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Rapidly changing geopolitical realities in Eurasia intensified transport cooperation between Azerbaijan, Türkiye, Central Asian countries and Georgia, multiplying the volume of cargo transportation along several routes of the Middle Corridor. The key transit hub of the Caspian region, Baku International Sea Trade Port (BISTP), plays an instrumental role in this scheme. Its annual logistics capacity will soon expand to 25 million tonnes of cargo, having the best effect on the development of the Alat Free Economic Zone (FEZ). Recently, Azerbaijani President Ilham Aliyev opened the first stage of the facility.

Proven effect

Free economic zones of various types have long been acknowledged as the most effective and proven tool for attracting investment in the transport, logistics and manufacturing sectors.

Under the provisions of the May 18, 1973 Kyoto Convention on the Simplification and Harmonisation of Customs Procedures, FEZs as well as Special Economic Zones (SEZs) are defined as part of a country's territory (enclave) in which goods are treated as being outside the national territory, known as the principle of "customs extraterritoriality". As a consequence, they are not subject to normal customs controls and taxation. Not only do such restricted areas enjoy duty-free customs, transit and trade regimes, but they also have more liberal economic rules than the rest of the country. This gives foreign and local companies the right to import, export and store raw materials and components. FEZs also provide services such as packaging and simple refining, labelling, quality control and kitting of wholesale and retail shipments. Residents of such hybrid FEZs enjoy a range of fiscal, utility, rental and credit incentives, particularly conducive to the construction of industrial plants with primarily export-oriented products. All these factors make it much easier to attract investment in capital-intensive industrial ventures, while the payback on such projects is accelerated by more than 40%.

As a rule, SEZs are established at sea harbours with access to the world ocean, and more rarely at major railway hubs and international airports of regional importance.

The effectiveness of various schemes focused on creating isolated economic clusters with preferential treatment is confirmed internationally: there are about 4,300 FEZs and ECOs of various types in more than 130 countries around the world. About a third of them are free trade zones (FTZ), making up to a quarter of global trade turnover. There are about 180 FTZs in the US, 150 in Europe, 23 in Japan and 14 in China. An even greater number of clusters with preferential treatment are mixed-type FEZs providing trade and manufacturing functions. The International Labour Organization estimates that the multiplier effect of such zones is particularly high for the labour market, with over 65 million people employed in various FEZs around the world.

There have been many instances in the world where duty-free zones like in Hong Kong, Shenzhen or Jebel Ali (UAE) have transformed these cities into major commercial and industrial centres. The largest number of effective SEZs have been established in China. The World Bank estimates that free economic zones collectively account for 22% of China's GDP, 46% of foreign investment and 60% of total exports.

Alat is a perfect location

For years, Azerbaijan has been working to create a free economic zone near the largest sea harbour in the Caspian region, the Baku International Sea Trade Port at Alat. BISTP's logistical capacity will soon be expanded with the construction of a new terminal for mineral fertilisers and a new container terminal in the long term. In total, the port's annual throughput capacity will be increased to 25 million tonnes of cargo. According to experts, the advantageous geographical location of Azerbaijan and the multi-billion-dollar investments into the development of transport infrastructure guarantee high investment attractiveness and comparatively fast payback period for the Alat FEZ. The choice of location is also ideal. There are exits to international highways as well as the Baku-Tbilisi-Kars railroad. They converge at Alat to form a convenient, fast and highly competitive transport and logistics hub for land and sea cargo handling on the Middle Corridor and the North-South route.

The Alat FEZ is being developed as an export-oriented manufacturing and logistics hub. It is focused on attracting freight forwarders and investors from the Caspian region, as well as the EU countries, South-East Asia, Türkiye and the Middle East. The foundation of the FEZ was laid on July 1, 2021. In a relatively short period of time, it was possible to build the primary energy and utilities infrastructure on 850 hectares, optical communication lines and access roads and railways.

Azerenerji announced a tender to select a contractor for the construction of a 110/35/6-kV AIZ-1 substation and a control centre at the Alat FEZ. Availability of own powerful substation is extremely important for stable functioning of the future industrial cluster in Alat. There is a 300MW Sangachal modular power plant nearby the FEZ, which serves as a backup generation facility.

In addition to infrastructure facilities scattered on the 60-hectare area, construction works are underway as part of the first phase of development (Zone 1, Phase 1), including customs checkpoints, customs inspection buildings, etc. at the main entrance to the zone.

On June 9, President Ilham Aliyev visited the Alat FEZ to learn about the works carried out in the area, visited the business centre covering a total area of 16,000 sq.m. It consists of three functional parts with all the necessary furnishings, IT and communications equipment. It will host the office of the authorised structure of the Alat FEZ, management facilities of investors and the office of attached customs officers, all providing one-stop services for investors.

Design and preparatory works for the next phase of the development is currently underway. In this phase, it is planned to construct standard production plants and logistics centres on an area of 138 hectares. Earthworks will start at the facility shortly. Heavy industry facilities will cover an additional area of 211 hectares. In the next stages, an automated logistics base with warehouses will be established in the FEZ. In the future, it will be possible to create a site for accommodating 100,000 standard containers.

Benefits for investors

The key advantage of the Alat FEZ is the availability of unique legislative framework, providing potential resident investors with tax, customs and other non-fiscal incentives. In particular, investors are exempt from VAT, withholding taxes, corporate income taxes and any other corporate tax, customs duties as well as taxes on imports and exports from the zone. In turn, employees of the zone with monthly salaries up to ₼8,000 are not subject to income tax, while social security payments for highly skilled foreign specialists are voluntary.

Another option for foreign entities and individuals is the absence of restrictions on ownership of property in the FEZ. Foreign investors are not required to have local partners or to be shareholders. There are no restrictions on currency transactions or repatriation of profits in the free zone. In addition, investors' property cannot be nationalised under any circumstances. Finally, investors' intellectual property rights are also fully protected.

The Alat FEZ was originally designed to be similar to free economic zones in the UAE, such as Jebel Ali in Dubai. DP World (UAE) acted as a consultant for the project, developing a feasibility study and other regulatory documents for the zone with maximum fiscal, export, visa and property freedoms for future residents. The project has been subsequently upgraded and expanded. The options for the development of production clusters, warehousing facilities (repackaging for local markets, adding value to goods) and their subsequent re-export to third countries have been increased.  The ultimate objective of FEZ development is the production of high value-added products, with over 75% planned to be sold abroad. According to experts, the next phases of logistics and production projects will attract about $1 billion in foreign and local investments to the Alat FEZ.