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High-Tech Park in Minsk: why software specialists prosper in Belarus

How to grow 30 percent per year, make a billion dollar profit and create the highest-paid jobs in the country? Russian magazine Ogonyok investigates the success story on the High-Tech Park in Minsk.

The industry is well-known – IT. We know the location – Belarus. In order to see how a former “assembly plant” of the USSR was turned into the European center for software engineering, “Ogonyok” examined the situation on the spot and spoke to the head of the Belarusian Silicon Valley.

IT-arithmetics

Belarusian Hi-Tech park (HTP) – a special area for software engineers – it made 650 million USD in 2014. It’s three times as much as the amount stated in business plans of 2006 when the company was set up.

Besides highly qualified IT specialists here earn much more than those in Moscow, Czech Republic and East Germany. As to the share of IT developments in the national GDP Belarus comes second among the countries of Europe, Central Asia and Middle East thanks to the Hi-Tech park. Israel is at the top of the list. However, the head of the Hi-Tech park Valery Tsepkalo says that his country from the point of view of technical development of IT sphere reminds him of Israel itself. Nonetheless he stresses out that the major example to follow is the Silicon Valley, the hub of the hi-tech developments in the west of the USA.

It’s not easy to reach the park on public transport as it is located on the outskirts of Minsk. However, the park residents don’t really use it. The parking lot is crowded with cars which can be viewed as good quality cars uaccording to Belarusian standards; parking area for the bikes is stuffed to the max.

Еhe Hi-Tech park occupies a small area, considering there are 140 IT companies – members of the park: there would be no space for all of them. IT community is organized on the exterritorial basis: a company can be located in any part of the country, however, it must conform to the HTP criteria. In this case it is subject to еру facility working hours and contributes to the impressive statistics.

According to the research of the consulting company Gartner, international IT sphere grows by 3-5 percent annually and we used to grow by 40-50 percent – says Tsepkalo.  Last year we grew by 30 percent only because our base had expanded too much. According to our estimateems this year we will grow by 30 percent. In 2016 we expect our profit to rise beyond one billion USD“.

We make 90 percent of this amount due to export. However it is important to mention that it is a gross amount for the country on its scale because as distinct from traditional areas of economic activity IT makes net profit.

Here is an example: at the best of its times in 2005-2006 BelAZ external imbalance made 300 million USD. The production volumes of Minsk tractor plant seem large as its export amounts to one billion USD. But in order to make a delivery worth one billion the plant should get the supply of spare parts worth 950 million. As a result it makes only 50 million USD. We do not need foreign spare parts. That is why HTP contribution to GDP in Belarus is larger than that of all the major machine building plants – MTZ, MAZ, BelAZ, Gomselmash, Lidselmash, Amkodor – taken together“.

Privileges and training

The HTP biography started in the middle of the 00s with the decree of the Belarusian President of the special tax regime for its residents: income tax cutting and limiting of the social insurance fund contribution rate. Belarusian IT sphere at that time was represented by the development bureau, inherited from the USSR – ECM research institute, the plant “Integral” and ECM plant after Ordzhonikidze (at present – Minsk Production Association of Computer Engineering Techniques) as well as a number of software developers who ”hammered” codes on orders from abroad and didn’t care about taxes.

According to HTP residents, within the last few years mainly outsourcing sphere grew up to significant orders from Google, Microsoft, Deutsche Bank and other major corporations. However, it is impossible to estimate the share of the Belarusian labourers, let’s say, in the operation system Windows: it’s commercially confidential.

In 2010 the sphere gets mature: one part of the companies change the direction of their work from outsourcing programming to their own product design. Belarus creates independent IT brands which gain worldwide popularity — Viber, Apalon, Maps.Me, Wargaming (publisher of the most profitable game in the world World of Tanks). At present a new – “brand” – and an old – outsourcing models are developing at the same time. Still outsourcing companies turn out to be picky: they take exclusively large external orders – mainly in banking, financial and gas and oil spheres. As to Valery Tsepkalo this way productivity is growing faster: alongside with the HTP profit growing by 30 percent per year, the number of employees increases by 15 percent.

Tax privileges are just the top of the iceberg. The HTP success wouldn’t be possible but for the availability of qualified specialists in Belarus.

