Posts Infrastructure electricity 1735 05 August 2024
Lack of readiness of infrastructure, unification of classes and rising prices for electricity can completely stop the development of industrial parks
Industrial development and stimulation of investments under war conditions is a difficult and sometimes impossible task for the authorities. However, it so happened that industrial parks (IPs) were developed in Ukraine after the outbreak of a full-scale war in mid-2022. Receipt of tax and customs incentives and large-scale relocation of enterprises due to the war led to a rapid growth in the number of new parks and intensification of construction in existing ones. However, there are no fewer problems, the main of which is the insufficient development of infrastructure, which in many parks has to be created practically from scratch.
Unexpected growth
Since the beginning of the war, Ukraine has seen a boom in the creation of new parks. In 2023, private companies and local authorities initiated the creation of at least 30 parks, of which only 13 were registered. Since the beginning of this year, 18 parks have been registered in the Register of Industrial (Industrial) Parks, which is more than for the whole of last year. A total of 86 IPs are currently entered in the Register, and parks not included there are also operating.
“In the tenth year of IP development, quantity finally began to outgrow quality. By the beginning of the war (Q1 2022), only four of the registered 62 parks were operating. In 2023, the number of operating IPs doubled, now totaling 15 parks. In 2025 the number of working parks can grow to 30, due to those that are now actively building”, emphasizes Valeriy Kirilko, CEO of the group of companies ‘Industrial Parks of Ukraine’.
More qualitative selection takes place at the stage of registration. Now the Ministry of Economy carefully evaluates concepts, financial model and the ability of the initiator to realize it, says Andriy Ropitsky, director of the industrial park “Bila Tserkva”.
Other qualitative changes in the work of parks include the following:
- almost all new parks have investors, residents or management companies;
- half of the parks were created by “quality” participants – with investment opportunities and development plans;
- the initiators of park creation have started a more active search for management companies due to the risk of being excluded from the Register.
The staggering rate of appearance of new parks in 2023-2024 has its own reasons:
- Appearance of real tax and customs incentives for IP residents in 2022. This created conditions for the restart of IP as a tool for attracting investment.
- Relocation of more than 1.5 thousand enterprises, which started looking for sites to operate in the central and western regions of the country. A sharp increase in demand for industrial space contributed to the intensification of construction in parks, which previously existed only on paper.
- The launch of programs to support IPs by the government, especially in the direction of infrastructure.
“The active growth in the number of IPs is largely the result of government support and stimulation of their development. The government is taking a number of measures aimed at creating favorable conditions for attracting investment and developing the infrastructure of these parks,” explains Mikhail Sakun, investment director at Dragon Capital.
In the state budget-2024 for the development of IP for the first time UAH 1 billion is allocated for co-financing the construction of engineering and transportation infrastructure or compensation for connection to such facilities. To implement these plans, on June 4, the government approved the relevant procedure, which provides for the allocation of up to UAH 150 million to one applicant. The co-financing of works will take place in the ratio of 50/50, in the de-occupied territories – 80/20.
The situation with investors
Almost all investors who are interested in locating production facilities in the parks are Ukrainian companies. The share of Ukrainian investors in the total investment structure of IP residents is now almost 90%.
Due to high military risks, lack of effective insurance mechanisms and other reasons, foreign companies are not interested in the Ukrainian market. There is partial interest (within 10 requests per year) from companies from Turkey, South Korea, Germany, Poland and others.
The largest number of inquiries comes from the agribusiness and food industry – from construction of elevators to processing, developers of warehouses and logistics facilities, manufacturers of building materials, where 50% are foreign companies. They expect that during the post-war reconstruction of Ukrainian infrastructure there will be a great need for various building materials.
Other trends in IP development include the emergence of industry clusters based on IP and network management companies, the development of specialized parks, and the increasing role of local authorities in the creation and management of parks. This contributes to the fact that industrial parks are becoming an important element of regional economic development.
Infrastructural (un)readiness
The most important factor in the attractiveness of a particular IP is the availability of ready engineering and transportation infrastructure and industrial buildings. According to the nature of applications received for site selection, we can note a sharp increase in demand for ready-made areas rather than for plots for construction.
“Initiators and management companies should realize that as long as there are no communications, the probability of inclusion of residents and participants in IP will tend to zero. Investors in their inquiries now no longer ask about existing utilities (electricity, gas, water), as their availability or proximity to IP (up to 500 meters, with free capacity) is a prerequisite”, says Valeriy Kirilko.
At the same time, the majority of Ukrainian IPs are still far away from infrastructural readiness for “arrival” of residents. As of the third quarter of this year, 61% of registered IPs have highways, power, water and gas supply – 25-29% respectively, railroad tracks – only 17% of parks. At the same time, the overall infrastructural picture is deteriorating due to the rapid increase in the number of new IPs with initially underdeveloped engineering and transportation networks: 50% of new parks are old industrial zones (brownfield) and another half are land plots in a “clean field” (greenfield).
Electricity supply in IP
Amid current problems in the energy sector, the issue of electricity supply and the state of the energy infrastructure in general is acute. Only a quarter of registered parks have a connection to the power grid, and in parks, as elsewhere in Ukraine, until recently there was a problem of power outages.
