complex cooperation network management and operation - Improvement of the competitiveness of - Sales and management of industrial complex industrial center - Advances of industrial complex structure - Operation of a comprehensive mini cluster - Establishment of Eco-Industrial Park - Academia-industry-research integrated information network

Improvement of the competitiveness of industrial complex and tenant companies

Source: KICOX.

142 • 2017/18 Knowledge Sharing Program with Ukraine KICOX has expanded various programs under the shifted paradigm for development of resident enterprises and industrial parks. The primary services of KICOX included sales of industrial sites, residence management and follow-up management, which have been provided by the first industrial park corporation, and new services such as establishment and operation of apartment-type factories (flatted factories), labor and financial support, support for factory establishment of individual firms and support for transfers of businesses located in the Seoul Metropolitan Area to local sites have been added since integration of the management organizations.21) Recently, cluster development, development of eco-industrial parks, restructuring of old industrial parks added to services of KICOX.

The Korean government had to supply large-scaled locations to the industry in order to promote the process industry, and supplier-centered large-scaled industrial parks were developed in a standardized manner. However, with the growing demand for small- and mid-sized industrial locations, KICOX has supplied small- and mid-sized industrial parks customized for users as well.

As the demands for IPs in Seoul Metropolitan Area and Ulsan are comparatively high, the new development of new industrial parks locations has been concentrated to these areas such as Incheon, Yangju, Osong and Ulsan.

5. Policy Actions and Recommendation

Based on analysis of Ukrainian industrial parks in chapter 3, problems of Ukrainian IPs can be summarized as following [Figure 2-12]. First, the Ukrainian government did not show strong policy capacity on industrial parks. Industrial park policies are not organically linked to long-term industrial policies and regional development policies based on regional characteristics. There is no dedicated public corporation in charge of industrial parks, and the department of MEDT has fewer professional staff. Second, there is a shortage of financial resources for industrial park construction and infrastructure construction. The central government’s budget ratio is less than 25%. Third, laws related to industrial parks are not well arranged. There is no legislation yet on the locations of the industrial parks, and overall there is a lack of incentive measures to attract foreign investment. The act on the evaluation procedure for the performance of the industrial parks has not yet been established and there is no R&D tax credit regime for encouraging technological innovation. Fourth, the governance of industrial parks is still weak. The management companies don’t have high level of expertise and the government does not have an evaluation system to prevent the clutter of industrial parks. Fifth, even though many industrial parks are still under

21) Cho, Hyeyoung, 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, 2012, p. 82.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 143 construction, there is still a lack of effective economic instruments for making cluster effects and diminishing negative side-effects on investment climate outside the park (negative spillovers and crowding out).

[Figure 2-12] Problems of IPs in Ukraine and Policy Suggestions

Effective Operation of IP FDI Attraction ㆍResearch-Industry Cluster ㆍSuccessful Supplier Development Program Lack of Effective Economic ㆍTechnology Road Mapping Instruments for IP ㆍInnovation and Incubation System

ㆍEffective IP Evaluation System Weak IP Governance ㆍReforms of excessive policy ㆍProfessional Management System regulations & Ineffectiveness of Structure Administration service ㆍEffective Aftercare Service ㆍSystemization of IP sites ㆍTax Incentives ㆍEfficient Tax Incentive Not well-arranged Legal ㆍPartnership with FDI-related ㆍR&D Tax Credit Regime Framework organisations in targeted countries ㆍImproving Living Conditions for ㆍPPP Foreigners ㆍImproving Competitiveness for FDIs Lack of Financial by Attracting more Domestic Firms ㆍPowerful Leadership and Extensive Resource for IP Support of Central Government (Introduction of Public Corporation for IP) ㆍSelection and Application of Appropriate Weak Policy Capacity ㆍSelection and Focusing Strategy ㆍIntroduction of Special Governance Development Strategy of Government ㆍIntensification of Gov't Support System Zone

Source: Author.

5.1. Policy Actions for Successful Operation of Ukrainian IPs

5.1.1. Strengthening Policy Capacity

5.1.1.1. Powerful Leadership and Extensive Support of the Central Government: Establishment of UICOX

The success of the industrial park strategy in Korea was fully supported by the central government and the strong commitment of the national leader. In the early 1960, then-President Park Chung-Hee directly managed development of industrial parks. Development of industrial parks was a large-scaled project requiring a huge budget for land expropriation and infrastructure building, so enthusiasm of the national leader and the efficient administration system were critical for the success of the policy.

The Korean government has established proper organizations to develop industries. The Heavy and Chemical Industry Promotion Committee chaired by the Prime Minister and the Planning Office of Heavy and Chemical Industry Promotion Committee

144 • 2017/18 Knowledge Sharing Program with Ukraine and Korea Industrial Park Development Corporation (now Korea Water Resources Corporation as a working group was organized in 1970 and established KICOX in 1974. Strong commitment and full support of the central government became critical backgrounds for the success of industrial park development strategies of Korea.

It can be recommended to establish public enterprises (UICOX) such as Korea's KICOX in Ukraine, which is responsible for the development and management of industrial parks. In Korea, the role of KICOX is mainly to support the process of moving in to the industrial parks and to support tenant enterprise. Regional public corporations such as LH and SH are mainly involved in the development of industrial parks as developers and in the case of small-size IPs development many private companies participate in development of IP. It is also important to establish an organization such as Invest Korea, which is responsible for attracting foreign investment. UICOX should play important role in exemplary IPs development at initial stage and provide IPs with professional management services and attracting FDI in cooperation with Ukraine Invest.

It would also be suggested that the MEDT continue to cooperate on the development of Ukrainian industrial parks with KICOX, which has accumulated a lot of experience and expertise. The KICOX made a significant contribution to developing countries especially in the field of EIP. In 2012, KICOX participated in projects to support green growth in developing countries with the World Bank and transferred the knowledge in the development of the Chittagong industrial park in Bangladesh and in 2016, was selected as an industrial symbiosis consultant for the pilot project for resource efficiency in the Hoa Khanh industrial park in Danang, Vietnam.

If the second year of the KSP project is approved, it will need to be included in the agenda for the establishment of KICOX-type public cooperation in Ukraine.

5.1.1.2. Selection and Application of Appropriate Development Strategy for Stage of Economic Development: Making a Comprehensive IP Development Program

The Korean government adopted unbalanced economic development strategy and focused on the primary industry because of deficient industrial infrastructure and locations in the 1960s. In the 1970s, the government placed large weight on heavy and chemical industries. New industrial parks for these industries were constructed in some coastal area to facilitate exports.

However, unbalanced and centered on large IPs development policy enlarged the regional imbalance. Thus government has to change policy directions since the

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 145 1980s. New IPs were constructed in less developed areas. In the 1990s, many techno parks were developed because IT industries emerged and hi-technology demand enlarged. In the 2000s, the government implemented the strategy to provide various specialized industrial parks for promotion of new industries.

The government of Korea has achieved a remarkably fast economic growth through policies that match economic conditions. Not all of the industrial park strategies of the Korean government have been successful, but the government has implemented policies with strategic consideration to selection and focusing.

MEDT does not have comprehensive industrial park development program reflecting the real situation in Ukraine. In this context, the MEDT’s working meeting held in June 28, 2017 has great significance. That meeting considers a cluster industrial development program as a fundamentally new strategy.

[Figure 2-13] Conceptual Framework for Cluster Industrial Development Program Synergies

Regional Economic development development policy policy

3 main joint vectors of regional and economic development Infrastructure development Innovation development Cluster development

Source: MEDT.

MEDT has to prepare a comprehensive industrial development program which can provide a two-way communication between the tasks of the IP development and the National Waste Management Strategy-2035, the Industrial Development Strategy-2025, as well as local infrastructure development plans.

5.1.1.3. Intensification of Government of Support System: Incentives Inducing Technology Transfer

In Korea, the benefits provided by the government consist of the support system for developers of industrial parks and the tenant companies. The support system for developers includes partially supporting development cost of industrial

146 • 2017/18 Knowledge Sharing Program with Ukraine parks and providing legal and administrative to enable easy acquisition of land for development of industrial parks. The support system for tenant companies includes tax benefits at the time of land acquisition and low-interest loan arrangement for land purchase.

[Figure 2-14] Support System for Industrial Parks in Korea

Support system for development of industrial parks

Support system for developers Support system for resident enterprises

Financial support / Support for Tax and financing Installation of Payment of expenses land development support welfare facilities

Restriction Support Exercise Public Subsidy Accep- on for of Support Welfare Service admini- Low for tance disposi- Tax Adjacent building the land for and facilities strative interest public of tion redemp- living of expropria- operating medical for and financing facility advance of national tion facilities infra- tion fund facilities producers treatment expense payment public structure right facilities land

Source: AKICOX, Industrial Park Development in Korean Economy, 2011, p. 56.

There are discussions on the improvement of the industrial park support system in Korea.

First, we need to construct a supply system of industrial park sites through activation of private participation. Since the enactment of the Special Act on Licensing of the Industrial Parks in 2008, the development of industrial parks by the private sector is increasing rapidly. In the future, it will be necessary to develop a policy that will enable more efficient development of industrial parks by private enterprises. Also, the simplification of procedures suitable for the development of small scale industrial parks by corporations which has real demands, and deregulation of land use such as securing green spaces and infrastructure.

Second, we need to supply industrial parks to upgrade the industrial structure and foster new industries. It is necessary to supply urban high-tech parks, small- scale industrial parks in urban centers and surrounding areas in order to supply industrial sites in response to changes in the industrial environment. Urban high- tech complexes linked with universities and research institutes should be supplied to the city center. In addition, the new industry requires advanced manpower, and it is necessary to pursue a strategy of remodeling and supplying the existing industrial parks in the city center for the new industry to employ them.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 147 Third, we need to develop and manage sustainable industrial parks. Another challenge to be addressed is the development of industrial parks in harmony with the environment. As the importance of advanced manpower to lead technological innovation increases, industrial parks should be equipped with residential, cultural and educational facilities and should be harmonized with the city in terms of landscape.

The speed of developing IP in Ukraine is very slow mainly because of limited financial resources. Acquisition tax, registration tax and property tax may be exempted for the land purchased by developers of industrial parks in Ukraine like Korea. For rapid execution of the industrial park development project, the state and local governments may reduce or exempt the expenses.

In Ukraine, due to the failed experience of SEZ, MEDT has negative perspectives on the use of tax incentives to attract foreign companies into industrial parks. In fact, it is difficult to see that the incentive for taxation has a great effect on Korea's experience. However, financial assistance to foreign tenants for promoting development of the national key industries, technology development, quality improvement, the high-tech industry should be provided. Notably, low-interest financing for the projects of tenants foreign companies in Techno IP and EIP should be considered.

There lacks welfare facilities for tenants foreign companies in Ukraine. Service facilities for producers like public administration institutions, management offices, banks, welfare facilities like labor welfare halls, medical facilities like hospitals and living facilities like supermarkets and restaurants should be included.22)

5.1.2. Activation of Public-Private Partnership

Industrial parks can be financed by public authority or private sector. Poland, Hungary, and the Czech and Slovak Republics belong to the former, the United States and highly developed countries in Western Europe belong to the latter. The Slovak experience with private industrial parks is modest, but successful. Such industrial parks have been set-up mainly by foreign developers represented by influential consortiums.

Recently, various PPP arrangements in the field of public investment were used more frequently in many countries. Even though there are a variety of forms and ways of PPP, the roles of government and private partners can be summarized as following

.

22) Cho, Hyeyoung, 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, 2012, p. 62.

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Roles of Government and Private Partners in the Framework of PPP

Government Private Partner

• Off-site infrastructure provision • Build, lease, sale land/buildings without government • Consolidation of land for long- interference on prices term lease • Install on-site infrastructure following established • Financing of some on-site and clearly identified technical equirementsr of public infrastructure agency such as: • Development rights on other –– Building codes properties, or related projects –– Setbacks –– Cabling • Tax and other concessions • Establish complimentary services for users within the • Investment promotion support zone at a fee without government interference in prices e.g., customs brokerage, personnel recruitment, supervising constructions within premises, cafeterias, child care centers, transportation of goods and people to and from the zone, security, maintenance, etc. • On-site customs facility built at the manager/developer cost • Register with the authority a copy of standard lease/ purchase agreements as well as any governing contracts (maintenance, compulsory/optional services) • Report to authority on each lease/purchase agreement executed • Ensure the overall environmental compliance of the property

Source: USAID, International Lessons on Industrial Zone Development: Public Private Partnerships (2008).

