Industrial zones of Azerbaijan - Catalyst for regional innovations EU Reporter article by Colin Stevens

EU Reporter has published an article by Colin Stevens highlighting economic potential of Azerbaijan. Caliber.Az reprints the article.

Azerbaijan, a country rich in natural resources located in the South Caucasus region, continues to remain an attractive destination for investment due to its strategic location, favourable business climate, and rapidly developing non-oil and gas sector.

Today, Azerbaijan stands as one of the guarantors of Europe's energy security and holds a pivotal position on the transportation map of Eurasia. In recent years, Azerbaijan has embarked on active initiatives to diversify its economy, with significant advancements made in sectors such as transit and logistics, alternative energy, tourism, agriculture, ICT, industry, and various others.

Approximately $200 billion has been invested in Azerbaijan’s non-oil and gas sector over the past 20 years, during which investments in fixed capital within the non-oil and gas industry have exceeded $30 billion. Notably, since 2010, Azerbaijan's non-oil and gas GDP has demonstrated consistent annual growth, averaging over 5 per cent, while the non-oil and gas industry has experienced approximately 9% growth. Moreover, investments in fixed capital within the non-oil and gas sector have exhibited an average growth rate of 5.5 per cent over the same period.

Industrial zones - catalysts for innovation

One of the primary drivers behind this positive economic transformation is the establishment of industrial zones, which provide abundant opportunities and incentives for both local and foreign investors. As of today, Azerbaijan has 7 industrial parks, 5 industrial districts, and 24 agro parks.

Since 2005, Azerbaijan's industry as a whole has attracted a total of $71.7 billion in investments at current prices, of which $38.8 billion accounted for foreign investments. Over the same period, industrial companies have invested around $276.5 million in implementing technological innovations. In this context, industrial zones have emerged as catalysts for the adoption of advanced technologies and business innovations across various industrial sectors.

For example, within the Balakhani Industrial District operates the Baku Plant for the Incineration of Solid Household Waste - the most advanced plant of its kind in Eastern Europe and the CIS countries. In the Sumgait Chemical Industrial Park, the largest glass manufacturing plant in the region, Azerfloat, operates successfully.

Another noteworthy resident of this industrial park is the “Alko” company, renowned for producing lubricants highly regarded by car manufacturers such as Mercedes-Benz and Volvo.

Quick Launch of Business: Incentives and Developed Infrastructure

Registering a business in Azerbaijan is a fairly straightforward procedure, which is reflected in international rankings. Azerbaijan ranked 22nd for ease of doing business among 132 countries in the Global Innovation Index 2023. Individual entrepreneurs can register for tax purposes within just 1 day, while legal entities can complete the process in no more than 2 days. Furthermore, limited liability companies can conveniently register online, benefitting from accelerated electronic registration procedures that significantly expedite the process.

Azerbaijan's industrial zones represent a dynamically developing and strategically important element of the country's economy. One of the notable advantages of residency is the comprehensive package of tax and customs incentives, coupled with readily available infrastructure. Companies granted residency status enjoy exemption from profit tax or income tax, as well as land and property taxes. Additionally, residents benefit from VAT and customs duties exemption on the import of machinery, technological equipment, and devices used in production for 10 years.

For investors choosing to operate in territories liberated from Armenian occupation in Azerbaijan, additional incentives are provided to support their endeavours. The state subsidizes company payments for social insurance, offers a one-time allowance of approximately $350 for employees, and provides a monthly bonus to their salaries. Moreover, the procedure for obtaining work permits is significantly streamlined, and there is no quota for foreign specialists in liberated territories for a period of 5 years. Employees' social insurance payments will be fully subsidized by the government for 3 years, followed by an 80 per cent subsidy for the subsequent 3 years. After 15 years, the subsidy will gradually decrease by 20 per cent every 3 years, with the employer assuming these payments after the 15-year mark. Additionally, companies operating in liberated areas will receive a 20 per cent discount on utility prices. Furthermore, residents of liberated territories are exempt from profit (income) tax, property and land taxes, as well as simplified tax, for a duration of 10 years starting from January 1, 2023. Additionally, the import of raw materials and materials for production in liberated territories is exempt from VAT for 10 years from January 1, 2023.

All infrastructure in industrial zones is provided on a Plug & Play basis, meaning that entrepreneurs receive a ready-made office, all necessary transportation, and other infrastructure. There is no need to lay power lines, internet, water and gas pipes, or sewage lines. All logistical details are already considered, including the presence of railway lines in some industrial parks.

