Incentives, usually in the form of tax breaks, are frequently responsible for putting the 'special' into a special economic zone (SEZ). In most cases, it is the promise of capital savings that put these previously unremarkable locations firmly on the investor radar. Indeed, this was what attracted Saint-Goban, a French mirror construction materials producer, and Trakya Cam, a Turkish company in the same field, to SEZ Alabuga.
In 2010, the companies invested more than $250m in a float-glass, mirrors and coated-glass plant as part of a joint venture. The decision to invest into SEZ Alabuga was made largely because of the incentives, says Beytullah Sahin, general manager of the new plant.
“At first we chose [the Russian city of] Krasnodar because [both companies] already had some investments there. But, then we started talking to [SEZ Alabuga representatives] about the advantages that we would have here in terms of taxes and cost of land,” says Mr Sahin.
SEZ Alabuga offers 10-year tax holidays on property, land and transport. Importantly, this incentive only becomes active when the tax base is created, which is when a factory is actually up and running. The zone also guarantees significant discounts on corporate income tax, which stands at just 2% for the first five years of operation, 7% for the sixth to 10th year, and is then guaranteed at 15.5% until 2055. Russia's corporate tax rate outside of the zone currently stands at 20%.
To attract research and development activities, the zone also offers discounted insurance for researchers working in the zone. The insurance contribution paid by the tenant increases over time, but starts at a low 14%, compared with the 30% that they would be expected to pay elsewhere in Russia.
Alabuga's status as a free zone has also allowed it to abolish VAT and import duty on all equipment shipped to the zone. It was this incentive that attracted Kastamonu, a Turkish MDF boards manufacturer, to the zone. The company saved between $15m and $19m, as it did not have to pay duties on importing its production lines, according to Ali Kilic, managing director of the plant. “The fact that we paid no tax on importing equipment, and decreased the cost of our investment, was a big issue for us,” he says.
Both the rental and purchase of land within the zone are heavily subsidised, too. Rockwool, a Danish producer of stone wool, moved to the zone in 2010, and owns a plot measuring about 200,000 square metres. Without revealing exactly how much Rockwool paid for the property, Maxim Vasiliev, the factory manager, describes the amount that the company paid as “funny”.
On average, a 40,000-square-metre plot of land in the zone costs about $30,400, while the rental of such a plot is about $9000 per year.
Incentives are only one part of the equation, however, and SEZ Alabuga knows that to attract investors it must offer far more than just tax breaks. Even the most generous of incentives are not going to attract investors if they do not think that there is the availability of an appropriately skilled workforce.This might be an issue in Russia where the unemployment rate is low at 5.6%, and in Tatarstan it is even lower, at 4.12%.
In order to overcome this hurdle, earlier this year SEZ Alabuga launched its HR centre, an entity charged with recruitment assistance and training. The centre works with a number of recruitment agencies and 40 higher education institutions, including the local Elabuga Polytechnic College and Kazan National Research Technical University, in order to scout for potential employees and conduct training sessions. Apart from HR know-how, it also contributes up to 75% of training costs.
“Whether the training is conducted here or abroad, we offer financial resources for our residents,” says Vyacheslav Gusev, director of the centre. “A number of residents, including Rockwool, Armstrong and Kastamonu, already signed up for the programme.”
Among the companies that turned to the centre for help was P-D Tatneft Alabuga Fiberglass, a joint venture between Preiss Daimler Group, a German fibreglass producer, and Tatneft, a local oil firm. The centre helped train 100 fibreglass extrusion specialists for P-D Tatneft. Meanwhile, Armstrong, a US producer of floors and ceilings, which recently finished constructing its plant in the zone, currently has its employees enrolled in a three-month course with the centre.
Too good to be true?
While the vast array of incentives offered by economic zones can be persuasive, the question remains: how many of these promises translate into reality, once a company decides to make the move into a zone?
Without relating specifically to SEZ Alabuga, Stephen Blank, senior fellow at the American Foreign Policy Council, a conservative US think tank, says that the biggest risk connected with investing in the zones, especially in countries with a less than perfect business climate, is the fact that incentives might at some point perish. “[Zones] will offer you tax breaks, but they cannot offer you a consistent regulatory environment,” he says.
Lotta Moberg, adjunct scholar at the Institute for Global Economic Growth at George Mason University, also in the US, is similarly cautious. “If you want to go into Russia… you want to make sure that the rules that you are going to adhere to are going to be consistent. You have to have the promise from the government that it is going to stick to it," he says.
Renat Halimov, deputy director-general of SEZ Alabuga, says that his zone operates under such guarantees and points to Federal Law 116 'On special economic zones in the Russian Federation', which was passed in 2005. “According to that law, the conditions under which you operate as a zone resident cannot be worse than at the moment of signing,” says Mr Halimov. “And it is a three-party agreement, so you sign it not only with us, but also with Ministry of Economic Development of Russia."
Rockwool's Mr Vasiliev says that the past four years, since his company moved to the zone, have passed free of any regulatory surprises. “Everyone from local authorities to the federal government, kept to guarantees that they gave us," he says. "Foreigners might be sceptical about this, because of Russian bureaucracy, but if you ask me whether it is true what they promise, the answer is yes."
Additional reporting by Helena Ball.