IT PARK CONCEPT GOOD, BUT COMPANIES SKEPTICAL

C O N F I D E N T I A L MINSK 000461 SIPDIS DEPARTMENT OF COMMERCE KIEV FOR USAID SIPDIS E.O. 12958: DECL: 04/28/2016 TAGS: PGOV ECON EIND ETTC BO SUBJECT: IT PARK CONCEPT GOOD, BUT COMPANIES SKEPTICAL REF: 05 MINSK 407 Classified By: AMBASSADOR GEORGE KROL FOR REASONS 1.4 (B,D) ¶1. (U) Summary: The GOB is in the process of creating its own Silicon Valley, an IT park in Minsk. The park will offer a number of tax and other administrative advantages to a limited range of high-tech companies. The head of the park also hopes to create a venture capital fund to provide investment for promising IT projects. The necessary legislation is in place and the park is accepting applications from companies, but has not yet registered any members. Belarus' IT companies believe the park and its tax advantages are a good idea, but many distrust the GOB and will wait and see what befalls the first companies to join before they decide themselves. End summary. ¶2. (U) In early 2005 Lukashenko, seeking to capitalize on Belarus' growing IT sector (reftel),announced the GOB would create an IT park in Minsk to act as Belarus' version of Silicon Valley. Lukashenko appointed his aide and personal representative to parliament, former Ambassador to the U.S. Valery Tsepkalo, to head the project. Tsepkalo remains an aide in the Presidential Administration, but as of January 1 has received a salary only as head of the IT park. ¶3. (U) The IT park is initially open to, and is now accepting applications from, companies involved in software development, data processing, and research and development in related fields. In the future the park hopes to invite companies involved in the medical field, biotechnology and nanotechnology. ¶4. (U) The park is taking over an unfinished academic compound in northern Minsk. The park is currently soliciting bids to develop the 52 hectares of land and finish the incomplete office building on the property. IT companies can either choose to build or rent office space on the territory of the park, or to register as park members while located elsewhere in the country. The infrastructure of the park is to include its own electrical substation, a fiber-optic network and access to high-speed satellite internet. Construction is due to begin in late 2006 and last three to four years. Tax Advantages -------------- ¶5. (U) In September 2005 Lukashenko signed a presidential decree giving members of the park a number of tax advantages. These tax advantages are to last for fifteen years from the signing of the decree (until 2020),and apply to non-resident park members as well. ¶6. (U) Park members will be exempt from payment of "dues and taxes to the state budget and non-budgetary funds," income tax, value added tax, and customs duties and VAT when importing equipment for the park. In addition, individual income tax for employees of companies registered in the park is set at a fixed rate of nine percent. Members are exempt from the normal fee for transferring workers from other cities to Minsk (currently USD 7,200, or three times the average salary). The decree also states that foreign companies without a representative office in Belarus can register as park members and are subject to an income tax rate on dividends, debts, royalties and licenses of five percent. Foreign firms are not liable for the "offshore fee" when transferring money abroad, and park members are not obligated to sell any of the hard currency they earn to the GOB. (The offshore fee stipulates that companies pay 15% of the money they transfer abroad to the GOB. Companies in Belarus must now sell 30% of the h ard currency they earn to the GOB at market rates.) ¶7. (U) Companies physically located in the park are also exempt from paying land tax for the duration of park construction, real estate tax, "payments for shared participation in city infrastructure development and compensation to the city administration for the available engineering and social infrastructure." Tsepkalo also stated that he expects the park to offer rent to residents for half the going rate in Minsk. State-Owned, But Not Quite -------------- ¶8. (U) Tsepkalo explained to the Ambassador that the state budget is providing the initial funding for the park. The park is registered as a state-owned entity, but Tsepkalo maintained it is not part of the Presidential Administration, even though he official remains an advisor to Lukashenko. The park itself is state-owned, but Tsepkalo claimed the park's employees would be considered private workers, not state employees, and no park proceeds would return to the budget. Venture Capital -------------- ¶9. (U) Members of the park must pay a fee of one percent of revenue to the park management. Tsepkalo explained this money would be used to pay for the administration of the park. According to the park's charter, the administration reviews business plans, supervises the work of the residents, and runs the infrastructure. Tsepkalo added the administration will help companies register and that any extra proceeds will go into a park fund to be used as venture capital, which is lacking in Belarus. Currently Belarusian IT companies have trouble acquiring capital because under Belarusian law banks are only allowed to lend money when they can offer concrete collateral. Accepting Applications, One American So Far -------------- ¶10. (U) The park is now accepting applications from prospective members and about 40 firms have already applied. Registration of members was due to begin in April, but has not yet commenced. Tsepkalo reported that several U.S. companies originally expressed interest in joining, but that most backed out after researching Belarus' business environment. He said only one American company, consulting firm Colliers, had applied. Belarusian Companies Skeptical, but Hopeful -------------- ¶11. (C) Emboffs discussed the IT park with several Belarusian and international companies, most of whom would like the park to live up to its promise but were skeptical. The most optimistic firm was Belsoft, Belarus' third largest IT company. Belsoft's sales manager explained to Econoff that Belsoft hopes to open an office in the park as soon as the park opens and to locate there the company's entire software development team, about 25 people. Belsoft wants to take advantages of the tax benefits, but also needs a new office. It currently rents office space from the Presidential Administration, which is expensive and substandard (he especially complained about the PA's bathrooms). ¶12. (C) Microsoft's regional director from Kiev explained to Econoff that his company is curious about the park, but complained that Tsepkalo refused to meet with him. Even though Microsoft is thinking of opening an office in Minsk, he did not think it would be in the IT park. The manager of software developer Averson Soft likes the idea of the IT park, but does not trust the GOB. Averson Soft plans to register a new company, and use that company to apply for park membership. That way, if the GOB is using the park as a means to take over IT companies, Averson Soft will not have lost its core business. The General Director of Checkpoint told Emboff that he likes the idea of the park, but will wait a few years to see how it develops before deciding to join. ¶13. (C) Econoff also heard from several sources rumors that the park is intended as nothing more than a shell for the GOB to launder proceeds from arms sales. Post cannot comment on the credibility of these rumors. Comment -------------- ¶14. (C) Post believes that this IT park, if managed in an appropriate manner, could provide a boost to Belarus' already growing IT sector. Tsepkalo's plan to create a venture capital fund would be particularly useful. Tsepkalo may be sufficiently "westernized" to be a successful manager (his wife even worked for MCI while he was Ambassador to the U.S.). However, the IT park remains a GOB project, and Tsepkalo still has ties to the Presidential Administration. SIPDIS Based on past GOB practice, if the IT park proves to be profitable there is a good chance the regime will attempt to milk it for whatever short-term profit they can. This practice is what is making many of Belarus' IT companies skeptical of joining the park, even with the obvious tax advantages. Krol