«All the Free Economic Zones (FEZ) of Kyrgyzstan, except the Bishkek FEZ, do not use their potential. One of possible options to consider is to cut these non-functioning economic projects. Alternatively, more attractive conditions for investors by maximizing the investment process should be created», – notes Gulzari Tursunova, investment promotion specialist, in the article written especially for analytical platform CABAR.asia.
РусскийSummary of the article:
- Nowadays, the Free Economic Zones (FEZ) in Kyrgyzstan face a number of problems such as the lack of electricity, water and sewage systems, and administrative barriers;
- Beside FEZ of Kyrgyzstan, there are 17 free economic zones in Central Asian countries;
- The current taxation system does not stimulate the subjects of these economic projects;
- It is necessary to cooperate with the special economic zones of neighboring countries;
- The Institute of Free Economic Zones (FEZ) is a large-scale project at the state level to attract investment in the country. However underdeveloped infrastructure, the law imperfection and political instability prevents development of the FEZ in Kyrgyzstan;
- In commodity countries there is a tendency to try to focus the economy on export of finished products. This in turn requires significant amount investment. Every country is trying to create the perfect conditions for investors;
- Free economic zone is a territory within the state where the subjects of the FEZ operate on preferential terms. FEZ subjects enjoy tax, customs, administrative, financial incentives and a number of other preferences.
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In Kyrgyzstan, the FEZ can contribute to the development of the industrial sector, to the localization of production, to output the goods and services to world market, to the creation of new jobs, to the innovations and infrastructure improvements.
At present, the FEZ of Kyrgyzstan faces a number of problems: the lack of electricity, water and sewage systems, administrative barriers. All of them in the end influence to the flow of investment into the national economy. Moreover, the development potential of the zones is constrained by political instability, the inefficiency of state policy in the economic sphere.!function(e,t,s,i){var n=”InfogramEmbeds”,o=e.getElementsByTagName(“script”)[0],d=/^http:/.test(e.location)?”http:”:”https:”;if(/^\/{2}/.test(i)&&(i=d+i),window[n]&&window[n].initialized)window[n].process&&window[n].process();else if(!e.getElementById(s)){var r=e.createElement(“script”);r.async=1,r.id=s,r.src=i,o.parentNode.insertBefore(r,o)}}(document,0,”infogram-async”,”https://e.infogram.com/js/dist/embed-loader-min.js”);
Free economic zones of Central Asia There are 10 special economic zones in Kazakhstan. Within industrialization policy the development system of special economic zones in the country has been completely revised, with changes and additions, a new the law “On Special Economic Zones in the Republic of Kazakhstan”, expanded list of benefits for their participants, the possibility of creating a free economic zone on private land. It is necessary to emphasize that the Kazakhstan Free Economic Zone “Ontustik” was noted in the annual global ranking “Free Economic Zones – 2018” according to the authoritative international magazine fDi which is included in the group Financial Times.
There are three free industrial economic zones in Uzbekistan: “Navoi”, “Angren” and “Jizzakh”. Uzbekistan’s FEZs are quite young compared to neighboring countries; they begin their activities in 2008.
