The IMF’s most recent visit to Ukraine ended with poor results for the Ukrainian side. No precise answer was given to the question of when Ukraine can expect its long-awaited loans. Every time the Cabinet reports to the fund on its attainments and every time IMF points to shortcomings, among them all those free economic zones which, although not spectacularly effective, still exist. And hence the IMF time and again reminds Ukraine that it must eliminate them. The Cabinet intends to deal with the issue of closing ineffective “special economic zones” and territories subject to special investment procedures. There are 11 SEZ and nine SIP regions, numbering 260 officially approved investments worth a total of $1.3 billion US. According to the State Tax Administration of Ukraine, budget revenues as taxes and duties levied on these projects have not registered any reductions, totaling some UAH 300 million since the time such special investment procedures were instituted.
Ihor KRAMARENKO, chief consultant, parliamentary committee for economic policy, administration of the nation’s economy, property, and investment:
Most SEZs are found in the developing countries and their products constitute over 5% of the world’s trade turnover. They also play an important role in reducing government influence on business, providing new jobs, stimulating an influx of foreign capital, expanding exports, and improving the balance of payments due to foreign exchange returns. Thus the Cabinet’s insistent opposition to the functioning SEZs (among them ones set up as instructed by the President) is surprising. The government says it is because of IMF pressure. The latter believes the integrity of the competitive environment can be damaged by SEZ tax concessions. What is so special about these concessions that causes so irritates the IMF? Basically, they are the same for all eligible business entities: VAT and customs duty exemption when exporting equipment and accessories for investment projects, income tax lifted for the first three years after the investment project becomes operational, 50% of the normal tax rate for the next three years, investment in the project excluded from gross income, and special customs procedures envisaging duty-free imports and exports. The “losses” sustained by the budget due to income VAT exemptions are rather quickly made up after the investment project starts to work. And customs duties on imported equipment are lifted only once, to stimulate the acquisition of modern technologies. Finally, the income tax exemption is effective for a limited period and cannot incur tangible budget losses or damage the competitive environment’s integrity.
Our domestic experience shows that there are positive and negative aspects to the SEZ, and the same is corroborated by world practice. Elsewhere in the world, the government provides allocations and builds an infrastructure before setting up a special economic zone. And then it invites investors to start doing business. Ukraine’s economic condition often makes such preparatory measures impossible, although they are the first and foremost requirement to every such project. Unequal starting conditions explain the different outcome of different SEZs. There are also specific reasons causing their ineffectiveness, mainly explained by local variations. Slavutych is a good example. The project is named after the city being the bedroom suburb of Chornobyl, so it would be ridiculous to expect quick progress there.
There is a special Cabinet-Parliament committee chaired by Stanislav Hurenko studying SEZ performance and that of all so-called priority development territories. Already several such projects are blacklisted, likely to lose their “free” status, but I will not identify them. Best we await the committee’s findings.
There are over 700 free [economic] zones across the world. What makes IMF attack those in Ukraine? Its experts regard them a source of concealed subsidization, damaging the competitive environment. This is why the fund demands closure of 19 such free zones in Poland as a condition of that country’s EU membership. It stands to reason to wonder about such a competitive environment in the United States, considering its intent to raise the number of its SEZs to 14. The answer is simple: the US is not borrowing anything from Ukraine. The issue would perhaps never be raised if we did not ask international financial institutions for help. So far, Ukraine is not paying for the music. If it is decided to close some SEZs, the consequences will affect the overall investment climate in Ukraine. Stable rules of the game are the main thing in the eyes of every investor. It is easy to imagine investors’ reaction to changes in the rules, after having weighed all the pros and cons and decided to go along with a given SEZ.
Oleksandr RIABCHENKO, chairman of the special parliamentary privatization oversight committee:
There are only two special economic zone in Ukraine, in the classical meaning of the word: in Zakarpattia and the Crimea. Here specific business procedures are really effective: All the others are largely exposed to subjective factors. Local authorities want such freedom as a way to implement the given region’s potential. This is correct, on the one hand, considering that by and large such potential is being utilized too inefficiently. On the other hand, there are problems, especially when such a free zone is set up in a territory absolutely unfit for the project. Until the government works out a uniform most favored investment status, Ukraine will need additional SEZs. At the same time, they must be placed under rigid control and whether they are worthwhile constantly analyzed. But isn’t it better to think things over first than decide to close a project afterward? Closing down the SEZ is just more evidence of our unstable economic policy.
International experts consider Ukrainian SEZs unnatural and insist they be closed. The West wants all of Ukraine to operate in a mode akin to that of a special economic zone. In other words, all economic policy must be investment-oriented. The trouble is, we still have a very long way to go to achieve this. Thus, we should try to do something where and whenever possible. I will not predict what SEZ will be closed, not before the Cabinet submits proposals to Verkhovna Rada. And this is not the point, after all, because closing down such zones will not solve our problems. The government must look for ways to secure normal working conditions, rather than punish the so- called guilty SEZs.
