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The mechanisms of an autonomous industry: SEZ

How are SEZs developing today, what advantages do their residents receive, and what cumulative effect do regions and industries get from their activitie.

The mechanisms of an autonomous industry: SEZ

The focus on creating an autonomous industry that does not depend on the vagaries of the market and the political context resulted in the fact that various types of support for domestic manufacturers in out country have become particularly relevant. In this regard, it would seem that special economic zones should have received a new round of development, as this would be one of the mechanisms to arrange production and social processes to support the economy. How are SEZs developing today, what advantages do their residents receive, and what cumulative effect do regions and industries get from their activitie

As the name suggests, a special economic zone is a territory with a special status. These characteristics are especially evident in a concessionary taxation system and various preferences, allowing resident companies to function successfully in the market, thus contributing to the efficient development of economy as a whole.

Special, or as they are also called, free zones are not a Russian invention. At the turn of our era, merchants from the Delos island were already exempted from taxes, which made the region a place of brisk trade for a whole century and significantly boosting the coffers. This simple trick is the current operation principle of SEZ.

The first attempt to form free zones in Russia was made in 1994, but the first step is always troublesome. The second attempt was made almost 10 years later.

In 2005, the law “On Special Economic Zones in the Russian Federation” was signed, according to which enterprises investing in the Russian economy were able to use the infrastructure created at the expense of the state budget; this would allow a significant reduction if expenses to create a new production.

Modern special economic zones are mostly located in large industrial regions of the country. They are formed according to a clear geographical principle, the main criteria of which include the proximity to a resource base, required to arrange a particular production and the access to the main transportation arteries. All the necessary infrastructure is built at the expense of funds from the state and regional treasury. This includes power and heat supply systems, gas pipelines, telecommunications, a customs post, a temporary storage warehouse, a water treatment plant, railway, container terminals, not to mention administrative and industrial buildings and facilities. All this significantly reduces costs, and therefore allows increasing competitiveness.

So, what kind of benefits do resident companies get? Due to the free customs zone regime, companies are provided with customs privileges; the “one window” administration system allows simplifying interaction with government regulatory authorities; in addition, companies can enjoy a number of tax preferences (according to the Ministry of Economic Development, the tax system currently operating in SEZ provides a 20-30% benefit). It's much more than that. Depending on the region, the specifics of the work and the sectoral focus, companies receive a number of special benefits in each specific zone. Let's consider them in detail.

Special economic zones in Russia

In addition to Russian residents and among 656 companies developing their business under tax benefits and other preferences, there are companies from 38 countries, which invest in our economy. In total, there are 25 SEZs in Russia today. Among them there is one port-economic zone, 6 technology-innovative zones, 9 tourist-recreational zones and 9 industrial-industrial economic zones. Within the framework of this article, we will be first interested in industrial production special economic zone (IP SEZ).

IP SEZ Moglino

Founded on July 19, 2012 in the Pskov Region. The total area of Moglino Special Economic Zone is 215 ha. The area for industrial construction is 150 ha. The size of plots range from 1 to 14 ha. If necessary, plots can be joined or divided into smaller ones.

3.2 bln Rubles from state investments, intended to create infrastructure, are allocated to Moglino SEZ.

The concessional tax period for resident companies is set for the whole period of the SEZ’s existence, which is 49 years. During this period, the state acts as a guarantor of the established preferences.

Priority development fields: railway, communal, agricultural equipment, automotive components, electrical and household appliances, construction materials, logistics and packaging.

In the immediate proximity to Pskov there are Riga and Tallinn sea ports, as well as major foreign cities (Helsinki, Stockholm and Kiev). The northern border of the SEZ is formed by railways, and A212 federal highway runs along the south. Both routes provide access to the local airport, which guarantees high transport accessibility at the regional and international levels. The nearest seaports: Ust Luga – 270 km, St. Petersburg – 280 km, Riga – 290 km. Tallinn – 350 km.

