Azerbaijan FDI

Baku, Azerbaijan

Azerbaijan is a country with wide range of investment opportunities and is undoubtedly one of the most attractive destinations for foreign direct investments (FDI) in the region. There are good opportunities for the development in the following sectors:

Agriculture and food processing. Agriculture is one of the most important sectors of the economy in Azerbaijan. Today, the agricultural sector employs over 39% of the active labour force of the country. The fertile lands, abundance of water and climatic diversity create favourable conditions for a strong agricultural sector. Meanwhile, the food-processing sector constitutes an important component of the national economy and accounts for around 14% of national manufacturing output. Furthermore, Azerbaijan trades intensively in agricultural and food products. Existence of 9 climatic zones out of 11 in the world creates favourable conditions for the development of agriculture in Azerbaijan.

Possessing great potential for development, the widest range of investment incentives and high economic profitability, the agriculture and food-processing sectors remain  among the most attractive for investment in the economy of Azerbaijan.  Different financial and non-financial schemes, such as exemption of farmers from taxes (except land tax), state subsidies, discounts and other privileges have been developed in order to promote further development of business in the sector.

Alternative and Renewable Energy. Alternative and renewable energy sector is quite new (except for hydro-energy which is one of the traditional energy sources) promising area of the economy. According to estimations, Azerbaijan has a great potential to raise effectiveness of use of the energy resources of the country by involving the following renewable energy sources:

Hydropower (by using the energy of small rivers); Wind (average annual wind speed in Absheron peninsula is 5.8 – 8.0 m/sec and number of wind gusting days per annum is up to almost 245-280 days); Solar (Azerbaijan has got 2500 hrs – 2800 hrs of sunshine period with 250 sunny days per annum); Thermal waters (with over 400 million cubic meter/day of between 35-100^o C total resources of the thermal waters); Biomass (with annual waste emission plays around of 2.0 mln. tons).

Construction. The construction sector is also a huge growth area, as one can witness Baku and regions of Azerbaijan look like a huge construction yard. Major redevelopments are underway to give the country a facelift, and much of the infrastructure is being built from the scratch. Many foreign companies are also fighting for a piece of that pie. Thus, inflow of investments is welcome in Azerbaijan for starting up a construction projects only by forming joint venture with local entities.

Tourism. Tourism is another important sector. We are learning from the experiences of many countries-well-known tourist destinations, such as our close neighbor Turkey. The year of 2011 was designated as the “Year of Tourism” in Azerbaijan. 40 hotel construction projects were ongoing in 2011, six of which were five-star hotels built in Baku city. It is no wonder that world-famous hotel chains are entering the market. All of six new hotels in Baku are the leaders in the global hotel industry (Hilton, Jumeirah, Kempinski, Four Seasons, Marriott, and Fairmont). Of course, we do not only aim at luxury tourism, as most of tourists prefer budgetary spending. Therefore, we dare to attract many more international middle-class and budget hotels companies to heavily invest in this particular field.

One of the ongoing biggest projects – construction of large-scale summer and winter tourism complex in Shahdag Mountain – is in the implementation phase. Construction of this complex stimulates development of the winter sports in the country.

Telecom/ICT. Telecommunications sector is developing and attracting investments as well. Soon Azerbaijan will launch its first satellite. Minister of Communications and Information Technologies made a forecast that during the years of 2020-2025 the revenues from this sector will reach significant sum. There are five major cellular phone carriers in Azerbaijan, two of which are world’s telecom giants like TeliaSonera and Vodafone. More than half of the population is registered as internet users. Online payments, registrations, taxation, and other e-services are being widely introduced and the sector is developing. Along with all these Azerbaijan still seems covenant area to invest and benefit.

Petrochemical industry. Throughout the 20th century chemical industry has been vibrant and growing due to oil production. Numbers of petrochemical and chemical facilities were built during soviet era along with city of Sumgait that produced most of the chemicals of the country. After the soviets collapsed many facilities were incapable to run. But, by the end of 2011 a new decree was signed by the president to give rebirth to this field by establishing a brand new and modern Sumgait Chemicals Production Site. It is 37 km away from Baku city and resides nearby the Caspian Sea that makes cargo transport a lot easier and suitable for future trade of goods and offshore carriages. This site will consist of plenty chemical plants that will be open to both local and foreign investors. A number of tax and customs incentives as well as concessional loans are considered to be granted in the Park.

