TBY talks to Francis Delaey, Head of Office at the European Bank for Reconstruction and Development (EBRD), on the EBRD’s role in the development of the Azerbaijani economy.
TBY How do you evaluate the EBRD’s contribution to the development of the Azerbaijani economy since the start of its operations here?
FRANCIS DELAEY We started our activities in Azerbaijan in 1991. Since then we have invested about $1.6 billion in 118 projects in various sectors of the country’s economy. Approximately 46% of our current portfolio is invested in the energy sector. The EBRD has financed all the landmark projects in Azerbaijan’s energy sector such as the Baku-Tbilisi-Ceyhan (BTC) pipeline, the Azeri-Chirag-Guneshli (ACG) oil field and the Shah Deniz gas field. We also provide financing to Azerenerji, the state-owned power utility, which is our largest client in the country. Around 23% of our portfolio is invested in the corporate sector. Most of our clients there tend to be local companies. These projects are often quite small by our standards, with values of less than $5 million. However, we have one large client called Garadagh Cement, which is part of the Holcim Group. Recently it decided to build a dry kiln to replace its four existing wet kilns. This is a large investment project of over €300 million of which the EBRD is providing €120 million. The financial sector represents 18% of our portfolio. We work with nine banks, five microfinance institutions, and three non-bank financial institutions. The financial sector is where we are most active, having completed more than 70 projects. The remainder of our portfolio, around 13%, is invested in the infrastructure sector. We financed the railway company, road rehabilitation, and AzerSu, Azerbaijan’s water utility. Over the past five years we have invested on average $150 million in 15 projects per year.
When we came to Azerbaijan in 1991 we were determined to support the process of economic transition. Azerbaijan’s achievements over these past 20 years have been impressive and I would like to use this opportunity to reaffirm our commitment to Azerbaijan.
What tools are you developing to encourage private sector involvement in non-prime sectors?
Although 46% of our current portfolio is invested in the energy sector, our new country strategy for Azerbaijan—which was adopted in December 2010—aims to support the diversification of the economy. In principle we are no longer involved in the oil and gas sector because a lot these projects can be financed through commercial means. The EBRD’s mandate dictates that we not displace private sector involvement, but instead play a supportive, additional role by investing alongside investors, local or foreign. In Azerbaijan we aim to develop the non-oil economy. We do that by investing in the corporate sector, supporting infrastructure development and deepening financial intermediation by providing financing to local banks and microfinancing institutions that are specifically geared towards SMEs. In addition to providing debt and equity financing we also provide consulting services, often financed through donor grants.
How will this strategy pan out in 2011?
We are currently assessing several projects in the agribusiness sector. Among others we are considering providing long-term debt financing to help expand existing production facilities at a dairy producer, a food wholesaler, and a soft-drink producer. We are also examining investment opportunities in the manufacturing and service sector. We are negotiating with a leading consumer goods retailer, a medical service provider, and a company that provides chemical mixes for BP. The remaining projects will mainly consist of SME credit facilities to local banks and microfinance institutions. Among the more noticeable transactions in the financial sector, the EBRD plans to support the emerging insurance and consumer finance sectors and participate in Azerbaijan’s first convertible bond issue. We are also exploring the possibility of supporting Azerbaijan’s rapid infrastructure development. The World Bank and the Asian Development Bank are very active in this area, and we would like to support infrastructure developments in a similar way.
How can Azerbaijan benefit from integrating more into the global economy?
The long-term development of Azerbaijan’s non-oil economy depends on the country’s ability to integrate into the global economy. WTO accession would support economic diversification by creating a stable and predictable framework for importers and exporters, resisting protectionist reflexes and signaling a desire to deepen trade in non-oil goods and services. Closer integration also means becoming a more open economy and attracting foreign investment. Foreign investment is not just about money. Foreign investors bring know-how, set new benchmarks, and increase competition and productivity, which leads to lower prices and better products and services. Azerbaijan boosted its oil and gas production by attracting foreign multinationals and as a result became a very wealthy country. The country should mobilize foreign investment in a similar fashion to boost its non-oil economy.
However, this is not directly our mandate, which is to facilitate investment whether foreign or local. Of course, if there are foreign investors willing to invest in Azerbaijan we would be happy to support that investment and vice-versa we are accompanying Azerbaijani companies who are investing abroad. In that way we are also helping Azerbaijan to integrate into the global economy.
In your view, what is the EBRD’s legacy so far as it enters its third decade of operations?
We’ve just marked the 20th anniversary of the inaugural meeting of the EBRD’s Board of Governors. In the 20 years since the EBRD started its activities, our institution has achieved a lot in support of economic transition. Our success is partly due to our unique model. The EBRD is owned by governments and international organizations, yet its main task is to promote private businesses. We regard change and development as our goals, but due to our ownership structure we are also able to serve as an anchor of stability in a sometimes rapidly changing and often still unstable environment. Transition is not a mere catchword for the EBRD, but our institution’s ultimate purpose.
The results are impressive. By the end of 2010 the EBRD had committed over €60 billion and mobilized €115 billion in third-party financing for overall investments with a total value of nearly €180 billion in our countries of operations. What is even more remarkable is that the EBRD has consistently been able to deliver on its mandate. With our investments we are pursuing clearly defined goals. It is a testimony to the strength of the EBRD that our institution in its 20th year of existence has demonstrated a high degree of flexibility and adaptability.
What is your general outlook on the economy here for the next few years to come, and in what direction will your attention be focused?
In the medium term, Azerbaijan will continue to prosper due to its oil and gas revenues. However, to remain successful in the long term Azerbaijan needs to do two things. Firstly, it needs to manage its oil wealth transparently so that it can pass it on to future generations. Azerbaijan deserves credit for being the first country to pass independent validation under the Extractive Industry Transparency Initiative (EITI). However, public expenditure could be improved. In this respect, state-owned public utilities should be encouraged to operate in a more accountable manner and public procurement should be strengthened to use public funds more efficiently.
Secondly, Azerbaijan needs to implement the necessary structural reforms to promote long-term sustainable growth. That growth will no longer come from oil and gas. Instead, it needs to come from the non-oil economy. Earlier I already mentioned some of these reforms: creating a business environment conducive to investment, opening up the economy, and attracting foreign investment. Of course, there are many other reforms that should be implemented in parallel, but in the economic sphere I believe these are the critical ones.
If these two requirements are met—transparent management of oil wealth and structural reforms to promote long-term sustainable growth—Azerbaijan will have a bright future for generations to come. The EBRD will continue to support Azerbaijan’s economic diversification and assist it in meeting these two requirements.
© The Business Year