Options for Private Sector Involvement in Industrial Parks

Private zone Joint Outsourcing of development and infrastructure other functions Management operation development and services: Support Programs

ㆍMost common ㆍTypically onsite (private) ㆍInventory control for ㆍAssist management to approach worldwide, and offsite (government) Customs purposes achieve vision and objectives especially in East Asia using a "plug & play" ㆍ ㆍ (Philippines, Indonesia, Private BOT or LDO for Investment promotion and management team Thailand) and Latin America off-site infrastructure investor services ㆍStrengthen operations by (Dominican Republic, ㆍ ㆍ Infrastructure fund financing Zone maintenance integrating leading practices Costa Rica, Uruguay, for offsite infrastructure Mexico, etc) and thought leadership ㆍ Private sector provided IT ㆍDevelop assets - with ㆍPublic partner designates/ and other utilities owns/man ages IZ regime "cradle-to-grave" approach ㆍPrivate developer assumes site development risk Examples Examples Examples ㆍEgypt New Generation ㆍIndonesia ㆍJordan IZ Program ㆍVietnam ㆍDjibutii Examples ㆍAbu Dhabi ㆍIn MENA, first examples are ㆍChina ㆍTurkey Kuwait, Jordan and Turkey ㆍMorocco

Source: USAID, International Lessons on Industrial Zone Development: Public Private Partnerships, (2008).

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 149 There are a variety of options for private sector involvement in developing industrial parks. It can be proposed that when considering the Ukrainian government’s financial capacity, the on-site (private) and off-site (government) model can be considered. If private partners invest in off-site, BOT (Build-Operate-Transfer)23) or LDO (Lease- Develop-Operate)24) scheme can be recommended. The government would be better off in establishing an infrastructure fund for the financing of off-site infrastructure. AP (Availability Payment) can be good stimulus for foreign private partners.

Management contract for designing and maintaining industrial parks with foreign partner like KICOX is also a good option for Ukraine.

5.1.3. New Arrangement of Legal Framework for Industrial Parks

5.1.3.1. Systemization of IP sites

Legal system for development of industrial parks in Korea was diversified and complicated in the 1970s and the 1980s. In order to solve those problems, the Korean government simplified the legal system by introducing "Industrial Sites and Development Act" and "Industrial Cluster Development and Factory Establishment Act.”

[Figure 2-15] Legal System for Industrial Parks in Korea

Industrial Sites Efficient supply of Balanced industrial sites and development Development of national land Reasonable placement Act of industry and regions Contribution to sound Rational Placement development Industrial of Manufacturing of the national Cluster Sustained economy Development Support for smooth industrial and Factory establishment of factories development Establishment Act Systemic management of IP

Source: Institute of Small and Medium Business Industry. http://www.ismbi.co.kr/ind04.

23) This is the simple and conventional PPP model where the private partner is responsible to design, build, operate (during the contracted period) and transfer the facility back to the public sector. Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it. In return, the public sector will allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model. https://www.indianeconomy.net/splclassroom/what-are-the-different-models-for-public- private-partnership-ppp-in-infrastructure/. 24) Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities. https://www.indianeconomy.net/ splclassroom/what-are-the-different-models-for-public-private-partnership-ppp-in-infrastructure/.

150 • 2017/18 Knowledge Sharing Program with Ukraine [Figure 2-16] Industrial Park Development Process in Korea

Establishment of Approval of Selection of Creation of industrial park industrial park Compensation locations industrial park development plan development plan

Application for Trial digging and Analysis of location Industrial park Preparation of a report approval of industrial excavation research on condition development plan on lands and objects park development plan cultural heritage

Preliminary Public notification Public notification and Initiation of Survey of location examination on and hearing from open circulation of industrial park demand environmental efficiency residents compensation plan construction

Appraisal and request Land development Surface survey for Consultation with Feasibility study for compensation and infrastructure cultural heritage related agencies consultation construction

Selection of business Deliberation by Ownership transfer Draft report on overall Completion of types to be invited and deliberative and payment of impact assessment industrial park preparation of basic plan committee compensation

Establishment of Public announcement Decision of project Sales and factory land use and of approval for industrial promotion feasibility construction facility plan park development plan

Source: KICOX, Industrial Park Development in Korean Economy, p. 93, (2011).

The purposes of “Industrial Sites and Development Act” in 1990 are to promote balanced development of national land and sustained industrial progress through efficient supply of industrial locations and appropriate allocation of industries, thereby contributing to sound development of the national economy. This act specify following to make a rational decision on IP sites.

–– establishment of domestic industrial locations, a political means for supporting this initiative, designation and development of industrial parks and location of factories in other areas. –– establishment of a policy for effectively supplying industrial locations and supporting activities are defined. –– detailed contents for designation and development of industrial parks –– various permissions and procedures related to development of industrial parks and supporting systems for promoting industrial parks

The Ukrainian government must make a law an IP location sites which specify review process of development plan stage and implementation plan stage and evaluation procedure for environmental, traffic and disaster impact assessment.

5.1.3.2. Efficient Tax Incentive for Foreign Tenants

Korean Foreign Investment Zone has two types of supports for foreign tenants: Location support and Tax exemption.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 151

Location Support in Korean FIZ

Rent of State &Public Owned Land

Rental Reduction of Rents Contract

Target Foreign Foreign More than 1 More than 5 More than 2.5 Investment Investment million USD Million USD Million USD Company Company investing in New investing in investing in in Individual Growth Engine Manufacturing Manufacturing Type FIZ Industry

Content –– Optional 100% • FIZ • FIZ Reduction of contract Exemption –– 100% –– material permanent –– Rent more Exemption parts employment than 1% (10 years) 100% size –– After 10 –– Rest 75% –– More than 200 100% years, • IP 50% reduction –– More than according to 150 90% Investment –– More than volume and 70 75% Employment size (2016.07.19) • IP 50%

In the case of public owned land, the local government decides

Condition National Companies fulfilled conditions by laws Property Law and related laws

Source: KICOX.

Tax Exemption in Korean FIZ

National Tax (Corporate Tax · Income Tax), Local Tax (Acquisition Tax ∙ Property Tax)

Targets New Economic Individual Type FIZ Individual Type FIZ Growth Engine –– More than 30 mil USD –– More than 10 mil USD Industry Manufacturing Manufacturing (Technology) –– More than 20 mil USD –– More than 5 mil USD Tourism Logistics –– More than 10 mil USD Logistics –– More than 2 mil USD R&D(more than 10 researchers)

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Continued

National Tax (Corporate Tax · Income Tax), Local Tax (Acquisition Tax ∙ Property Tax)

Contents <7 year Reduction> <5 year Reduction> 5 years 100% after that 2 years 50% 3 years 100% after that 2 years 50%

Maximum 15 years 7 years: Exemption of Custom, Consumption tax, VAT for 3 years 5 years: Exemption of only custom for 3 years

Source: KICOX.

Foreign tenants which contribute to the new growth engine in Ukraine should be provided differential tax exemption according to the technology level and investment amount of investing foreign companies.

5.1.3.3. R&D Tax Credit Regime

In order to promote the transfer of R&D activities within the industrial parks, at least initially, the R&D tax credit should aggressively promote contract and collaborative research between foreign investors and local research organizations. It is particularly important to cure the disconnect between the supply of innovative and scientifically-advanced solutions by exiting research institutions and the demand of businesses for such solutions.25)

The Korean government also gives tax exemption to foreign tenants that invest more than 2 mil USD in R&D (more than 10 researchers).

R&D tax credit can give stimulus to Ukrainian companies to allocate more resources to R&D.

5.1.4. Strengthen IP Governance Structure

5.1.4.1. Effective IP Performance Evaluation System

There is not standardized performance evaluation model for industrial parks in Korea, because there are too many IPs. However, Ukraine has to evaluate IPs yearly because there are only 41 IPs so far and many of them are under construction and

25) Public Private Partnership Development Program – P3DP, “Review of Policy, Legal and Institutional Framework for Industrial Parks in Ukraine," USAID July 2015, p. 24.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 153 the main target of Ukrainian IP is to attract foreign investment. Korea’s MOTIE also conducts performance evaluation of SEZ every year to grant incentives and to share best practice and to be use for budget support, restriction and promotion of development.

[Figure 2-17] Overview Free Economic Zone Performance Evaluation Procedure in Korea

• Planning Office of the Free Economic Zones Evaluation plan notification • (Ministry of Industry) → Free Economic Zone Authority ↓ Submission of self-evaluation • Free Economic Zone Authority result report → Planning Office of the Free Economic Zones ↓ Organization of Performance • Planning Office of the Free Economic Zones Evaluation Committee ↓ • Planning Office of the Free Economic Zones Preliminary Evaluation of → Performance Evaluation Committee Performance Evaluation Consultation on operation plan of on-site inspection Committee etc. Preliminary Evaluation by Subcommittee ↓ • Survey on the Actual Situation by Free Economic Zone Field inspection Authority ↓ Comprehensive evaluation • Comprehensive evaluation result report ↓ • Confirmation of performance evaluation result and Free Economic Zone Committee follow-up plan ↓ • Free Economic Zone Authority Appeal and Settlement → Free Economic Zone Planning Office

Source : The Board of Audit and Inspection of Korea, Report on the Results of Audit of Free Economic Zone Designation and Operation (2015).

FEZ Performance Evaluation Indicators and Points

Points Field Item First selected SEZ Later selected SEZ

Validity of the planning process 5 20 Business Planning Efficiency of business promotion system 10 12

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Continued

Points Field Item First selected SEZ Later selected SEZ

Funding Performance 9 9 Business Operation Foreigner support and PR 21 21

Development Project Performance 30 25 Business Performance Scale of Attracting Foreign Investment 25 13

Sum 100 100

Source: Korea Institute for International Economic Policy (KIEP) Development Strategy by Free Economic Zones in Korea toward Northeast Asia Economic Center (2012).

External factors of business such as attracting investment activities, corporate support activities, improvement of settlement environment should be included to Ukrainian IP efficiency evaluation indicators. However, it is necessary to induce smooth feedback on the evaluation results. The degree of improvement efforts of the points indicated in the previous year. Attracting domestic companies should be also an important indicator of the performance evaluation, and especially attracting anchor companies with large economic impact should be set as the main performance targets.

In the case of attracting foreign-invested companies, it should be reflected in the performance evaluation not only the amount of investment but also qualitative aspects such as attracting industry types and size of enterprises.

A performance evaluation committee should be formed and specific and clear evaluation criteria should be established. For objective and rational evaluation, statistics related to each IP should be produced and managed through system construction. Information on IP activities and future expectations in Ukraine is not enough.

5.1.4.2. Professional Management System

In order for an industrial park (or a science/technology park, or any business support infrastructure) to succeed it needs professional management with strong private sectors expertise as opposed to receiving direction and guidance from government or municipal officials or academics.

Establishment and efficient operation of industrial park management organizations are another critical success factor of the industrial park strategy.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 155 Industrial park management organizations efficiently operate industrial parks to realize the original purpose of park establishment through sales and lease of sites to businesses of desired industries; and support for production activities of resident enterprises. Korea has established the management organizations which maintained the original functions of industrial parks and attracted FDI; and maximized the benefits of the industrial location policies.

Each park should be managed by a specialized private company on the basis a of a performance-based management contract with clear and transparent benchmarks and firm performance monitoring indicators. The effectiveness of the park’s board of directors is also an important factor for its success. In addition to fiduciary obligations and hiring the management team, the purpose of a board of directors includes thinking strategically and setting broad policies that will ensure the park’s sustainability.

A management agency may operate support services such as provision of market information, improvement of energy efficiency, supply of energy, promotion of labor relations and vocational training, for the benefit of resident enterprises.

5.1.5. Economic Instruments for Increasing Cluster Effects

5.1.5.1. Research-Industry Cluster

Since 2005, KICOX has done project of strengthening competitiveness in industrial clusters. As part of this project, it is establishing and operating R&BD network. First, the industry-academia-government consortium is composed and operated by similar technology/industry in the center of the industrial core industry, and has been carrying out network activities of various industry-academy and research institutes including seminars, exchange meetings and project finding project meetings. And joint R&D support for industry-academia-government cooperation. Among the tasks derived through various joint-cooperative task-finding activities by industry- academia-industry consultative bodies during the year, the R&D e-Cluster, an online hub for industrial complex networks. It is actively supporting network activities and R&D tasks in industrial complexes through e-Cluster.

