PARADISE FOR BUSINESS

Azerbaijan is on the eve of the post-industrial era, with its characteristic emphasis on the development of a high-technology, information-based economy.  Progress in this direction will be helped by the creation of a regional innovation zone (RIZ), where technology parks - centres for the development of IT hardware and software, where research, production and service work is carried out - will operate.  The legal framework for the development of a RIZ and other types of special zones is already in place: in the middle of last year, the Milli Maclis passed the Law on Special Economic zones, of which the most important benefit is the liberal tax and customs regime for investors.

Free economic zones (FEZ) of different types are thought to be the most effective and internationally proven means of attracting capital to production and innovation.  In the second half of the 1990s the Government voiced more or less clearly the idea of creating a FEZ in Azerbaijan.  Since then, several projects to create FEZs of different types have been considered, for example, in the Sumqayit industrial zone, with its giant chemical industry infrastructure and ferrous and non-ferrous metallurgy.  The possibilities of creating a free trade zone or an off-shore zone at the Baku International Seaport and at the Heydar Aliyev International Airport in the village of Bina, as well as free trade depots on the railway, have also been studied.  However, none of these plans have been put into practice for various reasons, including the absence of specialized legislation for the FEZ.

A Technology Park for starters

As a provisional solution of sorts, the Economic Development Ministry planned to create a somewhat truncated version of a FEZ by building an industrial business town near the village of Yeni Yasma, 49 kilometres from Baku.  There were plans to create and ensure the full-scale operation of about 80 enterprises - both private companies and state-owned factories capable of manufacturing competitive products to replace imports.  However, excessive costs for the creation of the infrastructure (water, gas and electricity supplies, roads and communications) made Yeni Yasma unprofitable from the very outset.  That is why, some two years ago, the government decided to move the country's first Technology Park to the premises of the Azerkimya chemical concern's industrial zone in Sumqayit, where 200 hectares of land was vacant.  Azerbaijani President Ilham Aliyev took part in the opening ceremony for the first industrial facilities of the Sumqayit Technology Park (STP) in December 2009.  The Sumqayit Technology Park, unique in the post-Soviet region, occupies an area of 45 hectares; the total area of the industrial facilities themselves is 14 hectares.  Factories and production lines were built and they mainly manufacture products for the country's electrical energy sector.  High-voltage copper and aluminium cables of different sections, electricity and distribution equipment, and plastic pipes with diameters of up to 800 millimetres - the list of products which are now manufactured at the STP is far from exhaustive.  These materials and equipment will be used to modernize electricity generation and relay equipment, to build small hydroelectric power plants and systems for gas and water supply and wastewater, while some of the products will be exported.  In March 2011, the region's second largest paper recycling and cardboard facility will be put into operation (60,000 tons a year) at the STP.  The Azursun Holding Company invested more than 30 million euros in construction, counting on exporting more than two thirds of production to Georgia, Turkmenistan, Dagestan etc.  Eventually, during the launch of the second phase of the STP, a group of small and medium-size chemical enterprises are to be set up at the premises belonging to the Organicheskiy Sintez Factory, which will use raw materials from Azerkimya's core facilities to manufacture finished products.  It is expected that the STP, which will be made up of several dozen small and large enterprises, will make it possible to increase the output of products to replace imports and will eventually increase export potential.

Free zone

Despite all the benefits of the projects which are implemented at the Sumqayit Technology Park, the fundamental difference between the FEZ and the industrial township project is the absence from the latter of preferential taxes and customs charges for investors, without which attracting investment to the high-tech industry is very difficult.  This is why the initiative groups of the Communications and Economic ministries have continued over recent years to develop different versions of FEZ projects.  The extensive experience of European countries, India, China and South-East Asia, where there are almost 1,000 special economic zones for different specializations, shows that they are the most effective instrument for the development of innovative sectors of the economy, the attraction of foreign investment and regional development.  Azerbaijani law makers drew extensively on this international experience in developing the law on FEZs.

In June 2009, the Milli Maclis passed the Law on Special Economy Zones, which was yet another attempt to develop a FEZ in the country.  The law prescribed the main obligation of the state in FEZ development to be to assist in creating an investment-friendly environment and, in part, in building the basic infrastructure.  However, all other expenses for the development of the infrastructure would be borne by investors wishing to take part in the work of the FEZ.  The minimum term of operation for the special economic zones in development in Azerbaijan is 20 to 25 years.  The "service life" of every economic zone will be described in separate provisions which will be adopted at the point of creation.

