The task of the state is to achieve a 20% share of the manufacturing industry in GDP within 10 years, - Dmytro Kysylevskyi

Since 2007, the share of the manufacturing industry in GDP has decreased from 18% to 10%

As long as Ukraine does not get rid of the resource curse and does not move to the development of the manufacturing industry and the production of goods with a high added value, it’s not worth hoping for a happy future and rapid development. Unfortunately, the awareness that we actually hide our economic prospects under the billow of grains is still not widespread in our society. That is exactly why ZN.UA decided to talk about the development of industry with Dmytro Kysylevskyi, the Deputy Chairman of the Parliamentary Committee on Economic Development and a person who is sure that Ukraine has no other way than to develop its manufacturing industry.

– Dmytro, as a person who has been advocating "manufacturing" for years, can you convince me that the development of the Ukrainian economy requires the stimulation of investments specifically in the manufacturing industry, and not in the energy branch, the agricultural sector, or the IT sector?

– The post-war recovery experience of all successful countries shows that their main focus was exactly the manufacturing industry. Moreover, it was an export oriented industry.

This is evidenced by the experience of Germany's post-war recovery. After all, the Marshall Plan, according to which Germany was restored, is a plan for re-industrialization of the country. That is, the revival of the manufacturing industry.

In the case of Germany, it was a conscious choice of the countries of the Western world, because they understood that an agrarian country would create a lot of problems after losing the war. And a powerful industrial country – the Germany we know now – will be a reliable barrier between the Western world and the Soviet one. In the end that's exactly what happened.

Japan and South Korea followed a similar path. Japan lost the war just like Germany. South Korea was freed from Japan. And both of these countries became the states we know now precisely because of the policy of creating an export-oriented manufacturing industry.

And it was also a conscious choice of their main ally – the United States, which enjoys these two countries as reliable and strong partners in the region. For example, other partners of the US in Asia, such as the Philippines or Indonesia, have not been able to create a manufacturing industry. They remained poor, resource-oriented agrarian countries. Therefore, they have more problems, and their citizens are incomparably poorer than the citizens of Japan or South Korea.

That is why, the absolutely conscious choice of the economic model for Ukraine after our Victory, and even without waiting for the Victory, is the creation of a manufacturing industry. These are jobs for Ukrainian citizens, these are additional taxes to the budget, and this is the generation of added value within the country.

– The current de-industrialization is not only the consequences of hostilities, isn’t it? What was the "contribution" of the country's industrial policy into such de-industrialization in recent decades?

– De-industrialization in Ukraine began long before the invasion and even before the start of the war in 2014. We can follow this process with the help of the dynamics for the shares of the manufacturing industry in GDP and in exports.

If in 2007 we had a share of the manufacturing industry in GDP of about 18%, then in 2021 this indicator was already a critical 10%. The same applies to exports. In 2007, the share of the manufacturing industry in exports was about 73%, while in 2021 it went down to approximately 37%. 

That is, Ukraine has been gradually losing its industrial potential over the past 15 years. It has been increasingly becoming a raw material country – both in terms of GDP and exports.

Now the war is virtually finishing off our industry, since the hostilities affected those regions where it was most developed. These are Kharkiv, Zaporizhzhia, and Dnipropetrovsk regions, previously unoccupied parts of Luhansk and Donetsk regions, Mariupol and other cities.

– I can't help but ask about the sore point: how does the enemy’s shelling of the Ukrainian energy system now affect local manufacturing enterprises?

– Absolutely all Ukrainian industrial companies suffer from power outages. It is absolutely clear. Those enterprises that have a continuous production cycle are especially affected by the shelling.

All citizens of Ukraine are grateful to the Air Defense Forces, the Armed Forces of Ukraine, and the energy industry employees, who quickly restore power grids in extremely difficult conditions.

If we talk about the practical side of the issue, it is desirable that businessmen, heads of regional administrations, and managers of regional energy companies be in constant contact with each other and look for compromise solutions.

For example, if there are enterprises whose technology involves a certain rhythm of continuous operation, then for such an enterprise, working one week after another could be an acceptable solution. There are enterprises whose technological cycle allows them to work at night, when less electricity is consumed. So they could work in night shifts.