In Ukraine, there are many excellent universities and excellent researchers including Kiev Politechnic. Therefore, the government should actively participate in the establishment of industry-academia cluster and establish a homepage like e-Cluster to support active R&D.

156 • 2017/18 Knowledge Sharing Program with Ukraine [Figure 2-18] Industrial Cluster in Korea

University

Industry Research

Government

Service Labor Industry ResearchUniversity Exchange of Cluster Linking Knowledge Industrial Industrial and and Complex Cluster Cooperation Supplementation Information of R&BD Land Capital Creation and Innovation

Source: KICOX.

5.1.5.2. Successful Supplier Development Program

Supplier development is about generating a new capability or competency in suppliers. It is often linked to, although distinct from, performance improvement. By developing suppliers, organizations can generate competitive advantage. USAID advised the Ukrainian government to consider introducing supplier development programs to increase the occupancy of the planned parks, as well as to use such programs to promote technology and knowledge extension, upgrade the skills of the local workforce, and improve the global competitiveness of local suppliers etc.26) USAID proposed Czech’s Supplier Development Program as desirable model for Ukraine.

According to Kim and Park (2012),27) it is desirable for small and medium suppliers to selectively apply SDPs, because only a few programs (human resource support, supplier reward and recognition, share of information/goal/value) have impact on supplier performance from the perspective of supplier perception. In addition, they found that active utilization of communication reinforces supplier's performance in terms of direct investment such as human resource and physical resource support.

26) Public Private Partnership Development Program – P3DP, “Review of Policy, Legal and Institutional Framework for Industrial Parks in Ukraine," USAID July 2015, p. 54. 27) Jin-Han Kim and Jin-Han Park, “The Role of Performance and Communication of Supplier Development Program,” The Korean Journal of Production Management, Vol. 23, No. 2, 2012, pp. 127- 153.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 157 [Figure 2-19] Supplier Development Program in the Czech Republic

Supplier Development Programme

Multinational Companies

Database First Business Follow up Company Short-term Detailed Business of Czech Review Review Selection Action Plan Action Plan Opportunities suppliers (2days) (1day)

Supplier Development Support ㆍmentoring ㆍconsultancy ㆍaction workshops ㆍsupport ㆍnetworking ㆍmeet-the-buyer

Source: “International Experience in Supplier Development” The World Bank, Washington D.C. (April 2008).

Hyundai Motors and Cooperative Companies: The average sales volume of 300 primary suppliers supplying parts directly to Hyundai Kia Motors grew 9.1% annually from 73.3 billion won in 2001 to 272.2 billion won in 2016. The average sales of first- tier suppliers increased 3.7 times. As a result, the number of partner companies with sales of more than 100 billion won increased from 62 in 2001 to 156 in 2016, and the ratio increased from 21% to 58%. The number of suppliers that have grown from SMEs to large enterprises has tripled from 46 to 137, and the number of partner companies that have grown into medium-sized enterprises has tripled from 37 to 111.

5.1.5.3. Technology Road Mapping (TRM)

USAID also recommended Technology Road Mapping for the Ukrainian government. TRM would identify gaps in different areas needed for the development of local supply chains,102 as well as opportunities for these to become more differentiated and to move to a higher value-added market segment or meet the expectations of a targeted supplier development program to attract foreign manufacturers.

In 2007, the Korean government designed its SME Technology Road Mapping Program to reinforce the planning capabilities of SMEs and began actively administering the program in 2008. According to survey, TRM give effects to companies such as establishing medium to long term R&D strategy, enhancing the potential for the future technology and improving the rate of commercialization success and identifying the technology projects to be developed etc.

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Effects of the Technology Roadmap on the Company

Category Percentage

Identified the technology projects to be developed 13.8%

Enhanced the potential for the development of future technology 17.2% based R&D results and improved the rate of commercialization success

Acquired the techniques for building roadmaps 6.9%

Strengthened the company’s R&D planning ability 3.4%

Established medium to long term R&D strategy 58.6%

Source: S.-P. Jun et al. / Technological Forecasting & Social Change 80, 1002–1014, (2013).

5.1.5.4. Innovation and Incubation System

If the Ukrainian government activates an innovative atmosphere in industrial parks, industrial parks in the Ukraine may encourage multinational companies to locate a portion of their R&D activities within the parks. In particular, Fab Lab and innovation incubation service should be considered.

G-valley which was Guro Industrial Parks, historically the first IP in Korea successfully operate Seoul Innovation Fab Lab and G-valley IoT incubation Center.

5.2. Policy Actions for Attracting FDI of Ukrainian IP

5.2.1. Strengthening of Policy Capacity

5.2.1.1. Selection and Focusing

The Ukrainian industrial parks are at the stage of output failure and have a large resource and budget constraint for industrial park development. Therefore, selection and focusing strategies are needed. There is a need to first support techno parks in the Kyiv region, where manpower and capital are accessible and priority investment is needed in the Odessa harbor area, and Lviv industrial park which has a good access to logistics.

In this context, MEDT has to prepare strategies for differentiation and specialization among IPs. MEDT can strengthen the connectedness between IP policy and overall industrial development policy through de-designation of some IPs. Regular performance evaluation and detailed survey for foreign firms in Ukrainian IPs should be conducted.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 159 5.2.1.2. Establishment of Special Governance Zone

The biggest barrier to attracting foreign investment in Ukraine is the bad quality of governance. Therefore, it is necessary to consider establishing special governance zones that were implemented in China and India.

A Special Governance Zone (SGZ), a geographically limited area within a country, in which a comprehensive package of civil service reform, redefined role of government in the economy, enhanced rule of law, and enhanced citizen’s voice, will take place.28) SGZs can be applied to industrial parks. SGZs are being established and discussed about introduction in India, Poland, Honduras and other developing countries.

–– The role of government in the economy of the SGZ should be redesigned. The principle is that market mechanism should be used to its full extent to allocate resources and to regulate private sector behavior. All unnecessary permit/license requirements are reduced. All taxes, tariffs, and fees are simplified (with the aim of having a low and uniform rate). All unnecessary discretion that may be invested in government officials in the rest of the country is eliminated.

–– Civil service. The top officials of an SGZ should be chosen (by the central government or local election) from those with high caliber and integrity. Civil servants should be recruited and promoted based on merit.

–– Civil servants are properly paid (close to their best private sector opportunity cost). This is carried out along with building up and maintaining a lean and efficient civil servant force.

–– Once an SGZ is established, auditing and investigation are performed on the efficiency and integrity of the civil servants. Violations of law (including taking bribes) will be prosecuted after a due process.

However, since the SGZ may cause regional conflicts, it is necessary to reach a political consensus on which regions should be designated as priority areas.

28) Wei, Shang-Jin, “Special Governance Zone: A Practical Entry-Point for a Winnable Anti-Corruption Program” 2016, p. 1, https://www.brookings.edu/wp-content/uploads/2016/06/20000924.pdf.

160 • 2017/18 Knowledge Sharing Program with Ukraine 5.2.2. Improving the legal framework for attracting FDI

5.2.2.1. Reforms on Excessive Policy Regulations and Ineffectiveness of Administration Service

Ukraine needs to reform the “Doing Business Index” & investment environment.

Doing Business Index in Ukraine

DB 2018 DB 2018 DB 2017 DTF Change in DTF Topics Rank DTF info_outline (% points)

Overall 76 65.75 63.85 1.90

Starting a Business 52 91.05 91.03 0.02

Dealing with Construction 35 75.81 65.77 10.04 Permits

Getting Electricity 128 58.80 58.45 0.35

Registering Property 64 69.61 69.50 0.11

Getting Credit 29 75.00 75.00 ..

Protecting Minority Investors 81 55.00 53.33 1.67

Paying Taxes 43 80.77 74.27 6.50

Trading across Borders 119 64.26 64.26 ..

Enforcing Contracts 82 58.96 58.96 ..

Resolving Insolvency 149 28.24 27.95 0.29

Source : World Bank Open Data, Ease of Doing Business Index.

Even though it is difficult to improve infra-related indicators, Ukraine government can swiftly improve regulation-related indicators such as construction permission, protecting minority investors, and paying taxes.

Government can organize and provide one-stop service for foreign companies which want to invest in IPs.

In order to attract to FDI, Korea adopted a many administrative support service. Firstly, the Ministry of Industry and Trade introduced one stop service for attracting FDI in 1998.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 161 [Figure 2-20] One-stop Service Scheme in Korea

Source: KICOX.

5.2.2.2. Effective Aftercare Service

Creation of the effective aftercare services that address problems which investors are facing while doing business in Ukraine (taxation, finance, regulation of labor and etc.) and provide assistance in resolving difficulties can increase the attractiveness of the country.

In particular, a grievance resolution process should be introduced. The resolution process takes many forms in Korea. Generally, senior consultants, better known as “home doctors,” play a major role in the decision-making process. In the first stage, senior consultants do intake and evaluation to determine how a case should be processed. Then they consult with representatives from relevant government agencies. After a case is reviewed and opinions exchanged between the home doctors and the Ombudsman, senior consultants submit a grievance resolution proposal through official channels. In the event that a case is rejected, the matter can be brought before the Foreign Investment Working Committee, the Regulatory Reform Committee, and/or the Office for Government Policy Coordination. A request for an intervention can also be brought to MOTIE’s Business Grievance Consulting Center. For cases in which transnational corporations filed grievances requiring systemic changes, regulatory reform and/or amendments to enforcement decrees, the Foreign Investment Ombudsman acts on their behalf, directly contracting the heads of relevant agencies and submitting proposals. The Foreign Investment Act dictates that government agencies should reply within a week once they receive a recommendation from the Ombudsman. The Office of the Foreign Investment Ombudsman, which was established in 1999, aims to resolve the grievances of foreign-invested companies operating in Korea.

162 • 2017/18 Knowledge Sharing Program with Ukraine 5.2.2.3. Partnership with FDI-related organizations in targeted countries

Every IPs and MEDT need to develop partnership and/or creating dialogue channels with organizations like KOTRA in Korea which support Korean firms that want to invest abroad. In particular, IPs need to explore new-types of industrial cooperation such as inviting SMEs with advanced technology to Ukrainian IPs.

5.2.2.4. Improving Competitiveness for FDIs by Attracting more Domestic Firms

Ukrainian IPs should attract domestic firms to maximize domestic potential and competitiveness. It can provide possibility of setting up jventures for foreign investors with domestic firms in IPs.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 163 References

Barchuk, Valentyna, Maryana Vusyatytska, “Industrial Parks As A Tool For Promoting Industrial Zones Development In Ukraine,” International Journal of Economics and Society August 2015, Issue 3, pp. 25-28. Cho, Hyeyoung, 2011 Modularization of Korea’s Development Experience: Industrial Park Development Strategy and Management Practices, Ministry of Strategy and Finance, Republic of Korea, 2012, p. 32. Editorial board, VoxUkraine, “Trap Once Again?”, https://voxukraine.org/longreads/ industrial-park/article-en.html Jeong, Hyung-Gon, Jong-Hun Pek, 2016 Modularization of Korea’s Development Experience: Special Economic Zones: What Can Developing Countries Learn from the Korean Experience?Ministry of Strategy and Finance Republic of Korea, 2016. KICOX, Industrial Park Development in Korean Economy – A Guideline for Development and Management of Industrial Parks, 2011. Kim, Yong-Duk, Yeong-Seon Yoon, “Examination of the Effectiveness of FDI Incentive Policies in Korea through the Use of the Satisfaction Level Differences”, Journal of International Trade and Industry Studies, 21-3, 2016, pp.51-80. Pavliuk, Alla, “Industrial Parks in Ukraine as the Investment Mechanism for Regional and Local Development”, http://irn.center/wp-content/uploads/2017/11/Alla-Pavliuk_ Ukraine.pdf. Public Private Partnership Development Program – P3DP, “Review of Policy, Legal and Institutional Framework for Industrial Parks in Ukraine”, USAID July 2015. Roginska, Iana, “Report on Seminar on policy and regulatory issues regarding Special/Free Economic Zones and Industrial Parks in the context of State aid regulation”, A Project funded by the European Union and implemented by a Consortium led by Crown Agents Ltd, February 2015 Saleman, Yannick, Luke Jordan, “The Implementation of Industrial Parks: Some Lessons Learned in India,” World Bank Policy Research Working Paper 6799 2014.

