Interview about SEZ

Vedomosti, 22 December 2005
Interview with Yuri Zhdanov, Head of the Federal Agency for Management of Special Economic Zones
Businesses should not be abused
Yuri Zhdanov, head of the Federal Agency for SEZ Management knows how to combat corruption.
Having selected six special economic zones (SEZs), the Russian government believes SEZs will attract new investments to Russia and accelerate GDP growth. Yury Zhdanov, the head of a specially created Agency for SEZ Management and the youngest general in the Russian police forces, told Vedomosti that this would be "the major project of his life" and promised to do everything possible to ensure its success.
We did not accept nonsense
Question: Why would the state create special economic zones?
Answer: It is an attempt to shift the economy from oil and gas dependence towards innovations, new technologies, new economy, machine building and industry development. This task is difficult to achieve within the framework of the usual administrative and tax regimes, which is why it has been decided to try SEZs. For far-away regions like Tomsk, an SEZ is like a project of national importance on a regional scale. Regions set great hopes on their zones. Officials of one of the regional legislative assemblies told me that they were prepared to forgo local taxes for the sake of increasing attractiveness of the emerging zone.
Q: What would the government do to attract investors to SEZs?
A: First, the state will help build infrastructure. Residents of industrial zones will enjoy fast-track procedures for research and development costs declaration, lifting of restrictions for carry-forward of tax losses, and accelerated amortization of capital assets. Residents of technical/innovation zones will enjoy reduced unified social tax rate (14%). Property and land taxes shall not be payable by residents during the first five years. The SEZs shall be placed under a free customs zone: foreign goods used within SEZs shall be exempt from customs duties and taxes. Administrative barriers will be considerably reduced, which should also attract investors: licensing and certification procedures will take less time.
Q: What can you say about the tender?
A: It was a positive experience. Unfortunately, some of the regions failed to file proper applications on time because the local authorities were not very efficient, and several days were not enough to thoroughly prepare an application. Land issues caused some problems as a number of applications concerned land plots in long-term lease, or agricultural land, or forests. To use them for SEZs would require unnecessary bureaucratic hustle. Some proposed sites with existing infrastructure and private businesses in full operation. But the major problem was the lack of creativity, as many regions proposed the same projects. Nearly all of them applied for woodworking, but the whole country is doing it anyway, without SEZ regime. We had to study whether woodworking in SEZs could affect economies in other regions. We made a study on competition and decided that SEZs should be home to innovative and promising ideas rather than to traditional businesses and industries which were suggested in most applications.
Q: You speak about innovative ideas. However, one of the winning projects is about  the production of household appliances in the Lipetsk region, which has been there for years.
A: The existing production scale cannot compare to what we are planning to do. We intend to manufacture up to 80% of the components, actually assemble units using local components, and produce plastic articles. I personally held talks with Merloni (Italy) about that. The talks convinced us that we are going to take a big step forward and reach another level.
Q: It looks like investors could predict the results of the tender and knew about the benefits they would get beforehand?
A: Well, talks with potential investors did take place before the regions applied for the tender. Applications without prior agreements were hardly doable at all. H
ow can I assess any project that is not backed by the agreement of investors, millions of investments, budgets? It would be absurd to help those who know nothing, who have no SEZ experience or vision. However, we received dozens of applications proposing nothing but Potemkinґs villages, expecting zero investments this year and billions in two years. Even for technical/innovation zones this was nonsense (which we surely did not accept).
Any exploits scheduled for tomorrow?
Q: Experts blame the Government for dictating businesses which industries should be developed in each SEZ.
A: This focus, which was actually suggested by the experts themselves, is quite flexible and broad. It is just that we want to see the development of certain spheres in the near future. Elabuga, for example, may not only produce Toyota auto components, but also develop petrochemistry. We expect residents to occupy about 60% of the zone territory. The rest of the land will be allocated for new projects, so far unknown to us.
Q: Why do you want another SEZ tender in 2006?
A: I see great potential in SEZs. I do hope we could extend them to the Far East and to the south of Russia.
Q: Experts sound quite skeptical about technical/innovation zones, for example in Dubna. Who would guarantee development of innovations there?