“The state of energy infrastructure in industrial parks remains one of the key problems. Interruptions in power supply exist and have a significant impact on the cost of production and overall efficiency of enterprises,” emphasizes Mikhail Sakun.
Declaration of a particular power connection capacity does not always guarantee its real availability. According to Valeriy Kirilko, one of the parks formally had an input for 5 MW of power, but in fact it was not available.
According to experts, now many parks try to solve the problem of energy supply on their own – they already build or design construction of solar power plants (SPP), gas-generating plants, industrial energy storage systems. All new park residents working in the food industry immediately design the construction of biogas plants nearby.
Creation of own generation is quite capital-intensive. According to the experience of IP “Bila Tserkva”: the device of SPP with a peak capacity of 654 kW will cost $356 thousand or $567 per 1 kW of capacity. If each resident is interested, they can set up their own SPP, as there are suitable roof structures for mounting solar panels on every production and warehouse building in the park.
Expensive energy and class unification
Recent decisions regarding electricity supplies to large consumers have jeopardized the development of industry in general and, in particular, industrial parks. Since June, the Cabinet of Ministers has raised the size of electricity imports to 80% of the consumption structure, at which the power supply without blackouts is guaranteed. At the same time, until recently, one of the key factors of investors’ interest in locating production facilities in Ukraine was the lower cost of electricity and gas compared to the European market.
“When importing electricity in the amount of 80%, as required by the Cabinet of Ministers resolution, this temporary competitive advantage disappears. At the same time, the conclusion of a direct import contract does not always mean that it is technically possible to supply imported electricity to the buyer due to the peculiarities of the functioning of power grids – sometimes it is impossible to realize it. The cost of electricity remains too high for industrial enterprises and forces them to balance on the edge of profitability,” says Andrei Ropitsky.
In addition, in July, the National Commission for State Regulation of Energy and Public Utilities (NEURC) planned to unite tariffs for electricity distribution – to make one of two classes, differing in voltage level. This would call into question the investments that companies have made in building the energy infrastructure.
Kronospan Ukraine, a resident of the IP of the same name and one of the largest producers of wood sheets, can be cited as an example. Since 2019, the company has rebuilt the entire energy infrastructure of the Kronospan Rivne Park, investing: in new power grids – UAH 400 million, a new substation – UAH 260 million, gas generation for 10 MW – UAH 250 million. These investments allowed to move from the 2nd class to the 1st class, and tariff unification may increase costs by more than UAH 100 mln annually. This amount is equivalent to the investment in the new furniture factory project.
“We are investing in energy infrastructure with the expectation of stable rules of the game. If the classes of industrial consumers will be united, not only the plans for the construction of new production facilities may be disrupted, but it will also put in doubt the already implemented investment projects,” Yuriy Dyug, representative of Kronospan Ukraine, told at the meeting organized by the Federation of Employers of Ukraine.
Not all IPs belong to the 1st voltage class. The park “Bila Tserkva” receives electricity with nominal voltage of 10 kV – this is the 2nd voltage class. The park also has a connection to the power grid according to the 2nd category of power supply reliability. According to Andriy Ropitsky, this means that in the event of a power failure of one of the power sources, the interruption of power supply lasts for the time necessary to switch on the backup power supply. In case the outage is prolonged and both power sources are disconnected, the management company ensures the operation of critical infrastructure: fire tank and fire sprinkler system using its own backup generation.
Class separation is available in 26 out of 27 EU countries. If the decision is adopted – Ukrainian parks will become uncompetitive compared to any EU country. This means that foreign investors will choose Slovakia or Morocco instead of Ukraine, and Ukrainian investors and enterprises will prefer Poland, Bulgaria or Hungary when choosing the option of relocation and expansion of production.
The Ministry of Energy’s strange desire to “sponsor” Energoatom with funds at the expense of war-torn industry will destroy the prospects of Ukraine’s economy. The EU will also not want to accept another country into its membership, which will have to be subsidized in everything, as there will be no industry to support the economy.
After the information about the possibility of unification of tariffs for distribution and fair indignation of business, the NEURC postponed this decision for a while, and then planned the transition to three voltage classes. This is exactly what is laid down in Ukraine’s European integration documents, and the decision should be made no later than 2025.
Prospects for industrial parks
In general, the real results of infrastructural development and operation of parks can be seen no sooner than in a few years. Important prerequisites for their effective operation are reduction of military risks, launch of investment insurance mechanisms, increase in the number of foreign investors, etc.
“As a rule, the process of attracting investment and filling the parks requires a certain amount of time, so we can talk about specific development results in a year or two. Now it is important to monitor how the infrastructure of these parks will develop and which companies will decide to locate their production facilities on their territory,” summarizes Mikhail Sakun.
Predictability of tariff policy of state monopolies, tax policy of the state is a prerequisite for potential Ukrainian and foreign residents of indparks to plan their investments and work in Ukraine for 5-10 years. The very fact of considering the decision on unification of classes has already created new risks for existing and potential investors. The fact that this decision was temporarily postponed does not play a role – business will take it into account in its planning. The state should be very careful in its actions – we are already a high-risk country.
“Expensive electricity and unpredictable tariff policy may finally kill the idea of developing the manufacturing industry through the concept of industrial parks” summarizes the director of GMK Center, Stanislav Zinchenko.