There are four free economic zones in Tajikistan: “Sughd”, “Punch”, “Dangara” and “Ishkashim”. Each zone has its own specialization and different starting conditions for functioning. The differences are based on the level of socio-economic development of regions, remoteness of zones from trade ways, railways, terrain, condition of roads, etc. The functioning of all created SEZs in the country is marked for 50 years. In the Xinjiang Uygur Autonomous Region, the region closest to Kyrgyzstan China, developed 2 large project special economic zones: Kashgar and Khorgos. Thus, at the regional level, in addition to the FEZ of Kyrgyzstan, there are also seventeen another SEZs in neighboring countries. There is a big risk that investors will go to the already well-established FEZ. However, there is also the possibility for Kyrgyz FEZ to cooperate with neighbors and be part of the value-added chain. Kyrgyzstan has relative advantages over neighbors like cheaper labor force and relatively low electricity rate. Factors constraining the development of the FEZ of Kyrgyzstan World experience is replete with successful case studies of the institution of free economic zones. First, you need to ensure minimum conditions to carry out activities. It is necessary to create a favorable infrastructure – electricity, water and fenced territory and reduce administrative barriers. Critical influence on the decision of investors also provides political stability in the region and investment guarantees. In the beginning, eight special economic zones were created on the territory of the Kyrgyz Republic. At the moment, there are only five: Karakol, Naryn, Bishkek, Maimak and Leilek. The rest like “The Alai Free Economic Zone”, “the Chon-Alai Free Economic Zone” and “The Kara-Kulzha Free Economic Zone” were liquidated due to inability to finance and lack of investment. According to the current legislation of the Kyrgyz Republic on free economic zones, the subjects must pay 0.5-2 % from the sale of goods, works and services for the right to carry out activities as a subject. However, the law does not contain rules that establish the amount of payment to subjects. This gap in the law generates open space for corruption and abuses by the General Directorate of the FEZ in establishing the subjects of various rates. It would be appropriate to use a rate proportional to the turnover of the subject of special economic zone. In the USAID study, survey participants – subjects of the FEZ – noted that they make additional payments to the General Directorate. An additional payment of $ 600 was approved by internal by order of the General Directorate. Therefore, the law needs to clarify that the mandatory payment to the General Directorate in the amount of 0.1 – 2 % is one and only payment and other payments do not apply to entrepreneurs for the right to carry out activities as subjects of the FEZ. [1] It should also be noted that the subjects of the FEZ – foreign investors – do not want openly conflict with the management of the FEZ and it is easier for them to pay the requested amount of money. Investors can not leave since they have paid rent fee for long period in advance.!function(e,t,s,i){var n=”InfogramEmbeds”,o=e.getElementsByTagName(“script”)[0],d=/^http:/.test(e.location)?”http:”:”https:”;if(/^\/{2}/.test(i)&&(i=d+i),window[n]&&window[n].initialized)window[n].process&&window[n].process();else if(!e.getElementById(s)){var r=e.createElement(“script”);r.async=1,r.id=s,r.src=i,o.parentNode.insertBefore(r,o)}}(document,0,”infogram-async”,”https://e.infogram.com/js/dist/embed-loader-min.js”);
Among the five free economic zones in Kyrgyzstan only the “FEZ Bishkek” functions nowadays. The number of functioning entities in it reached 360 out of 1276 registered. The FEZ is characterized by proximity to the sales markets in the Kyrgyz Republic and Lugovoy-Bishkek railway line, that is, its logistic conditions are the most favorable compared to other areas in the Kyrgyz Republic. In the FEZ also have a place power reserve limits in the supply of electricity. That is, new businesses it can be connected to a power line under the condition of minor power consumption. The Karakol FEZ consists of two sections in the city of Karakol, 200 km from Balykchi railway station and Tamchi village (30 km from Balykchi). Suffice it to say, there are no enterprises in the FEZ. Volume of total exports in 2014 amounted to only 156.9 thousand US dollars [1] . FEZ “Naryn” formally occupies the entire territory of the region, but in reality there are only five small businesses left. The regional center is located 170 km from the nearest railway station Balykchi and is separated from it by the Dolon Pass at 3000 meters above the sea level. New subjects in the FEZ have not been registered since 2013. The volume of total exports in 2014 amounted to only 272 thousand US dollars. The Maimak FEZ is located near the Taraz-Shymkent railway line. Unfortunately, the highway is controlled by Kazakhstan therefore access to it is limited. Also, the status border crossing of the railway station “Maimak” Kazakhstan-Kyrgyzstan is not granted. The economic activity of the subjects in the FEZ is not noted that caused the FEZ territory reduction. This FEZ has disadvantage and advantage as well in the form of proximity to one of the dynamically developing FEZ of Kazakhstan. There is a risk that investors will leave to the well-equipped FEZ with the appropriate infrastructure. However, it opens and opportunity, as in Kyrgyzstan, VAT is 12 %, while in Kazakhstan it is 18 %. The Leylek Free Economic Zone has formally registered eight subjects since 2011. Due to disorganization of the zone territory no enterprise in the FEZ has been launched.
