TBY talks to Afgan Isayev, Executive Director of the Azerbaijan Investment Company, on attracting investment to Azerbaijan.
TBY Since its foundation in 2006, how has the Azerbaijan Investment Company (AIC) assisted in the evolution of the non-oil sector in Azerbaijan?
AFGAN ISAYEV The Azerbaijan Investment Company is a state-owned equity fund established in March 2006 by Presidential decree. The sole purpose of the AIC is to provide termed equity injections into important green and brown field projects in the non-oil sector. Through this mandate, we are supporting the diversification of the Azerbaijani economy. The initial capital was provided by the State Oil Fund (SOFAZ). AIC is managed by a board of directors, the chairman of which is the Minister of Economic Development. In addition to making mandated investments, we also work to attract foreign investors who would like to establish a presence here. To give you an idea of our projects, we have invested in two projects together with the European Bank for Reconstruction and Development (EBRD), including the Garadagh Cement Plant, which is the largest cement producer in Azerbaijan. AIC has a 10% holding, while a further 10% belongs to the EBRD and 70% belongs to Holcim, another global player. These proceeds are currently being invested into the development of a new facility that will allow production using the latest technology. The second project we have cooperated with the EBRD on was an investment in M-Pro, the largest dairy producer in Azerbaijan. AIC owns 20% of that company, while EBRD owns 10%. These capital injections are being spent on the construction of a new milk processing facility. These two projects represent our goal of importing new technologies and applying the best international practices. This will help to develop the local skill base—another crucial goal of this organization.
How does AIC work to attract foreign investors specifically?
Azerbaijan has become the most attractive country in the region due to its political, economic, and social stability. AIC cooperates with the Azerbaijan Export and Investment Promotion Foundation (AZPROMO), which acts as our front office, organizing bilateral business forums and exhibitions. When investing in a project it is important to attract investment partners that have experience and successful track records in managing similar facilities and businesses. In this case, we can award management contracts. The second option is to team up with investors on the development of a project and bring in management teams for fixed periods. Currently, one of the largest projects we are working on is the construction of the only modern shipbuilding and ship repair facility on the Caspian Sea. It is a project worth over $400 million, and we own a 25% stake while 65% belongs to the State Oil Company and 10% belongs to Singapore’s Keppel Offshore and Marine Company. It’s a large and reputable company that is experienced in managing ship repair and shipbuilding facilities globally. In addition to the equity investments, Keppel will be awarded the management contract for the next 25 years. Over the next 25 years that firm will gradually train local experts who will eventually take over the management of the facility. This is a typical operational mechanism for AIC. Azerbaijan needs such a shipbuilding facility, and we feel this investment will be crucial for the future of the economy.
How geared toward promoting exports are your investments?
One of our key targets is to promote businesses that will produce export or import replacement orientated products. To give an example, AIC participated in a project to develop the first salt production facility in Azerbaijan. Historically, the country had imported salt from Russia, Ukraine, and Turkey. We now have enough raw materials to refine and produce our own. To realize this project, we teamed up with the largest holding company in the region, Azersun Holding. The plant was commissioned in July 2010. This project serves as a great example of how we can replace imports by creating better quality local production.
Is AIC looking to diversify its operations over the coming years?
AIC is looking to become something of a fund of funds. We believe that by partnering with the private sector and international equity players, we can better allocate funding to various sectors and sub-sectors of the economy where it is needed the most. For this reason, one of our tasks is to establish funds in Azerbaijan that can invest both domestically and internationally. The country’s reserves of $30 billion put us in a great position to begin such a journey. In that regard we have already begun making progress. In 2008, together with the Islamic Development Bank (IDB) and the Islamic Corporation for the Development of the Private Sector (ICD), we established an equity fund in Azerbaijan: the Caspian International Investment Company (CIIC). AIC owns 24.1%, and 50% belongs to the IDB and ICD. The rest belongs to various Middle Eastern investors. The purpose of this fund is to take advantage of the many opportunities that are present in the domestic non-oil economy. Currently, three projects have been invested in by the CIIC, and great success has been achieved.
What sectors do you believe offer the best opportunity for foreign investors in Azerbaijan going forward?
I would like to highlight the agriculture sector as a key investment field over the coming years. Due to Azerbaijan’s geographical location, it is possible to grow almost everything. Historically, we have been supplying our neighbors, including Russia and Kazakhstan, with fruit, vegetables, and meat. Now, we are taking it to an industrial level—and this is where the potential lies. Food processing is also another key investment sector, and AIC is interested in targeting this area. As a result, packaging is also going to be an important growth segment in the coming years. After that, I would like to highlight alternative energy as a growth sector. Taking into consideration that the State Agency for Alternative and Renewable Energy Sources was established recently, once its legal base is up and running, AIC and foreign investors will be able to take advantage of the environment to launch new projects in the renewable field. In addition, AIC is interested in recycling projects, including the recycling of tires, car batteries, and paper. Tourism is also an obvious choice, and we have recently been mandated to begin investing in the country’s tourism infrastructure. The final sector I would like to highlight is logistics, which will also be a growth sector, attracting investment aimed at turning the country into a regional transport hub. Furthermore, the industrial production sector will always be interesting for AIC to consider.
How did the global economic crisis impact Azerbaijan as an investment destination?
The crisis made us more efficient in managing our economy. For this reason Azerbaijan was able to propel itself into a position as one of the top destinations for foreign investment. This is also boosted by its rich natural resource reserves that are great for local production. In addition, Azerbaijan’s strong infrastructure and young population also helped it stave off the worst effects of the crisis, and are its greatest assets going forward.
What is the next step to further encourage foreign investors to come to Azerbaijan?
The government is keen to invest and encourage investment and provides all types of support. We are now thinking about establishing industrial parks based on best international practice. This will help SMEs to develop themselves very quickly and efficiently. The Ministry of Economic Development, based on the recommendations of the President, is planning several projects of this nature in various cities, where the government will provide utilities such as gas, water, and electricity, as well as prepare the sites, create administrative buildings, and install all the necessary infrastructure that enterprises will need to begin operating. This is the next phase of our development, and AIC will be investing in these as well going forward.
What regulatory challenges remain to make Azerbaijan more attractive to foreign investment?
Regulations and procedures are continuously changing. Many things have been tried in Azerbaijan, including incentives and tax exemptions, and it is all about waiting and watching how foreign companies respond. Feedback can then be assessed and changes can be made. I had previously mentioned alternative energy as a future growth sector, and the regulations surrounding this sector are still developing, and we are waiting anxiously to find out what the State Agency for Alternative and Renewable Energy Sources will offer in terms of incentives. I can highlight a recent development, whereby the government provided additional incentives to investors. Certain equipment being imported into Azerbaijan for agricultural purposes will be VAT and custom duties exempt. This incentive was enacted in March 2011 will continue to stimulate the sector.
© The Business Year