Reforming Free Economic Zones in Armenia
Currently, two Free Economic Zones (FEZ) are operational in Armenia and have active residents, while several further projects are planned. The impact in terms of attracting investors and creating employment has been limited so far. International experience shows that it takes time for zone programmes to unfold their effects. At the same time, the assessment carried out identified a need and potential to increase the effectiveness of FEZ in Armenia in the four important dimensions (1) strategic focus, (2) value proposition, (3) institutional model and (4) promotion.
To unlock the potential of FEZ for economic development, future reform efforts should focus in particular on the strategic and institutional framework. Those areas play a critical role for the reform success in the other dimensions.
Background
Free Economic Zones (FEZ) or other types of Special Economic Zones (SEZ) constitute geographically delimited areas, in which governments facilitate investment and industrial activity through fiscal and regulatory incentives as well as further infrastructure support and services. Zone-based concepts are commonly used around the globe. According to UNCTAD, there are more than 5,000 zones in close to 150 countries. International experience shows that FEZ or similar zones can make an important contribution towards economic growth and sustainable development. The rather moderate performance of FEZ in Armenia in terms of attracting investors and creating employment suggests that this policy tool is not used to its full potential, yet. Against this background, the German Economic Team has carried out an assessment of FEZ in Armenia and relevant reform measures in the recent past. Based on the assessment, areas were identified, in which further reform efforts are required.
FEZ in Armenia – State of play & key developments
Currently, only two FEZ – Alliance and Ecos (created in 2013 and 2019) – are operational, each with approx. 10 residents and 200-250 employees. FEZ Meridian (created in 2015) has no residents anymore and alternative options for the use of the premises are currently explored, as the focus on jewellery exports is not viable in the context of Armenia’s EAEU membership. FEZ Meghri, which was established in 2017 at the border to Iran, is still without active residents due to unsolved land issues. In summer 2024, the creation of a Tourism FEZ centering around a ski resort in the Aragatsotn province was announced. According to the interviews carried out as part of the assessment, several further zones are planned, including the Shirak Dry-Port and SEZ. The 400 ha project forms an important element of the “Crossroads of Peace” initiative of the Government of Armenia.
Free Economic Zones in Armenia
Source: Own research and display
The zones in Armenia vary with respect to their profile. The FEZ in Meghri constitutes the only public zone. The other zones are managed by private companies. In the case of the planned Shirak Dry Port and SEZ, a PPP model is envisaged. The two operational zones – FEZ Alliance and FEZ Ecos – are multi-activity zones with a target group spectrum beyond one industry and a focus on broad-based industrial development. The new Tourism FEZ and the FEZ Meridian, which is no longer operational, fall into the category of specialised zones geared towards the development and international integration of specific industries and value chains. The FEZ in Meghri is designed as a border zone. The planned project in the Shirak Region combines a dry port as a logistical hub with a multi-activity zone to attract additional industrial investment creating mutually reinforcing effects. So far, an innovation or technology-oriented zone does not form part of the FEZ portfolio in Armenia.
Reform potential in key dimensions critical to success
The assessment carried out identified a potential to improve the zones’ effectiveness in all key dimensions building on recent reform efforts. The lack of a coherent strategic framework constitutes a cross-cutting challenge. Well-designed strategic foundations are of particular importance when the private sector is involved in the development and operation of zones. While a strategic approach is recognisable in the case of the planned Shirak Dry-Port and SEZ, most FEZ have been created on an ad hoc basis strongly driven by companies’ interests. The operational zones do not yet have a fully convincing value proposition relying strongly upon incentives without a targeted approach. The potential for differentiation of target-group-oriented infrastructure or services is only partially exploited so far.
The current institutional framework comes with a low synergy potential and capacity building impact, as all zones are developed by different entities and the private operators cannot draw on any relevant experience from other zone-related projects. The financing model, which is based on subleasing privately-owned land / facilities almost inevitably leads to uncompetitive cost structures for investors. The promotion of the zones has been improved by the Ministry of Economy and Enterprise Armenia. However, the scope of communication tools and channels as well the intensity of the promotional measures is still limited in international comparison. Synergy potentials between the different zones remain untapped.
Reform focus on strategic and institutional framework
Against this background, there is clearly a need and potential to increase the effectiveness of FEZ in Armenia. Reform efforts should place particular emphasis on the strategic and institutional framework, which plays an important role for the success in the other dimensions.
As a starting point, the envisaged number and type of zones should be clearly defined to provide guidance for all stakeholders. In this context, the minimum requirements for future zones should be specified. A development path is recommended shifting first the focus from multiactivity zones towards specialised and logistics zones and then towards innovation-driven and (cross-) border zones. In the long-term, zones should be converted / integrated into a country-wide innovation-oriented industrial development programme.
It should be considered to limit private sector involvement to PPP arrangements to ensure a higher level of influence for the state. The path taken in the planning for the Shirak Dry-Port / SEZ should be pursued further. In light of the moderate performance of the private zones, PPP agreements seem to be a more promising option to balance the risks and returns. Furthermore, the monitoring of the performance of the zones and of the implementation of investment projects should be further intensified. An effective monitoring is a precondition for the implementation of a strategic approach.
Proposed development path
Source: Own research and display
Conclusion
Reforms of the strategic and institutional framework provide the basis for refining the value proposition and strengthening the promotion of the zones. Reflecting the proposed development path, the future value proposition of zones should focus more strongly on needs-oriented infrastructure and services and less on incentives. The promotion should be intensified based on a target-group-oriented and collaborative approach. To increase the effectiveness, the promotion of the zones under a common brand offers a promising potential.
This newsletter is based on the Policy Briefing Reforming Free Economic Zones (FEZ) in Armenia –Assessment of implementation and next steps.