The subjects of the FEZ are mainly representatives of small and medium businesses. This segment is the most sensitive to the market. Unfortunately, the current taxation system does not give appropriate incentive to the FEZ subjects. The subjects of the FEZ are not seeking to expand production and increase the number of jobs. No income tax relief for employees, value added tax cost, social insurance depending on the investment contribution and production innovation might be considered to the betterment of situation. In particular, support the initiative, according to what the subject of the FEZ is exempted from all types of payments until they pay all the costs incurred by the subject for the implementation of entrepreneurial activities as a subject of the FEZ.
- benefits provided in the free economic zones;
- political stability;
- investment guarantees;
- quality of infrastructure;
- labor qualification;
- simplified administrative procedures.
These criteria serve as a foothold when investors make decisions. Moreover, to attract investors to the FEZ in the regions, it is necessary to form additional preferences taking into account such factors as:
- Highlands complicating the production process;
- Transport and logistics costs of investors;
- Lack of necessary infrastructure that investors need;
- Create at your own expense, etc.
The ban on the import, storage and sale of excisable goods on the territory of the FEZ led to negative consequences, like idle enterprises, producing products using excisable goods. Required allow import of excise goods into the FEZ that are used in the process production of goods. This practice, for example, in Georgia, is not considered as export of goods.
In addition to the development of infrastructure of free economic zones and preferential taxation, the directorate should build strong relationships with players in other markets through public channels, through established business structures and through private activity. There is a great opportunity for cooperation with the special economic zones of neighboring countries. Regarding the management of the FEZ, it is necessary to introduce an independent assessment of their activities. In neighboring Kazakhstan, all state companies are required to obtain a credit rating from reputable rating companies. It is possible to adopt this practice in relation to the BMS, as well as to consider the possibility of mandatory auditing by recognized audit companies. Also, world experience shows that the greatest efficiency of the SEZ can be achieved when the leadership of the FEZ are subordinate to the highest governing body in the country, rather than lower levels of government. It is usually President, Prime Minister or Minister of Finance. Moreover, it is necessary to clearly state in the legislation financial activities of general directors. It is needed to make the budget of the SEZ as transparent as possible – to control the accumulation of funds and their targeted spending. In Kyrgyzstan, FEZs can only be created “from above” – by decree of the Jogorku Kenesh of the Kyrgyz Republic. However, if you pursue the original goal establishment of the FEZ – a contribution to the development of the national economy, it is necessary to consider the option that free economic zones will be created where it is convenient for entrepreneurs. To the main directions of improving the efficiency of the FEZ in Kyrgyzstan attributed to: increase the investment attractiveness of the zone by ensuring guarantees and protection of foreign investment, the conclusion of bilateral and multilateral investment agreements; development of the infrastructure of the FEZ, arrangement of infrastructure serving the business, development and implementation of measures for the preparation of highly qualified managers, engineers, workers, etc. It is important to pay attention to the development of vocational and special vocational schools, institutes and universities, consulting companies and etc. There is a need to create business incubators for training entrepreneurs in the basics of business in the territory of the FEZ. An important impetus for improving the functioning of the SEZ is an information and analytical work. A huge role in this should play mass media, public organizations and other interested sides. The main direction of their work is to form country`s image as a reliable business partner.This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project implemented with the financial support of the Foreign Ministry of Norway. The opinions expressed in the article do not reflect the position of the editorial or donor.
Sources: [1] The USAID and BDK study “The state and prospects of development of free economic zones of the Kyrgyz Republic”, Bishkek 2014 [2] The Karakol FEZ paid taxes on 600 soms for this year. Access mode: https://knews.kg/2016/06/08/sez-karakol-za-etot-god-zaplatil-nalogi-na-600-somov