* Government says a dozen companies have registered
* Asmara seeks to capitalise on strategic location
By Andrew Cawthorne
ASMARA, May 19 (Reuters) - Eritrea intends to launch a free trade zone at Massawa on its Red Sea coast later this year, with a dozen firms already registered to operate in a venture Asmara hopes may help drive future economic growth.
The small Horn of African nation is also planning another free zone in Assab port, near the Djibouti border, as it seeks to take advantage of its strategic location next to bustling shipping lanes to-and-from the Suez Canal.
The Assab trade zone would start in 2010 and others are planned inland, including one for agro-industrial businesses on the border with Sudan, Eritrea Free Zones Authority's enthusiastic chief executive Araia Tseggai told Reuters.
"These could help transform the economy," said Tseggai, a U.S.-educated economist and banker who ran Eritrea's central bank for several years after Asmara won independence from Ethiopia in the early 1990s.
"We are located in one of the busiest shipping zones in the world ... All ships pass by Assab. It's a captive audience," he added in an interview late on Monday.
Nearly 20,000 vessels a year pass Eritrea loaded with some 700 million tonnes of cargo -- more than 9 percent of the estimated 7.7 billion tonnes carried by global shipping.
Due to open for some companies before the end of 2009, Massawa free trade zone will encompass about 5,000 hectares, including the port and airport. Authorities have invested tens of millions of dollars in preparing the infrastructure.
Some 12 companies, including from China, Italy, Israel, India, Djibouti, Sudan and Dubai, have registered to use Massawa, mainly for small-scale plants for things like construction materials, foodstuffs and batteries, Tseggai said.
"About two-thirds of those have said any time you contact us, we will start ... At the beginning, it will take long. If I get two dozen companies in three years, that would be a good start. Then the jump will take off."
Africa's youngest nation, with a population of about 4 million, is also one of its poorest, and the free zones are a key plank of rebel leader-turned-president Isaias Afwerki's strategy for developing the tightly-controlled economy.
He has an office in Massawa, an ancient city a two-hour drive down from the mountain capital of Asmara, and spends plenty of time supervising the development of fisheries, as well as the zone and other lowland projects.
Some see the free zones as over-ambitious for Eritrea.
But Tseggai said business interest was high, and the spill-over for Eritrea could be big: employment and training for locals; development of foreign trade links; and a conduit for local products like fruit, livestock, fish and minerals.
Assab is intended to specialise in trans-shipment and not compete with Massawa, which will start with processing and assembly plants, factories for light industries, and services, the zones authority boss said.
Beside Eritrea's location, low labour costs should help attract foreign firms, he said. "When you consider it in terms of convertible currency, our salaries are peanuts. I get paid the equivalent of $200 a month," he said.
Competition, however, remains fierce, with Djibouti, Aden, Port Sudan and -- of course -- Dubai all offering free trade zone facilities in the region.
"Who would want to stay in Dubai now? It's very expensive for the small companies. The small companies are looking for a place where they can survive," Tseggai said.
Eritrea's 1998-2000 border war with Ethiopia, and continuing political enmity, is a deterrent to potential investors here.
Landlocked Ethiopia, whose economy dwarfs Eritrea's, would probably be a major user of trade zones were the border re-opened and relations normalised.
"If that were resolved, it would have an additive effect but not a determining effect," he said. "The free trade zones are for the whole world, not just Ethiopia." (Editing by Daniel Wallis)