When and how a free economic zone will be created in Poti

Nino Arveladze

A lot of century projects, which attract a great interest of the public, economists and businessmen, are being planned in Georgia.

One of them is a project of a free economic zone in Poti proposed on the President’s initiative. What project is this? How it will be made and realized, who will manage it, what is an approximate period of its implementation and how many investors it will attract – here are the questions everybody is interested in.
Most complex processes precede the introduction of free economic zones. It envisages a breakthrough into the country’s economy and integration on the world market. Great importance is attached to it from the viewpoint of the country’s economic development. The most important thing is to give our readers information on not only what should take place in Poti, but also on what is happening in the world from this point of view.
Poland is a member of the European Union. It has 14 special economic zones, which envisages attraction of investments, growth of employment indicators, introduction of technological novelties and economic progress. Trade zones are mainly located in ports and airports, they have storehouses in which the world’s leading producers store goods by the agency of dealers, and then they are sold throughout the region. Let us draw Dubai as an example; there the main trade zone is set up in the port. There is a number of this kind of trade zones in the UAE and each of them is more or less developed, but Dubai is a well-organized trade centre. In a trade zone sales are the priority, so it is the regional trade centre. Technoparks are a different type of such zones and Shenzhen, in which all leading electronic companies of the world are represented, can be drawn as a good example. All leading electronic companies of the world are represented in it and any computer parts are produced there. Science and technology intensive branches choose Shenzhen for the sake of tax privileges, since expensive machinery is not taxed there. In Shenzhen there is even no labor legislation, i.e. there is a direct contract between a person and the employer and no one interferes in their relations. It is noteworthy that China’s national currency – yuan is cheaper in comparison with foreign currencies, which is attractive for investors, since they produce output for both the local market and export. Computer technique from Shenzhen is distributed all over the world, so export also becomes cheap and goods are competitive. Taking into account these conditions, we take technoparks. Concentration of production, including a considerable part of machine-building, takes place there. A different phenomenon is offshore zones, where financial companies, banks, insurance firms, transnational giants’ offices, etc are located with the purpose of the profit tax’s reduction. Monaco, Gibraltar, etc. are well-known offshore zones. Resident firms are also a source of their incomes and their minimal profit tax represents one of the sources of Monaco’s incomes.
What is the attitude in world towards these three types of zones? There is a positive attitude towards trade zones, they contribute to integration of the world trade and accelerate the process of establishing a union between consumers and producers from the viewpoint of globalization. There is also a positive attitude to technoparks, they contribute to the development and introduction of modern technologies and facilitate a difficult adaptation period. This cannot be said about offshore zones, since suspicions concerning money laundering often arise in their relation. Special economic zones are created with a particular purpose, when a country needs a particular incentive for its development. That is why creation of a free zone in the territory of Poti port will contribute to attraction of investors to Georgia. Maybe it will be the only chance for attraction of technologies and science intensive branches with the purpose of production development in Georgia and for Poti to become a centre of regional trade.
In connection with the project concerning the creation of a free zone in the territory of Poti port we speak to the Deputy Chairman of the Parliament of Georgia, the President of the Georgian Chamber of Commerce and Industry – Mr. Jemal Inaishvili:
– What kind of zone is it planned to create in Poti?
– There are different types of economic zones in the world, and I would single out the most widespread ones among them: industrial; software and industrial technologies zones; tourist zones; centers of logistical and financial services (known as offshore zones).
However, out of more than 3000 zones existing in the world, only 20% are really successful. A zone of any type is set up with a concrete purpose and its creation is preceded by an intensive preparation period. One of the main conditions is that there must not be any bureaucratic barriers in a free zone, and the companies registered in it should be exempted from taxes, except for the service cost. Only in this case a free economic zone will be successful.
One of the most successful free economic zones in the world – Jebel Ali Free Zone (JAFZA) – is located in Dubai emirate. It was set up 25 years ago and one of the main reasons for its creation was that it had the smallest oil reserves in comparison with other emirates and they started to think about substitution of its share in the economy in the future. One of the reasons for the present Dubai miracle is creation of this zone, it has given a serious impetus to the economic development and contributed to formation of Dubai as one of the most important trade, financial, transport and tourist centers of the region.
Currently Dubai’s free zone makes up 135 km2, more than 6 000 companies from 120 countries are registered in it, and 500 new ones are added annually. Why has Dubai’s JAFZA become successful? It offered companies the registration in the zone, created favorable conditions for their activities and exempted them from taxes. Initially this zone was set up with the purpose of trade and business promotion in the Emirates and the Persian Gulf countries. Later on the idea proved to be correct and the free zone developed so much that the companies registered in it have trade relations not only with the region’s countries, but also with Pakistan, India, the countries of eastern Africa and the former USSR. JAFZA and Dubai port, in which 13 million of conventional units of containers are handled annually, belong to the Dubai government by 100%.