The investment potential of these sectors is broadly presented in all promotional activities of AZPROMO.

Are there particular geographical areas and cities you particularly wish to develop?

To achieve diverse and rapid development, the Azerbaijani government executes  extensive programmes, one of which is the State Program on socio-economic development of regions (2009-2013) This program aims to develop all regions and cities of the country and contains widespread renovation, development and construction of interconnected roadways, bridges, highways, utilities, schools, hospitals, olympic sports centers, industrial buildings and many other diverse infrastructures to enable expansion of the business throughout the country.

Government also pursues strategies to restore the economic activities in the areas traditionally known for specific products manufacturing.

As a proof, the city of Sumgait-as it once carried out a title of chemicals capital of the Soviets-is set to be chemical and industrial superpower of Azerbaijan nowadays. Sumgait Technological and Chemicals Manufacturing Park is currently being established to vitalize country’s industrial strength and regain its title as an industrial city.

One of the ongoing audacious urban development works is “Baku White City” project that will be one of the largest modern projects in the world, built entirely on ecologically reclaimed industrial zone. As a lead consultant, the world-renowned global multidisciplinary engineering and architectural design firm Atkins (UK) performed master planning and detailed planning activities for the project. Along with specialists from Azerbaijan, Fosters and Partners (UK), established by legendary architect Norman Foster and American architectural bureau F+A Architects, were also involved.
Baku White City will encompass 244 ha, making it largest development in Caucasus region – 11 times the size of Iceri Shahar (The Old Town) in Baku and more than Monaco inhabitating up to 50 000 residents. When completed BWC will be able to provide 48 000 workplaces, 20 000 residential and commercial units and 40 000 parking spaces. Currently this project is looking for principle investors in all aspects to be financed.

Currently a number of projects are being implemented in the regions of Azerbaijan. Among them are such projects as construction of Aluminum plant in Ganja, construction of Cement Factory in Gazakh region. The establishment of Ganja Industrial Park that will boost development of industrial areas is also on stake. This is important both from regional development perspectives and for opening of new work places. After Baku, construction boom now spread to other big cities of Azerbaijan. Besides that, government pays special attention to reconstruction of infrastructure in the regions of Azerbaijan.

Since acquiring independence in 1991, tremendous efforts were made to develop the infrastructure area and this resulted in Azerbaijan’s lead in infrastructure of the region. Many mega infrastructural projects are underway.

One such project is the Baku-Tbilisi-Kars railroad, which is also called ‘Iron Silkway”. After completion of this project in 2012 Azerbaijan will turn into logistic hub by restoring ancient trade routes which will connect Asia to Europe. We have also managed to establish air connections to major European and Asian cities, and Azerbaijan has never been so well connected. Despite relatively small territory of the country, we have six international airports; latest opened in November 2011 in Gabala. The biggest one is in Baku. The new 53,000m² terminal of Heydar Aliyev International Airport designed by world-known “Arup” company, with capacity of 3 million passengers a year will promote Baku and Azerbaijan to the wider world. The Baku International Sea Port which will be the largest on the Caspian is also under construction. Being located on the territory of 400 hectares the Port will capacitate 21 mln tons of goods per year or 150 000 containers. It is needless to mention that most of the above infrastructural projects will enable to increase the capacities for moving of persons and goods to and from Azerbaijan and will make Azerbaijan the logistic hub of the region.

One of the ongoing biggest projects – construction of large-scale summer and winter tourism complex in Shahdag Mountain – is in the implementation phase. Construction of this complex stimulates development of the winter sports in the country.

Another ambitious project is construction of “Khazar Islands” which will cover 2 000 hectares and is being developed 23 km away from capital city. Numerous residential buildings, office spaces, educational and medical facilities, business centers and other amenities will be constructed in the city. Leading companies experienced in the construction of cities from UAE, UK, The Netherlands and other countries are engaged in the project.

What are your plans to develop your financial sector, including in banking, your stock brokerages and the domestic stock exchange market?

Financial sector in Azerbaijan has gained its sustainability and market cap during last 10 years by leaping numbers of newly opened commercial banks, insurance companies and financial entities of multi-purpose loans etc. Currently, up to 44 banks, 19 insurance companies and 38 money-lending equity funds are operating in Azerbaijan serving millions of customers. Some of them have international operations in the cities of Tbilisi, Moscow, London, Paris, Frankfurt-Mein, St. Petersburg and New York.

