Partner to Trust

As an important investor in the industrial sector in Azerbaijan, how has the Azerbaijan Investment Company (AIC) contributed to the development of industry this year?

The year of 2013 has been immensely successful for Azerbaijan. We saw the launch of our first telecommunications satellite earlier in the year. Some 20% of the 3.2—ton satellite capacity will be used to meet local demand in Azerbaijan, whereas the remaining 80% will be offered for international commercial purposes. As recently as on December 17, 2013, Azerbaijan hosted an official signing ceremony of the agreement on construction of the $45 billion Trans-Adriatic Pipeline (TAP) for natural gas deliveries to Europe, which will serve to enhance Europe’s energy security—the 520-kilometer Southern Gas Corridor will carry natural gas from Azerbaijan through Turkey, Albania, and Greece to Italy. TAP, a project of Norwegian Statoil, Swiss Axpo, and German E.ON Ruhrgas, is due for completion in 2019. The total project cost is approximately $2.2 billion. The annual capacity of the pipeline will be 10 bcm, while in the future it will reach 20 bcm. The jewel in the crown for AIC though was the Baku Shipyard Company LLC, a new 62-hectare shipyard that is jointly owned and developed by the State Oil Company of Azerbaijan Republic (SOCAR), AIC, and Keppel Offshore & Marine Ltd. (Keppel O&M), a Singapore-based world leader in the maritime industry. It was inaugurated by the President of Azerbaijan, HE Ilham Aliyev, on September 20, 2013. The new yard is designed to undertake construction of a wide range of specialized vessels and merchant ships, including subsea vessels, anchor handling tug/supply vessels, and multi-purpose offshore support vessels such as platform supply vessels, as well as tankers and cargo vessels. The yard also has ship repair and conversion capabilities. Although Keppel O&M owns just 10% of the yard, it has full responsibility for management and operation. The largest shareholder, at 65%, is SOCAR, followed by AIC, which owns 25% equity in the company. Phase I of the yard was built at a cost of $470 million. When operating at full capacity, it is able to undertake up to 100 repairs and conversions per annum and is estimated to achieve an average annual steel output of 25,000 tons. Plans for Phase II include the construction of a graving dock with added facilities for offshore projects. With highly skilled human resources, world-class expertise and know-how, as well as well-structured capital investments, we will not have to wait too long to see the shipyard becoming a globally recognized center of excellence in shipbuilding, repair, and conversion. Baku Shipyard Company LLC will be serving not only local demand in Azerbaijan, but also that of the littoral countries of the Caspian basin, as well becoming an important production hub for maritime industries in the region.

In what ways is the government helping to support agricultural producers in Azerbaijan?

With over a 6% of share in GDP, agriculture is a major contributor to economic growth, diversification, food security, and poverty reduction, and takes an obviously important position amongst priority sectors for state investments in Azerbaijan. Agriculture in Azerbaijan is very diverse due to geographic and climatic conditions. The fertile lands, abundance of water, and climatic diversity create favorable conditions for a strong agricultural sector. Azerbaijan has 4.7 million hectares of agricultural land, which comprises over 50% of its total territory. Approximately 38% of the agricultural lands are arable. Crop production accounts for around 52% of agricultural production, with livestock farming making up the remaining 48%. Meanwhile, the food-processing sector constitutes an important component of the national economy and accounts for around 37% of total manufacturing industry. Agriculture is the largest employer in the country, accounting for around 40% of the active labor force, while 99.7% of the produce is generated in the private sector. Azerbaijan trades intensively in agricultural and food products. Traditionally, the main destination and the largest consumer of agricultural and food exports from the country has been the CIS market, but in recent years this market has expanded to include many other countries in Europe, Asia, and the Americas. The main export products are fresh vegetables and fruits, vegetable and animal oils, sugar products, tea, processed vegetables and fruits, beverages, tobacco products, cotton, and others. To promote the further development of business in this sector, the state has been encouraging the introduction of different financial and non-financial schemes. Agricultural producers do not pay any taxes beside land tax, which varies depending on the quality and location of the land. Businesses engaged in the food processing industry are subject to the statutory tax regime, which is still quite competitive. All companies registered in Azerbaijan, even those with 100% foreign interest, may benefit from numerous subsidies, discounts, and other privileges provided by the state. Such subsidies and discounts can scale up to 70% of the value of goods, products, and services producers may require in executing their business. The state has established a strong institutional mechanism aimed at sustaining economic growth and stimulating production and development in the non-oil sectors of the national economy. Recent disbursements of soft loans in the agricultural sector by the National Entrepreneurs Support Fund total over $930 million. As another part of the institutional mechanism, the establishment of AIC was a showcase of one of the first public-private partnership (PPP) initiatives by the government. Projects in agriculture add great significance to the structure of our portfolio, coming second only to industry and representing nearly a fifth of our total investments. So far, AIC has invested over $28 million in various projects in the sector. One such project is Aghstafa Agroservice. Launched in 2012 and with an overall value of just under $6 million, a quarter of which is owned by AIC, the project serves the purpose of establishing an advanced agro-technical services facility to help improve productivity and promote the efficient use of soil. Having partnered with RAO Global Group GmbH in this project, we at AIC are pleased to have been able to facilitate local farmers to access modern technology and machinery for daily use. Yet, another project AIC has invested in in the sector is Davachi Broyler, a poultry production facility with an overall value of over $60 million. The AIC investment of about $15 million back in 2010 helped the renovation and capacity expansion of one of the largest poultry production farms in Azerbaijan. The facility today occupies 135 hectares of land and employs over 800 people, who contribute to the production and processing of poultry products in excess of 13,000 tons a year. Azertokhum is one of the greenfield projects AIC joined in 2010. The $24 million investment was aimed at the construction of the first modern seed processing plant and granary, and the cultivation of highly reproductive, elite, and super-elite seeds using advanced technologies. Three years later, Azertokhum today occupies a 70,000 sqm of territory in the central part of Azerbaijan. It has a production capacity of 86,400 tons of seeds per annum. The plant also has dry and wet grain silos, as well as a drying tower with a capacity of 36 tons and a 10-ton-per-hour packing unit. These, and the other new projects that we are currently considering, help to put AIC in a privileged position as a part of the mechanism established to support the non-oil sector of the national economy.