Tomasevska, O.A. “In Relation To Functioning Of Economic Clearzones in Ukraine”. Wei, Shang-Jin, “Special Governance Zone: A Practical Entry-Point for a Winnable Anti-Corruption Program”, https://www.brookings.edu/wp-content/ uploads/2016/06/20000924.pdf. Scientific Bulletin of NUBiP of Ukraine, Series: Economics, Agrarian Management, Business, No. 181 (2013): Part 6. LAW OF UKRAINE from June 21, 2012 of No. 5018-VI on Industrial Parks (In edition of the Law of Ukraine from 7/4/2013 of No. 406-VII; the Law of Ukrainefrom 24/11/2015 of

164 • 2017/18 Knowledge Sharing Program with Ukraine No. 818-VIII). Draft Law amending the Customs Code of Ukraine on the development domestic production by stimulating the attraction of investments into the real sector of the economy through industrial parks 2555a-d from 04/25/2016. Draft Law amending the section XX "Transitional Provisions" of the Tax Code of Ukraine on the development of domestic production by simulating the attraction of investments into the real sector of the economy through industrial parks 2554a-d from April 25. Kim, Gunsoo et al, A Study on the Incentive for Foreign Direct Investment, Gyeongi Research Institute, 2012-67. Kim, Jin Suk, “A Study on Korean Industrial Network Development via Process Modeling,” Journal of the Korea Academia-Industrial Cooperation Society, Vol. 18, No. 4 pp. 648-652, 2017. Hye-Young Cho, Performance and Improvement Tasks of Foreign Investment Zone in Korea, KICOX, 2017-04. KICOX, 50 Year Performance and Tasks of Development of Korean Industrial Parks, 2014.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 165 Appendix

Appendix 1. General information on case studies of industrial parks in Ukraine

This part analyzes recent situations of IP in Ukraine, using information available at MEDT (hereinafter MEDTU) up to May 25, 2018. In order to provide similar general information for every case study and provide the comparative analyses of the main IP features, all experiences have been summarized according to a defined common structure.

First, information concerning the organization of the park include (i) the name of initiator of the IP, (ii) the name of the Developer (managing company), (iii) the date of registration by the MEDTU (for those included into the Register of IPs, (iv) size of the park (land plot in hectares), (v) the number of tenants/companies, (vi) planned results: the number of new jobs and the investments attracted or to be attracted.

Following, the current status of the IP is described as (i) planned, (ii) under construction, (iii) operating, (iv) changed status or (v) stopped. To complement, functional purpose and main sectors of activities, number of inhabitants in the region (if it is available). Further, it is reasonable to consider such indicators as amount of money, received from State Fund for Regional Development and from local budgets, the amount of taxes paid by participating companies, the volume of attracted investments by their sources.

The above-mentioned information is presented in a table as an introduction to each case. The table also presents references (names of IP managers, their e-mails and telephone numbers) and Internet links in case it will be necessary to get more detailed information about the industrial park.

As of May 2018, 41 IPs in Ukraine are at the different stages of development, of which 31 is included in the IP register. In

, the consolidated information on all these parks is grouped by regions, which are presented in alphabetical order using English alphabet.

Below, we give a detailed description of 33 industrial parks, using their numbering from

.

In addition, for each region, we give references to the program documents relating to industrial parks.

166 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 2. C hernihiv region

The Strategy for Sustainable Development of the Chernihiv region for the period up to 2020 (hereinafter – Strategy-2020) defines "the establishment of industrial and technological parks" as one of the tools for achieving the strategic goals of the region's development.

The Action Plan for Implementation in 2015–2017 the Strategy-2020 included the task to develop a project for creating an industrial park in Chernihiv. The Action Plan for implementation the above Strategy-2020 in 2018–2020 includes a terms of reference (TOR) for industrial parks being created as regional development projects.

Since 2010, Industrial Park N 1 “Chekhsyl” has been operating in the city of Chernihiv on the territory of the Private Joint Stock Company (PrAT) named "Worsted-wool company" Cheksil ". Thith park is not registered because it uses existing infrastructure and capacity (area of 15 hectares).

In addition, the concepts of the two following industrial parks are being worked out:

- in the city of Chernihiv on the territory of the former industrial enterprise PJSC "Chernihivske" Chemical fiber";

- in Bobrovitsa, on a land plot with a total width of 36.9 hectares, which can be divided into 6–10 separate sites, depending on the needs of potential participants;

- also selected are 3 plots of land of 52 hectares, 95.2 hectares and 15.6 hectares for the construction of an industrial park in Chernihiv.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 167 Appendix 3. Ch ernivtsi region

One industrial park, "Novodnistrovsk," has been created in the Chernivtsi region, initiated by Novodnistrovsk City Council. In addition, the Action Plan on implementation in 2018–2020 the Strategy for the development of Chernivtsi region up to 2020 contains tasks regarding the development of industrial parks. Among them: the creation of the industrial park "Energy of Bukovina”; construction of water supply, drainage and storm water networks in the Novodnistrovsk industrial park.

Industrial Park N 2 “Novodnystrovsk”

Region Town Novodnistrovsk of Chernivtsi Oblast

Initiators Novodnistrovsk City Council

Developer The managing company is the public joint stock company "Graviton"

Registration data 13.01.2017

Term of activity 30 years

Size of the park 15,36 hectares Building square: 18710.9 m2

Planned results 850 new jobs

Total 32,5 million UAH (including 8,8 million UAH from state

Investments to be budget and 0.5 million UAH from local budget). 23,3 million UAH attracted for design and construction works in the park

Sustainable economic development of the city by creating favorable Overall purpose conditions for attracting investments, effective functioning and developing industrial enterprises.

Functional Production of electric equipment; manufacturing auto parts and purpose components for cars; food production.

Status Under construction

Boldashev Anatoliy, Ostafi Georgy: Tel.: +38 03741 3-15-45; +38 097 261-33-34 e-mails: [email protected]; [email protected]. References Chornousenko Vitaliy: Tel.: +38(099)7696950, vitaliy.chernousenko@ gmail.com

Internet links N/A

Source: Author.

168 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 4. C herkasy region

The Strategy of social and economic development of Cherkasy region for the period up to 2020 determines the development of regional investment and innovation infrastructure, techno- and industrial parks among the perspective tasks. Such a promising project is the construction of an industrial park "ZOLOTONOSHA" in the town of Zolotonosha with the necessary engineering and transport infrastructure.

Industrial park N 3 “Zolotonosha”

Region Town Zolotonosha of Cherkasy region

Initiators Zolotonosha City Council

Developer Managing company is not selected

Registration data 18.05.2017

Term of activity 30 years

Size of the park 39,9285 hectares

Planned results 1,110 new jobs

Investments to be 55.9 million UAH (including 39.2 million UAH from state budget attracted and 4.7 million UAH from local budget,

Creating a sustainable development city, where the innovation high- Overall purpose tech industry, high quality of life and a safe environment will be harmoniously combined

Production of auto parts and components for agricultural Functional machinery; manufacturing electrical equipment, wearing apparel, purpose textile production, food products (complex processing and storage of vegetables and fruits).

Status Under construction

Zolotonosha City Council: Tel.: +38 04737 5-50-13 (5-23-94; 5-22-79); Ostrohlazova Viktoriya - chief of Economy Division of Zolotonosha References City Council 38 067 Tel.: +38 (067) 892 47 01; e-mail: [email protected]

Internet links zolotonosha.osp-ua.info.

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 169 The overall purpose of IP establishment is creating a sustainable city, where the innovation, high-tech industry, high quality of life and a safe environment will be harmoniously combcined.

170 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 5. Dnipro region (former Dnipropetrovsk)

The Strategy of the Development of the Dnipro Region for the period until 2020 provides the development layout of industrial parks in the region and creating the new industrial parks, including in the old industrial areas, for attracting investment in the economy sectors. These measures should contribute to economic growth and employment in the region.

Currently two industrial parks are under construction, there are IPs Kryvbas and Pavlograd.

The creation of the new IP, on Slobozhansky Avenue, have been initiated by Dnipro authorities. It will be situated at 5 Km from the center of city in the old industrial area and has ready communications.

Industrial park N 4 “Kryvbas"

Region Town Kryvyi Rih of Dnipropetrovsk region

Initiators Kryvyi Rih City Council

Developer Not yet selected

Registration data 01.09.2014

Term of activity 30 years

Size of the park 26,03 hectares

Planned results 2,245 new jobs

Investments to be To arrange the park infrastructure it is necessary 6.5 million UAH attracted from state budget and 19.4 million UAH from Managing Company

Enhancement of the competitiveness of the territory, development Overall purpose of modern production and market infrastructure, to attract investments into the city's economy

Functional Machine building, manufacturing building materials, logistics purpose center, others

Status Under construction

Tel.: +38 0564 74-73-32 ; +38 0564 92-13-69 References e-mails: [email protected]; [email protected].

Internet links http://ig.krogerc.info/ua/ideas/detail/what/10.html.

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 171 The main purpose of the creation of the industrial park "Krivbas" is to attract investments into the city's economy by meeting the investors' demand for the sites prepared for the placement of industrial objects, logistics and related services, as well as enhancement of the competitiveness of the territory, development of modern production and market infrastructure.

The territory of the industrial park "Kryvbas" already has a formed a road network.

In addition, the following documents are ready: topographic survey M 1: 500; technical documentation on drawing up the boundaries of existing land uses; detailed plan of the territory; draft land plot; technical passport of the land plot.

The management company is still not selected. From the beginning of 2018, work is being done to find potential сandidates to select a management company.

Industrial park N 5 "Pavlograd"

Region Pavlograd District of Dnipropetrovsk region

Initiators Dnipropetrovsk regional state administration

Developer State Enterprise "Investment and Innovation Center"

Registration data 14.02.2017

Term of activity 30 years

Size of the park 250 hectares

Planned results 5,000 new jobs

For the preparation of construction documents and providing related work it is expected to attract approximately 15.9 million UAH Investments to be from the regional budget (8.3 million. UAH, or 52.5%), government attracted (6.7 million UAH, or 42.18%), at the expense of the management company (UAH 0.9 million or 5.32%).

Increasing quality of life of the population by improving the investment and innovation climate, ensuring employment; Overall purpose prepareing industrial areas for placement of objects of industry, construction, logistics and related services

Functional Machine building, manufacturing construction materials, logistics, purpose light industry, processing industry.

Status Under construction

172 • 2017/18 Knowledge Sharing Program with Ukraine Continued

Psar'ev Alexey Sergeevich, Tel.: +38 0567786610, e-mail: psarev@ adm.dp.gov.ua, References Kolomytsev Alexander, Tel.: +38 097 077 00 62 e-mail: invest.dp.gov. ua

Internet links N/A

Source: Author.

The industrial park "Pavlograd" was created by the Dnipro regional state administration in 2016 and included in the Register of industrial parks on 14.02.2017. Up to date the IP is under construction.

Management company is the State Enterprise "Investment and Innovation Center".

In 2018, the project-budget documentation for the construction of engineering structures is beingdeveloped, the construction of communication networks and automobile road in the length of 1.3 km to the international route Znamenka - Dnipro - Pavlograd - Lugansk - Izvarin (E-50) is being developed.

To arrange the park infrastructure it is necessary 9.75 million UAH, including 0.9 million UAH from local budget and 8.8 million UAH from other sources.

In April - May 2017, the treaties were signed with three participants: LLC SG METANOL, LLC SINGAZ FTS and LLC INVESTMENT GROUP named “QUARTER”.

As the success factor of the park it may be considered its location in the immediate proximity to Pavlograd-1 and Pavlograd-2 railway stations, as well as to the international highway E-50.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 173 Appendix 6. D onetsk region

The action plans for the implementation of the Strategy for the Donetsk region development until 2020 include the establishment of six industrial parks: during 2017–2018 - 4 IPs (towns Toretsk, Mariupol, Lyman, Kostiantynivka), during 2018–2019 - 2 IPs (towns Slovyansk, Bakhmut).

At present there are tree industrial parks in the region: IP 6 “Limansky” is under construction, IP 7 “Tekhnocity” is planned, IP 8 "Chemical-metallurgical plant" (Donskoe) is operating.

Industrial park N 6 “Limansky”

The main objective of IP is to ensure the economic development and competitiveness of the Lima Integrated Territorial Community (OTG) through the intensification of investment activity; creating new jobs; development of modern industrial infrastructure; application of modern technologies and world experience in the organization of industrial production.

Region Town Lyman of Donetsk Oblast

Initiators Lyman City Council

Developer Limited Liability Company LLC "SK-DARINA".