It seems that we have created such a model of interaction between our industrial and education systems which is completely new for the post-Soviet area”,— says Tsepkalo. He gets to the core of the matter: educational establishments are not sufficient when it comes to employment as the technologies develop at a faster rate and universities lag behind with educational programmes renewal. It is the worldwide issue.

What we did first, – continues the head of the HTP, – was establishing of the cooperation with educational establishments by opening 65 laboratories on their bases. It’s the Stanford model used in the Silicon Valley: beside compulsory university studying programmes students are welcome to attend additional courses taught by the visiting professors — most often these are employees of the HTP companies. They help students overcome the gap between academic knowledge and the actual sphere requirements”.

An average Belarusian IT student is employed as a software engineer on his third-fourth year of studies (HR managers of IT companies hunt for the most talented ones on their first year). In case somebody missed the moment or a person doesn’t have technical training there are educational centers at HTP or a number of other IT schools offering their services on nearly every lamp-post in Minsk.

This model was applied in 1990 by an American of Jewish origin named John Bryce. He was one of those who contributed a lot in making Israel a regional IT leader out of a predominantly agricultural country.

Bryce set up a training center in the 1990s, at the times of mass migration of Jews from the former USSR and started teaching immigrants IT engineering and prepare them to work in these centres. He helped to draw a few American companies into the country – Motorola, Hewlett-Packard and some other which then founded development centres in Israel. We set up our training center based on the Bryce’s model and it turned out very effective”.

Training in the HTP educational center is fee-based. But the Park has an agreement with the leading companies in the sphere: if upon completing the training a student passes internal developer tests successfully, he gets the job with his company, the employer immediately reimburses his training expenses. If a student fails, he doesn’t get any reimbursement.

IT courses have recently grown in number. As a result the Ministry of Education decided to arrange them properly. Tsepkalo doesn’t see it as a necessary measure considering that upon completion the state diploma is not issued.

Diploma is not important for the IT industry.The knowledge one has that is what important. You don’t need a certificate of any sort but if you studied and mastered the technology you are valued extremely high”.

Belarusian Hi-Tech Park (HTP) is called one of the leading IT clusters in the Eastern Europe. Here are the figures that show its highly successful performance:

138 resident companies

(data as per June 2015), offering services to IT customers in 56 countries

21 000 people

The total number of employees working in HTP

650 000 000 USD

That’s how much HTP made in 2014. According to the moderators in 2016 its income will exceed one billion USD

90 % of profit

Export earnings ( 45 percent come from EU countries, and about 40 from the North America)

1500 USD

is an average salary of a Belarusian software engineer (average wages in the country – 420 USD)

 

Moscow specialists are bought up wholesale

If about ten years ago a software engineer was just one of the most sought-after professions, in recent years the son’s IT specialization has practically become a dream of every Belarusian family: it is sort of a financial guarantee. There is a real war between HR departments that is why standard employment benefits in the sphere, although typical for any other company in the west, it looks pretty impressive according to Belarusian standards.

Generally, an IT specialist gets a medical insurance, gym or fitness club season ticket. In some companies there is a 50 percent lunch discount. There are a lot of apartments for rent which are leased for a small payment. But mainly they build their own accommodation – we have programmer housing companies, several residential houses have been built right here, on the territory of the HTP”.

Experienced software engineers have good wages – according to Tsepkalo, they don’t need any employment benefits. An average month salary of a Belarusian programmer is 1500 USD and against the average 420 USD about the country it doesn’t look bad. The wages of project managers with 10 years of experience in narrow specializations (let’s say, specific mobile phone platform engineering) reach 5-6 thousand USD.

Another advantage of the Belarusian IT sphere is stability. Tsepkalo explains that it’s different from the Russian IT engineers who mainly work for the internal market, belarusians export 90% of their production. 45 percent are delivered to the EU countries, 40-42 percent – to the North America. The share of all CIS countries doesn’t exceed 10 percent, about 5 more percent of programming products go to Singapore, South Korea, Japan. Therefore, wages in dollars practically don’t change which has become a problem for Russian companies as lately they have been opening their development centers in Minsk: Belarusian programmers have become too expensive for Russian employers.

“Sberbank Technologies” work here, as well as Yandex. Mail.ru has recently bought out start-up Maps.Me. wages in these companies are tied to the Russian ruble. They used to be competitive in comparison with the wages of the majority of our IT specialists who now are working for Great Britain, Germany or the USA. As the ruble fell the problem arose: they have to increase employees’ wages in Russian rubles in order to keep the staff who can easily shift to western projects”.

