Thursday, September 27, 2012

Government grants to boost food processing investments in Eastern Europe

Agriculture is one of the most subsidized sector of the European Union, and Eastern European governments are keen to subsidize food processing investors.

Generally we can say, Eastern European governments' threshold stimulus is around 50 million euros investment and approx. 250 new jobs in food processing industry, under these numbers you are a very small investor. Governments normally sign an agreement with investor, so receiving a government grant is a contractual connection between the company and the government. It means, you get some money, but you also have some obligations, e.g: for job creation money you have to employ your staff for 1-2 years - and when you could't, you have to pay back the grant.
The subsidizing process always starts at the governmental investment promotion agencies: the PAIZ in Poland, the HITA in Hungary, and the RomTradeInvest in Romania. Decision making about the government subsidy requires normally 1-3 months.
There are several dues you can apply for, here we overview the most important:

#1 Subsidies for investments in "assets"
Governments appreciate the investments is real estate (new processing plant) and machinery. Machinery investments can be the main part of investment costs, e.g: Polish government subsidizes it with a 2-10% grant.
When you think about real estate grants, do not forget: real estate business is a particular profession, and real estate costs are approx. 10% only of the total investment - it's much easier to lease a property on a subsidized fee.

Case study: subsidized leasing in Polgar, Hungary Polgar Industrial Park, Hungary won an EU grant in 2012 for development of a new, 7,000sq.meter (75,000 sq.feet) manufacturing hall, available from Q4 2012. The grant provides a leasing fee discount for potential investors, and in the meantime they don't have to invest in a real estate.

#2 Job creation and other HR-related subsidies
The G-spot of Eastern European governments is job creation, this is the magic word you should build on. Some countries simply provides a "head money" for each new job created, others provide grant frameworksFor example, if you invest 40 million Euros in Romania, AND create at least 300 new food processing jobs, the Romanian government will offer a maximum 20 million Euros package. The final job creation grant in Romania depends on the location of the new plant (investments in underdeveloped regions get higher grants), contribution to infrastructure development, involving research and development, energetic efficiency improvement etc. Other governments subsidize also smaller costs (e.g:  training costs and employees' commuting cost in Hungary), but these are the typical schemes.

#3 Tax relieves
Eastern European governments are a bit shy when its about tax relieves. Before EU accession, most government provided large scale corporate income tax relieves, but the European Union doesn't like it indeed. However, most of the governments found smart, EU-compatible solutions for tax relieves. For example, the Hungarian government provides "development tax allowance", with the following scheme:
  • Amount of subsidy: exemption for 80% of the corporate tax payable for 10 years following installation. Up to HUF 500 M turnover the corporate tax rate is 10%, above HUF 500 M the tax rate is 19%.
  • Conditions: investment volume min. HUF 3 B (EUR 11.3 M), min. 150 new jobs OR HUF 1 B (EUR 3.7 M) investment volume and 75 new jobs in preferred regions
  • Application: depending on investment volume request or application needs to be submitted
  • Provider of incentive: Ministry for National Economy

#4 Cash grants
In the love packages of Eastern European governments there is two types of cash. All the grants above have specific goals, preferences, and obligations (e.g: re-training grants have to spend for local trainings), but when you hear about "cash grants" it means in general: you get money (normally not more than 5% of total investment costs) as a bonus.

The European sandbox
Finally: the government grants ("state aid" in European jargon) are generally prohibited by European Commission (the "federal government of EU"), because government grants have a negative impact on internal market competition. However, there are some exceptions, when EU not prohibits but supports state aids: the underdeveloped regions of Eastern Europe can provide grants on this way. The understanding of EU state aid policy can help to make better investment decisions, so lets take a look at the following presentation:


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