Registration data 30.06.2017

Term of activity 40 years

Size of the park 27.52 hectares

Planned results 1,200 new jobs

To create the engineering infrastructure it is planned to attract Investments to be 13.2 million UAH (including: from the state budget 3.96 million attracted UAH, oblast - 3.96 million UAH, city - 1.34 million UAH, managing company 3.96 million UAH.

Intensification of investment activity; creating new jobs and modern Overall purpose industrial infrastructure; application of modern technologies

Manufacturing building and insulating materials; equipment for Functional the use of alternative energy sources; creating facilities for servicing purpose the rolling stock of the Donetsk railway department; logistics and related services.

174 • 2017/18 Knowledge Sharing Program with Ukraine Continued

Status Under construction

Zimidan Petro: Tel.:+38 (06261) 41244, e-mail: [email protected], Kartyshev Sergey: Tel.:+380503431112, e-mail: [email protected], References Management company: Buz Constantine Tel. +38 095 4522222, +38 063 3700910 email: sk- [email protected].

Internet links N/A

Source: Author.

On January 9, 2018, an agreement was signed on the establishment of IP with the management company "SK-DARINA LLC," a winner of the competition for the selection of the management company.

The initiator created a working group to support the development of engineering and transport infrastructure to the territory of the IP industrial site.

As of May 2018, work is being undertaken to obtain the technical specifications for the development of design estimates for the project "Building the engineering and transport infrastructure of the industrial park" Limansky "(estimated cost of the design and estimate documentation - UAH 2.7 million).

Industrial park N 7 "Techno city"

Region Town Kostyantynivka of Donetsk oblast

Initiators Konstyantynivka City Council

Developer

Registration data 22.02.2018

Term of activity 49 years

Size of the park 34.02 hectares

Planned results 1,300–1,400 new jobs

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 175 Continued

Estimated 14.3 million UAH for the design and construction works on the engineering networks reconstruction (13 million UAH at the Investments to be expense of state and non-state funds, 1.3 million UAH from the local attracted budget and other funds); for construction work on the IP site - 6.2 million UAH (including 5.6 million UAH at the expense of the State and other funds, the management company and park participants).

Ensuring sustainable economic development of the region, forming a single territory with a well-equipped infrastructure for Overall purpose the placement of new industrial objects, innovation, logistics and related services

Mechanical engineering in the field of alternative energy, production Functional of spare parts and accessories for engineering and equipment, light purpose industry, assembly of electrical appliances; complex utilization of computer electronic equipment.

Status Planned

Davydov Sergey: Tel.: +38(06272)4-16-75, e-mail: [email protected]; Tykha Nadezhda: Tel.: +38 (06272)4-39-34; e-mail: konstecon@gmail. References com; Vlasenko Anna: Tel.: +38 (050)7014206

Internet links N/A

Source: Author.

As of May 2018, a terms of reference is being prepared for the development of design estimates of the project "Preparation of a land plot for the construction of an industrial park."

The initiator plans to submit this project to a competition for programs and projects that can be financed at the expense of the State Fund for Regional Development.

176 • 2017/18 Knowledge Sharing Program with Ukraine Industrial park N 8 "Chemico-metallurgical plant"

The industrial park "Chemical-metallurgical plant" was actually created on the basis of Chemical-metallurgical plant (former ChMZ, located in the village Donskoe in Donetsk region), which is now a structural subdivision of the State institution "State Scientific- Research and Design Institute of Basic Chemistry" (NIOCHEM, Kharkiv). The Industrial park have been created 20.04.2016.

The property of former Chemical-metallurgical plant was transferred to the balance of the NIOCHEM scientific-research institute under the joint order of the State Property Fund of Ukraine and MEDT dated December 30, 2015, No. 2033/1820.

Within the industrial park, the following production facilities were organized: (i) chemical and metallurgical mixtures; (ii) powder wire; (iii) welding electrodes; (iv) metal structures. Also, servicing of the mechanical equipment of local enterprises, production and transportation of heat energy to residents of the Donskoye village was provided: part of the equipment of the former Donetsk СhMZ was allocated, modernized by its own forces and transferred to a new enterprise - the Donskoe Thermal Network.

Region Village Donskoe, Donetsk region

State Scientific-Research and Design Institute of Basic Chemistry Initiators (NIOCHEM)

Developer The administration of the Chemical-metallurgical plant

4 participants (on outsourcing Size of the park 270 ha of production capacities)

Planned results: - jobs

Investments -

Ensuring the effective functioning of enterprises within the industrial Overall purpose park and employment for inhabitants of local and neighboring communities

Functional The production of chemical and metallurgical mixtures, the powder purpose wire, the welding electrodes, the manufacture of steel structures

Status Is operating

References Schaslyvets Yevgeny Olegovich, 0961655821, [email protected],

Internet links http://hmz.org.ua/

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 177 Within the industrial park, the following sites are prepared for operation: (1) wood processing line (production of furniture pieces); (2) the railway section, parts of the transport shop and the warehouse complex; (3) a platform for the production of reinforced concrete structures; (4) the complex for the production of secondary zinc; (5) a site with a complex of facilities for the possible location of the waste recycling line; (6) a complex for the extraction and enrichment of feldspar (pegmatites), which will provide an opportunity for import substitution of raw materials for the production of high-quality glass.

Taking into account the location of the industrial park, the production processes within it are mainly carried out by outsourcing the production capacities for private business. The role of the management company is assigned to the branch administration. The NIOCEM provides engineering services to IP participants, including technological and development work.

178 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 7. Ivano-Frankivsk Region

According to the Strategy for Development of Ivano-Frankivsk Oblast for the period until 2020, the achievement of its strategic goal, "sustainable economic development" is possible, among other issues, through the implementation of projects to develop a concept and a feasibility study on the industrial parks location in the region; development of engineering infrastructure for industrial parks; as well as the creation of industrial parks in cities and on the territories of the old industrial zones.

The action plan for realizing the above strategy includes the implementation of the project "Creation of industrial parks in the cities of the Dolyna, Kalush, Burshtyn, Kolomyia."

Industrial park N 9 “Dolyna”

Region City Dolyna of Ivano-Frankivsk region

Initiators Dolyna City Council

Developer Communal enterprise of Dolynska City Council "Dolyna-Invest".

Registration data 03.02.2014

Term of activity 30 years

Size of the park 28.4 hectares

Planned results 2,030 new jobs

In accordance with the concept of the park, the arrangement of its Investments to be territory requires 25 million UAH (from the state budget - 6.3 million attracted UAH, at the expense of the management company - 18.7 million UAH).

The introduction of mechanisms to effectively meet the investors' Overall purpose demand for sites prepared for the placement of industrial objects, logistics and related services.

The priority areas of activity for determining the functional purpose Functional of an industrial park are light, food, woodworking and automotive purpose industry.

Status Under construction

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 179 Continued

Tel.: +38 03477 2-70-07 e-mails: [email protected]; n.holovata@ References dolyna.info Tel.:+38 03477 2-52-30, +38 099 230-81-94 e-mail: [email protected]::

Internet links N/A

Source: Author.

Industrial park N 10 "Burshtyn"

Region Town Burshtyn of Ivano-Frankivsk region

Initiators Burshtyn City Council

Developer Still not selected

Registration data Not registered

Term of activity 30 years

Size of the park 32.45 hectares

Planned results new jobs

Eensuring the creation and functioning of the IP will require about Investments to be 21.96 million UAH, including sources: 15% - state budget, 10% - attracted local budget, 75% - non-state funds

Creating favorable conditions for attraction of direct investments in Overall purpose Burshtyn and stimulation of economic development of the city and region as a whole.

Construction of a modern high-tech cleaner industrial complex Functional with its arrangement by developed engineering and transport purpose infrastructure, warehouse premises

Status Planned

Tel.: +38-(03438) 44-936, e-mail: [email protected], br-mrada@ukr. References net

http://burshtyn-rada.if.gov.ua; Internet links http://burshtyn-rada.if.gov.ua/wp-content/uploads/2017/08/21.- zminy-do-kontseptsiyi.pdf.

Source: Author.

180 • 2017/18 Knowledge Sharing Program with Ukraine The creation of the IP "Burshtyn" was initiated in 2015 on a plot 32.45 hectares. The concept of IP development was adopted by the decision of the City Council session in April, 2016. It is the basic document for the development of the city of Burshtyn until 2030. The land plot design is developed. For the arrangement of the park the city budget already financed 243.2 thousand UAH.

The city of Burshtyn refers to cities with mono-dependent economies. The basis of the city's economy is Burshtyn TPP, the largest thermal power plant in Western Ukraine and the largest industrial enterprise in the Ivano-Frankivsk region. Industry plays a leading role in shaping the economic profile and community development. The city needs diversification of business and economy, attraction of several powerful strategic enterprises, preferably high- tech enterprises, bringing new jobs with a high level of productivity.

The Burshtyn City Council is taking measures to attract investors to the park. In 2017, meetings were held with representatives of the German company "Leoni AG" regarding the possibility of constructing a new plant in the industrial park. The management of the company adopted in February 2018 a decision on the construction of a plant for the manufacture of cable-conductor products for cars in the IP territory of 12 hectares. The construction of the plant is scheduled for completion in the summer of 2019. An important requirement for sustainable development of the city is the industrial modernization and the use of resource-saving technologies and materials.

The main factors of success can be considered the placement of IP (proximity to the EU countries, road and railways of international importance), the availability of labor resources and population of the area.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 181 Appendix 8. Kharkiv region

Technological park N 11 "Malynivka"

Region Village of Malynivka, Chuhuivsky District, Kharkiv rfegion

Initiators OLIMP GROUP, International industrial and construction group

Developer OLIMP GROUP

Registration data Not registered, created in 2002

Term of activity N/A

Size of the park 5 plants

Investments N/A attracted

Overall purpose Profitable busines

Functional Various food products, beverages, bottles, cans, cable products, purpose biofuels, organic products.

Status Operating

Usachev Mykola, Chairman of the Board of the Olymp Group of Companies References Tel.: +380443924821; e-mail: [email protected] Nikolenko Taras: Tel.: +380675790828; e-mail: [email protected].

http://olimp.group/malinovskij-texnopark/bikorm-zavod- Internet links kompleksnoj-pererabotki-zerna/

Source: Author.

Malinovsky Technopark is one of the largest food technoparks in Ukraine and Europe.

The Technopark Malinovsky began to be built in 2002. Since then, four most modern plants have been built on its territory: the Prime Distillery, the Malinovsky Glass Factory, the Bikorm Food Additives Plant and the KGS Aluminum Closure Plant, and the construction of the Malinovsky Cable Plant is nearing completion. Technopark produces various food products, beverages, bottles, cans, cable products, biofuels, and organic products. In 2014, the most modern plant for integrated grain processing in Ukraine was built.

182 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 9. Khmelnytsky region

The action plan on implementing the strategy of the development of Khmelnytsky Oblast for 2018–2020 defined the terms of reference: "Development of the infrastructure for the industrial park" Slavuta"and "Creation of an industrial park "Khmelnytsky.”

Industrial park N 12 "Slavuta"

Region City Slavuta of the Khmelnyskyi region

Initiators Slavuta City Council

Developer Communal enterprise "Slavutsky city center of land cadastre works".

Registration data 03.02.2014

Term of activity 50 years

Size of the park 50 hectares

Planned results 1,000 new jobs

The IP needs for infrastructure development are 13 million UAH, Investments to be including from State Budget - 0.6 million UAH, local - 0.7 million attracted UAH, others - 11.7 million UAH.

Attracting investments, provision of favorable conditions for the functioning and development of industrial enterprises, improvement Overall purpose of the city's investment image, ensuring economic development and competitiveness, creating new jobs.

Functional The priority areas are medium and small engineering, woodworking purpose and pharmaceutical industries.

Status Under construction

Developer “Slavutskyi miskyi tsentr zemelno-kadastrovykh robit”: Datsyuk Sergei: Tel.: +38 097 258 20 25; e-mail: [email protected] References Initiator: Slavuta City Council Tel.: +38 (03842)7-11-68, +38 (03842)7- 11-66. e-mail: [email protected]

Internet links N/A

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 183 In 2017, the reconstruction of the access roads to the industrial park was started. From the local budget, 6,893.0 thousand UAH were allocated. During 2017, systematic work was undertaken to attract a potential investor to the industrial park. During the year, the city received 5 requests from potential foreign investors. Systematic work has been carried out with LLC OZON INVESTMENT on the investing by VERBIO VereinigteBioEnergie AG, Ciurbig, Germany, in the construction of a plant in the Khmelnytsky region, in particular, on the territory of the industrial park Slavuta.