A: For Dubna, the key word is R&D, and I am 100% sure weґll have innovations there. Products for mass consumption, on the other hand, should be manufactured outside the zone. The Dubna project is one of the best thought-through projects; it can have a great number of potential residents. New materials, nuclear technologies, and aviation and space industry - these are the spheres that investors will find interesting. Everybody is positive that Dubna SEZ is bound to succeed.
Q: When will SEZs deliver results?
A: This is like asking whether we have scheduled any exploits for tomorrow. We canґt promise that weґll make some scientific discovery in the next five days. But I do believe that the zones will yield results, and some projects will reap the harvest really soon. They just need a bit of fine-tuning. For example, one of the research institutes in Dubna has really poor and out-dated water-refining technology. But this refined water is perfectly drinkable; academicians who drink it are still alive. Itґs just that the technology needs to be developed and commercialized. I am sure it can be done.
Q: How about special IT-zones?
A: IT-technologies will be developed both in technology/innovation zones and in the 5 technoparks to be created by 2008 in Tumen, Kazan, Novosibirsk, Obninsk and in the Nizhniy Novgorod region. IT-companies may become residents of technical/innovation zones to enjoy respective benefits. Technoparks will not grant such benefits, but the state will help build infrastructure.
No bribes, no abuses
Q: How do you plan to manage an SEZ?
A: I will assign 10-15 o f my staff to each SEZ, they will act as regional branches of the Federal Agency. Each branch will work as a one-stop shop to help potential investors. Local authorities will play a very important role: the SEZs may develop really fast, if granted help from regional governors. We shall also address problems from the federal centre if a governor fails to facilitate the process. Besides each SEZ will have a Supervisory Board, consisting of representatives of trade chambers, local authorities, and the SEZ residents. These measures will help ensure effective, fast and transparent problem solving; we do not want anything to impede business. All for the sake of business
Q: Who may investor complain to against local authorities?
A: They may call hotline; all our contact phones will be available from the agencyґs web-site. I think this will help create favorable climate for business which will be most evident in technical/innovation zones hosting mostly SMEs. Bigger companies, especially foreign ones, are not that much prone to administrative barriers, as they feel free to complain to top-ranking officials including the President; but it is very easy to do injustice to small companies. Anyway, I feel that authorities are very positive about SEZs, and all problems can be solved. But Iґd like to stress that I do not mean there wonґt be problems at all.
Q: The former Singapore Prime Minister Lee Kuan Yew told Vedomosti about his meeting with you. Did you follow any of his advice?
A: I continue to be in touch with him, and the first tip I used concerns the number of the zones. They should be few. And he said he was prepared to take up one or maximum two zones. I think that is how it is going to work. Singapore experts backed by his personal involvement and Singapore capital will participate in one or two SEZ projects. Singapore's experience is of unique value to us. Together with China they created a wonderful high-tech zone in China; they also have experience in Vietnam and Indonesia. I have seen almost all of this myself, which gives me a vision of pros and cons of the project.
Q: Human capital was one of the factors behind the success of Suzhou zone - new, young and uncorrupt people. How are you going to select people to manage SEZs?
A: This is one of my key problems. I expected regions to recommend applicants, but it turned out just the other way round. One of the winning SEZ regions has asked me to send people from Moscow, because local authorities started to fight for the position with the Agencyґs regional branch. I might have to consider this option. For several years I was in charge of staff recruitment at the Economy Ministry. In fact, as Deputy Minister I had to oversee HR department besides 10 other departments at the Ministry. Thus, I have some experience in where to look for personnel and how to test applicants. Well, of course I can make mistakes but we do not have to be perfect. We just have to be good enough.
If something goes wrong, the punishment will be severe.
Q: What is the major problem for you?
A: If just one of the 6 SEZs fails, it will be a major scar upon the projectґs good name. They are so few, and each single zone matters. Any negative experience will speak against the credit of this project. This mainly concerns building infrastructure. The major problem is the danger of misappropriation of funds. Apparently, some regional officials would like to profit at the SEZ expense. But I have been working in the construction industry. I know how money tends to vanish, and I know how to force it out of private pockets and back to construction sites. Well, I wonґt go into details...
Q: What is the liability for mistakes?