That is, for different types of production facilities, you can try to find solutions that will allow them to keep the production capacity at least at some level in those critical circumstances that exist now. The main thing is that all interested parties should have a desire to do that. It should concern not only the enterprises, but also local authorities and power grid operators.

– What points of effort do you see for the development of the manufacturing industry?

– This is an issue we are constantly working on. On the one hand, there is no need to invent something new here for a long time. Many countries before us have already passed this way. On the other hand, not everything can be done at once.

Among the growth points for the industry, I see the following:

• Processing of raw materials that are grown or mined in our country;
• The demand for industrial goods from the growing sectors of the economy, with the appropriate state policy, can give an impetus to the development of production of such goods in Ukraine;
• The state's demand for industrial goods should be covered mainly by products of the Ukrainian origin; and
• Substitution of imports from Russia and Belarus with Ukrainian goods – both on our market and on the markets of EU countries.

– And what tools has the state introduced at present to motivate investments in the manufacturing enterprises?

– Unfortunately, the number of such tools is quite low now. They need to be created. Among those that currently exist there is the "5-7-9" preferential loan program, thanks to which people can get access to cheap money.

This is a program of grants for the development of the manufacturing industry. These are not some extra-large grants – up to UAH 8 million. But this money will also come in handy for small-scale producers.

The Ministry of Economy announced the possibility of insuring new investments against military risks. This insurance will be provided by international entities. So far, it is available only for foreign investments, but work is also underway to introduce similar tools for Ukrainian companies.

Then there are industrial parks. This mechanism has been already implemented in terms of regulation – all legislation and by-laws have been adopted. Communities are already starting to set up industrial parks.

In addition, the Export Credit Agency (ECA) has been finally launched. Therefore, Ukrainian exporters of value-added products can receive export financing.

Since July of this year, the requirement for a local component in public procurement has also come into effect.

– Look, if you evaluate each tool, taking into account that the localization requirements are in force for five months, can we already talk about some results?

– The law was adopted at the end of last year. In the first half of the current year, the Cabinet of Ministers developed and approved the necessary by-laws. So this mechanism was finally launched on July 14.

Currently, there is a very limited list of products to which this requirement applies. These are mechanical engineering products of several categories: city and railway transport, utility and special machinery and equipment, and power engineering.

Accordingly, those state or communal customers who purchase a tram, locomotive, or garbage truck must demand that this product contains a part of components of the Ukrainian origin. This year, this share is 10% and it will be 15% next year. Then it will gradually rise until it reaches 40%.

Participants in the public procurement process with the required share of localization submit information about their goods to the register, which is maintained by the Ministry of Economy. This is a list of products with a confirmed share of localization. And this list already has more than a thousand products. That is, manufacturers register their goods in it quite actively.

We see that some purchases of products with a mandatory local component have already taken place. They are conducted quite successfully, and Ukrainian manufacturers participate in them. For example, the Lviv Military Regional State Administration purchased a large batch of school buses manufactured in Ukraine.

This is a good example of how it works. The Lviv authorities have solved their task – to have vehicles to transport children to their schools. Meanwhile the Ukrainian company that manufactures these buses, as well as its suppliers that produce components for these buses, got some orders, and their workers received their salaries, being capable of supporting their relatives with money, the state – with taxes, and the Armed Forces of Ukraine – with donations.

The benefit of such behavior during the tender is well understood in contrast to similar purchases made by the Ukrainian capital in previous years. For example, in 2021, Kyiv bought MAZ buses manufactured in Belarus. 

Even then it was clear that this was a very inappropriate step for both economic and political reasons. But now its inappropriateness has become even more apparent, since the purchase of MAZ vehicles involves the supply of spare parts from Belarus. And, obviously, there are problems with this now.

– Have tax and customs incentives, which began to operate during the war, given a new impetus to the industrial parks?

– The package of legislation on industrial parks (IP) consists of three laws. These are amendments to the basic Law on industrial parks, which was adopted last year.