As a result of widespread privatization after gaining independence, the financial sector has also passed through all procedures and state-owned banks’ shares were bid and sold to investors. In the beginning of 2011, total assets of all local commercial banks exceeded $13.6 bln and kept their rating not below BBB- (according to Fitch and S&P indices). One of the Russian major banks, Bank VTB, established its office in Baku in 2009 and expanded business to substantial extent with millions of dollars portfolio.

Hence, audit & financial consulting firms are also doing a successful business in Azerbaijan. Worldwide-spread and recognized as “Big Four”-the audit, tax & legal giants-Deloitte, KPMG, PriceWaterHouse Coopers and Ernst & Young are among these promising companies which run in Azerbaijan as well. They, along with local audit companies, offer diverse services including overall financial analysis, corporate taxation issues of enterprises based on IFRS standards.

Despite major financial downgrade & economic recession, Azerbaijani banks kept their credibility while maintaining their stable portfolio and revenue growth (total profit from banking activity in 2003: $25 mln; in 2010 increased more than 10 times: $300 mln.) These indicators demonstrate the reliable business climate of financial & banking field in Azerbaijan.

Azerbaijan has stakes and is actively engaged with the European Bank for Reconstruction and Development, Asian Development Bank, World Bank, Islamic Development Bank, Black Sea Trade & Development Bank, etc. all of which have running projects portfolios in the country. There are also representative offices of some leading foreign banks in Azerbaijan, such as KfW, Societe Generale, etc. that are actively involved in financing of local companies and mainly infrastructural projects.

As for the domestic stock exchange market, in 2000 Baku Stock Exchange (BSE) was constituted with an aim to create an organized stock market in the country. The trading partners include banks, capital management organizations, financial funds, holdings and industrial companies. BSE carries out trading and settlement (clearing) operations for corporate securities. Trading, depository and clearing operations on primary and secondary markets of public securities (T-bills of Ministry of Finance and Notes of the Central Bank) are carried out solely at BSE. At present, BSE has 19 shareholders including Istanbul Stock Exchange among them.

How do you wish to promote international investments into your domestic companies?

The fact that, Azerbaijan has been receiving the largest amount of foreign investments in the region proves the existence of firm and favourable investment climate in our country. Since 1995, almost 120 billion USD was invested into Azerbaijani economy of which more than a half was made by foreign businesses. The striking results in investment attraction are achieved through the implementation of quite serious economic and legal reforms, liberal economic policy and a policy of ‘open doors’ for foreign investors. Along with favourable legal regime that provides foreign businesses with certain necessary guarantees, there are a number of other key positive factors behind our success in attracting foreign investments. Political stability and sustainable economic development over the last 15 years, reformist business environment, liberal trade regime as well as the presence of abundant resources and a favourable location on the crossroads of Eurasia with the best infrastructure in the region, make our country very attractive investment destination. But all abovementioned certainties are only a glimpse into the advantages of our country.

Azerbaijan has many attractive sides which are really appreciated by the foreign decision makers, but still strongly require publicizing on the international level. From this point of view, one of the major objectives of AZPROMO is promotion of our country as the favourable investment destination by organizing international business events along with matchmaking between local and foreign entrepreneurs, making specific country presentations and publishing brochures on priority investment sectors. Undoubtedly, business forums, investment seminars, road shows and one-to-one business meetings are essential tools for presentation of country’s investment opportunities and specific business projects initiated by local companies directly to the foreign potential investors.

Moreover, in order to increase awareness of foreign investors in the projects to be implemented in Azerbaijan and increase efficiency in finding foreign business partners the “Investment Projects Catalogue” based on local businesses’ proposals has been prepared by our organization which is being continuously updated. To promote the sectors with competitive advantage, AZPROMO publishes brochures and catalogues highlighting the sector potential and business opportunities. All these measures create great scope for expansion of cooperation between local and foreign entrepreneurs and stimulate implementation of joint investment projects in Azerbaijan.

Are you planning to promote PPP (Private Public Partnerships)?

PPP model of cooperation between public and private sector is something new for Azerbaijan. AZPROMO itself being a kind of PPP established by Government closely works with representatives of both private and public institutions.

Currently all PPP relations are governed by Civil Code, law on public procurement and other related legislation.

Today a number of projects offered by public authorities with participation of foreign companies are currently being implemented. Such projects are mainly implemented in infrastructure and include building of and reconstruction of roads, bridges, passages, etc.