– How relevant is this project?
– It is important that the President came out with this initiative. Proceeding from the strategic and geographical location of our country, much importance is attached to this project. It will not be only a customs zone, in which only storage of products and raw materials will take place –different kinds of enterprises will be created there, which will attach new functions to Poti and Georgia. The companies that are not currently represented in Georgia will come to the country by means of the mentioned free economic zone. With the aid of this zone we create favorable and very attractive conditions for them. We should also envisage all insignificant details and rouse companies’ interest to get established in our free zone and implement their activities on the regional scale. The case in point is that Poti free economic zone should turn into the region’s economic and trade centre.
– Does the matter concern the whole territory of Poti or only the territory adjacent to the port?
– It is envisaged to set up a free economic zone in Poti similar to JAFZA. Of course, Poti port will be its integral part, since Georgia, and Poti in particular, have a very important strategic location in the region, but we should not be a country fulfilling only the transportation function. Poti free economic zone itself will be an ordinary resident, a Georgian legal entity that will pay all taxes on the basis of its incomes, but the companies operating in the zone’s internal territory will be exempt from any kind of taxes, except for registration and service ones.
– Should we expect adoption of a new law or implementation of the project will take place on the basis of the old legislation?
– Of course, changes will be introduced in many laws, since an economic zone, in which there will be a different tax regime and registration of companies will take place, should be created.
– This project requires a concrete investor, do we have one?
– JAFZA is considered as one of the variants, as the operator and investor of the free zone, especially since they operate with similar zones in many countries. JAFZA is setting up a large free zone in Djibouti. It is also holding negotiations with the governments of Senegal and Morocco concerning the creation of similar zones. JAFZA manages different type zones in many countries.
With the purpose of implementation of this project, JAFZA should minutely study the economy, prospects and priorities of the country and the region in order to correctly choose the strategy of Poti free zone. This zone should be considered as an integral part of the region’s economy.
– What steps are being taken for this purpose?
– I have been to Dubai several times, then we invited JAFZA’s representatives to Georgia. Not long ago the Minister of Economic Development, Mr. Giorgi Arveladze made a visit to Dubai. In the near future the President of Georgia will visit it. As I have already said, at the first stage a detailed study should be carried out by JAFZA’s specialists, and then, after introduction of the corresponding legislative changes, the procedure of the zone’s creation will start.
– What is the approximate period of time necessary for preparatory works?
– I guess that at least one year is necessary for the examination and settlement of institutional issues. At the same time the territory’s development should start, which should take place by stages. For instance, at the initial stage 100-150 hectares of the allotted territory will be liable to development.
– What is in store for the operators and private companies that are currently functioning in the territory of Poti port?
– They will continue their activities and, at the same time, they can get established in the zone.
– Should the project be financed first of all by Georgia?
– Yes, or together with an investor.
– What effect will creation of a free zone in the territory of Poti port have on Batumi port?
– It is clear that there will be competition between the ports, but the zone’s existence will have a positive effect on the whole region and the country.
– Will it be “Made in Georgia”?
– Yes, it will. In case products are produced in the free zone, they are sure to be considered as produced in Georgia.
– Shall we still make use of GSP+ system?
– Of course.

Let us familiarize ourselves with the world experience in more detail:
Special economic zones
A special economic zone is a geographic region, it has such economic laws that surpass the country’s typical economic laws in their liberal essence. The main purpose of their creation is foreign investments increasing in the country. With introduction of tax privileges an offshore zone attracts financial capital and achieves a comparative economic growth by means of it. With the aid of this kind of policy economies of small countries, which have no considerable natural resources or significant economic potential, achieve success. There are the following ways of turning a country into a free zone:
1. Complete ruling out of taxes;
2. Introduction of a fixed annual tax;
3. Introduction of low tax tariffs;
4. Introduction of fixed taxes for a company’s registration in conditions of other taxes’ existence;
5. Introduction of other special terms in conditions of non-existence of taxes (e.g. the tax on opening of a bank account, etc).