In addition, these are two laws on amendments to the Tax and Customs Codes, which actually provided fiscal incentives for IPs. These two laws have been adopted this year. We should give credit to the Cabinet of Ministers, which developed and adopted the by-laws quite quickly, and this mechanism started to work.

Since the adoption of this updated legislation, we see that about 10 IPs have already been entered into the register according to the new rules. And we see the communities’ interest in this tool. Why did I mention communities? Because IP is a tool that a community can use to stimulate economic activity on its territory. That is, this is the legislation, using which a mayor or a head of an amalgamated territorial community can attract an investor.

IP is a plot of land for industrial purposes, where roads and networks were built or arranged at state or municipal expense. There are some customs and tax incentives, being in effect in this territory. Now the head of the community has a good argument for negotiating with investors and inviting them to his or her location. And we see quite great interest in this among communities. I recently returned from Volyn, where I participated in the opening of a new industrial park in the city of Novovolynsk.

Lviv deserves special attention in terms of the IP development. A year ago, grass was growing in the industrial zone of Syhnivka – there was nothing there. And now an industrial building has already been erected there, which is waiting for the residents of the IP. The city authorities of Lviv made a decision to cancel the land tax for IPs located on the territory of the city.

The Lviv Industrial Park in the Ryasne residential district, which is managed by the Dragon Capital investment company, has attracted funding from the European Bank for Reconstruction and Development (EBRD) in the amount of $24.5 million for the development of this area. That is, we see attention to the IP tool from both local authorities and private companies and international financial organizations.

– The Export Credit Agency (ECA), which was established a few years ago, was supposed to become one of the incentives for the export of industrial products. What is it doing now?

– The fate of the Export Credit Agency in Ukraine is quite sophisticated, as is the fate of other industry-oriented initiatives. Why do I say that? The Law on ECA was adopted back in 2016. The following year, the Government had to adopt all by-laws, approve the governing bodies, and launch the agency’s operations. Unfortunately, several successive governments had sabotaged the creation of this extremely important institution. So ECA was finally launched only in 2020.

And let me remind you that export credit agencies operate in all developed countries of the world – without any exception. Their purpose is to help exporters of their country sell products with high added value on export markets. This is a very common practice – and very effective.

What is German Hermes or Italian SACE hardly needs to be explained to someone who is engaged in international trade. And finally, Ukraine got an institution, which in perspective should get that extremely important place in the Ukrainian economy.

Until recently, ECA offered only one product to its customers – insurance of export non-commercial risks. And it is obvious that this was not enough. So since May of this year, ECA began to offer its customers a rather interesting product. This is an insurance policy that banks can accept as collateral for a loan for the performance of an export contract.

How does it work? For example, a Ukrainian exporter has to execute an export contract. He will receive the money for it after the shipment of the goods, but he needs financing to fulfill the contract. Then he can come to a bank and show his export contract. The bank will contact the ECA, and if this borrower meets the bank's requirements, the ECA will provide him with an insurance policy, which the bank will accept as collateral for the loan. Therefore, the exporter will get his financing to execute the export contract.

The Government regulated this interaction in such a way that banks will provide a loan under the "5-7-9" program. That is, the exporter receives financing at a good interest rate. And he does not need to look for property as the loan collateral – it will be represented by the ECA insurance policy.

Using this opportunity, I call on all Ukrainian exporters of goods with a high manufacturing share to get interested in the operation of the ECA, to meet with the institution’s employees, learn about the conditions, and use this tool. And the list of tasks that must be performed by state representatives in this area includes the increase of funding limits (because they are quite low at present) and the expansion of range of the ECA offers.

The next steps in the development of ECA's product line may be export factoring (a loan before closing the contract) and Buyer's Credit – provision of loans to foreign buyers of Ukrainian goods.

– If we mention the already available support loans, do enterprises of the manufacturing industry use, for example, "5-7-9" preferential loans?

– The "5-7-9" program is actually in effect. Obviously, this requires money from the state budget. And it is also obvious that this resource is limited. The problem is, so to speak, the spontaneous principle of loan distribution.

