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Linar Yakupov: “Tatarstan promotion campaign attracts foreign investments» 16 Nov

Linar Yakupov: “Tatarstan promotion campaign attracts foreign investments»

The Republic of Tatarstan is likely the only place in Russia where public-private partner-ships are operative rather than declared. In addition, this is the only Russian region that – so as to attract foreign investors – has imple-mented an international PR campaign. We interviewed Linar Yakupov, chief executive of Tatarstan Investment Development Agency, about the results of this program, SEZ and the effort to bring in international investors.

How is the Republic of Tatarstan currently vying for financial and investment resources? What is being done in the region to attract investments and how? How is legislation put together? 

Tatarstan is today one of the leading regions in terms of attracting investments to Russia. In 2011 expressly for working with investors – to publicize the region and attract businessmen to the Republic – the Tatarstan Investment Development Agency was set up. What have we achieved? According to a World Bank report, every U. S. dollar spent on promoting the region returns 189 U. S. dollars of foreign investment in the economy. In our case this indicator was exceeded three-fold. 

Today we are intensively working on infrastructure for part of the region. Specifically, since early 2012 the Tatarstan Investment Development Agency together with the Republic’s municipalities has worked to set up a system of municipal-level industrial facilities to attract investors and facilitate the processing sector of the economy, manufacturing of new product types and launch of new technologies and factories. Work is underway to create 10 of these facilities, which could accommodate around 100 company-residents. In addition, we’re actively working with legislation to guarantee investor rights. We have the Law “On investment activities in the Republic of Tatarstan”, laws on public investments and public-private partnerships. 

In 2012 the PR campaign “INVEST in TATARSTAN” was held. This was an interesting precedent – for the first time a Russian region entered the international market in order to advertise itself before the world investment community. How did the campaign transpire and how effective was it? 

Indeed, last year we conducted a large-scale advertising campaign for the Republic. World leading television station CNBC was chosen, with an audience exceeding 380m viewers across the world. During 2012 clips about Tatarstan aired on the station, reaching households across Europe and Asia. The total budget equaled USD1 mln. We also conducted road shows in countries of importance for us, where we plan to raise investments (Southeast Asia: Singapore, Malaysia; the Middle East, Europe). We traveled to other countries to show what we’re capable of, presenting our projects to international investors. As a result, the campaign allowed us to increase awareness of the Republic from 18% to 44%. 

Was there any financial result? Which abilities did you demonstrate during the road-show? What in particular did you sell to investors? 

We identified 8 niches open for investors. These are chemicals/petrochemicals, mechanical engineering/auto parts, agriculture, construction/building materials – these four bedrock industries of Tatarstan represent enormous development opportunities. There are four new businesses – IT/ telecommunications, medicine/pharmaceuticals, the services sector and halal certified products. 

The financial result was quite robust. In 2011 foreign direct investment in Tatarstan’s economy totaled around USD100m, in 2012–580m. Thus every dollar invested generated 580 dollars of attracted investments. This is a very good result. I would especially like to mention that the special economic zone “Alabuga” accounted for 60% of this FDI, above all because this is a finished, correct investment product, intelligible for foreign investors. Questions regarding securing land, laying utilities, the role of infrastructure – all these matters are precisely spelled out in the SEZ “Alabuga”, and consequently investor interest in this territory was entirely expected.

Perhaps some concrete examples… What do investors receive when joining Alabuga, what preferences are given for their businesses? 

To start – a bit about the blueprint for developing sites in the region. The Republic already has in place a network of industrial parks with readied infrastructure. This includes technopark “Idea”, technopolis “Khimgrad”, Kama industrial park “Master”, industrial parks “Kamskie Polyany”, “Chistopol”, “M-7” and several others. It’s worth mentioning separately the special economic zone “Alabuga”, which provides investors with much broader opportunities for development than the technoparks do. To be sure, we try to exploit the experience of the SEZ in the industrial parks, although no matter how it’s spun, the development of IPs is subject to the standard set of regional preferences: the regional profit tax rate can be cut to 15.5%. 