The negotiations have been carried out with LLC "EKO-FOTURE" SLAVUTA" regarding the placement and construction of facilities in power generating enterprises, institutions and organizations, as well as establishing business relations with the Polish company Techimpex in order to build an industrial park.

184 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 10. Kirovograd (since 2017 named Kropivnitskii) region

According to the Strategy for Kirovohrad Region Development up to 2020, one of the tasks for implementing the strategic priority "Building the investment potential in industry and stimulating the renewal of fixed assets" is the promotion of the creating of industrial parks in order to attract advanced technologies, as well as developing modern production and market infrastructure of the region, in particular - in the areas of production of energy saving equipment, agrarian mechanization facilities, etc.

Industrial park N 13 "Oleksandriya"

Region Oleksandriya, Kirovograd region

Initiators Oleksandriya City Council

Developer Registered 13.04.2018

Registration data 03.02.2014

Term of activity 49 years

Size of the park 24.48 hectares

Planned results 1,330 new jobs

54.68 million UAH is required to create the engineering infrastructure Investments to be and carry out construction work (from the state and local budgets), attracted 464 million UAH is required for organizing the IP activity and development (the funds of management company)

Ensuring the sustainable economic development of the region, forming a single territory with a well-equipped infrastructure for Overall purpose the placement of new industrial objects, innovation, logistics and related services,.

Production of spare parts and accessories for agricultural machinery, Functional electrical equipment (assembly and manufacturing); furniture, purpose textile, food production.

Status Under construction

References Gavrilenko Oksana +38(066) 938-25-90

Internet links N/A

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 185 Appendix 11. Kyiv (city)

Industrial park N 14 "Bionic Hill"

Region City Kyiv

Initiators Kyiv City Council

Developer LLC “Bionic Development"

Registration data 01.09.2014 registered

Term of activity 39 years

Size of the park 56.74 hectares

Planned results 35,000 new jobs

The construction of IP will require about $ 387 million. The creation Investments to be of an industrial park will be funded at the expense of its own and attracted attracted by the investors.

Creating industrial infrastructure for innovative high-tech and Overall purpose intellectual businesses

Functional ICTs; pharmacy and biotechnology; energy saving and energy purpose efficiency; other high-tech and intellectual-minded areas of activity

Status Under construction

Managing company: Tel.: +38 044 496-30-38 e-mail: melnyk@bionic- References hill.com

Internet links http://www.bionic-hill.com/.

Source: Author.

The IP development has been suspended because of the issue of the legality of land transfer from the Ministry of Defense to the Kyiv City Council, which then initiated the creation of the IP on this land plot.

In early 2016, the Supreme Administrative Court of Ukraine recognized the legitimate decision of the Kyiv City Council to allocate a land plot for the construction of an industrial park Bionic Hill. Similar decisions in essence were previously passed by the Supreme Economic Court of Ukraine, the Commercial Court of Kyiv, the District Administrative Court of Kyiv, and the Kyiv Administrative Court of Appeal. Thus, to date, the company has successfully proved its right along the lines of both economic and administrative courts and hope to speed-up the IP development.

186 • 2017/18 Knowledge Sharing Program with Ukraine Industrial park N 15 "Kyiv business harbor"

Industrial park "Kyiv business harbor" (KBH) is a large-scale project with aim to create industrial facilities, wholesale and retail complex, consolidating production and trade capacity for local production in Kyiv. Kyiv Investment Agency is defined as a customer of the preparatory works.

Region Desniansky district of Kyiv City, residential area ”Troyeshchina”

Initiators Kyiv City Council

Developer Not yet selected

Registration data Not registered

Term of activity 30 years

Size of the park 106 hectares

Planned results -

Investments to be The construction of IP will require about $440 million. attracted

To create industrial facilities, whole-sale and retail complex for local Overall purpose production in the city of Kyiv.

Processing industry, furniture and decorations, pharmaceuticals, Functional spare parts and components for the automotive industry. R&D purpose activities in the field of ICT.

Status Planned

Kyiv Investment Agency: Tel.: +38 (044) 289-53-51, References e-mail: [email protected].

Internet links www.investinkyiv.gov.ua.

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 187 Appendix 12. Kyiv region

According to Strategy for the Development of Kyiv Region for the period up to 2020, one of the tasks for achieving the strategic goal "Sustainable Economic Growth on the Basis of Innovative Development of a Multidisciplinary Economy" is the industrial modernization on a new technological basis, in particular by creating and developing industrial and technological parks.

Industrial park N 16 "First Ukrainian Industrial Park"

Region Village Velyka Dymerka of Brovary District, Kyiv Region

Initiators LLC "Land Union" (“Zemelnyi Soyuz")

Developer LLC "Industrial Park Management"

Registration data Registered on 07.08.2014

Term of activity 40 years

Size of the park 105 hectares

Planned results 2,100 new jobs

Investments to be The expected total investment in the development of IP is USD 210 attracted million (UAH 1,680 million)

Ensuring economic development and increasing the competitiveness of Kiev region; intensifying the investment activity; raising the Overall purpose level of employment of the population; development of modern production and market infrastructure.

Mechanical engineering and metal working; food, light, printing, Functional microbiologic, woodworking, furniture, printing, construction purpose materials industry; warehousing.

Status Under construction

Managing company: LLC "Industrial Park Management": References Tel.: +38 044 364-38-2838; +38 044 280-57-42; e-mail: egor-kiev@ rambler.ru

Source: Author.

188 • 2017/18 Knowledge Sharing Program with Ukraine At present, there are six industrial parks in Kyiv region (excluding Kyiv city), 5 under construction, one is operating. Five industrial parks have been included into the IP register during 2014–2018.

The IP, "The First Ukrainian Industrial Park," was created in the village Great Dymerka, Brovarsky district of the Kiev region. The initiator of its creation is the Limited Liability Company LLC "Land Union," it could accumulate a land plot at 105 hectares.

Industrial Park "Fasindastry" was created in the city of Fastov, Kyiv region, by Fastov City Council, which is the initiator of the creation of this industrial park in the area of 15 hectares.

Industrial park N 17 "Fastindustry"

Region Town Fastiv of Kyiv Region

Initiators Fastiv City Council

Contest for selection of the management company is planned for Developer the first half 2018

Registration data 13.01.2017 registered

Term of activity 30 years

Size of the park 15 hectares

Planned results 450 new jobs

In order to equip the IP, it will be necessary to draw the tentative Investments to be 16.9 million. UAH (from the State - 12.7 million UAH, from the city - attracted 4.2 million UAH).

Attracting investments for city development, provision of favorable Overall purpose conditions for the development of industrial enterprises, increasing revenues to the city budget.

Functional Light, food, pharmaceutical industry; electronics and IT. purpose

Status Under construction

Netyazhuk Mykhaylo. Tel.: +38 04565 6 02 16, + 38 04565 6 16 70; References e-mail: [email protected]

Internet links fastiv-rada.gov.ua.

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 189 Industrial park N 18 “Mirotske"

Region Village of Myrotska in the Kyiv-Svyatoshinsky district of the Kyiv region

Initiators Ivanchenko Vasyl Leonidovich, a citizen of Ukraine

Developer Industrial Park "Myrotske" Ltd.

Data of 30.05.2016 registration

Size of park 36.67 hectares

Planned results: Up to 2,000 new jobs jobs

To attract approximately 42.633 million UAH; the cost of constructing Investments to be an engineering and transport infrastructure is at the level of 40.9 attracted million UAH

To provide favorable conditions for the placement of industrial production facilities, logistics centers, international trade and Overall purpose industrial representations, scientific, techno and innovation centers on prepared sites

To carry out the activities related to the processing of construction Functional materials; woodworking; light and food industry; instrument purpose making; alternative energy

Status Under construction

German Stanislav Viktorovich, 095 495-24-95 Stanislav.German.ua@ gmail.com References Volodymyr Kacharaba, Tel.: 050 617-29-15 e-mail: kacharaba.v@ gmail.com.

Internet links http://mirotske.com.

Source: Author.

The industrial park began its activity on 07.04.2016 and was included in the register on May 30, 2016.

Industrial Park Mirotske was dedicated to innovative high-tech small and medium- sized industrial enterprises. The park members are able to shortly build-up their industrial real estate within supportive ecosystem, teaming-up with modern innovative industrial companies including leading international players.

190 • 2017/18 Knowledge Sharing Program with Ukraine IP has fully developed and approved the urban planning documentation, what sufficiently boost realization of almost any new factory at our park. To reduce newcomers’ risks, IP provides preferential terms for the period of the property construction. Since the Property first stage development commissioned the Client is getting the land plot freehold certificate.

The Industrial Park Mirotske is located just 15 km from Kyiv, along the international highway M07 Kyiv-Kovel, and has a facade length of more than 1,300 m. The park site is surrounded by highly populated area of well-qualified labor force. More than five million people are living as close as 60-80 km to the park location. The total area of the first stage of the Mirotske Industrial Park is 336.7 thousand sqm and the area of more than 250 thousand square meters is under development for the second stage. The Industrial Park Mirotske as well as all land plots is in sole Ukrainian private ownership with a designated use – industrial land.

The project concept includes construction of solar power plant. The management company have completed the first stage in the amount of 2.039 MW, which have to be commissioned within March-April 2018. The second stage is about 4.0MW and will be delivered on December 2019. The IP development includes solar power plants mounted on the industrial building roofs. IP estimate to generate about 15 MW at 2025.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 191 Industrial-technological park N 19 "KYIVSCHYNA"

Region Novi Petrivtsi village Vyshgorod raion of Kyiv Oblast

Private Joint Stok Company (PJSC) "Industrial-technological park Initiators «KYIVSHCHYNA»

Developer

Data of 25.10.2017 registration

Size of park 150.43 hectares

Planned results: Up to 3,000 new jobs jobs

In order to create the engineering infrastructure, it will be necessary Investments to be to attract UAH 100 million. at the expense of the management attracted company and park participants.

Formation of proper conditions for the implementation of Overall purpose investment projects at the industrial sites and ensuring the socio- economic development of the territory.

Functional Agricultural processing, light industry, machinery and equipment, purpose logistics

Status Under construction

Village Novi Petrivtsi, Vyshgorod Raion, Kyiv Oblast, street Vatutina, References 34; Tel.: +38 468 23 02; email: [email protected]

Internet links N/A

Source: Author.

There are two industrial parks located in the city of Bila Tserkva. One of them is private industrial park, which is operated on the on the territory of the Communal Enterprise "Bila Tserkva Cargo Aviation Complex," using the ready production facilities of the former aviation repair plant.

Second IP Bila Tserkva is also private industrial park being created on rather new land plots and facilities. It was included in the register.

192 • 2017/18 Knowledge Sharing Program with Ukraine Industrial park N 20 Communal Enterprise "Bila Tserkva Cargo Aviation Complex” (IPCE “BVAC”)

Region The City of Bila Tserkva in Kyiv region

Initiator Bila Tserkva City Council

Developer LLC "INDUSTRIAL PARK MANAGEMENT"

Size of park 250 ha 70 resident companies

Data of Not included in the Register, operate since 2016 registration

Planned results: 1,000 jobs

Investments attracted

Overall purpose Submit facilities and services B2B (Business to Business)

Functional Cargo-repair works, logistic services purpose

Status Private IP. Operating.

Management company: Tel.: +380 44 364 78 89 mail: info@ip-bt. References com; +38 0456 34-45-92 [email protected]

Internet links http://ip-bt.com/ ; www.bcavia.com.

Source: Author.

Since 2000, in the city of Bila Tserkva, Kyiv region, an industrial park with about 70 resident enterprises is operating on the territory of the Communal Enterprise "Bila Tserkva Cargo Aviation Complex" (BVAC) in the area of 250 hectares, which provides jobs for over 1000 residents of the city and district. The overwhelming majority of industrial park companies use the production facilities of the former aviation repair plant, the rest - areas around the industrial site of the plant.

Also, in 2016, a private industrial park "Bila Tserkva 1" was created in this territory. The biomass CHP will be the first object to be built on the territory of this industrial park.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 193 Industrial park N 21 "Bila Tserkva"

The industrial park "Bila Tserkva" was created on the territory of the Shkarev settlement council of the Bila Tserkva district of the Kyiv region and included in the Register of industrial parks as of April 13, 2018.

