The Silmet Group, a metal processing plant and the largest employer in Sillamae, applied to the government for the right to turn 410 hectares into a free economic zone where companies can avoid paying value-added-tax.
Many businesspeople view free economic zones as an important tool for countries, such as Estonia, that want to develop themselves as a transport center. The Estonian government normally charges companies 18 percent VAT on all goods entering Estonia, which is returned if the goods eventually leave the country. This process requires stacks of paperwork and can take months, a situation that would be avoided with a free economic zone.
"You don't have to bother with customs declarations. You save a lot of time and money," said Augu Remelg, director of the Estonian Investment Agency, who said the plan would encourage foreign investment. "I don't see any drawbacks."
The government's approval did generate some controversy however. Critics questioned whether the government approved the plan in return for campaign contributions. Tiit Vahi, chairman of Silmet Group and former prime minister, and other people in management are members of present Prime Minister Mart Siimann's Coalition party. Siimann denied any connection.
"We could have postponed the decision by six more months, but we found that northeastern Estonia urgently needed investment incentives," said Siimann, during a press conference last week, adding that both the local government and an expert commission support the plan.
Creation of the zone should give the Sillamae area and the northeast a much-needed economic boost. The area is dependent on power supply and oil-shale mining for jobs, which will be hard hit when the energy sector is privatized.
"The main purpose was to make the investment climate more attractive to possible foreign investors," said Signa Raatso, deputy chancellor at the Economics Ministry. "This is a rather difficult area. There is a very urgent need to find employment for people who may become redundant during industrial restructuring."
Ida-Viru county already has an unemployment rate of almost 15 percent, the highest in any county in Estonia, according to the Social Affairs Ministry.
Vahi said the zone wouldn't just be a warehouse for goods passing through the country.
The Tallinn-Muuga port is the first and only free economic zone in Estonia but is only used to transport goods and no manufacturing is done on the premises.
Silmet wants to develop the area as a manufacturing center where companies could import raw materials, process them in the zone and then export the finished product.
Vahi anticipated that raw materials, such as metals or lumber, would most likely be imported from Russia, whose exports have increased as their economic situation has deteriorated. He added that companies in the Silmet zone would be in an excellent position to take advantage of this trend. Twenty-five percent of the metals Silmet uses come from Russia.
The government won't have to shell out any money to develop the zone, stated Vahi.
"All the money to be put in will have to be put in 100 percent by Silmet," said Vahi. The chairman said that the plan was never intended to be only for Silmet's benefit, but government approval was contingent on developing the zone for other companies.
Raatso said that one of the factors in Silmet's favor was that infrastructure is already in place and since it used to be a restricted industrial area during Soviet times, it will be easy for customs to control. Water, heating and warehouses have already been developed and the location is near the Narva highway, railroads and the Russian border.
"One of the requirements is that it has to be near a frontier area," said Raatso. Silmet is also developing a port that they want to open in a few years. The next step, said Vahi, is to develop a plan with customs officials on how to implement the zone and then decide how much to charge companies for using it. He anticipated that this would take at least a month.
Siimann said that the government was also considering creating free economic zones in Paldiski, Voru and Valga.
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