What I mean here is that it is easier for banks to give loans for import operations – and banks do it. Banks have experience in lending to farmers. And they do it under the "5-7-9" program. At the same time, banks have fewer clients among the manufacturing industry enterprises.

If we talk about what the state policy should be, then the state should direct the limited resources, allocated under the "5-7-9" program, to those types of economic activities that will bring the highest benefit to the state. This means that the main priority of the soft loan program should be lending to exactly the manufacturing industry, rather than to the import of foreign goods.

Being guided by this principle, it is necessary to adjust the "5-7-9" program for the next year. For example, at present, trade companies can get loans of up to one billion hryvnia – while all other enterprises can receive UAH 60-120 million.

The Ministry of Economy has already taken some steps to change the priorities of this program. In particular, a loan program was introduced to restore manufacturing enterprises that were destroyed or damaged as a result of military operations. This is a good program, and it is really great that it appeared. But it has the same drawback as most other programs – a quite low money limit. The maximum amount that a company can receive under this program is UAH 60 million. It is obvious that not all manufacturing plants can be restored with the help of UAH 60 million.

That is, the development of this tool should be changed in the direction of raising the limits for manufacturing enterprises and increasing the share of loans for them in the total portfolio of issued loans.

– You mentioned grants. The Cabinet of Ministers provides them for businesses in the amount of up to UAH 8 million with the condition of creating jobs, making 50% of own investments, and returning the grant through taxes. Isn’t this amount too small for manufacturers? What goals does the Government set for itself by introducing such a tool?

– The amount is obviously too low. But we understand that the Government has limited financial capabilities, and the Government should be praised for being able to implement and launch this program. This is a very good form of small business support and an absolutely correct signal from the Government to business on what kind of economic activity the state expects. The state says: we want the manufacturing industry, so here are grants for the manufacturing industry.

Now the task for the Government, when communicating with donors and foreign partners, should be to convince them of what the priorities must be, so that the use of international loans and grants will generate the maximum possible multiplication of paybacks for the Ukrainian economy.

– Can you give examples of other countries where the idea of stimulating the industry worked perfectly?

– I already mentioned a number of them at the beginning: these are post-war Germany, Japan, and South Korea. But there are more recent examples – our neighboring countries.

The share of the manufacturing industry in the structure of Ukraine's GDP in 2021 was about 10%, which is a critically low indicator. While in countries neighboring us, such as Poland, Slovakia, and Turkey, this indicator is twice as high – approximately 20%.

It should also be noted that the share of the manufacturing industry in the structure of GDP has a direct correlation with the level of poverty in the country. Our GDP per capita at purchasing power parity is approximately $14,000. Meanwhile, in neighboring countries, this indicator is around $35,000.

And they achieved this level of industrial development precisely thanks to the stimulating tools: industrial parks, development banks, export credit agencies, institutional incentives for the manufacturing industry, etc. This industry did not appear just by itself.

These countries did not rely on the "invisible hand of the market"; they did not say that the state should remove itself from the economy and watch how everything will happen by itself. No way – these states purposefully developed their manufacturing industry through the state stimulation tools.

I can give you an example here. Slovakia has grown an extremely powerful automobile industry in the country. And it was possible to do this thanks to the active role of the Government, which stimulated the development of this industry – by compensating a part of investments, by bringing infrastructure for these enterprises, by creating individual conditions for the requirements of each specific car manufacturer, and so on.

At the same time, former Slovak government official Ivan Mikloš worked as a consultant of the Prime Minister in Ukraine. And when Ukraine had a chance to attract one of the world's car manufacturers to start the production here, Mr. Mikloš for some reason gave the Ukrainian Government advice that was significantly different from the approaches followed by Slovakia. And by some strange coincidence, this car manufacturer did not choose Ukraine for the location of its production facilities, but chose Slovakia instead.

– In your opinion, who is the most active in attracting investments to create the manufacturing industry – the business itself, the Verkhovna Rada, the Cabinet of Ministers, or local governments?