Region Shkarevsky village council, Bila Tserkva district, Kyiv region

Initiator LLC "Industrial Park "Bila Tserkva 1"

Developer

Data of 13.04.2018 reestration

Term of activity 50 years

Size of park 24.14 hectares

Planned results: 3,000 jobs

Creating the necessary engineering infrastructure will require an Investments to be estimated 117.4 million UAH, and the construction and equipment attracted of the park - 2,740 million UAH. at the expense of initiator, management company, park participants, investors.

Ensuring economic development and increasing the competitiveness Overall purpose of the region, activating investment activity, raising the level of employment, developing modern production and market infrastructure.

Machine building and metal working; light and food industry; Functional woodworking and furniture industry; other industries that are purpose compatible with the foregoing.

Status Under construction

References Andrei Ropitsky: Tel.: +38(044) 364-78-89, +38 (066) 758-15-86

Internet links N/A

Source: Author.

194 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 13. Lviv Region

According to the Strategy for Lviv region Development for the period up to 2020, one of the tasks for the implementation of the strategic target "Competitive Economy" is to ensure the development of industrial infrastructure in the region through the development of a network of industrial parks.

The next project ideas are outlined in the Action Plan for Implementation in 2017–2018 the above strategy:

- construction of the engineering infrastructure of the Novorozhdy Industrial Park (NRIP). Stage 2;

- construction of the road infrastructure of Novorozhdy Industrial Park. Stage 3;

- creation of the center of primary processing of waste electrical and electronic equipment in IP;

In the Lviv region, there are 5 industrial parks, of which 4 are still being developed. In addition, creation of 3 more parks was initiated.

Industrial park N 23 “Yavoriv Industrial Park”

Region Village Nemyriv of Yavoriv District, Lviv Region

Initiator Yavoriv Rayon Council

Developer LLC “SiTiPark Lviv”.

Data of 26.04.2017 registration

Term of activity 30 years

Size of park 40 hectares

Planned results: 2,200 new jobs jobs

In order to equip the industrial park, it will be necessary to draw Investments to be approximately 193.4 million UAH. At the preparatory stage it will be attracted needed 3.1 million UAH. At the stage of construction will be needed 188.3 million UAH.

Ensuring economic development and competitiveness, attractng Overall purpose investments, raising the employment, developing modern production and market infrastructure.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 195 Continued

Functional Instrument making, machine building, metalworking, logistics, purpose trade and services

Status Under construction

References Hlyan Orest: Tel.: +38 (03259) 2-1254, e-mail: [email protected]

Source: Author.

The preparatory stage was implemented at the expense of the project of the Program of Cross-Border Cooperation Poland-Belarus-Ukraine on 526, 4 thousand UAH. There is still a need for 868 thousand UAH, which will be allocated by Yavoriv district council. At the expense of the State Budget, financing is provided in the amount of UAH 49 million. On the development of the engineering and technical network. 146.7 million. UAH planned at the expense of investors.

Industrial park N 25 “Novorozdilsky industrial park”

Region Town Novii Rozdil of Lviv Oblast

Initiator Novii Rozdil city council

Developer Still not selected

Data of 15.06.2017 registration

Term of activity 50 years

Size of park 46.4 hectares

Planned results: 1,150 new jobs jobs

Investments to be In order to equip the industrial park, it will be necessary to attract a attracted maximum of 471.2 million UAH.

To stimulate the economic development of the city of Novii Rozdil Overall purpose and the region as a whole, as well as to increase the quality of life of the population.

Production of eco-saving materials, products and technologies to Functional reduce the consumption of natural resources; to provide resource purpose efficiency

196 • 2017/18 Knowledge Sharing Program with Ukraine Continued

Status Under construction

Tsyura Andriy, Tel.: +38(096)3824398; e-mail: tsyura.andriy@gmail. References com

Internet links http://www.novyrozdil.lviv.ua/

Source: Author.

At the beginning of 2018 a regulation on the conditions for a competition for the selection of the management company of the IP “Novorozdilsky industrial park” was elaborated. It is scheduled to be approved at the session of Novorozdilsky City Council.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 197 Appendix 14. Odessa region

According to the Strategy of Economic and Social Development of Odesa region until to 2020, one of the tasks for implementing the strategic goal “Creating the modern industry” is the formation of a favorable investment climate in the region for attracting foreign investors, in particular by creating industrial parks.

Industrial park N 27 “iPark”

Region Village Visirka, Kominternivsky rn, in Odesa region

Initiators Citizens of Ukraine Stavnitser Oleksiy, Mushynska Valentyna

Developer Transinvestservice, a foreign investment company

Data of 01.09.2014 registration

Size of park 15,9996 hectares

Planned results: 1,195 jobs jobs

Investments 36 million Euros

Attracted investment

Attracting investments in the economy of the village Vizirka and Kominternivsky district, developing industry, attracting scientific Overall purpose potential for the innovative production, increasing the social standards of living

Building a modern industrial complex with developed engineering Functional and transport infrastructure, warehouse and administrative purpose premises. The priority directions are processing, instrument-making, automobile, electronic, and electrical engineering

Status Under construction.

Tel.: 38 0482 300-711, 38 0482 30-07-25, e-mail: [email protected] References [email protected], Mob: 38 067 517-80-69

Internet links http://ipark.info/

Source: Author.

It is planned to carry out works on the IP arrangement at the expense of private investors.

198 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 15. Poltava region

According to the Strategy of Poltava Region Development for the period up to 2020, one of the tasks for implementing the strategic goal "Improving the Efficiency of Economic Potential of the Region" is the promotion of the IP establishment. Possible areas for its implementation - the development of a scheme for deployment of industrial parks in the region and the creation of industrial parks in small towns , including in the territories of the old industrial zones). The Plan for the Development of the Poltava Region Development Strategy for the period 2015–2017 includes the project "Creation of the Industrial Park" and Central "in Kremenchug, Poltava region."

IIndustrial park N 28 "Central" (in Kremenchug city)

Region Town Kremenchug in Poltava region

Initiators Kremenchuk City Council

Communal Enterprise Kremenchuk Center for International Relations Developer and Economic Development named “Kremenchuk Invest”

Data of 01.04.2014 registration

Term of activity 50 years

Size of park 168.55 ha

Planned results: 4,225 new jobs jobs

Investments to be 16.3 million UAH (25% fro State budget, 8.8% from local budget, attracted 66.2% - non-governmental)

Attracting investment, introducing modern technologies of industrial production (machinery, automotive, energy, development of IT- Overall purpose technologies, electronics), the use of world experience of industrial production

Functional Industrial production (mechanical engineering, logistics, IT purpose technologies and electronics, alternative energy).

Status Under construction;

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 199 Continued

Maletsky Vitaliy,Tel.: +38(053) 673-00-44 email: [email protected], References Melnyk Andrey, Tel.: +38(053) 663-30-13, (067)247-11-27 e-mail: [email protected]

Internet links N/A

Source: Author.

In April 2017, work was begun on developing a detailed plan for the territory of the industrial park "Central" in conjunction with the state enterprise "Ukrainian State Research Institute of Designing Cities" and “Dipromisto” (funds are allocated from the local budget in the amount of 290 thousand UAH).

In August 2017 at the meeting of the working group on the creations of the project IP "Central,” the members of the tender committee selected and agreed zoning the industrial park.

The project "Creation of an industrial park” Central "in Kremenchug" was submitted for participation in the competitive selection of investment programs (projects), for implementation at the expense of the State Fund for Regional Development in 2018. As of February 2018, there was no works on the infrastructure of the territory of this industrial park.

Industrial park N 29 “Lannivsky industrial park”

Region Village Lanna in Karlovy district of Poltava region

Initiators The private enterprise “Lanivsky sugar factory”

Developer LLC “Lannivska MTS”

Data of 09.09.2017 registration

30.7135 ha Size of park 2 participants (an ownership of initiator)

Planned results: About 600 new jobs jobs

Investments 220 million UAH (own funds of LLC “Lannivska MTS”)

Attracted investment

200 • 2017/18 Knowledge Sharing Program with Ukraine Continued

Creating favorable conditions for ensuring the effective functioning Overall purpose of enterprises within common industrial zone; enhancing the level of socio-economic development of local and neighboring communities

To carry out the activities on the processing of agricultural raw Functional materials, food industry; agricultural machinery and services, as well purpose as logistics and storage.

Status Under construction;

Sanzharovsky Vladimir Nikolaevich, 0503045377, sk.lannacukor@ ukr.net, References Management Company: LLC "Lannivska MTS", Pidgayny Roman Aleksandrovich, 0503057662, [email protected]

Internet links N/A

Source: Author.

The industrial park is located on the territory of the former sugar factory and is developing at the expense of the initiator - LLC “Lannivska MTS”. The new elevator has been put into operation in 2017.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 201 Appendix 16. Sumy region

The Actin plan for realization of the Strategy of regional development of the Sumy region for the years 2018-2020 contains tasks for the implementation of the project "Creation of an adequate infrastructure of industrial parks" (project participants - executive committees of Shostkinska and Trostyanets city councils). At present there are three IP in the Sumy region: 2 under construction and 1 is operating. In addition, on May 23, 2018 an industrial park "Sumy" for 30 years have been created and its concept have been approved by the decision of the Sumy City Council.

Industrial park N 31 “Svema”

Region Town Shostka of Sumy region

Initiators Shostka City Council

Developer Communal enterprise "Industrial Park Svema"

Data of 06.06.2014 registration

Size of park 92 ha (free lands 76,5 ha)

Planned results: 2,035 jobs by 2020 jobs

Up to 34.6 million UAH (from the State budget - UAH 8.6 million, Investments from the other sources - UAH 26.0 million)

Attracted 457.6 thousand UAH from DFRD; 221.4 thousand UAH from city investments budget (2016)

To attract investments in the economy of Shostka, industrial Overall purpose development, attracting scientific potential for innovative production, raising social standards

Chemical production, manufacture of pharmaceutical products, Functional construction materials, plastic, wood processing, from provision of purpose logistic services

Status Continued construction.

Director of the Communal Enterprise “Industrial park Svema" References Andrusenko 38 066 Tel.: 5341315 e-mail: [email protected]

202 • 2017/18 Knowledge Sharing Program with Ukraine Continued

goo.gl/uvTpEF Internet links ipsvema.com.ua

Source: Author.

The IP "Svema" have been provided with electric power - 13,475 kW/h, water supply - 193 cubic meters/year, drainage - 192 cubic meters/year, natural gas - 49,900 cubic meters/year, heat 1,270 kcal/year. The IP has already an engineering infrastructure, but it needs repairing.

The IP "Svema" has become a member of the LLC Shostkinsky Elevator since 03.04.2016. The construction of the second stage of the "Shostkinsky Elevator" LLC, a participant of the IP, is underway. In 2017, the railway line, which connects the company with the southwest railway, have been put into operation. Volume of capital investments 2.5 million UAH. In the 1st quarter of 2018, the launch of the facility for railway shipment and drying is scheduled.

In 2016, the State Fund for Regional Development (named DFRD) selected two projects to finance the construction of the IP "Svema": (i) "Construction of electric networks to the industrial park" Svema (from the DFRD - 457.6 thousand UAH, from the local budget of the city of Shostka - 221.4 thousand UAH); (ii) "Reconstruction of roads to the industrial park" Svema "in Shostka" (planned amount of financing: from the DFRR - 993,7 thousand UAH, from the local budget of the city of Shostka - 112.0 ths. UAH). In 2017, the project had to be implemented at the expense of the city budget.

In 2017, two projects were submitted to the competition commission for selection of regional projects to be implemented at the expense of the state budget received from the European Union, namely: "Construction of industrial solar Power stations with capacity of 1.0 MW with ground-based panels in IP "Svema" and "Reconstruction of non-residential premises under the scientific and exhibition center of the industrial park "Svema." A contract was signed on 09.10.2017 from "Shostka-Elektromontazh-463" LLC on the construction of electric networks to the IP "Svema" in Shostka.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 203 Industrial park N 32 "Patriot"

The industrial park, “Patriot,” was created on the basis of a large textile company - the Sumy Worsted-Spinning Factory. It started its activity in 2008 and it is not included in the IP Register.

The IP PATRIOT provides space, communications, energy carriers and support services for more than 130 tenant companies. Participants of this industrial Park are enterprises, organizations and private entrepreneurs in the industrial, commercial and service sectors. The overall purpose of its activity is "business for business," creation of favorable conditions for the organization and development of entrepreneurship in production and commercial spheres in the Sumy region.