A: Mistakes will be prosecuted. That applies to my mistakes as well. But there is nothing terrible. We should simply go by the law. During my three years as a military prosecutor, I learned to abide by the Criminal Code.
Q: Abide by it or evade it?
A: Oh well, one has to spend a life studying this kind of loopholes. Three years is not enough.
Q: How are you going to prevent violations and abuses?
A: One former Prime Minister has advised me that if something goes wrong and borders on criminal offence, this has to be punished really hard. We are prepared to do so. We are in the position to punish any regional official. You know, I used to oversee the internal budget spending at the Ministry of Economic Development and Trade. Minister German Gref entrusted me with the sanctum sanctorum - the Ministryґs money, and no one stole them. So we can cope with this new present task as well. Businessmen do not usually steal from their own business. We will have to ensure that nobody steals government money.
Q: How can you ensure that?                           
A: There is, for example, the Audit Chamber, the Prosecutor General. By the way, the Chairman of the Audit Chamber Sergey Stepashin used to be my boss at the Ministry of Interior, and we are still in touch.
Q: Do your first steps show that there is a need for the SEZ legislation to be amended?
A: It all depends on lobbying potential of sensible people, for example, of such giants as Evgeny Primakov, Head of the Chamber of Commerce and Industry, who are prepared to prove their views. If you mean granting more benefits, this is simply immoral. By extending benefits before yielding results we will only get new foes, not friends. We should proceed step by step, explaining the needs of real businesses.
Q: There are plans to adopt a law on tourism and recreation zones, to complement the SEZ legislation. When do you expect this bill?
A: We (meaning the Ministry for Economic Development and Trade) intend to propose it by the end of 2005, though it requires a lot of preparation. Once the law is passed, we expect to have a tender to select the zones, hopefully in the first half of 2006. Regions will have only 45 days to file their applications. To do it properly, it would be worthwhile to start preparations right now, and I do invite regional authorities to consider the option.
Q: How are you going to shape the law on port zones?
A: This project is being coordinated with the Transport Ministry. They have sent it to regional ports and are waiting for applications. I believe we should take a broad approach: build new infrastructure, upgrade old facilities, introduce customs-free import regime. Weґll see how it comes out in February or March. Our ports need a lot of improvement, be they state or private. They require enormous investments. In Singapore they unload over 100 ships daily, and compared to them our technologies and logistics are two hundred years behind.
We lifted out from poverty.
Q: You came to the Ministry for Economic Development and Trade from the Ministry of Interior. How did it happen?
A: German Gref invited me to join the MEDT in 2002. I served as Deputy Minister for over two years. This was all new to me. I made my career in at the Ministry of the Interior, but for many years my mane focus was international law. This helped me to learn English and get a Doctorґs at MGIMO, and also helped at top negotiations. There were hundreds of law experts at the Ministry of Interior, but I was the only one with a doctorґs degree in international law. This, and also my experience of working with four Ministers of the Interior, gave me a chance to rub shoulders with all kinds of officials, not just within the narrow bounds of my department. Minister Gref employed some of my colleagues and friends who they knew me as an expert in international law who drafted G-to-G agreements, which were then adopted by the Government and signed abroad. This is what eventually brought me to the MEDT. But then I did not fit into the framework of the administrative reform. I went into business for some time.
Q: Why did you take up construction business?
A: First Vice-Mayor of Moscow Vladimir Resin invited me to head a major construction company (SU-155) which built over 1 mln sq. m.  a year. When someone invites you to take up a top position like this it is really tough to resist. I am still not too sure what I can do better - manage people or do construction business. By that time I had built a lot. For example, as head of the Moscow Police Academy, I managed to get the new building for the Academy constructed without any federal money. It was an investment project of the Moscow City Government. I got support from Deputy Mayors of Moscow, they trusted me, and with their help we were lifted out of poverty. I took part in the construction of a new building for the Academy of Foreign Trade, reconstruction of some of MEDT buildings and the Voronovo resort. Construction was a significant part of my life.
Q: And yet you decided to go back to civil service.
A: My colleagues called me. They offered me to take up a project of my life. So I dropped a huge salary, interesting opportunities and grand plans to expand my company to overseas markets. It was a pity to leave all this behind. I guess I agreed to this new offer because I am keen to venture into something more important.