INVESTMENT FLOW

The stimulation of the sphere of telecommunications and information technology is identified as a top priority for the development of Azerbaijan in the near future. For financial and technical support for the initiatives of private companies existing in the IT sector, the State Fund for the Development of Information Technology is being set up in the country. The Ministry of Communications and Information Technology (MCIT) has already identified the priority objectives of the Fund for the next year and will soon finalize the formation of its structure and statute.

From producer to consumer

Azerbaijan has been taken one of the first places in the former Soviet Union in terms of ICT development for many years. Over the past decade, the total state revenues from telecommunications services have increased by 100 times, exceeding, according to preliminary estimates, $ 1.5 billion. Specifically, at the end of last year, the telecom sector and the postal service provided almost a 12-per-cent income growth while the amount of public investment in the sector reached $ 412 million.

"In the next ten years, the government of Azerbaijan is planning to invest about $ 3.5 billion in a variety of ICT projects," Minister of Communications and Information Technology Ali Abbasov said. "The country has developed and is implementing national programmes for the development of Fibre to Home technology, space technology, cyber safe e-government, digital TV broadcasting, broadband infrastructure in the regions, and so on."

At least $ 1 billion will be invested in the implementation of measures to ensure information security, fight cybercrime and develop e-government in the next decade. Approximately the same amount will be spent on the launch of satellites and the development of the space industry. Public expenditure on the creation of the Regional Innovation Zone (RIZ) is expected to reach $ 500 million, while the development of digital television will require another $ 100 million.

About $ 1 billion will be set aside for the implementation of the state programme for the development of Fibre to Home technology, the development of a network of landline and wireless communications, the establishment of broadband infrastructure in the regions, etc. In particular, the introduction of Fibre to Home technology envisages that each house or public building should be provided with broadband access to the Internet via fibre-optic lines. Investment in this programme will be $ 342 million, and up to 40 per cent of the investment will be reinvestment. A comparable amount of investment should also come from the private sector. Thus, by 2020, the volume of investment in the information and telecommunications sectors should reach an annual level of $ 800 million.

It is noteworthy that the main goal of the expected investment growth is high-quality transformation of the domestic ICT sector, i.e. in the next few years, the domestic market, which is now a primary consumer of information technology, should become a manufacturer and exporter of IT hardware, software and services. And the most important role in the development of the ICT sector is assigned to relatively small private companies engaged in research and the practical implementation of innovative technologies, software structures, systems integrators, etc.

In order to effectively support the private and public sectors involved in the ICT sector, on 15 March of this year, President Ilham Aliyev ordered the creation of a special structure - the State Fund for the Development of Information Technology under the auspices of the MCIT, which is charged with providing financial, technical and organizational support to the development of IT projects. "The work on the formation of the State Fund for the Development of Information Technology has almost been completed and the development of the fund's statute is currently nearing its end. We expect that the decision on its approval will be made in the near future," said Deputy Minister of Communications and Information Technology Elmir Valizada.

We need incentives

It is expected that the fund will begin to finance major projects in January of next year. And by the end of the year, the Cabinet of Ministers is expected to make a positive decision on the proposals of the MCIT to provide local IT companies with special benefits in the tax and customs areas.

Despite the rapid development of the ICT sector in Azerbaijan, the export of science intensive products is far behind their import. One reason for this disparity is the lack of special preferential treatment, which stimulates export by local IT manufacturers. Today, the fee for imported computers is 3 per cent, while the fee for the import of components for their assembly is from 10 to 15 per cent, says Minister Ali Abbasov. The latter is of little help in localizing production in the country. The MCIT proposes to reduce customs duties on the import of components for high-tech products, as well as to optimize the tax laws for developing innovative businesses and attracting foreign investment. Finally, through transfers from the State Fund for the Development of Information Technology, the needs of IT companies for low-interest and long-term credit resources and research grants will be fully satisfied.

Among other things, the fund will provide direct financial support to promising "start-up" projects (start up is a business idea designed for quick implementation) in science and technology. In international practice, the participation of small innovative enterprises in the programmes of such funds allows them to turn their product from a scientific idea into a sustainable business that is attractive to domestic and foreign investors. Most likely, the Azerbaijani fund will support initiatives in the field of ICT through venture financing, that is to say by forming a starting base for the development and production of high-tech products. To this end, international experts with extensive experience in the venture financing of ICT projects will be involved in the management of the fund.

World practice shows that venture financing is one of the most common and effective forms of developing the ICT sector. It is noteworthy that two years ago, venture funds in North America, Europe, India and China invested $ 7.8 billion in the development of ICT companies, and this year, a 20-per-cent increase in funding is expected in these countries. There are several reasons why investors in the post-Soviet states are also willing to invest in IT start-ups: the IT industry emerged in the 1990s and over the past two decades, it has formed a good base, which can be attractive to local and foreign portfolio investors today. And among recipients of venture investments, there are mainly organizers of Internet projects, as well as companies specializing in software development. This is due to a relatively low initial amount of investment (often tens of thousands of dollars) for their promotion, potentially high returns and very fast profitability, and transparent business models of such projects. Most likely, the Azerbaijani State Fund for the Development of Information Technology will not disregard domestic software companies along with funding larger production activities in the field of information technology.

Another objective of the fund will be an increase in the scale of scientific research and training of human resources. This expansion of the fund's functions is welcomed not only by business, but also scientific circles in our country. "We strongly welcome the decision to establish a dedicated state fund in our country," said the director of the ANAS Institute of Information Technology, Rasim Aliquliyev. "I believe that its funds will be available to all participants of the ICT market, which will allow for more timely support for innovative projects and create a favourable environment for attracting foreign capital. The IT sector is rapidly changing, and this upgrade process requires financial support. And it's not just about technology, but also about the development of human resources, as there are still some voids in this area," he said.

According to many experts, the creation of the State Fund for the Development of Information Technology and the successful financing of MCIT initiatives will become a turning point in the development of the domestic telecommunications sector.