The crisis in the neighboring countries helped Belarusian IT industry lure away a lot of specialists from there. The story about a single company Wargaming which made a “wholesale” transfer of 200 game developers from Moscow already overgrew with rumors inside Belarusian IT community. Tsepkalo says that this year Belarusian companies have employed several hundred software engineers from Donetsk and Lugansk regions from Ukraine. The head of the HTP adds that other foreigners work in the Park – from the Netherlands, Germany, the USA, South Korea. But we don’t observe a massive influx of expatriots: “Objectively, Belarus is not the country with favourable conditions for migration”, – tells us the interlocutor of “Ogonyok”.

Office in Cyprus, heart in Belarus.

Large income is favorable for the programmers but not for the sphere where 70-80 percent of the products cost is paid up in the form of wages. Growing appetites of those involved in the Belarusian IT sector jeopardize its competitiveness. That is why lately the wages have been increasing slowly. However, IT is a flexible sphere and an employee always has a chance to increase his income by obtaining profound knowledge of a certain technology and getting to the category of guru – “seniors” (from English senior).

At the same time ranks of those “hammering the code” are reinforced with newcomers. But what are the limits to the growth?

A certain number of people can be musicians or programmers”, – smiles Tsepkalo. “There are 21 thousand people in the HTP now. According to my estimates, about 60-80 thousand people can work effectively in the Belarusian IT sphere. My estimates are based on the percentage of those involved in the sphere in successful countries – Finland, Ireland, Sweden. I believe we are able to grow twofold painlessly at the expense of the local staff”.

Nevertheless, according to the head of the Park, increasing the number of employees is not the only objective for the sphere development.

We believe that quantitative changes have become qualitative ones. By means of the higher concentration of the IT specialists, a whole new “ecosystem” is being formed in the country”.

As explained by Tsepkalo, the success of the Silicon Valley is not provided by the fact that “there is a whole street of legal offices which can help you set up a firm or a street of venture funds which can finance you”.

It’s not a problem to write a letter – and American venture fund will gladly provide you with the money for the start-up in Belarus as there is a clear idea deficiency in the today’s world. It is most important to have efficient concentration of engineers and technological specialists”, – remarks Tsepkalo. “The success of the Silicon Valley is due to the special atmosphere in which “zen Buddhist” Steve Jobs was able to find engineer Steve Voznyak and upon meeting with the two other engineers they were able to create a product. Here is our main goal – creation of the “ecosystem”, maximal concentration of IT specialists per square meter”.

The investor from the US was not mentioned accidentally. He says that earlier the Park management lamented that in the Eastern Europe venture funds, where the start-ups receive their financing from, do not exist as a class. In due course they realized that a geographically close investor is not the best option.

When one has no difficulty in coming home and grabbing cash or let’s say when one is financed by a certain governmental fund, it is easy money which doesn’t stimulate to search and analyze the world market. One thinks locally. It is a different story when your investor is a Japanese, an American or a British fund. You are in the process of developing but they start talking to you in a serious mature way and you realize that the whole world is your market”.

What really holds industry development back is the legal base. IT is not a standard sphere, it often happens that minimum payments are to be accepted – let’s say, one dollar payment – from millions of clients around the world. However, there are serious limitations for such bank transfers in the whole post-Soviet area and some EU countries, says Tsepkalo.
You are not entitled to receive money and transfer it without a contract. Especially if we are talking about the accumulation of assets in accounts of a legal entity: here it is supposed that money can be transferred only as a result of a written agreement”.

Another example – attitude to copyright

In regards to investment to an object of intellectual property in Belarus traditional investors face obstacles: they are not confident about correct copyright of intellectual property here. Certainly, our government makes attempts to change the situation but we are too far away from the British or American models of copyright”.

It turns out that large Belarusian companies often have to choose other jurisdictions in order to set up their back offices. Changing the situation would require altering the whole bank legislation. However, Tsepkalo thinks that office split-up between countries is a normal global phenomenon. In his view “nationality” of an IT company doesn’t depend on the location of offices but on the location of its major development center.

Majority of IT companies in Israel, which is a technological superpower, are registered in Cyprus or London. But it’s not what’s important. Major issue today is the location where a company performs, i.e. where programmers physically work. Our companies may have an office in Cyprus, but the development center is in Belarus. And for the whole world it will be a Belarusian company”.

