Thought leadership from our experts

Azerbaijan: New framework for real estate development

 

Introduction

The Republic of Azerbaijan is rich in oil and gas resources. Located beside the Caspian Sea, the country was historically a bridge between Europe and Asia and a strategically important section of the Silk Road. Nowadays Azerbaijan is a country with an area of 86,600 sq. km and a population of 9.5 million.

As it is commonly known, the economy of Azerbaijan is mainly driven by oil and gas resources. Current situation that is on-going in the oil prices market might pose a threat to the economic well-being of the country. Therefore both the state government and private investors since few years have already become more interested in economic diversification and the involvement of the private sector in order to boost the country's growth. Lately economy diversification is one of the hottest topics in Azerbaijan.

Azerbaijan's geographical location is favourable for the development of transport, logistics and industry. The Baku-Tbilisi-Kars (BTK) railroad is the key strategic project designed to facilitate the creation of a network of logistic centres and industrial zones. The BTK railroad will stretch through Azerbaijan, Georgia, and Turkey and create a perfect link for cargo trade between Asia and Europe. The project is due by the end of 2015 and is expected to be completed in time.

The country is now looking for ways to promote the participation of private capital and attract foreign direct investments (FDI). Given the growing competitiveness in the region the active involvement of the private sector is crucial. The government is considering whether the introduction of special zones, concessions and public-private partnerships (PPP) would be feasible for this purpose. Lithuania's experience in these spheres is looked at as one of the examples.

BTK as part of regional hub and framework for industrialization of Azerbaijan

Development Concept "Azerbaijan 2020: the Vision of the Future" is the country's main strategic development document and has been approved by the President of Azerbaijan. This concept indicates that for Azerbaijan to become a regional trade centre, the country's strategic geographical location must be used effectively, transit and transport services developed and logistical centres established in the districts.

As Azerbaijan is located at the intersection of international transport corridors – in the directions East-West and North-South, the BTK is part of a greater idea – to benefit from a favourable geographic position by establishing a regional transportation hub. The BTK line goes through the coastal city of Alyat, Baku region. When Alyat seaport is finished all cargo is to be redirected from Baku port making Alyat a regional hub.

Sumgait Chemical Industrial Park and Balakhani Industrial Park have been built recently and will be operational in the near future. In 2015-2016, two more industrial parks will be opened by the President of Azerbaijan – one in Ganja city and another in Mingachevir city. The Model Charter of Industrial Parks has been approved to regulate the establishment, management and operation of these industrial zones and other related issues.

Industrial estates (10 to 15) are also planned in every region of Azerbaijan, in order to promote the establishment of new businesses. Each estate is estimated to cover the area of five to ten ha and to accommodate small and medium companies (SMEs).

The main difference between an industrial park and industrial site (estate) is that the latter does not offer tax exemptions. The main idea of an industrial site is to provide SMEs with the ready infrastructure for their projects.

To sum up, the Government of Azerbaijan has started building industrial parks and industrial sites (estates). However, the success of these zones largely depend on efficient connection to the transport corridors, including the BTK. The lack of clear vision on infrastructure development might become a drawback. Therefore there needs to be further discussion to improve performances.

Currently discussed regulatory models for special zones, PPP and concessions to attract FDI and improve logistics conditions in Azerbaijan

Azerbaijan has an effective Law on Protection of Foreign Investments. Yet the country lacks strategy and legislation to attract private investors. The situation could be improved by revising the existing legal regulations on free economic zones (FEZ) as well as introducing legislation on PPP and concessions.

The country has the law on FEZ, but it applies only to the FEZ in the territory of Heydar Aliyev International Airport. Thus it generates limited benefits for the national economy. The effective concept of FEZ has also demonstrated less efficiency than expected.

There is huge potential in the territory of Alyat port and in the proximity of BTK for establishment of FEZ. The on-going and future developments in the country demand novel FEZ regulations, which would enhance the competitiveness of the new economic zones in the global market.

Such zones have to be created on the basis of a flexible and efficient legal framework, which would provide different models for establishment and management of special zones. FEZ areas could be established and operated by the development and management companies with an international background, or by joint ventures of such companies and governmental institutions. It is proposed that the government could hold the majority ownership in such joint ventures whereas national and international logistic corporations along with governmental agencies and private entities would play a significant role in governance of these companies.

Another model proposed is to apply PPP or concessions arrangements for infrastructure development in the free economic zones. These models usually give a fairly clear idea, how the regulatory authority will operate separately from the ownership, development and operation function. The PPP model also allows investing both private and public funds in the supportive infrastructure to ensure the efficiency of the implementation of such projects.

Many governments over the world take an option to lease the land and/or infrastructure designated for a FEZ to a private company, which acts as a zone operator and/or developer. Private companies operate globally and are more competitive, while public companies basically are not able to ensure the efficiency of FEZ and successfully attract FDI. The government can be a co-investor or act as a regulator, provide essential infrastructure inside and outside the zone (roads, railways, electricity, water, sewage etc.), be a promoter. While the private operators invest in the remaining infrastructure and facilities, are responsible for the zone expansion etc.

As an example, Lithuania refers to itself as a transit country with well-developed infrastructure, including Klaipeda seaport and the crossroad of international transit routes in Kaunas region. Strong FEZ's operate in Klaipeda and Kaunas. Both these zones are oriented towards the logistics sector, among other developments. Both zones were created under the Law on the Fundamentals of Free Economic Zones, which was passed on June 28 1995. This law provides for conceptual regulation and is very flexible; it allows choosing various models for development and management of FEZ. Therefore, this law gives possibilities to establish various forms of special zones and gives broad discretion to the management company. In addition, on September 10 1996, the Law on Concessions was enacted, and on July 7 1999, the Law on Investments was passed. These laws created possibilities to implement concessions and PPP projects in Lithuania.

The success of Klaipeda and Kaunas FEZ's lies in the following key factors: adoption of the best foreign practices, timely facilitation of a friendly legal environment, establishing definite purposes of the zones, attraction of private qualified operators and settlement of the agreements with clear targets, which should be reached by the mutual cooperation of the private investors, state institutions and subsidiaries.

Conclusions

Azerbaijan is now in a favourable position to improve its legislation and attract the private sector by employing the following fundamentals: foreign investment guarantees by the state; flexible and efficient regulation and legal framework for investors, including PPP concept; attract international experience into governance of industrial and logistic zones; create FEZ's with a favourable tax regime; and contribute relevant initial investments into infrastructure.