At Alabuga preferential profit tax rates are in place for residents. Including federal taxes these total: 2% for the first five years; 7% for the next five years, and 15.5% until 2055. Taxpayers may also use an expedited amortization schedule with 2% coefficient. One preference provided to residents of SEZ “Alabuga” is unpaid connection to electricity grids. In addition, tax on property, land and trans-port totals 0% for a period of ten years following tax registration. 

At the technopolis Khimgrad of republican significance, for those residents conducting approved investment projects, the profit tax rate is cut to 15.5%, and the property tax rate is slashed from 2.2% to 0.1%, while the coefficient for calculating land rental rate drops to 0.1%. Moreover, residents are exempted from the transport tax. 

The above are the key avenues for providing preferences in the Republic. To be sure, we realize that merely using regional preferences for IPs hardly ensures competitiveness – all this is in place in other cities too. Hence there is a need for additional investment products intelligible for external investors. Moreover, the speed and dynamism of the government’s responsiveness to investors and business are critical. In my opinion, an open dialogue between investors and the government is presently seen in Tatarstan. The best illustration of this statement could be the fact that Rustam Minnikhanov, President of the Republic, participated in our international road-show. On the one hand, this proved the seriousness of the Republic’s plans in terms of raising investments, while on the other exhibiting the administration’s openness. 

How willingly are foreign investments put toward Tatarstan’s development segment? 

In terms of building real estate in the Republic, there are three sources of investment – federal programs, regional programs and domestic investments. The number of projects implemented by foreign investors may be counted by hand. Thus, of course, we would like more vigorous investment in this industry. 

It cannot be overlooked that during the preparations for the Universiade, infrastructure in Kazan and the Republic of Tatarstan overall was greatly improved. First, the airport was fully upgraded, with the construction of a new terminal and additional runways, while the aeroexpress between the city and airport was optimized. Roadways were improved with the construction of many bridges and interchanges. With the private sector’s assistance, an impressive number of hotels, hostels and sport facilities were built… 

…and it would be wasteful not to capitalize the market upon this completed infrastructure. What do you plan to do? 

You’re right; the existing opportunities must be parlayed into still greater opportunities. We have long worked with investors from the Persian Gulf countries, the Middle East and Southeast Asia, who gave us a sense of how to develop land to make it multi-functional and ensure that these functions supplement each other, providing synergy in projects. All this cogitation resulted in the project for the International investment technopolis “SMART City
Kazan”. We drafted a general land development master plan stipulating the industry concept and modern business infrastructure accounting the needs of future residents of the city ensuring the city’s sustainable development. 

In which format will the project take place and how do you plan to attract investors? 

“SMART City Kazan” is an international investment platform implementing contemporary international investor relations standards, creating the necessary conditions to attract residents. Following the project’s inclusion in the 2014 Investment Memorandum (i. e. list of priority projects), project investors will receive the following benefits: profit tax cut to 15.5%, transport and property taxes cut to 0%. In addition, an agreement is in place for full exemption from the land tax. Investment tax credits may be provided for a period from one year to seven totaling one-half of the Central bank refinancing rate. Work is underway to allocate subsidies from the budget of the Republic of Tatarstan for laying roads, gas utilities, electricity grids, etc., that is infrastructure costs. All these preferences made possible the arrival of investors from the Middle East and Southeast Asia. Specifically, Singapore-based Radiance Hospitality Group is commencing implementation at “SMART City Kazan” of several development projects at once: a hotel-office center and University of management and hospitality with training in English. 

One of the first residents to join the “Smart City” was TGT Oil and Gas Services, headquartered in Dubai – developing a scientific R&D and manufacturing park accommodating modern laboratories, engineering center, manufacturing facilities and a hotel. Investment companies from the Persian Gulf, having gauged the aptness of “SMART City Kazan” for this project, set in motion the Tatarstan Gulf Investment Company (TGIC), whose founders are a group of investment firms from the United Arab Emirates, Qatar and Bahrain. In particular, the company is working to attract other Middle Eastern investment forms to work on the project. 