Great Opportunities for Integration into Global Trade

Azerbaijan is situated at the intersection of several international transport corridors. The country is a key hub of the Trans-Caspian International Transport Route, also known as the Middle Corridor, one of the shortest routes for transporting goods between Europe and Asia. The role and significance of the Middle Corridor are rapidly increasing in the current geopolitical conditions.

Interest in the North-South Corridor, yet another international transport route traversing Azerbaijani territory, has also surged, particularly amid concerns in the Red Sea region. In addition to the East-West and South-West corridors facilitating the transportation of goods from China and India to Europe, the Lapis Lazuli route enables the transit of goods from Afghanistan and Turkmenistan to European destinations. Azerbaijan plays a pivotal role as the interconnector for all of these routes. Looking ahead, Azerbaijan has the potential to serve as a natural extension of the China-Kyrgyzstan-Uzbekistan railway line. This would involve extending the railway line through Uzbekistan to Turkmenistan, followed by transportation via the Caspian Sea to Azerbaijan, and onward delivery to Europe.

The strategic location of industrial zones enables residents to implement an effective trade policy. The Aghdam and the “Araz Valley Economic Zone” Industrial Parks, located near newly developed highways and railways, provide excellent opportunities for unimpeded access to international transport routes.

As a result, by the end of 2023, Azerbaijan had established successful trade relations with 193 countries.

Foreign investors show great interest in industrial zones

Azerbaijan's strategic geographical location, coupled with its favourable business climate and attractive tax and customs incentives, have spurred heightened interest from foreign investors in the country's economy, particularly in its industrial zones.

Among these zones, the Sumgait Chemical Industrial Park stands out as the largest in the South Caucasus region. Boasting the highest number of residents, many of whom are industry leaders in their respective fields, the park serves as a beacon for innovation and industrial development in the region.

A resident of the Sumgait Chemical Industrial Park, Azerbaijan Vanhong Ceramics Co., with 100% Chinese capital, has invested over $50 million in the production of ceramic tiles with annual production capacity of 18 million m2. The products will be marketed domestically as well as in regional countries.

Using advanced technologies, the Azersulfat LLC plant is engaged in the production of sulfuric acid.

Another resident of the Sumgait Chemical Industrial Park, the local representation of the Turkish company 4MAPS Bilgi Teknolojileri, provides cartographic and navigational services, supplying data for maps used by companies such as Apple and Yandex. The company's office in Azerbaijan serves as a processing centre for handling cartographic data for Eastern European, Georgian, CIS, and Central Asian countries.

As a resident of Sumgait Chemical Industrial Park, the SOCAR Carbamide Plant produces 650-660 thousand tons of urea annually using 435 MM m³ of natural gas as the primary raw material.

Utilizing Canadian and Austrian technologies, SOCAR Polymer LLC manufactures 184,000 tons of polypropylene (PP) and 120,000 tons of high-density polyethylene (HDPE) per year.

"AutoLeasing Azerbaijan" has built the largest service centre in the region for servicing commercial vehicles and agricultural machinery in the "Araz Valley Economic Zone" Industrial Park, which will serve as a regional hub for transnational carriers.

Residents of the Pirallakhi Industrial Park, Gen Pharma Caucasus Manufacturing Operations (Türkiye) and R-Pharm (Russia) are building the largest pharmaceutical manufacturing plants in the region.

In the Neftchala and Hajigabul Industrial Districts, the only car manufacturing plants in the South Caucasus are in operation. In Hajigabul, Azerbaijan and Uzbekistan jointly manufacture cars under the Chevrolet brand.

Growing Role in the Economy

Industrial zones are playing an increasingly significant role in the development of Azerbaijan's economy. By the end of 2023, the share of industrial zones in the non-oil and gas industrial sector reached 18.6 per cent, and in non-oil and gas exports – 23.6 per cent. Products manufactured in industrial zones are exported to more than 65 countries.

Residents of industrial zones have invested $3.9 billion in their enterprises. Currently, industrial parks have created more than 10.000 permanent jobs. In the next stage, an additional investment of up to $490 million is planned, resulting in the creation of more than 7000 jobs.

Much of the production from industrial zones has fully or significantly met domestic demand. Industrial zone products are actively used in reconstruction and renovation projects in the territories liberated from the occupation.

Industrial zones represent integrated territories with advanced infrastructure, guaranteeing the effective functioning of enterprises. They serve as innovative ecosystems that foster the proliferation of competitive product manufacturing. The combination of top-tier infrastructure, abundant resources, and state support renders Azerbaijan's industrial zones highly appealing to investors. This, in turn, assures the enduring growth and sustainability of Azerbaijan's economy amidst global challenges and opportunities.