What are the benefits for companies to co-invest in projects together with the AIC?

AIC offers extensive knowledge of the local economy, experience in investing in projects of varying scale and magnitude, in-depth knowledge of the local legal framework, a value-added investment approach for maximum returns, joint due diligence and cost sharing pertaining to investments evaluation, sourcing additional funding from a range of internationally renowned lending institutions, and an extensive network within public and private sectors. In all the projects we invest in, AIC always remains a minority shareholder with full representation at the board level. Being a state-owned equity investment fund, AIC’s engagement in any project is a result of a very long and hairsplitting due-diligence process, detailed feasibility study, and market research and fulfillment of rather specific AIC requirements by the investee companies, which include submitting independently audited financial statements, adherence to international financial reporting standards, and an established tradition of corporate governance best practices. For foreign investors, partnering with AIC in any project is an additional reassurance of the safety of their investments. Local partners, on the other hand, benefit from AIC’s outstanding expertise and unlimited access to a vast database of globally accepted innovations, know-how, and new technologies on top of the additional funding that they require to ensure the successful execution of the project. Foreign or local, AIC partnership offers an overall winning formula to all co-investors in our successful projects.

What has your collaboration with AZPROMO consisted of this year?

AIC and AZPROMO are like two hands of the same clock. They move in unison to point at the opportunities for investors in the country, as well as export potential for local businesses, and offer a reliable partnership for those who wish to join the story of economic success that Azerbaijan showcases to the world. Our colleagues at AZPROMO are doing a tremendous job organizing a great number of successful events in Azerbaijan and overseas, while also creating opportunities for local businesses to be heard beyond national borders. They are also encouraging potential foreign investors to join in by providing them with a comprehensive insight into the endless opportunities that help to firmly establish a prominent spot for Azerbaijan on the global investment map. Over the past year alone, AIC and AZPROMO have participated together in various forums and B2B gatherings with representatives of various businesses from Austria, Italy, Germany, the US, the UK, Russia, China, Slovenia, Saudi Arabia, Kazakhstan, and so on. Such events held in Azerbaijan as well as overseas have given AIC several potential promising leads that we are considering at present.

Azerbaijan has reached out to a number of relatively new partners this year. What are your expectations regarding the contribution of foreign investment and trade to economic diversification?

Last year was particularly productive in terms of building new partnerships with foreign investors. Here, I would like to refer to a quote by Mark Zuckerberg, who defined the basis for Facebook’s partnership strategy thus: “We build the social technology, they provide the music.” In Azerbaijan we offer mutually beneficial and potentially highly profitable investment opportunities, and a dependable partnership, in return of globally attested and recognized new technology, know-how, and innovative ideas that will serve our goal of fostering the development of the non-oil sector of the national economy.

Azerbaijan will be the host of the first European Games in 2015. What will that mean in terms of investment in the economy?

The forthcoming European Games is just another story of success in Azerbaijan’s effort toward gaining a well-deserved reputation as a host country for large-scale international events. Each such event opens up new development avenues in Azerbaijan, including the construction of multiple venues for various sports and games, such as a new football stadium with a retractable roof to house 65,000 spectators, a state-of-the-art National Gymnastics Arena with a seating capacity of 12,000 people, a new Baku Aquatic Centre, athletes’ villages, roads, and other related infrastructure. The government has spared no expense in the development of this infrastructure, which will serve local people and attract a good number of returning visitors, thereby helping to boost tourism for many years beyond 2015.

© The Business Year – January 2014