IP SEZ Alabuga

One of the largest zones of this type is Alabuga. Its total area is 3 903.5 ha. It accounts for 59% of the total revenue of all SEZs of the country; private investments account for 39% of all funds invested in Russian SEZs. The total amount of investments for 2019 equals179.8 bln.Rubles, of which 121.6 bln.Rubles were spent; among the largest foreign investors there are Dutch and Turkish companies.

Automotive cluster is formed in the Republic of Tatarstan, therefore the projects of current and potential resident companies are mainly related to the production of components for this industry. The localization of component production is also explained by the fact that it is based on products of deep oil refining, petrochemistry, which are manufactured in sufficient quantities in the Republic of Tatarstan. Auxiliary production units are also located on the territory of the SEZ; the manufactured output is used in consumer goods industry and construction industry.

By now, 22 residents have been registered, including Ford Sollers Elabuga, a joint venture of Ford and Sollers for the production of cars and engines with a design capacity of 85 ths. cars and 185 ths. engines per year; Air Liquide Alabuga is a subsidiary of Air Liquide for the production of industrial gases. Among the residents there is also P-D Tatneft-Alabuga Steklovolokno, an enterprise for the production of fiberglass and fiberglass-based products, and other companies.

The location of the SEZ gives access to rail, air and water transport.

Enterprises registered in the territory of the SEZ will receive a number of preferences.

In particular, it is a free customs zone regime in which foreign equipment is placed and used within the SEZ without paying customs duties and VAT; the abolition of export duties on the export of manufactured products; exemption from property tax from the moment the property is registered and from land tax from the moment of the emergence of the title to the land plot. The republic provides for a full exemption from transport tax to be credited to the budget of the republic.

Research and development costs are assigned to the reporting period, in which they were incurred, in the amount of the actual costs. Residents are removed from restrictions on the transfer of losses incurred in the previous tax period.

A 100% shareholder of the management company of Alabuga special economic zone is the Ministry of Land and Property Regulations of the Republic of Tatarstan.

Lipetsk IP SEZ

The total area is 2 298.3 ha. Among the 64 residents there are companies such as: Solinkom, engaged in the production of ingots and plates of multicrystalline silicon for solar energy; Yokohama RPZ, producing Yokohama car tires; ABB Electrification Products (production of electrical distribution and control equipment); Radalit Schlumberger (production of components of electrical centrifugal pumps); Tsifrovyye tekhnologii (creation of the production of specialized computing facilities for distributed data storage and organization of data center of Tier III standard) and others.

Among the main activities of companies the following should be emphasized: production of energy equipment, elements and systems of alternative energy; production of machinery, equipment, automotive components, household appliances, medical equipment, as well as production of bio-and nanomaterials.

Through contributions to the authorized capital of the management company 6.109 bln. Rubles of the funds from the federal budget and the budget of the Lipetsk region (for the creation of infrastructure facilities) were invested for the development of the SEZ. The ratio of public to private investments is 1:3.5.

IP SEZ Kaluga

Founded on December 28, 2012 on the territory of Lyudinovsky District, the Kaluga Region. The area of the SEZ is 1042 ha; the planned state investment equal to 2 600 mln. Rubles.

Priority development fields: production of automotive components, machinery and equipment, woodworking, agriculture.

It has two sites: Lyudinovskaya and Borovskaya. A line of tax benefits is used for companies: 0% property and transport taxes for 10 years, 0% land tax for 5 years, 0% customs duty and VAT. Income tax for the following economic activities: production of machinery and equipment, wood processing and production of wood products; production pf parts and accessories for cars and engines. For other economic activities: 5% until December 31, 2022, 9% for 2023-2026, 13.5% until the end of the existence of the SEZ. The location of production in the SEZ allows increasing the competitiveness of products on the Russian market by reducing costs up to 30%.

IP SEZ Tolyatti

Founded on the territory of the Samara region on August 12, 2010 The area is 660 ha. Declared investment - 22.9 bln. Rubles.

