ICE IS CRACKING

So, Azerbaijan is already a leader for GDP growth rate, and not only among CIS countries. It is beyond doubt that this fact cannot but please both the government and the broad public. And this is clear: a developed economy will sooner or later bring even more dividends to us, ordinary citizens, in the form of creation of new jobs, revenues to the state, higher wages, pensions, allowances, etc. In the meantime, the government is still facing a number of strategic tasks.

Entrepreneurs are "in favor"

First of all, it is necessary to take urgent measures to prevent the so-called Dutch Disease because successful implementation of the oil strategy has undoubtedly led to a lop-sided development of the national economy and the fact that oil and oil products account for the lion's share of the country's exports (90%). This figure may further increase, which is evidenced by the beginning exports of Azerbaijani gas to world markets. Therefore, development of the non-oil sector of the Azerbaijan economy is next on the agenda. This holds true not only for the development of the sector of information technologies, which can fetch many millions in revenues to the state, but also agricultural and industrial development.

The first thing that comes to mind when industrial development is concerned is whether the state has a clear program of such development. Will reform affect all industrial segments, including those which glorified Azerbaijan in USSR times? Finally, can the government guarantee industrial development of rural districts as well?

It has to be acknowledged that the state has done a lot to encourage the development of small and medium-sized enterprise in Azerbaijan. As a matter of fact, this is not confined to the solution of organizational issues to bring business circles together. First, the interference of controlling bodies in business activity has been minimized of late. Second, businessmen are now able to receive low-interest loans. It is particularly important that the Azerbaijani government has been doing a lot to create a favorable environment for private enterprise development in the industrial sector. The idea of expanding non-oil production runs like a golden thread through state programs on socioeconomic development of the countryside, which were adopted and have been implemented for several years now, along with poverty reduction, development of the IT and communications sector, etc. A number of legislative acts have been adopted to encourage investment in the agricultural and industrial sectors and production of construction materials, conditions created for the development of financial leasing and participation of banks in industrial crediting, and preferential tax and customs regime created for strategic industrial sectors. In other words, businessmen are as interested as ever in starting their own businesses now. On the other hand, can all this revitalize the industry, which is a truly gigantic area?

Of course, when at issue is the development of the non-oil sector, things cannot be confined to the loans provided by the National fund of support for entrepreneurship. There is a need for major resources required for the restoration of production at large enterprises. These funds, reaching tens of millions of dollars, are to be channeled into the restoration of old or organization of new productions. As a rule, neither the National fund nor commercial banks can provide such money.

Neither would it be appropriate to rely on the efforts of the Azerbaijan investment and export promotion fund (Azpromo), although this organization is doing its utmost to attract foreign investors. This is understandable: foreign investors want to minimize the risk posed by potential investment in our economy, particularly as at stake are not thousands but millions of dollars, as even modest calculations suggest. For example, the revitalization of the Baku steel factory named after Tagiyev alone will require about $20 million, not to mention large-scale projects in the area of chemical production.

Long-awaited document 

Due the above-mentioned problems, Decree of Azerbaijani President Ilham Aliyev "On the establishment of special economic zones" was issued on 6 March 2007. This is yet another step along the path of industrial development because the document is expected to ensure rural development, encourage investment in priority non-oil sectors, create new jobs and facilitate export-oriented industrial development. Today, the Cabinet of Ministers and the Ministry of Economic Development are developing a draft law and regulations on free economic zones, identifying priority development directions for them, preparing suggestions regarding tax and customs benefits, activities of customs checkpoints and the access of goods, transport vehicles and individual persons to the zones.

The establishment of special economic zones in the country has been discussed for a long time. For instance, in the mid-1990s, an attempt to establish a special economic zone was made in Sumqayit and foreign investors even channeled about $3 million into the idea. But for a number of reasons the project was suspended, which sparked off negative reaction from foreign partners. Only in late 2006 did these projects start becoming more discernible. Suffice it to point to the project of the Ministry of Economic Development which envisages the establishment of a special economic zone in the Alat settlement of Qaradag district. It is expected that the necessary infrastructure will be developed within the project framework, including the construction of a seaport. The initial version of the feasibility study has already been developed with the assistance of the European Bank for Reconstruction and Development (EBRD). In fact, the new special economic zone will represent a symbiosis of different zones - industrial, financial and servicing. Of course, all investor companies will have an exemption from taxes and duties.

