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CHIEF: Interview. Guest DMITRY RYABOV: ON THE BENEFITS OF COMPETITION

27.08.2011

Investment climate is an important component in the development of any region.  Economic prospects, government revenue, the number of jobs and quality of life all depend on how "warm" the investment climate is.

Ulyanovsk Region Development Corporation, OJSC is responsible for creating the investment climate in our region. Thanks to this specially created body working closely with the development block of the region's government, Ulyanovsk Region is one of the most attractive for investors. The corporation's Director General, Dmitry Ryabov, will tell us how they achieved such success. 

- Dmitry Alexandrovich, is there a rating for investment attractiveness of Russian regions? What position are we in?

- There aren’t any official ratings as such at the moment. Federal bodies, various associations and organisations provide different ratings. However, the methods for compiling these ratings are so diverse and subjective that the results can be very different. The most important indicator for us is the rating from the Russian Ministry for Economic Development. The Government has decreed that this department shall, by the end of this year, provide an official rating. Our position in this will be obviously very important to us.

We have subjective assessments from the department for investment policy and development of public-private partnerships of the Ministry for Economic Development, the Deputy Minister and Minister. According to them Ulyanovsk Region is in the top five most attractive regions for investment. The other leaders are Kaluga Region, Tatarstan, Perm and Stavropol Regions, Nizhny Novgorod and for some aspects Tver Region.

 - Is there strong investment competition between the regions?

- Competition is quite strong, which is good, we can't relax. There are a number of regions which didn't use to work actively on creating an attractive investment environment who are now studying our experience and the experience of Kaluga Region which has done even more than we have.

The main competition criteria is the availability of production sites with a ready infrastructure. It takes years to develop them. In general, from the moment a region decides to actively develop its investment activities, several years should pass before it can realistically offer investors something.

Occasionally the region's development is held back by the mentality of its leaders, regional and municipal. They should realise that investors are a good thing. However, sometimes investors are loaded with excessive social responsibilities instead of being offered something. And today they can choose where to go. Therefore, the investment process has many components. Each investment project should be found and supported until complete implementation. There should be constant discussions, sites need to be prepared and tax incentives offered.

 Industrial zone priorities

 - What are the main reasons for investors to choose Ulyanovsk Region?

- There are lots. We are well situated geographically. The Volga Federal District occupies first place in Russia according to a number of indicators; the share of industrial production in the country's economy, aviation industry, car industry, agricultural production, innovation expenditure and freight transport. For many investors the important points are the sales market, high population density and cities with over one million inhabitants close by. So we have a strong starting position.

Secondly, Ulyanovsk has a well developed transport infrastructure. We have two airports, one of which is international, two river ports (cargo and passenger) and a railway.

Thirdly, strong workforce capacity. To all this we added the industrial zones which are one of our key advantages. We created an industrial park, Zavolzhye industrial zone, which was one of the first in Russia to be certified.

 - Has there been any return on this yet?

- Of course. Over the last couple of years every federation subject has declared that they have industrial zones. But often they were not quite what was expected. The terminology got confused. Not everyone understood what is an industrial zone, industrial park or technology park. In reality there are very few so-called Greenfield sites with ready infrastructure, which have been created from scratch and are ready for investors’ plants. And this is shown by certification. There are less than ten turnkey industrial zones in Russia today. Of these four are in Kaluga and one each in Ulyanovsk Region, Ivanovo Region and Tatarstan.

We plan to have four industrial zones: Novospasskaya, Novoulyanovskaya, Karlinskaya and Zavolzhye.

We also have two industrial parks specialised in aviation component production in Dimitrovgrad, based at DAAZ sites (where a number of projects are already being implemented), and at UAZ, whose management are prepared to provide production sites.

 Birth of a project

 - What do you think is the Corporation's greatest achievement? 

- The most important indicator for us, despite all ratings, is the number of real companies who have entered the region. For the first six months of 2011 twelve new investment projects have been attracted with a total investment of more than 10.5 billion roubles. This is signed investment agreements where all negotiations are complete. We expect that in this half year at least 5 more companies will complete negotiations. In addition, there are always 10-15 projects in a high readiness stage. 

 - How does the birth of an investment project happen?

- As a rule, negotiations with investors take about one year. The "funnel" looks like this: for the first six months we worked on a thousand companies, of which representatives of about 60 came to see us. Negotiations are in the final stage with 15 and agreements have already been signed with 12. Our main task is to make the first contact, to work on it at exhibitions and forums, to invite the investor here (as a rule investors come at least five-six times to the region, and we go to them several times) to get to the decision making stage.

Usually the Governor takes part in the final stages of negotiations. The investor demands certain conditions. For example, to create specific conditions for developing workforce capacity, so that the region pays for training employees, or contributes, together with the investor, funds to secondary vocational educational establishments, where specialists are trained for certain enterprises. This is where we are going today, we think this option is good experience.

 - Do investors complain about a lack of highly skilled employees? After all many projects being implemented in Ulyanovsk Region are high-tech and require specialist knowledge.

- We hardly have any staff issues. This is because labour productivity in Russia is much lower than in developed countries.  There is no other way to become competitive. We must triple or quadruple this figure. Such a growth in labour productivity frees employees from existing companies. And none of the investors coming to us are creating a large number of jobs. This is, in fact, how it should be. The largest company with a multi billion turnover is SABMiller, and it employs 300 people and Mars 150.

 Green or brown?