There are 21 companies operating on the territory of SEZ Tolyatti, the main activities of which are focused on such spheres as automobile manufacturing, automotive components, construction materials, engineering, chemistry, packaging, pharmaceuticals, consumer goods

Benefits and preferences for residents: property tax – 0% for 10 years. Transport tax and land tax are not paid for the first 5 years. Accelerated procedure for recognition of research and development expenses, preferential terms of rent, possibility of buying out a land plot.

Titanium Valley IP SEZ

The total area is 721.4 ha. The volume of investments in projects approved by the Supervisory Board exceeded 8.7 bln. Rubles. Today there are two residents on its territory: Zibus plant – the production of medical instruments and implants, launched in summer of 2018, and Ural Boeing Manufacturing plant (titanium machining for Boein aircrafts) – SP VSMPO Avisma and Boeing Company, opened in September 2018.

Resident companies receive the following tax benefits: exemption from property tax for 10 years, reduced rates of contributions to social funds.

An SEZ resident may apply accelerated depreciation by setting a multiplying factor for its own fixed assets.

SEZ in the world

In the first decade of the third millennium, the number of special economic zones increased significantly throughout the world. Currently, about 3 000 SEZs operate in the world. The leading regions in terms of number is the Middle East, where 528 SEZs are located. Among the countries in this region Turkey and Egypt can be marked for the number of SEZs. There are 253 special economic zones in the USA, 30 in the United Kingdom, and 17 in South Korea.

The main types of free economic zones in the world practice are trade and warehouse zones, industrial or export production zones, complex zones.

Enterprises are being created in industrial zones, including knockdown production companies, which produce goods for export on the basis of imported semi-finished products. A situation, when export products are manufactured on the basis of local raw materials with imported equipment and technology, is also possible. Such forms of industrial companies largely occur in Asia, Africa and Latin American countries, as well as in Hungary, Romania, Yugoslavia, China, United Kingdom and the USA.

In the Middle East, in particular, in Turkey, SEZs are located near the major Turkish ports of the Mediterranean, Aegean and Black Seas, which provide access to international trade routes. Resident companies are exempted from the payment of duties, corporate income tax for industrial companies, payment of VAT, and payroll tax.

In the USA, the majority of SEZ residents are employed in oil, automotive, pharmaceutical industries and in electronics manufacturing. Most of the products are consumed by the domestic market. Special economic zones in the USA contribute to the economic strengthening of the territories on which they operate (depressed old industrial or backward regions), or of the industries, and in some cases of specific enterprises. When selecting a region to create a SEZ, unemployment rate and monetary incomes of the population are used as criteria.

In the countries of Southeast Asia, there are about five hundred SEZs. They are also based around major seaports and airports, which have been converted into tax-free zones in order to develop the national economy. In industrial areas, almost all enterprises are focused on the export of industrial products, which are made mainly on the basis of imported raw materials.

The experience of the creation and operation of a SEZ in China is especially remarkable. At the beginning of the 80s, the Chinese economy was based on a closed model and was characterized by low growth rates. In order to avoid a sharp transition from a closed to an open economy, the government decided to create a SEZ in the eastern and southern coastal parts of the country, where special tax, customs and foreign exchange regimes were introduced in order to attract foreign investors to this region.

In general, it should be noted that SEZs, created in the donor regions, where the selection criteria include the unemployment rate and the average income per capita, contribute to the development of the national economy.

Today, Russia ranks No. 5 in the world in the amount of technology parks, but their material and financial base does not allow for the intensive development of small high-tech innovative enterprises. Nevertheless, the possibilities of SEZs are wide enough and their creation will be successful, if we manage to create a transparent and efficient economic system with a well-developed regulatory framework, minimal bureaucratic mechanisms and maximum competition.

Статья «The mechanisms of an autonomous industry: SEZ» опубликована в журнале «Neftegaz.RU» (№, )