As an example of PPP project which is currently being implemented in Azerbaijan, I can specify construction of Waste-to-Energy Plant which is a “turn-key” contract and being carried out with the principle of “Design Build Operate”. So the designing, building and operating are entirely being held by “CNIM” S.A. The designing, construction and 20 year operation of the future Waste-to-Energy plant with 500,000 tons of MSW per year is considered in 20 ha area designated in Balakhany settlement. The amount of electricity obtained as a result of burning of waste will be equal to 231,5 million kWh/year.

The other PPP  projects  are implemented by Azerbaijan Investment Company (AIC) together with foreign partners. The main objective of the AIC is to implement fixed-term equity investments in the private sector and to assist FDI in the non-oil sector of Azerbaijan. One of the biggest PPP projects of AIC is the construction of the modern shipyard and ship repair facility on Caspian Sea which is being implemented together with State Oil Company of the Republic of Azerbaijan (SOCAR) and Keppel Offshore and Marine (Singapore).

In order to further promote PPP projects we plan to include information on projects offered by state authorities to our Catalogue of Investment Projects  to keep foreign companies informed.

How are you looking to cut red tape for industry and commerce?

Well, one of the priorities of the Government is to support development of local business. In order to simplify procedures for doing business, lessen bureaucracy and reduce number of documents, different reforms on registration of legal entities, registering property, customs, payment of taxes and other sphere have been implemented during last years.

These reforms have been observed by international community. Thus, World Bank 2009 report named Azerbaijan top reformer improving its position from 97^th place to 33^rd out of 181 economies. Azerbaijan improved in seven of 10 indicators, catapulting 64 places in the rankings, the biggest jump ever recorded by the World Bank.

One of the brilliant examples of the reforms was the introduction of “one-stop-shop” system for registration of legal entities, effective from January 2008. This system was designed explicitly to reduce the red tape, costs and paperwork associated with the process of business registration. After this, the number of procedures and number of days to establish a company was reduced to 5 and 3 respectively. Very recently the system was further developed and “online” registration of the company now is a reality.

Besides this, the “E-Government” project is currently under implementation. The aim of the project is to increase the introduction level of ICT in state agencies and using modern ICT to render services to citizens. Implementation of this project will enable to increase the quality of services rendering to population, reduce the time and costs. Azerbaijan is pursuing its goals to ease business conditions and establishing favorable environment for starting business. A new information portal on permits and licenses www.icazeler.gov.az will be launched on March, 16^th. . The web-site will give broad information on type of permit required, process of obtaining it, granting authority, state fee and other related information.

From our side, as a part of policy advocacy role of AZPROMO we regularly analyze current legislation and prepare our proposals on improvement of both investment and export related legislation.

How does your government plan to make it easier for small and medium size to grow their businesses?

Considering that small and medium size enterprises are one of the major determinant factors for sustainable economic growth, Azerbaijani government implements significant reforms and provides incentives in order to stimulate SME’s development and increase its share in the whole economy. Simplified tax system and concessional credits for starting and improving business are striking examples of supporting policy pursued by the government to SMEs. In order to ease tax burden for small and medium size businesses the country introduced simplified tax regime, whereby legal entities with total revenue not exceeding 150,000 AZN (approximately 190,000 USD) for the previous 12 months period are charged at the rate of 4% in the capital city of Baku and 2% in other regions of Azerbaijan of the gross revenue. In that case, such enterprises are exempt from VAT, profit and property taxes.

The National Fund for Entrepreneurship Support was established by the government with its primary mission to support the development of SME in Azerbaijan by providing concessional credits of 6-7% annual percentage rate to entrepreneurs in all regions of Azerbaijan (the loan portfolio was approximately 578 million USD as for the 01 August 2011).

Moreover, there are a number of state subsidies for agricultural growers on purchase of seeds, fertilizers, fuel and for covering other costs. In order to support companies in agricultural sector Azerbaijan abolished all taxes, except for land tax. Along with that, no customs duties and VAT are imposed on specified products and equipments which are imported for the purpose of using in agricultural and food production.

Taking into consideration wide opportunities existing domestically, the government of Azerbaijan successfully implements import substitution objectives.. The production is not only focused on meeting the domestic demand but also export oriented.

How do you plan to maintain going forward the impressive strong economic growth you have experienced over the past in light of the global slowdown?

