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ESTABLISHING EXPERIENCE OF SPECIAL ECONOMIC ZONES IN
CIS COUNTRIES Avlezova Gulzada Dauletbaevna
(e-mail: [email protected]) 1st year master degree of World Economy University of world economy and diplomacy, Tashkent, Uzbekistan
New special economic zones (SEZs) regimes have been introduced over the last decade in many CIS countries including the Russian Federation, Uzbekistan, Kazakhstan, Tajikistan, Ukraine, Georgia and Kyrgyzstan. The first "modern zone" was established in Ireland in 1959. Since then, a variety of different zone setups have evolved that are subsumed under the SEZ concept namely:
• Free trade zones (FTZs; also known as commercial free zones) are fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations.
• Export processing zones are industrial estates aimed primarily at foreign markets. Hybrid EPZs are typically sub-divided into a general zone open to all industries and a separate EPZ area reserved for export-oriented, EPZ-registered enterprises.
• Enterprise zones are intended to revitalize distressed urban or rural areas through the provision of tax incentives and financial grants.
• Freeports typically encompass much larger areas. They accommodate all types of activities, including tourism and retail sales, permit on-site residence, and provide a broader set of incentives and benefits.
• Single factory EPZ schemes provide incentives to individual enterprises regardless of location; factories do not have to locate within a designated zone to receive incentives and privileges.
• Specialized zones include science technology parks, petrochemical zones, logistics parks, airport-based zones, and so on.
The rapid proliferation and economic impacts of SEZs, especially export processing zones, have been documented in numerous studies. By some estimates, there are approximately 3,000 zones in 135 countries today, accounting for over 68 million direct jobs and over $500 billion of direct trade-related value added within zones.1
CIS nations began developing Free Economic Zones in the early 1990s. Economic performance of Free Economic Zones was mixed over the 1990s due to a number of reasons, including:
1. Challenging macroeconomic environment;
2. Uncertainly over application of investment incentives;
3. Local versus central government control;
4. Bureaucratic burden on investors;
1 These figures were derived from a database developed by FIAS, in close consultation with the World Economic Processing Zones Association (WEPZA).
5. Risk of corruption and illegal activities;
In addition to providing secure, serviced industrial or commercial land to investors, SEZs also provide a package of policy and procedural reforms to overcome impediments to the existing business climate. Major policy areas addressed by the SEZ regime include:
S Income Tax;
S Customs Duty;
S Restrictions on Foreign Ownership;
S Land Use and Building Permitting;
S Business Licensing;
S Company Law Regime;
S Labor;
S Environment;
S Dispute Settlement.
There are several problems with special economic zones in CIS countries, for example, the main problem with Russia's special economic zones is that they offer few attractions for investors. First, they are too small to host large-scale projects. For example, the zones in Zelenograd and Dubna outside Moscow and the zones in St. Petersburg and Tomsk are confined to from 129 to 207 hectares each.
Second, they offer scant advantages in comparison to similar zones abroad. The Lipetsk zone, for example, has cut the profit tax from 20 percent to only 15.5 percent. The social tax on employees' salaries was cut from 30 percent to only 14 percent effective from 2012 to 2017, but after 2017 the rate will jump back up to 28 percent. Third, they are all impractical from the standpoint of logistics. In other countries, many zones are created near the coastline to take advantage of modern airports, sea ports and major highways leading to the city. But Russia's poor transportation infrastructure makes setting up special economic zones in coastline cities less attractive.
"Russia's innovation potential is probably greater than that of most other countries at comparable levels of GDP per capita. The country benefits from a substantial science base and a well developed education system in science and technology. Yet indicators of actual innovation activity remain disappointing. There is striking imbalance between the public sources devoted to knowledge creation and the observed outputs in terms of innovation. Closing this gap constitutes one of the major challenges for Russian innovation policy. The other is to stimulate greater private-sector involvement in R&D, which remains limited. A healthy business environment may be considered a precondition for boosting innovative activities. Russian innovation policy should therefore be carefully designed, with a balance between general and targeted measures. Here the paper identifies two measures that should be considered as first priorities for the government: the reform of the state science sector and the strengthening of the intellectual property rights (IPR) regime. It argues that the authorities should proceed with caution when it comes to targeted initiatives like the creation of special
zones and technoparks."
SEZ in Russia are located in the most developed regions. There are hi-technology enterprises, scientific and research laboratories in the zones. By December 2013 there were 338 residents in the special economic zones, including leading foreign companies from 24 countries, among them there are the major transnational companies: Ford, Yokohama, 3M, Air Liquide, Rockwool, Hayat, Novartis, etc. The total volume of scheduled investments is more than US $12 billion. Residents of technology and innovation zones obtained 350 industrial patents. The world's largest companies, such as Boeing, Airbus, Apple are among the consumers of SEZ residents products, and such companies as Phillips, Samsung, IBM, etc. are their partners. The SEZ residents' products are in demand, and this indicates the high potential of SEZ as a tool to support innovative companies, through which residents compete successfully in the global market.
One of the most successful zones in Russia is Lipetsk, which was the joint winner for large tenants in the Europe region in Global Free Zones of the Year Awards in 2014. The zone is located close to the large city of Lipetsk and 430 kilometres south-east of Moscow.