First lobbyist in the country

Tsepkalo stresses out his positive relationship with the authorities. Still within the last six months the Park has already criticized certain significant institutions twice. It has shown that it was capable of effective advocating of its interests on a governmental level.

Last spring the HTP successfully “bayed” the initiative of thr Belarusian Ministry of Finance to increase direct and indirect taxes for HTP residents. In order to fill the budget this Ministry proposed to increase of the income taxes for programmers from 9 to 10 percent (with Belarusian 13 percent in other spheres) as well as to increase the maximal contribution to the social insurance fund threefold. And that’s in spite of the President’s decree on the privileged regime for the sphere which is in force till 2020.

1 percent tax increase wouldn’t change much, of course. But here is what’s important: trust. All these privileges are fixed in the President’s decree which has been ratified by the Parliament – it is an actual law. And if we keep changing the law, other investors won’t believe any of our promises. It will corrupt the trust they have towards Belarus and its investment climate”, – Tsepkalo comes down hard on the financial institution in a non-typical for a Belarusian manner.

In regards to the increase of the social tax three-fold, it would be very good for the industry. Along with the tax increase we would have to raise salaries to keep our specialists in their seats. It would make the sphere incompetitive”.

Hi-tech parks in the other countries

In recent years the countries of the former USSR have been attempting to create their own counterparts of the Silicon Valley.

Special economic zone “Park of Innovation technologies “Alatau” was founded in Almaty by the President decree of 2003. In April 2004 the construction started, the first construction stage was finished two years later (123 ha). At present about 160 companies work in the Free Economic Zone. The government exempted them from corporation income tax, social, land and property taxes,  the customs fees and the ground rent. At different stages Microsoft, Cisco, Oracle, Siemens, Samsung and other companies invested in the project. Microsoft trains local IT developers on the territory of the Free Economic Zone. By the end of 2014 the hi-tech park companies have developed the number of products that are worth 11 billion tenge (3,3 billion rubles). It is planned to finish the construction of “Alatau” in 2016.

Free economic zone of Klaipeda was founded in 2002. At present 28 companies operate on the area of 412 ha that actually looks like a hi-tech park. Resident companies are involved in industrial production of electronics, biodiesel fuel, plastic, metal articles, energy from renewable energy sources and so on. On the territory of the Free Economic Zone small tax privileges are in force: residents are exempted from income taxes for the first 6 years, there is no road tax and any property taxes, there is zero tax VAT. Over 500 million euros have been invested since the set up in the Free Economic Zone.

Special economic zone “Dubna” was founded in 2005 by the Russian Federation government order. The total area is 187,7 ha. 92 companies work on the territory of SEZ, the majority of them specialize in IT, nuclear physics, bio-and medical technologies, design of complex systems. The Innovation technological complex was put into operation in 2009 and is of key importance. In total 15,2 billion rubles were invested in the project (it is planned to invest 36,4 billion). There are tax privileges for the companies: fund payments – 14 percent, 10-year property and land tax holidays, income tax – 13,5 percent. Besides, the residents are provided with land parcels and apartments. In 2014 the companies of SEZ turned out products worth 2,7 billion rubles.

Technological park Tehnopol was founded in 2001 on the base of the Tallin technical university by the Ministry of Economics and Communications of Estonia in liaise with the city council. First four companies started to work in 2002, at present there are both start-ups and large firms operating on the territory of 9,5 ha (including the branches of Bayer and KPMG) – in total over 150 companies, specializing in electronics and micro-electronics, telecommunications and multimedia, materials engineering and biotechnologies. There is also an IT college in the park, five scientific centers and a business incubator for start-ups.

The presentation of the innovation hi-tech park Bionic Hill took place on 29 March 2012 in Kiev. The same year in August the project of the first hi-tech park in Ukraine was included in the national programme “Technopolis”. The Bionic Hill is supposed to operate on the base of the IT university – Bionic University. The park is located in the area of 147 ha around Kiev where up to 35 thousand people will be able to work under special tax regime. The cost of the foundation of the Bionic Hill is measured at 1 billion USD. First 760 thousand were provided by Kiev authorities at the end of October in 2013. In 2014 the project was frozen for an indefinite term due to the change of power in the country.

Text by Nikolay Anischenko of Kommersant.ru

Photo: Start of construction of IBA new office in Minsk

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