Which segments will you seek to engage first? It’s well-known that Kazan has a surfeit of retail real estate, yet an extreme shortfall of business centers… 

As a matter of fact even shopping malls are lacking. I mean high-quality ones. Thus this market remains open for developers. As for office real estate, vacancy at class A and B business centers totals around 2%. Of course, companies entering the market must occupy some premises, which is why a large business center will exist at “SMART City Kazan”. 

How will the project be connected to the city? After all, it’s located far from the Kremlin… 

The project is located on a land plot of 650 ha, of which 102 ha pertains to the SEZ, where the creation of high-tech manufacturing is envisaged. All the remaining land will be used for the construction of commercial and transport infrastructure. This means a full-fledged business center, hotel, exhibition center, high- and business-class housing, and academic and scientific centers. The technopolis is located 3 km from the airport and 15 km from downtown Kazan. A road has already been built which connects the city with the “SMART City Kazan” project. 

Judging by the project’s scale, the footprint of “SMART City Kazan” includes other cities? 

That’s right. The worst outcome scenario is that it becomes a gravitation point only for Kazan. The best – which we are counting on – is the entire Volga region. Located within a 1000-km radius form Kazan are 7 of Russia’s 11 largest cities. The project footprint includes around 50m people. And we, of course, are targeting them. Specifically, talks are currently under-way with major private hospitals from other countries so they will open facilities with us. We are purchasing small airplanes for 9–12 people to make it possible to fly to even the smallest towns in nearby regions. We also want to set up major interregional shopping malls and state-of-the-art Expocenter meeting contemporary business center standards, and a strong educational cluster. All this makes it a cosmopolitan project. 

Let’s suppose that a developer wishes to build a business center as part of “SMART City Kazan”. What steps should they take to do this? 

Development – in its current form in the West – assumes the government’s participation in the project in terms of building basic infrastructure with subsequent “buildup” of the commercial part by the developer. We use the same principles – we provide all the necessary infrastructure for projects. Thereafter, we transfer the project to the investor, who arrives and, depending upon their specialty, implements the project. The project envisaged by the land development master plan stipulates functions, key characteristics, volumes, etc. 

The property which the investor builds can be designed for lease or ownership (build-to-suit). What’s important is that the developer should implement their project within three years – we don’t want any speculative matters to arise here, and seek to ensure that the investor commission their property as quickly and transparently as possible. 

And the Tatarstan Development Corporation oversees these projects? 

The Development Corporation is currently the development operator for this site; it is a 100% state-owned structure, whose tasks include work on the master plan, work with all infrastructure organizations, investor relations, providing all the necessary assistance in securing permit documentation, registration, hiring manpower, etc. So the full range of work necessary in order to implement investment projects is handled by the Development Corporation.

What is the overall project cost and budget breakdown between state and private investments? 

During just the initial stage, required infrastructure costs will total around RUB5bn. Clearly, the project will be implemented in phases, including because a one-off “extraction” of such an amount from the budget would be unfeasible. Of course, we will operate under the PPP system. During the initial stage, private investments of around RUB10bn will be needed. However, the ratio of public and private investments will quickly change. I think the second project stage will see a ratio of 1 to 5 and then 1/15 and ultimately 1/30, meaning that each ruble invested by the government will be matched by 30 rubles of private investments. 

What is the level of interest among industrial developers in SEZ? 

Yes, industrial developers have ramped up their engagement with special economic zones. This partially owes to the auto cluster development, which critically lacks premises. They are reluctant to earmark working capital for the construction of their facilities, and instead seek leased premises. 

So build-to-suit for lease is rising? 

Yes, we are intensively working on crafting a build-to-suit concept. What are we doing? We are attracting investors, helping with the selection of specific premises, and then inviting developers, holding joint negotiations and in accordance with the investor’s specifications discussing with the developer the feasibility of the plans. After that, if necessary, we involve financial structures. For each of these properties we create a roadmap, spell out the implementation schedule and commence work. As a result, the aspiration to raise investments automatically leads to creating completely new business processes. And this is a very important part of land management work. 

Text: Tatyana Lomakina

C o m m e r c i a l R e a l E s t a te (CRE)