The law determines that the operators to manage the economic zones will be selected on a competitive basis from private companies, including foreign ones.  In April 2010, the head of state approved the "Rules of competitive bidding to select the operator of a special economic zone," according to which companies which have at least one year's experience of operating a FEZ are eligible to participate in the selection process.  The Ministry of Economic Development was appointed organizer of the tender procedures to select the operator, and the cabinet was given responsibility for forming the tender commission.

Preferential rates of tax and customs must be one of the main means of attracting investors.  According to the draft law, the tax regime will depend on the territory, infrastructure, the zone's potential and, naturally, its field of activity.  The preferential rates will apply to profit tax, value-added tax, income tax and property tax.  Those involved in business activities will pay a tax rate of 2% of turnover (revenues from the goods and services provided), VAT will be zero-rated, and they will be exempt from other taxes and customs fees.  Excise-duty goods imported to the FEZ will be subject to the same customs fees as apply to the rest of the country.  However, business activities relating to the production of alcoholic beverages and tobacco products, TV and radio broadcasting, the manufacture of precious metals and the extraction and processing of oil, oil products and natural gas will not be allowed in the FEZ.  In addition, the FEZ will not be open to companies which import goods for retail sale in the zone.

In the year following the adoption of the law on the FEZ, a number of regulations were passed which regulate the fiscal benefits and simplified customs rules.  For example, the cabinet approved in December 2009 the procedure for customs regulation of the enterprises which operate in the FEZ, including rules for simplified customs control, the operation of customs posts, customs documentation, the movement of transport vehicles and individuals within the zone.  The State Customs Committee will also record special customs statistics for the FEZ, and a special form of reporting will be used for this purpose.  And in January 2010, the cabinet approved the "Rules for preparing accounting balance sheets by subsidiaries and affiliates operating in the special economic zone."  The balance sheet will include information about land, buildings and equipment, non-material and biological assets, reserves, loans receivable, cash, loans payable, tax liabilities and assets, capital and capital reserves.  The annual deadlines and intervals at which balance sheets should be prepared are also described, and so are the components of the balance sheet.

The draft law envisages the creation of production, infrastructure, innovation, mixed zones and free trade zones.   To achieve flexibility in the system, the document also allows the possibility of other types of FEZ.

In particular, the construction of the international merchant seaport at Alat and the creation of a free zone there fall under the infrastructure category of FEZ.  The trunk railway and motorway which pass nearby, and the future international seaport make the Alat section of the coast an optimal site for the creation of a special economic zone.  It will be a kind of symbiosis of different versions of the FEZ - industrial, financial and service.  Incidentally, the country's first international logistics centre, which is to be organized within the framework of the European Commission's project to support such facilities in the west of the CIS and the Caucasus, is also to be organized in the same area.  100 hectares of land have already been allocated for the logistics complex in Alat, and it may become one of the first facilities of the future FEZ and serve to develop multi-mode transportation along the TRACECA transport corridor.

Innovation Zone 

As for the innovation zones, the regional innovation zone project initiated by the Communications and Information Technology Ministry (CITM) will probably belong to that category.  In November 2010, during the Bakutel 2010 international exhibition of information and telecommunications technologies, the CITM will present a renewed virtual project for a regional innovation zone.  "The process of forming a regional innovation zone will be a multi-stage one; at the first stage, these organizations will be tuned to fulfil state orders and, later, they will focus on the production of research-intensive export products.  In the renewed project for regional innovative zones, the experiences of a number of foreign states will be analyzed, including Belarus and Israel," said Communications and Information Technology Minister Ali Abbasov.  In the following stages, there are plans to create educational and research centres within the framework of the regional innovative zone, and to establish an International Information Technology University, laboratories, innovation and research centres, and innovation-oriented small and medium-sized enterprises.  If a favourable fiscal and tariffs policy is created, companies like Cisco, Intel, HP, Microsoft, Ericsson and Siemens are willing to take part in the work of the Azerbaijani innovation zone.  And the Islamic and Asian Development Banks and the World Bank, which have expressed their readiness to take part in funding the development of the information and telecommunications sector in Azerbaijan, will act as creditors for projects implemented in the regional innovation zone.  Investment in the production of electronic, communications and computing equipment can also be expected from South Korea, China, Israel and Thailand.

Most local manufacturers of computers, multimedia equipment and software, such as ULTRA, AZEL, Gigabyte, KUR, Sinam, R.I.S.K. and others, have also expressed their readiness to set up production facilities in innovation zones.  The heads of these firms believe that if favourable conditions are created, Azerbaijani software and computer companies can be quite competitive on the international market.  On the other hand, working with the world leaders of the information and communication technology sector in the innovation zones will enable small, local companies to accumulate experience and make themselves known, or possibly become sub-contractors to global projects implemented in the country and the region.