November 2018 Belarus: Comparative Research on Industrial Parks and Special Economic Zones Prepared by Dzmitry Kolkin for the European Bank for Reconstruction and Development Table of contents Acknowledgements 2 Executive summary 3 Chapter 1: Introduction 7 Chapter 2: Regulatory framework and performance of FEZs in Belarus 12 Chapter 3: Regulatory framework and performance of the High-Tech Park 37 Chapter 4: Regulatory framework and development of the Great Stone 47 Industrial Park Appendix 1: Architecture of official collaboration between Belarus and China 58 Appendix 2: Comparison of incentives of economic regimes 59 Appendix 3: Structure of management of FEZs 63 Appendix 4: Brief information on integration of the HTP in the local economy 64 Appendix 5: Comparison of some economic indicators taken per employee 65 of respective regime Appendix 6: The Great Stone Industrial Park collaboration structure 67 Appendix 7: List of residents of the Great Stone Industrial Park 68 References 71 1 Acknowledgements This report is part of a project studying the This report benefits greatly from the guidance of establishment of Chinese development zones counterparts from China’s Center for International and industrial parks in countries of the Belt and Knowledge on Development (CIKD), including Road Initiative. This joint research collaboration Mr Sen Gong, Ms Xiheng Jiang, Mr Taidong Zhou includes China’s Center for International Knowledge and Ms Yu Zhou. It also benefited from the open on Development (CIKD), the European Bank for and frank exchanges and comments from the Reconstruction and Development (EBRD), the World independent research community of Belarus during Bank, the United Nations Industrial Development roundtable discussions. In particular, the author is Organization (UNIDO), and other relevant partners. grateful to Dzmitry Kruk (BEROC), Serge Naurodski (CASE Belarus), Dzmitry Markusheuski (SYMPA) and This report represents a part of this work and was Alexander Chubrik (IPM Research Center) for the prepared by independent consultant, Dzmitry Kolkin. very helpful exchanges of ideas, deep insights and A significant contribution as well as important open discussions. editorial work and coordination efforts were made by Ms Xinxing Li (EBRD Principal Adviser to Managing Moreover, the report also received invaluable Director and the operational leader of the project). support and reviews from various colleagues in the Mr Alexander Pivovarsky (Head of the EBRD Belarus Economics, Policy and Governance department; Resident Office and the team leader of the project) the Office of the Chief Economist team; along with has provided endless support and advice. All this work the Communications department at the EBRD. was initiated and the team was inspired and guided by They include Ms Anna Engstrom, Mr Peter Sanfey, Dr Mattia Romani, Managing Director for Economics, Mr Martin Pospisil, Ms Rika Ishii, Ms Idil Bilgic- Policy and Governance at the EBRD. Alpaslan, Mr Gabriele Liotta, Mr Cagatay Bircan and Ms Natasha Treloar. This work would not be possible without the proactive role of Mr Nikolai Snopkov (Deputy Head of the In addition, the report benefited greatly from Presidential Administration of the Republic of Belarus) interviews and discussions at various formal in developing Belarus-Chinese cooperation, and the and informal meetings and seminars with the efforts he put into the creation and development of representatives of various government agencies and the Great Stone Industrial Park. The author thanks local authorities. Mr Alexander Yaroshenko, Head of the Great Stone Industrial Park Administration, for his cooperation and support at all stages of the preparation of this report. The efforts of Mr Kirill Koroteev and Mr Sergei Vaitekhovski, First Deputy Head and Deputy Head of Industrial Park Development Company respectively, helped to make the report meaningful and depict the state of play. The author also thanks Deputy Minister of Economy of the Republic of Belarus Mr Alexander Chervyakov and the Head of the Department of Investment Policy of the Ministry of Economy Ms Elena Perminova, for their useful suggestions and support. The author is particularly grateful to Ms Olga Bondar and Ms Marina Grichik, Head of the Division of Infrastructure Development and Head of the Division of Macroeconomic Policy of the Ministry of Economy of the Republic of Belarus, respectively, for timely statistical support and in-depth discussions. 