The oldest free economic zone was established in the People’s Republic of China in 1980s, while Shenzhen turned out to be the most successful one, which within the period of 20 years turned from a small fishing village into a large city with a population of 10 million people. Its location was chosen with the purpose of attraction of industrial investments from Hong Kong. The experiment was justified and gave a positive incentive to China’s economic reforms. In 2001 the number of people employed there made up 3.3 million. Since 2001 its economy has been growing by 16.3% a year. Shenzhen represents the main center of Chinese production. Doing of business was taking place in accordance with the Chinese methods, i.e., on the one hand, investors were given big privileges: complete exemption from the profit tax for the period of two years, halfing of the tax for the period of another eight years from the moment of the beginning of receiving of the profit. If the profit was used for reinvestment, creation of a company’s authorized capital or subsidiary, a company could get up to 40% of the paid profit tax as a compensation during the period of at least five years. Compensation of the damage suffered by a foreign investor or its Chinese representative office could be made at the expense of the profit received in the next financial year and this would have continued during the period of five years. Production and office premises were exempt from the property tax for the period of five years, etc.
According to its freight turnover, Shenzhen port is the second largest in China after Shanghai. As the Chinese say, it is the largest market of computers and electronics in the south-west Asia. It is the sea of stalls that trades in everything.
After China, similar zones were established in India, Iran, Jordan, Poland, Kazakhstan, Philippines and Russia. South Korea’s attempt to create a free economic zone was a failure.
According to the World Bank’s data, in 2007 more than 3000 projects are planned in 120 countries that envisage creation of free economic zones.
Free economic zones became especially popular in the last decade, since many countries try to encourage export of non-traditional goods, raise the level of exporters’ competitive ability, attract investments, diversify the economy, reduce the unemployment indictor, extend technology transfer and tourism. Foreign investors take interest in this kind of zones for the following reasons:
– Profit tax does not exist or it is insignificant;
– Registration procedure is simplified to the maximum;
– There is no limit for import or export of currency;
– Firm management procedure is very simple and often a conditional one;
– Customs and tax violations are not considered as crimes.
It is possible to implement a number of operations within the bounds of a special economic zone. It should be pointed out that success of a free economic zone depends on political stability in the region, appropriateness of the port and the quality of customs services. A vivid example of that are similar zones created in the territory of the former Soviet Union, Pakistan, Lebanon and some politically unstable countries that, in view of constant internal political and ethnic conflicts, cannot reach the necessary level of development.
Free economic zones legally exist outside the customs territory of a country and in them there are tariffs and tax regime that are considerably different from the ones existing at the customs. At the same time, introduction of various taxes and stimulation of investments is also possible. Free economic zones are located within a country’s borders are a part of the national economy, they may include the whole country or a city. However, they have a secured perimeter that is controlled by the customs. The customs service should implement control from the perimeter to the zone, its role consists in control over the goods coming from the zone to the customs territory or some third part of the country. Transit of goods coming in or out of the zone can be involved in this activity.
Jebel Ali Free Economic Zone in the UAE can be considered as the most successful one in the world. It was founded in 1985 and there is no tax system in it. Limitations are reduced to the minimal level and there are no obligations to have a local partner; it is permitted to hire the operating personnel from any place. The zone is provided with excellent ports, warehouses, office spaces and already built factories ready for rent negotiations. The port is the busy one in the Middle East and holds the tenth place in the world from this point of view.
The management of Jebel Ali Free Economic Zone is planning to create a new zone for spare parts industry of internal Dubai companies. A special market space will be formed with creation of this zone, and the management hopes that they will have producers, traders, suppliers and ultimate consumer will be in the same place. 2 billion dirhams’ worth of investments were made for this purpose. Dubai auto zone will consist of several parts – a free zone with the purpose of investment attraction, a special economic zone for supplying of the auto market and a retail sale zone with the purpose of attending to the local market. The project should be completed in 2007. The purpose of creation of Dubal car and spare parts zone is consolidation of re-export of secondhand cars to Asian and African countries.
Dubai technopark is one of the first ones in the Middle East, it attends to the high-tech sector in the region and was created for attraction of the industries that take interest in study and development of oil and natural gas sphere. This zone is the base for some world leaders in the sphere of technologies. It has 75 registered companies, and another 55 are in the process of registration. The zone consists of four parts and 90% of one of the parts has already been leased. 50 applicants are located in the technopark and negotiations with 1000 companies from different parts of the world wishing to join the park are underway. Dubai technopark is a world-class industrial complex that represents a center of high-tech production for local and international companies. Each industry has a separate zone, and their further development will be related to the level of demand. The companies represented in the park belong to oil, gas, water technologies and other spheres.
The technopark’s basicallyoffers is a world-level service and an ideal possibility for implementation of investments. It contributes to the growth of the local economy and better productivity, since it stimulates of industry-based technologies. The technopark created an appropriate technological base, which has had an effect on the regional market as well. The technopark is orientated on three basic spheres – high tech, oil, gas and water technologies.