– The experience of my recent communication with local authorities shows that communities will become an extremely important player in the field of attracting investment in the manufacturing industry. It will happen because leaders of communities, especially large and capable ones, understood that the emergence of new industrial enterprises means money for local budgets and jobs for their voters.

Therefore, in my opinion, providing communities with those tools that they themselves can use to attract investors should become one of the directions in the development of industrial policy tools.

The already mentioned example of Lviv concerning the industrial parks is one of a number of examples of the fact that communities are ready and truly interested in doing so.

– What groups of goods, previously supplied by the Russian Federation and Belarus, can Ukraine substitute on the domestic market and on the markets of European countries?

– On the Ukrainian market of products of the manufacturing industry, imports from the Russian Federation and Belarus averaged $11 billion per year. This amount does not include the imports of energy carriers and minerals. These countries supplied an average of $25 billion worth of the manufacturing industry products to the European Union.

We can completely substitute the vast majority of goods of this import with our own production. These are products made of ferrous metals, the output of the woodworking industry, chemical products, polymer materials, etc.

For example, Russia annually supplied the EU with rapeseed oil worth $0.5 billion. At the same time, we export only rapeseed to the EU. That is, for us it could be a simple successful case: we can process the seeds into oil at home and substitute Russian products in Europe.

As for other items that were imported to Ukraine from the aggressor country and its satellite, these are petroleum products. It is necessary to work with this category quite actively. Now we can substitute the production of fertilizers and polymer products.

An interesting example is flat glass. Until last year, we covered about 70% of our needs with glass produced in Russia or Belarus. In the era of large-scale restoration of destroyed property, we will have to take care of this. After all, the demand for glass will be incredible. And it is best that we cover this demand with our own production.

– What else needs to be done for the development of the manufacturing industry?

– Ukraine does not have to reinvent the wheel. It is enough to look at the tools used by other developed countries to achieve high rates of economic development – and introduce them in Ukraine.

In general, the list of these tools includes the following:

• Military risk insurance;
• Access to long and cheap money;
• Significant simplification of connection to networks;
• Incentives to create the manufacturing industry, such as compensating a part of capital investment through taxes or industrial parks;
• Stimulation of domestic demand for local goods through public procurement or through government programs;
• Stimulation of export of finished products through ECA, trade diplomacy, exhibition activity, etc.; and
• Modification of both the tariff and customs policies to reduce the price of import of raw materials, components, and some types of equipment for production with simultaneous restriction of export of raw materials.

The last point means that the task of the state should be to create a situation where it would be less profitable to export raw materials from Ukraine than to export manufactured goods – on the one hand. On the other hand, it should be profitable to import raw materials to Ukraine – especially the ones that are not produced here. Also, any restrictions on the import of components that are not made in Ukraine, and on the main production equipment that is not manufactured in Ukraine, should be removed.

If this entire set of tools is implemented in our country, then each of the manufacturers will be able to choose from this "investment menu" those tools that exactly correspond to their type of business.

– So what will be the result of conducting the correct industrial policy?

– Manufacturing industry is the creation of added value. Therefore, the implementation of a policy for its development in Ukraine will result in a significant increase in the Ukrainian GDP.

The benchmark for the share of the manufacturing industry in GDP, which is determined by the OECD (Organization for Economic Cooperation and Development), is 20%–25%. That is, in their opinion, this is the share that should be in GDP of a normal economically developed country. Let me remind you that Ukraine now has 10%, and in the conditions of war, unfortunately, this share is rapidly decreasing.

The goal that the Ukrainian state should set for itself is to reach an indicator of around 20% for the share of the manufacturing industry in GDP within 10 years. This is an economically justified and quite realistic target. As I mentioned at the beginning, in 2007 the share of the manufacturing industry in Ukraine's GDP was approximately 18%.

The situation with export is quite similar. In 2007, we had a share of the manufacturing industry in exports of slightly more than 70%. Now we have moved down to the level of about 37%. And the task that must be solved within the next 10 years is to increase the share of the manufacturing industry in exports to the level of more than 75%.

Actually, this specific achievement – the growth of the manufacturing industry level in the structure of GDP and exports to reach the OECD standards – will become a real economic European integration of Ukraine.