2 Executive summary Belarus has accumulated experience in the design However, the FEZs and HTP are relatively poor in and implementation of economic incentives to terms of some social indicators. The average salary promote business development, exports and foreign in the FEZs is almost equal to that of the rest of the direct investment (FDI) inflows in the country. The economy, although the residents generally have creation of free economic zones (FEZs) and the High- higher competitiveness than their peers outside the Tech Park (HTP) were effective policy instruments in zones. Contrary to expectations, the HTP also has a the late 1990s and 2000s. lower value of per employee revenue in comparison to the FEZs and the rest of the economy. The Great Stone Industrial Park (GSIP) is the latest example of the state’s economic policy to boost Special economic zones in Belarus are also limited investments and exports, based on previous by the sectoral development. The HTP, for instance, Belarusian experience and Chinese development has a clear focus on the development of the ICT experience on the Suzhou Industrial Park (SIP). industry. This policy, on the one hand, sets boundaries It is also a new form of cooperation between the for its residents to be in the ICT-related business. Belarusian and Chinese governments. The project is On the other hand, it limits other high technological of high importance for both countries since it is part of companies from residing in the park. However, the the Belt and Road Initiative (BRI). latest changes in local legislation will allow more freedom in this area for HTP. The FEZ residents, The study focuses on three issues. First, the paper however, were not limited by particular sectors, but it analyses the Belarusian experience in the creation did not lead to the creation of new economic sectors. of special economic zones. Second, we look at how the GSIP has been developing so far and what Lastly, special economic zones have different levels lessons have been learned from the past experience. of integration with the domestic economy. The FEZ Lastly, this paper makes policy recommendations on residents increase their sales in the local market. how to increase the efficiency of the Belarus-China This suggests that these zones play a substantial role cooperation under the GSIP project. locally. However, the HTP has a low level of integration with the local economy. Compared with the performance of the national economy, the FEZs and the HTP show a better Both FEZs and the HTP have disadvantages due to record of economic development. They contributed the extraterritoriality approach. For example, in FEZs, significantly to the country’s net FDI inflows and inorganic growth allowed for the inclusion of big state- played a crucial role in exports formation. owned enterprises as residents no matter where they physically resided. Moreover, the rules of the Eurasian Economic Union (EEU) require that the benefits for residents allowed in the free economic zones are almost identical across the Union. This made them less attractive in comparison with the HTP or the GSIP. 3 The Belarusian government has been refining its d. In addition, the Park residents enjoy the most policy approaches for the GSIP to develop the Park favourable fiscal and economic conditions in based on our assessment of the performance of the country, in line with the EEU legislation. As the FEZs and HTP, the revealed advantages and a “territorial special economic zone”, the Park disadvantages policy-wise, and what we have learned enjoys more customs and tax benefits than from the Chinese SIP. Clear evidence can be found “regular” special economic (free) zones; that is, from the evolution of the legislation governing the its residents benefit from duty-free imports of GSIP. A few examples from the recent Decree number equipment and raw materials; in fact, duty-free 166, which was the first Presidential decree that has imports are a significant competitive advantage been the result of consultations with experts including of the GSIP given that EEU legislation has limited private sector participants from a foreign country, are quotas for member countries on such zones. highlighted below: 2. A number of challenges were identified in the 1. There are a number of special policy experiments course of the development of the Park. that have been granted to the GSIP for the first time. a. Access to finance is viewed as a constraint for the GSIP residents due to the combination of a a. The government introduced an option that permits lack of long-term funding, high interest rates and foreigners to own land within the territory of the stringent collateral requirements demanded by GSIP. Both foreign and local residents are eligible local legislation. To solve this, the Belarusian to purchase land plots for business purposes. and Chinese governments set up two financial instruments to support business projects in b. The government also offers additional visa-free the park. However, there is still no experience entry to the country for staff and their families accumulated to be confident of their effectiveness. working in the GSIP. b. There are risks associated with Belarus being c. The GSIP is managed by the Park’s administration part of the Customs Union. In particular, we refer and the development company, which can help to unstable and inconsistent relationships with to avoid a conflict of interest. The former deals Russia, a major market for Belarusian companies. with common matters of the Park’s management Non-trade barriers under the EEU can potentially and rendering of relevant services to the Park discourage Belarusian products and services residents in terms of projects review and approval, being sold in the Russian market.