ALAT: FREE TRADE ZONE

The most effective and proven tool in the world for attracting investments in transport, logistics and production sectors are the various types of free economic zones. Azerbaijan has also begun to create them: a little over a year ago, the Azerbaijani president signed a decree to establish a Free Trade Zone (FTZ) in Alat settlement of Garadagh. The project’s consulting company, DP World (UAE) has completed the development of the legal framework, master plan and feasibility study for the future FTA.

The government has initially considered the potential of establishing special economic zones (FEZ) in Azerbaijan since the second half of the 1990s. The most serious studies were carried out jointly with the UN Development Program for the creation of industrial-type FEZ in Sumgayit industrial zone, which would be focused on the production and export of petrochemical products.

After a lapse of fifteen years, this idea has taken shape, but in a slightly different form: today the petrochemical complex is created based on the Sumgait Chemical Industrial Park (SCIP). This project has become one of the components of the state program implemented since 2009 to create a number of multidisciplinary technoparks and industrial blocks. In recent years, these clusters have served as analogues of classical industrial FEZs: due to fiscal and tariff preferences, preferential rental of production facilities and a number of other advantages, local and foreign capital is gradually attracted contributing to the establishment of a new industrial cluster in the country.

At the same time, due to favorable geographical position of Azerbaijan and multibillion investments invested in the development of transport infrastructure, the government considered options for the establishment of the Free Trade Zone (FTZ) in the country.

The main advantage of FTZ is its quick payback (in comparison with industrial FEZ) with relatively insignificant capital investments. Most importantly, according to international practice, the establishment of a FTZ in the shortest possible time will ensure the attraction of significant foreign capital to the national economy.

Today there are more than 1,000 special economic zones in the world, and about a third of them are free trade zones, which make up to 25% of the world commodity turnover. At present, there are about 180 FTZs ​​in the U.S., 150 in Europe, 23 in Japan, 14 in China. The world's largest FTZs ​​are established in Hong Kong, Singapore, and UAE. In world practice, there are many examples of how free trade zones, such as, for example, in Hong Kong, Shenzhen or Jebel Ali (UAE), turned these cities into centers of attraction for investors from around the world and began to bring huge revenues to the state.

By the way, Azerbaijani government has already considered options for creating transport and logistics hubs in the country: in particular, similar FTZ analogues were planned to be created on the territory of the Baku International Port, at the Heydar Aliyev International Airport in Bina, and analogues of free trade depots along the railway lines.

However, the most promising project was the FTZ project in the new Yeni Baki port in Alat settlement, which together with the Baku-Tbilisi-Kars railway (BTK) forms a convenient, high-speed and highly competitive land-sea route on the Silk Road connecting Europe with Asia. To this end, it is planned to create the largest regional logistics center in the port territory, designed for servicing 100,000 standard containers and to facilitate the development of multimodal transport between the ports of the Caspian Sea.

According to the previously developed strategic roadmaps for the development of the national economy, the establishment of the largest transport and logistics hub in the region has been initiated in Azerbaijan.

Last year, the government signed a deal with DP World (Dubai Port World) of UAE, which provides consulting services regarding the Free Trade Zone in Azerbaijan. "Over the past time, DP World has done a great job, which can be divided into three main areas: preparation of the general plan of the territory, development of the draft law "On the Free Trade Area", as well as a feasibility study for the project," said Minister of Economy of Azerbaijan Shahin Mustafayev. He added that the proposals prepared by the company will soon be presented to the President of Azerbaijan.

The establishment of Alat FTZ will allow increasing the volume of transit cargo to 26 million tons per year, said DP World representative Adeel al-Zaruni. "However, Azerbaijan needs to take a number of steps: first of all, to develop uniform tariffs for cargo transportation, to improve and speed up customs procedures and cargo control system," said Mr. al-Zaruni. In particular, specialists of DP World suggest creating an independent arbitration system in the Alat FTZ that will be focus not only on Azerbaijan, but also on international law. "This could be the legal system of any state chosen by the parties when signing the agreement, this may be the legal system of both Azerbaijan and, for example, the UK," said al-Zaruni. According to him, the FTZ will have its own labour, environmental and investment regimes, a special mechanism for fiscal and customs deductions.

Compliance with these requirements will turn Alat FTZ into the largest hub of the Caspian region, which will serve not only transit traffic, but also allow storing and processing goods for their subsequent sale to third countries. Thus, the concept of Azerbaijan regarding the development of the Free Trade Zones provides for increased competitiveness and the creation of additional value for goods. "So, if the cargo container is sent to Europe, our concept is to process this cargo in Alat FTZ, create added value and export it." This is a more innovative solution in the field of cargo transportation, it contributes to the creation of additional value in the non-oil sector," believes the general director of ZAO BMMTP Taleh Ziyadov.

Along with the development of the legal framework, the project and feasibility studies of the future Alat FTZ, measures are also being taken to attract potential transport investors and residents to the zone - transport and logistics companies. Assistance in this is provided by the Islamic Corporation for the Development of the Private Sector (ICD), which signed a corresponding memorandum with the BMPP in December last year. ICD specialists study the potential of the port and the Alat FTZ, and have already invited potential investors from China. The European Bank for Reconstruction and Development (EBRD) also showed interest in financing this project. Companies from Turkey, Kazakhstan, Russia can be registered as residents of the FTZ. In particular, the Russian logistics company Pony Express does not exclude the option of creating warehouse facilities in Alat FTZ.

"With the acquisition of the Free Trade Zone status, it will be possible to attract about $1 billion of foreign investments in a few years. The main goal is to create understandable conditions for foreign investors. Only in this case we will be able to achieve direct investments in the free trade zone, establish production facilities there, launch the production of many types of goods under the Made in Azerbaijan brand, provide thousands of workers with high-paid jobs," said Mr. Taleh Ziyadov.

In the future, it is possible to localize some more industrial clusters on the territory of Alat FTZ such as petrochemical, pharmaceutical, and light industry facilities, etc. As to the production potential of the Alat FTZ, it is planned to apply a special tax and customs policy: the benefits may extend to the profit tax, VAT, income tax and, in particular, property tax, customs duties on the import of components and raw materials may be abolished. Of course, the export of products produced in the FTZ will also be regulated under a preferential fiscal regime.

The final concept of the Alat FTZ will be clear in the near future: by the end of 2017, it is planned to complete all the preparatory works and begin the registration of residents and potential investors.