We can also mention the establishment of the Azerbaijan Investment Company (AIC) which has been tasked with investing in private industrial enterprises of the non-oil sector by acquiring an interest share in their charter funds. This, beyond doubt, can dramatically improve the situation in the non-oil sector of the country, especially since the AIC is currently working on over a dozen promising projects, including the establishment of a new petrochemical facility operating on the basis of processing natural gas. On the other hand, the participation of the state in joint projects could be a guarantee for foreign investors, which will help them treat the projects being offered with more interest and attention.

It is also worth pointing to the efforts of the Ministry of Economic Development towards attracting foreign investors to strategically important directions of the economy. Even today we can observe the revitalization of the entire chain of metallurgic production: this project is being implemented by Det Al Limited, which intends to invest $235 million in upgrading the Daskasan ore-mining works and production of rolled steel products. About $250-300 million will be invested in the modernization of the Ganca aluminium and the Sumqayit aluminium smelting factory, as well as extraction and processing of local raw materials - alum stone which is extracted at Daskasan's Zeylik deposit. There are also plans to build the second major cement factory in Azerbaijan.

Everything will be okay

It has to be indicated that economic experts are welcoming the government's decision to form special economic zones in the country. At the same time they caution: the project is of large proportions, which means that it is necessary to approach certain problems accordingly, by taking into account organizational, economic and macroeconomic aspects. According to R+ respondents, entrepreneurs of special economic zones must enjoy favorable investment and tax conditions - perhaps even a zero VAT rate. The same holds true for customs duties. In fact, when investing in a certain project, attention must be paid to the most promising sectors of the Azerbaijan economy. The problem of rural disproportion is particularly noteworthy because 93% of customs levies are collected in the capital which is a concentration of 75% of business activity.

There is no denying that all this is likely to generate the development of Azerbaijan's non-oil sector and improve the country's investment environment. But in order to encourage investment, the government still needs to provide specific guarantees to both potential entrepreneurs and investors with regard to their property and financial assets.

Experts believe that the most favorable areas for the establishment of special economic zones are Sumqayit, the Naxcivan AR and Lankaran. It is evident from the above that the establishment of special economic zones will play an important role in the further development of the non-oil economy and of the country as a whole. This will also boost the country's export potential and expand its economic relations with other countries of the world, particularly as Azerbaijan is remarkably positioned from the standpoint of availability of transport communications.

It would also be appropriate to indicate that over the past several years the Azerbaijani government has been working on setting up the first industrial camp in the country. The Ministry of Economic Development has recently reached agreement with the Turkish International Cooperation and Development Agency (TIKA) on expanding cooperation in the construction of an industrial camp near Baku. According to the head of the entrepreneurship development department of the ministry, Samir Nuriyev, TIKA is actively engaged in the development of the project's feasibility study. "We are interested in expanding cooperation with the Agency because it possesses extensive experience in establishing such camps. On some issues we have already secured principal consent of the Turkish side. In particular, TIKA will contribute to the preparation of a legal framework on industrial camps. It will prepare documentation for a tender on the camp construction," S. Nuriyev said.

The ministry would like TIKA to assume partial management of the camp. "In the near future, we can expect a significant breakthrough in the construction of the industrial camp," the head of the department said.

According to preliminary assessments, the construction of such a camp will cost more than $30 million. The Ministry of Economic Development plans to divide the camp in 90 sections, the smallest of which will be 1.2 hectares, while the largest about 8 hectares. The camp is to be established 49 km away from Baku. The main objective in establishing it is to provide favorable conditions for private enterprise development.

P.S.: The establishment of special economic zones is only one of the steps being taken towards revitalizing the country's industrial enterprises. All projects and plans involving modernization of national industry are expected to conclude in the form of a State Program of Industrial Development and the Investment Plan for 2007-2012, which are being developed by the Ministry of Industry and Energy. The document will cover all promising industrial directions, including petrochemicals, metallurgy, production of construction materials, food and processing sectors, etc. In fact, one of the main directions of the state program will be proposals on revitalizing the enterprises not operating to full capacity or those at a complete standstill, as well as the establishment of new productions the Azerbaijani economy badly needs.