Azerbaijan’s economy has become one of the fastest growing in the world. In 2006 and 2007, Azerbaijan topped the world GDP real growth rate table accounting for 34.5% and 25% respectively. Even in the period of global financial turmoil Azerbaijan managed to keep the high pace of development. Today, share of Azerbaijani economy in the region of South Caucasus accounts for over 73% which shows the economic potential of the country.

Of course, rich oil and gas reserves play important role in the development of Azerbaijani economy and provide great prospects for the country. But it is known that economic development in only one direction might be the reason for negative results in future, considering that oil price trends in international market are unpredictable. Therefore, with embarking on the course of development in the beginning of 21^st century, the diversification of economy and the development of non-oil sectors became key strategic goal for our government.

Today, a large amount of funds are allocated both by public and private sectors in our economy for the purpose to promote the development of non-oil related industries such as agriculture, food processing, tourism, alternative energy, ICT, chemical industry and so on. Just as an example, almost 16 billion USD were invested in the non-oil fields of national economy in 2011, which makes over 78% of total investments. As a result of well-considered policy of Azerbaijani government, in 2011, non-oil GDP growth accounted for 9.4% and this is not the limit of our potential at all. All necessary measures serve one single purpose which is transformation of the country from single-sector economic growth into a diversified and stable economy.

What role will the “green and clean” technology and the renewable energy sector play in your country in the future?

Alternative energy is set to be a future emerging sector, especially after the announcement of 2010 as a year of ecology. Many projects were launched over the course of that year by a State Agency for Alternative and Renewable Energy Sources within the Ministry of Industry and Energy established in 2009.

Solar energy will be promising business in the coming years, as Azerbaijan begins its own solar panels production. The first in Azerbaijan solar production plant with capacity of 30 MW or 120 000 units per year has already started its activity. Another project is launching of the first in the world 5 MW hybrid Experimental Polygon and Training Center in Gobustan which covers solar, biogas, wind and thermal energy sources.

Caspian coast is also a perfect source for wind energy, and pilot projects are being developed with participation of foreign investors. The number of wind farms will be increased, tariffs are being restructurized by the Government and I am sure the subsidies will be provided, as showcased in many European countries.

The declaring 2010 the Year of Ecology gave a start to the implementation of numerous environmental projects. More than that, in December 2011 the President signed a decree on drafting of State Strategy on usage of alternative and renewable energy sources for the years of 2012-2020, which considers implementation of measures to further stimulate the development of sector.

Besides that, in order to improve ecological situation in Baku and surrounding areas “Tamiz Shahar” JSC was established to carry out the works through placement and disposal of the solid household wastes in accordance with the modern standards.

“Tamiz Shahar” JSC was entrusted with the function of management, placement and disposal of household wastes in accordance with modern standards, carrying out this process in an organized manner, as well as improvement of environmental situation of the city and development of this field based on the principles of market economy.

Azerbaijan Export and Investment Promotion Foundation (AZPROMO) being the single organization in Azerbaijan that serves as a “one-stop-shop” for international investors has good knowledge of investment opportunities and market features of the country and provides newcomers to the Azerbaijani market with all kinds of support and information. Foreign investors enjoy AZPROMO advices relevant to doing business in Azerbaijan.

AZPROMO was established in 2003 with the purpose of attracting foreign investment in Azerbaijan. In 2005, AZPROMO’S activities expanded to include the promotion of Azerbaijani exports overseas and the brand “Made in Azerbaijan”. The main aim of AZPROMO is to increase non-oil FDI inflow in Azerbaijan as well as to stimulate strengthening and expansion of the country’s non-oil export capacities. Our main task is working with foreign investors who wish to start business activities in Azerbaijan. AZPROMO provides a range of support services for interested foreign businesses free of charge, including consultancy and logistic services. AZPROMO also works closely with Azerbaijani entrepreneurs, helping them to discover new markets and find partners overseas. Our core function is to build bridges between the private and public sectors of the economy. AZPROMO has representative offices in Georgia, and also in Austria, we are an active member of the World Association of Investment Promotion Agencies (WAIPA), and are on the board of directors of WAIPA covering the South Caucuses and Central Asia.

AZPROMO also serves as a mediator in handling concerns of investors helping to address them and advising the Government of Azerbaijan on improving the business climate. Aftercare services for existing foreign investors who are interested to retain investment, expand it and re-invest are also provided by AZPROMO.