 - By the way, what are the specifics of working with foreign and Russian companies? 

- Most foreign investors implement Greenfield projects. They don't need existing sites, Russian companies are more interested in them. That's what usually happens. However, we are in the final stages of negotiation with two large foreign companies looking at brownfield sites (with already existing industrial infrastructure). As a rule, this is quite a specific market and there are hardly any buyers looking for large workshops in the region. We have a lack of such sites. So if anyone has an unwanted building or idle production sites, we will happily put this information in our database and show investors these sites. Demand will start to grow.

Out of the 12 companies who came to us in the first six months half are Russian and half are foreign. Overall slightly more foreign companies come to us. Some of the current Russian investors are large organisations. However, we react cautiously to applications from some Russian companies. They declare they will implement a large project, however we understand that there is a long way to go to implement this intention. They just might not manage it. 

The advantage of foreign over Russian companies is that, as a rule, they have built plants before and know the technology. We don't have any doubts and we clearly understand why we are putting money into the site's infrastructure. We are sure that we will provide funds and the investor will bring us a project with new jobs and taxes. We don't care whether the company is foreign or Russian.  It is important that it is a serious organisation with a confirmed funding source and experience in doing business.

- Does the Corporation have a "black list" of investors who will not implement projects on Ulyanovsk land whatever the money?

- We don't have such a list. But we do have principles. We will not sign agreements with companies with high environmental risks. The region just does not need them. We will not take manufacturing which consumes a lot of energy resources. Experience shows that this is right. Energy conservation is very important today. Large steel plants and such are not our clients.

Returns

- Investors who come to Ulyanovsk Region are offered quite a lot of tax preferences. How quickly does the government get them back? 

- You have to understand, that we wouldn't receive these taxes without the investors coming here. Therefore, we use this logic: it is better that we only get an indirect effect now from this project and receive tax payments tomorrow, than get nothing. Yes, companies implementing projects in the special period to 2015 and who invest over 200 million roubles are exempt from taxation for eight years. But preferences are a necessary condition. If we don't provide them, then investors won't come at all. After all they are offered by other regions.

In any case, we get income tax revenue and all taxes, direct and indirect, from project contractors and small businesses which develop around them. An example of the effectiveness of infrastructure investment is the SABMiller plant. We receive excise duty, in one year this plant exceeded by two and a half times all investment in the industrial zone.

The distinguishing feature of Ulyanovsk Region (it is still unique, but several regions want to follow our example) is that we not only provide tax benefits but also grants. This concerns the remaining taxes which we can not provide benefits for. This is one of our biggest advantages.

- Another undoubted plus is the availability of sites for investors with ready infrastructure

- We applied to Vnesheconombank for three billion roubles to finance the infrastructure of our industrial zones and Special Economic Port Zone. We showed that we could guarantee repayment of the investment in the industrial zones. We expect the bank's decision by the end of the year. If the decision is positive, which we really hope it will be, then all our industrial zones will be fully provided with utilities. 

This is a revolutionary moment. We are prepared to exempt investors from paying for electricity grid connection. This hasn't been done yet, but we are looking at various tax benefit options, delayed payment, discounts, mainly concerning our individual agreements with power supply companies. But this is non-systemic decision. We want to build our power capacity in each zone, including gas generation, which will free investors from paying for connection.

Comfort for investors

- In finding new ways to make the investment climate even warmer, it turns out that you are developing your competitors. The regions follow the experience of Ulyanovsk Region and are starting to snap at your heels.

- That's good. We mustn't stop at what has been done. We clearly understand what our next steps will be. Today work is being done systematically, the mechanism for attracting investment is very well understood. If another region does something similar to us, then we take new steps and go further. In any case we will be competitive.

Competition is not just about economic factors. For them we definitely have some of the best conditions in Russia. 

- Is the environment the investor comes into also important?

- Of course. The most important thing we need to improve our work, in the region as a whole and in Ulyanovsk itself, to attract a greater number of investors. After all, many rely not only on economic factors but also more widely on a comfortable living environment.  What the authorities are doing in terms of redevelopment and hotel construction is very important. Without this investors will not come. For them it is important that there are good quality planes and airports, restaurants, hotels, a beautiful city, roads... 

Creating an investment climate is a constant process. We want Ulyanovsk to be a European city, with a corresponding infrastructure. And investors are the catalyst for this process. For example, we have a flight to Germany, it is expensive. Very few people from cities such as Ulyanovsk can afford direct flights to Europe. The same goes for Hilton level hotels. We are making some serious steps forward in many ways.

Commercial real estate is growing rapidly. If all the announced construction projects of large centres are implemented, which I don't doubt, then Ulyanovsk will be filled with quality retail centres and will take a leading place in this area. Delivery of the AquaMall shopping mall, unfreezing of the Perekrestok hypermarket construction in New Town, implementation of the Motom Group project on Ryabikov Street will make us one of the leading places for shopping centre per capita. 

Ulyanovsk has also made good progress in hotels with Hilton and Hampton (a Hilton brand) projects. Over the next six months we plan to find an investor in the hotel business for a site in New Town.

There are a number of residential construction projects: Zapad-1 and Zapad-2, Iskra micro district, a residential micro district on Minaev Street, on an unfinished site, renovation of land on Avtozavodskaya Street... Several major, integrated projects have begun. And that is good. I am sure that for many indicators we will soon take top position in the Volga Federal District.

Victoria Chernysheva

Source: CHIEF magazine, September 2011