Since being established in 2007, the zone has attracted 37 resident firms from 11 countries, including Japanese tyre company Yokohama, Swiss power and automation technologies company ABB, German electrical fit- tings manufacturer OBO Bettermann, US supplier of paints and fibreglass PPG Industries, Belgian steel wire products supplier Bekaert, Chinese motorcycle and car manufacturer Lifan, and Dutch milling engineer Ottevanger. "The growing Russian consumer market is the main attraction of our zone," says Ivan Koshelev, director-general of Lipetsk SEZ. "Economics always come first, whatever the political situation. Federal government warrants and guarantees also help to protect any foreign investment in the zone. We are keen to attract companies working in areas of advanced technology and that want to establish R&D centres within the park." In particular, the zone is attractive to metal- intensive industries, thanks to its close proximity to Novolipetsk Steel, one of the world's larg- est steel companies.
Special economic zones provide special condition of doing business for the residents, which is guaranteed by the Government of the Russian Federation:
1. Tax preferences:
• Income tax: for the SEZ residents tax rate is 0-13.5% instead of 20%;
• The residents of technology and innovation and tourist and recreational special economic zones which are combined into cluster are exempt from income tax;
• Property and transport tax exemption for 10-15 years;
• At the federal level investors are exempt from land tax for 5-10 years.
2. Investors receive modern transport, social, customs and other infrastructure for business development created at the expense of state budget;
3. Special custom regime - is a regime of free customs area which means that investors in the special economic zones' territory don't have to pay customs du-
ty and value-added tax for foreign goods and it is also forbidden to use prohibitions and restrictions of economic character;
4. Reduced administrative barriers (the system "single window" simplifies the interaction with regulatory authorities). Single window means that investor give all documents to one special agency and this agency assist in agreement procedures that reduce the time on initial stage of the investment project.
5. Access to the qualified personnel resources.
6. There is simplified migration regime for highly qualified foreign staff, involved in the special economic zone.
To foster its export potential and investment attractiveness, Russia has developed sound framework in relation to special economic zones. Several types of special economic zones were introduced to benefit businesses involved in production and processing of export goods, international trade, the hospitality sector and cross-border financial services, including:
• Free Industrial Zone Company;
• Free Tourist Zone Company;
• Tourism Enterprise;
• Special Trading Company;
• International Financial Company.
Kari Liuhto, professor of the Russian economy at Finland's University of Turku, questions the added economic value of SEZs in Russia. One of their benefits is supposed to be helping to establish a business in the country, but World Bank surveys show this is now a reasonably straightforward process throughout Russia. He says what would be an advantage is if the SEZs could help with customs so that investors face far shorter delays in obtaining spare parts and inputs, but it is not clear if the zones can do this.
The collaboration between the SEZs and the state-funded technology centres, regional industrial/innovation parks, and universities is much below potential. A National Innovation System (NIS) can be a step towards a right direction, as long as the state minimises its own role, since less bureaucracy means more results. The integration of the activities of the Russian Nanotechnology Corporation with some SEZs might give some boost to creating a high-tech network in Russia. The experience and outstanding leadership skills of the corporation's director general, Anatoly Chubais, are without a doubt major assets for the future development of Russian nanotechnology. The SEZ are often located outside the city centres, which decreases the attractiveness of these zones in the eyes of the workforce and companies.
As of January 2012, there are 306 residents, including 44 international companies from 20 countries with an overall committed investment of USD 12.2 bn.
Number of investors in SEZ in Russia 350 - snn ___ 306
icn ___ 257 ■
200 - 150 - 100 -53 50 12 0 2006 2007 2 207 r ■
143 ■
:008 2010 2012 2014
Russian SEZ have approved themselves successful in the international arena. SEZ "Alabuga" in the Republic of Tatarstan was included in the "Foreign Direct Investment" magazine global rating of "Free Economic Zones 2012-2013", and took 40th place (this rating takes into account more than 600 zones in 120 countries).
Russia and the CIS now have a large number of SEZs that are promoting regional development and creating local jobs. But the zones have been slow to take off because of a high level of bureaucracy and they are not doing nearly enough to market themselves internationally to foreign investors.
As it is not constructive to analyse the plans, promises and hopes of the bureaucrats, one can only conclude that "no progress" means a relative weakening of the competitive position of the SEZ, since their competitors have not been idle for the past four years. To put it differently, Russia's stand-still means that the innovation gap between Russia and the rest of the world widens, as the surrounding world goes ahead, whilst Russia stays relatively unchanged. Even if the progress in Saint Petersburg is not impressive, one should not forget that the Saint Petersburg SEZ may have a trump card up its sleeves, since Anatoly Chubais, Director General of Russian Nanotechnology Corporation (Rusnano), originates from St. Petersburg. It remains to be seen what will be the extent of the future collaboration between Rusnano and the Saint Petersburg SEZ. In this context, one should not forget that Rusnano possesses USD 5 billion funds to be allocated to the development of nanotechnology investments.
As the new law on SEZs was passed relatively recently, it is understandable that the results of new SEZs are very modest. In other words, the results of today do fully describe the potential of tomorrow, and therefore, it is highly advisable that the follow-up of the SEZ analysis would be conducted in three-five years from now.