Region City Sumy, prospect Kurskiy, 147

Initiators LLC "Industrial park "Patriot"

Developer LLC "Industrial park "Patriot"

Data of 23.0.2018 registration

buildings Size of park 8,9681 ha 130 companies - 10,000 sq. m

Creation of favorable conditions for the organization of business Overall purpose and enterprise development at the industrial and commercial areas of the Sumy region

Organizing business under the scheme Production – Warehouse Functional – Office– next to a large number of companies that supply raw purpose materials and services

Status In operation since 2008

Novak Daniel Sergiyovich Tel.: +38 0542 77-31-75, e-mail: ippatriot@ References ukr.net

Internet links http://patriot.sumy.ua/

Source: Author.

204 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 17. Trans-Carpathian region

The Strategy for social and economic development of the Transcarpathian region for the period up to 2020 determines support for the development of IP infrastructure as one of the important tasks to achieving the strategic goal "Formation of a competitive and innovative economy".

According to the Strategy, it is planned to attract the largest volumes of investments to the industrial sector, in particular: - Solomonovo Industrial Park (production of cars, auto components and auto parts), it is foreseen to attract USD 7,0 million. US foreign investment; - planned industrial park "Narcissus" (pharmacology, cosmetology, food additives and in-depth processing of wild berries).

Industrial park N 33 "Solomonovo"

Region Village Solomonovo, Uzhgorod district, Transcarpathian region.

Initiators LLC "Sezparkservis," LLC "Euromotor," LLC "EuroavtoTek," LLC "RIC".

Developer Sezaparkservis LLC

Size of park 66.2 hectares (free square 41 ha)

Data of 06.06.2014, confirmed status on 16.03.2016 registration

Expected term of 30 years activity

Planned results: 10,000 jobs jobs

investments

The creation of a high-tech area, an analogue of the best world Overall purpose models, for the placement of productions of medium and precise engineering.

To become the placement of branches of medium and precise Functional mechanical engineering (automotive, instrumentation, electronic purpose industry, etc.).

Status Operating, under continued construction

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 205 Continued

Panov Volodymyr Alekseevich, 031261-24-47 [email protected], References Marina Paraschynets, 050 437-79-34, [email protected]

Internet links http://sezparkservice.com/

Source: Author.

During 2013–2017 the following works were carried out:

construction, modernization and reconstruction of objects of engineering and industrial

infrastructure in the territory of the first stage of the project;

construction and installation work on the territory of the second stage of the project (downgrade transformer substation of 110/35/10 kV Substation) (put into operation in 2015);

reconstruction of 110 kV overhead line Bathevo-Chop-Solomonovo;

commissioning works at the treatment plants "Biolider-250";

improvement of the power supply system (110 kV overhead line);

preparatory work for the technological arrival of the highway T07-07 "Solomonovo" - V. Dobron - Janosha and the construction of a fire department.

The Solomonovo IP is actually provided with electricity – 450 MW/h, water supply - 285 cubic meters/day, drainage - 296 cubic meters/day, natural gas - 3,680 cubic meters/hour.

Work is underway to search for park participants.

206 • 2017/18 Knowledge Sharing Program with Ukraine Appendix 18. Vinnitsa region

The Strategy of social and economic development of Vinnytsia region up to 2020 determines among the priority measures the promotion of the development of high-tech industrial park in order to implement projects using innovative technologies. Currently the two industrial parks are in the development in Vinnytsia region: one in the planning stage and one under construction.

Industrial park N 34 “Vinnitsa Industrial Park”

Region Vinnitsa region, city Vinnitsa

Initiators Vinnitsa City Council

Developer Vinnytsia Municipal Center for Innovation

Registration data 15.07.2016

Size of park 60.7 ha Free square – 60.7 ha

Planned results 6,400 new jobs up to 2026

For IP’s arrangement: 302.5 million. UAH (by source: state budget – Investments to be 75.5 million. UAH, Developer - 227 million. UAH); attracted For IP’s promotion: 100 thousand UAH from the city budget

Attracting investments, providing favorable conditions for Overall purpose companies, developing modern production and market infrastructure.

Production of food products, beverages and tobacco products; textile Functional production, clothing, leather and other materials; machine building; purpose manufacture of furniture, repair and installation of machinery and equipment; logistics, service

Status Under construction

Pogosyan Vitalii, Tel.: +38(0432) 59-50-40 e-mail: [email protected], References Managing company: Goshovsky Vasily Tel.: +38 (095) 646-59-09 e-mail: [email protected]

Internet links N/A

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 207 In January 2018 the managing company ordered the estimated documentation for the elaboration of a detailed plan of the Vinnytsia IP territory. Up to date, technical specifications for connecting IP to drainage and water supply networks have been received, a set of documents for obtaining technical specifications for connection to gas supply and electricity networks have been sent to regulators in Vinnytsia city.

Managing company is planning to carry out in 2018 the works on the construction of internal engineering networks, road surface and fencing structures due to attracted investments of the total value at 3.323 million UAH.

Industrial park N 35 “Vinnytsia refrigeration engineering cluster”

Region Vinnitsa region, city Vinnitsa

Initiators Vinnitsa City Council and Public joint-stock company UBC Group

UBC Group Developer (Ukrainian Beer Company)

Size of park 19,2676 ha

Registration data 21.05.2017

Planned results To create 2,020 new jobs by 2024 1,200 new jobs in spring 2018

Investments to be To draw 26.6 million UAH at the expense of the management attracted company and the companies-participants

To ensure economic development and increase the competitiveness Overall purpose of the city, create new jobs, and manufacture competitive products

To build a modern industrial complex with developed engineering Functional and transport infrastructure, warehouse and administrative purpose premises on the territory of the city

Status Under construction

Department of Economics and Investments, Vinnytsia City Council. References Tel.: 38 0432 595040, 38 0432 595122 e-mail: [email protected]; Kovalenko Valentin +38 050 301-91-31 [email protected]

Internet links N/A

Source: Author.

The Ukrainian Beer Company (named UBC GROUP) is co-initiator and the main developer on the IP "Vinnitsa refrigerating engineering cluster". It provided the construction of the

208 • 2017/18 Knowledge Sharing Program with Ukraine refrigeration plant manufacturing on the park territory. The first stage of this plant with 1,200 new jobs was estimated to put into operation in spring 2018. The company has already started recruiting staff and is actively negotiating with the Vinnytsa universities and vocational schools regarding the order for training young specialists.

As of April 2018, the initiators of creating the IP “Vinnytsia refrigerating engineering cluster” are working on its organization and holding an open competition for the selection of the management company.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 209 Appendix 19. Volyn region

The Action plan for 2015–2017, aimed at implementing the Strategy for the social and economic development of the Volyn Region for the period up to 2020, envisages the creation of two promising industrial parks in the region: the Pharmaceutical Industrial Park and the Industrial Park of renewable fuels, as well as the development of a technical feasibility study (TEC) for the creation of industrial parks in Volyn. Currently, there is one industrial park in this region, named Novovolinsk, which is still in the stage of construction.

Industrial park N 36 “Novovolynsk”

Region, location Volyn region, city Novovolynsk

Initiators City Counsil of Novovolynsk

Developer Not yet selected

Size of park 20 ha

Registration data 30.06.2017

Expected 30 years term of activity

Planned results To create 1,020 new jobs by 2024

To draw 26.4 million. UAH for infrastructure development (incl. 21.1 Investments million. UAH from State Budget, 1.1 million. UAH from City budget, 63.1 million. UAH from investors)

To ensure sustainable economic development of the city by forming a single territory with a specially equipped infrastructure for placing Overall purpose new objects of industry, innovation, logistics and related services aimed at ensuring economic growth, creating favorable conditions for attracting investments

Priority areas for tenants: engineering; instrument making; material Functional and technical supply and sales (logistics); light industry (textile, purpose sewing, leather and footwea); agricultural industry (greenhouses); IT cluster (outsourcing).

Status Under construction

210 • 2017/18 Knowledge Sharing Program with Ukraine Continued

Gromik Alexander, Tel.:+380678574974, mail: ekonomika@nov- rada.gov.ua, Serheyeva Veronika, Tel.: +380505854766, mail: invest@ References nov-rada.gov.ua, Tel.: +38(03344)41202, +38(03344)31633, mail: [email protected]

Internet links N/A

Source: Author.

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 211 Appendix 20. Zhitomir region

The Strategy for socio-economic development of Zhytomyr region for the period till 2020 determines among the other strategic goals "Sustainable development of multi-sectoral competitive economy of the region." One of the tools for achieving this goal is to strengthen the innovation potential by activating the work on the creation of industrial parks.

The Action Plan for implementing the above mentioned Strategy outlines the implementation of the following projects:

- construction of engineering networks of the industrial park "Korosten";

- creating the industrial park "SMOKOVKA" (Zhytomyr city);

- improving the energy supply of the city by constructing a 330 Kv and upgrading the transmission lines to create the Industrial Park “Novopark” (Novograd-Volynskyi town).

Currently there are three active industrial parks in Zhitomir region: “ZHITOMIR-EAST” (under construction), “Korosten” (changing concept) and “Ukrecoline” (private IP, operating).

Industrial park N 38 "Korosten"

Region, location Town Korosten of Zhytomyr Region

Initiators Korosten City Council

LLC "Ekobau Service" was defined in July 2015, but now the contract Developer is torn due to violation of the terms of the contract

Size of park 42.2 hectares

Registration data 31.03.2014

Expected term 30 years

Planned results 1,000 new jobs

For the IP construction, it is necessary to 9.1 million UAH. (1.4 million Investments UAH from State budget, 0,9 from the local budget, 6.8 million UAH at the expense of non-state funds).

The purpose of creating an industrial park is to attract the Overall purpose investments necessary for the development of the city.

Functional Instrument making, light industry, woodworking industry. purpose

212 • 2017/18 Knowledge Sharing Program with Ukraine Continued

Status Operating, but changing the IP Concept

Zhilin Alexey: Tel.: +38(041)425-01-44; +38(067) 411-09-43 References e-mail: [email protected]

Internet links www.korosten.in.ua

Source: Author.

Industrial park N 39 “ZHYTOMIR-EAST’’

Region, location City Zhytomyr

Initiators Zhytomyr City Council

Communal Enterprise "CENTER OF INVESTMENTS" of Zhytomyr city Developer council.

Size of park 24.7324 hectares

Registration data 27.10.2016

Expected term 40 years

Planned results 1,250 new jobs

Approximately 44.9 are needed for the IP arrangement (including Investments 9.9 million UAH from State budget, 1.3 from the local budget).

To ensure the city's economic development and increase its Overall purpose competitiveness, create new jobs, develop modern production and market infrastructure

Production of building materials; engineering; instrument making; Functional woodworking; manufacturing of goods of the light and food purpose industry; IT technology; construction of a logistics center and a center for maintenance and repair of airplanes.

Status Under construction

Chapter 2 _ FDI Promotion through Development of Industrial Parks • 213 Continued

Kostritsa Mykola, +38(0412)481202; +38(0412)481194; email: der@ zt-rada.gov.ua References Gorb Valery Mikhailovich, 38(093)2383806, +38(041)2481194; Email: [email protected]

Internet links N/A

Source: Author.

In November 2016, at the expense of the city budget, a project-budget documentation was prepared for the construction of engineering networks of the industrial park and a positive expert opinion had been obtained. Following the December 2016 tender for the definition of the executor of works, in January 2017, an agreement was signed with the contractor – Private Enterprise “Elitbud-1” (city of Zhytomyr) to carry out works on the construction of the IP engineering networks.

According to the measures in the Zhytomyr Utilities Development Program for 2016–2018, it is planned to allocate UAH 2.7 million in the city budget in 2017 for the arrangement of the IP territory (10% on terms of co-financing). Another part of the funds for realizing the first stage of construction is planned to be received at the expense of the State Fund for Regional Development (SFRD).

An alternative option is receiving financial support at the expense of domestic and foreign investors.

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2017/18 Knowledge Sharing Program with Ukraine

ksp .go.kr www. ity 30149, Korea c moef.go.kr Center for International Development, KDI Development, International for Center cid.kdi.re.kr Knowledge Sharing Program Sharing Program Knowledge www.ksp.go.kr (set) www. www.kdi.re.kr 5 7 94320 SBN 979-11-5932-348- SBN 979-11-5932-302- I I 791159 323485 9 Korea Development Institute Development Korea 263 Namsejong-ro, Sejong Special Self-Governing Ministry of Economy and Finance and Finance of Economy Ministry Korea Government Complex-Sejong, 477, Galmae-ro, Sejong Special Self-Governing City 30109, Tel. 82-44-215-7741 Tel. 82-44-550-4114