Aqaba Special Economic Zone in Jordan was created with the purpose of economic development and raising of the amount of foreign investments. It is interesting that the management of Aqaba Special Economic Zone formed a separate customs service for the zone’s territory which is independent from the National Customs Administration of Jordan, and that was done for consolidation of operations in the zone. Lack of trust and cooperation between the two customs services caused administrative complications. However, the zone achieved success in a short period of time. Aqaba Free Economic Zone is considered as an accelerant of the customs reforms in Jordan.
Industrial and technological parks in Poland are becoming increasingly popular since they are considered as an instrument of regional development, which is also very important for Georgia’s realities. Technological parks contribute to knowledge exchange between scientific institutes and business. The following kinds of service are offered to high-tech companies:
– Establishment and development of a company;
– Transfer of technologies;
– Scientific research and development projects in technological novelties;
– Creation of favorable conditions for business.
Scientific and technological park in Poznan was set up in May 1995, which was the first precedent for Poland. Further development of technoparks in Poland was supported by the Polish Business and Innovation Centers Association.
The industrial park was set up in cooperation with the local administration, which implies privileges for business activity, especially for small and medium enterprises. The main objectives of the industrial and technological parks:
– A possibility for companies to apply new technologies;
– Attraction of investors;
– Creation of new jobs.
In spite of the fact that industrial and technological parks have common objectives, their possibilities differ. Each park has different signs envisaging the region as well as cultural and economic conditions. There is no single universal model, but each them has a management system of its own. Technological and industrial parks are another friendly gesture made for potential investors.
Special economic zones are certain places where preferential conditions for production or distribution activities are made. Their objective is regional development. They are set up in order:
– To contribute to economic growth in the Polish region;
– To develop and apply modern technologies in the Polish economy;
– To increase the competitive ability of products and services;
– To make post-industry and infrastructure useful;
– To give an incentive for creation of new jobs.
There are 14 special economic zones in Poland. The purpose of each of them is to rendering assistance to business in the zones and contribution to the investment process.
1. Pomeranian Special Economic Zone was set up on the basis of the decree dated 11 July 2001, it will operate till 30 November 2017.
2. Slupsk Special Economic Zone is managed by Pomeranian Regional Development Agency. The zone’s area makes up 210.02.
3. Suwaki Special Economic Zone is situated in the north-east part of Poland, four additional zones are arranged in it. The zone has the operation period of 20 years. It offers the following advantages to investors:
– The area is provided with technical infrastructure;
– The lowest real estate prices;
– A possibility of cooperation with the companies operating in the zone;
– Perfect location – near to Russia, Lithuania and Belarus;
– The cheapest labor force in Poland;
– Highly qualified young workers;
– Friendly relations.
62 firms operate in this special economic zone, 55 investors have already started their activities in the mentioned place.
4. Warmia-Mazury Special Economic Zone was set up in 1997. It borders upon Kaliningrad region of the Russian Federation. The total cost of planned investments makes up 423.7 million EUR, by means of which 5 550 people will be employed.
5. Kostrzyn-Slubice Special Economic Zone is situated in the western part of Poland. Geographically, it represents the center of Europe and is near to Germany and the Czech Republic.
6. Aódz is the second largest city of Poland and has the population of 800 000 people. Its special economic zone is divided into 16 sub-zones. This zone is distinguished by high quality standards and services, which makes a good environment for investors.
7. Lengica Special Economic Zone is situated in the south-west part of Poland. It is divided into 7 sub-zones, located in the centre of Europe and distinguished by a high quality of the communication network.
8. Strachowice Special Economic Zone has the area of 329.8 hectares.
9. Kemienna Gora Special Economic Zone is situated in the south-west part of Poland and is convenient for small business. The zone borders upon Germany and the Czech Republic, it will operate till 2017. 27 investors work in the zone and more than 2000 people are employed by them.
10. Walbrzych Special Economic Zone is divided into 15 sub-zones. Each sub-zone has a modern technological infrastructure that is permanently being developed. 18 788 people are employed by the companies operating in the zone.
11. Tarnobrezeg Special Economic Zone was set up for the period of 20 years. 6000 new jobs were created by means of investment projects; 9000 people are currently employed.
12. Katowice Special Economic Zone was set up in 1996 with the purpose of creation of new jobs. 21 690 new jobs were created.
13. Euro-Park Mielec Special Economic Zone was set up in 1995 and it was the first precedent in Poland. Now it occupies an important place on Poland’s economic map. Investors like it, since there are good conditions and a favorable tax system in it. 11 000 new jobs were created in the zone.
14. Krakow Technopark – Special Economic Zone was set up in 1998.