2 BILLION OF JUSTIFIED INVESTMENT

In order to build a sustainable economy, Azerbaijan has identified its priorities as economic diversification and development of the non-oil sector. These priorities will dominate the country's cooperation with international organizations. The World Bank has expressed readiness to support the country's efforts in this direction, and a new strategy covering the period until 2015 has been developed.

With the aim of turning Azerbaijan into a country with a high level of income by 2020, the World Bank has suggested changing the approach to the country's development due to the ongoing instability on the world's financial markets and a gradual stabilization of Azerbaijan's oil revenue.

The World Bank's country manager for Azerbaijan, Joseph Owen, shares with R+ the bank's plans in Azerbaijan.

- Could you update us on the preparations for the second top-level forum and how will it differ from the first meeting held two years ago?

We are actively involved in organizing the second forum on long-term economic development in Baku, which will be held on 17-18 October and attended by senior officials of the bank. The forum will focus on improving the business environment in Azerbaijan and the development of new viable institutions that are needed in a market economy.

We have assisted in the invitation of seven to eight internationally known experts who will hold discussions with the Azerbaijani government's economic team on how the economy is developing andwhat reforms would make sense.

The first forum allowed us to begin a constructive dialogue on the diversification of Azerbaijan's economy. Using the experience of Ireland and Slovakia, it was proposed that the country prepare its own model of economic growth and balance the dependence on domestic and foreign markets, because against the background of the changing economic environment and the volatility of oil prices in the wake of the global financial and economic crisis Azerbaijan should dramatically increase its non-oil exports in the next 10 years.

International experience shows that this can be achieved only through a significant increase in direct foreign investment. During the first forum local businessmen highlighted the most important elements for attracting direct foreign investment with the aim of introducing new products and innovation, including the preservation of macroeconomic stability, creation of a dynamic business environment and improvement of the population's educational capacity.

An assessment of progress and results in these areas will be given and a detailed discussion held during the second forum. 

- Azerbaijan is conducting extensive reforms to improve its business environment and develop the non-oil sector. What would you recommend to further improve the country's attractiveness to foreign investors?

The main issue for Azerbaijan is the reduction of economic dependence on the oil factor. No-one can say with certainty over what period of time the country will have a revenue windfall - for five, 10 or 15 years. And the main solution to this problem was the establishment of the State Oil Fund, whose mission, among others, is to preserve a certain share of the proceeds for the next generation. As of today, the State Oil Fund has accumulated approximately $30billion, and over 10 years the fund's resources will exceed $100 billion.

The government also acknowledges that further economic growth requires non-oil sector development and economic diversification. The oil sector can provide a maximum of 70,000-80,000 jobs in the country, while Azerbaijan has huge potential to create jobs in the non-oil sector. One of the key areas for major investment is agriculture (production, processing) and agribusiness, as it contributes to the creation of new jobs outside of Baku.

The second important aspect of achieving economic diversification is to deepen institutional reforms which should cover a broad sphere: from institutions ensuring property rights to the tax and customs systems. It should be acknowledged that there have been some structural changes in this field in recent years.

In addition, the country is in need of institutions that create the conditions for competition; the country needs to develop its judicial system.

The third important area is the comprehensive reform of the education system at all levels. In connection with this, the president decided a month ago to establish a commission to prepare a national strategy on educational development in Azerbaijan. I think that all these measures will contribute to maintaining sustainable economic growth in the country.

Today, Azerbaijan also needsa direct debate between the private sector and government so that entrepreneurs could share their needs and initiatives.

Most countries have a successful experience of establishing investment councils or councils of entrepreneurs that include 10-15 people. Such associations represent the interests of all investors and the private sector. They meet with the president and the economic bloc of the government once or twice a year to exchange views and information about the most important issues.

I believe that it would be useful to set up such a council in Azerbaijan in the near future. But this initiative must come from the entrepreneurs themselves. The government can benefit from working together with the private sector to improve the investment climate in the country.

- What are the World Bank's priorities in Azerbaijan and how is the new strategy being implemented?

The bank's new strategy is based on such priorities as strengthening the non-oil sector, including the development of infrastructure and agriculture. In addition, the bank's activities will also focus on enhancing the effectiveness of social services, including health, education, social protection and water supply.

The World Bank, in cooperation with other international financial institutions (ADB, IDB), takes an active part in the program to improve water and sanitation systems in the country. To achieve the objectives set out by the president,every district of Azerbaijan must be provided with a good water supply and sanitation system before the end of 2013. This requires work to be stepped up.

We consider the transport sector also very attractive, and theassistance program in this area has a double effect. First, the improving relationship between regions is in the interests of the population. On the other hand, a transport corridor between Central Asia and Europe is emerging. Let me note that the government believes that it was the World Bank's assistancein the development of roads in the country that has led to a very good systematic approach to the field of transport and road infrastructure.

 At the same time, we provide assistance in the energy sector and will soon complete a major project on the management and transmission of electricity. I think that our bank is closely involved in the modernization of both physical and social infrastructure. There is a very constructive dialogue between the bank and the government.

But most importantly, our work yields results, and we expect that people will benefit from the investment of $2 billion. We seethese results today whenwe visitthe country's districts. We recently visited Saki and Agdas where the construction of two hospitals with financial support from our bank is nearing completion. Over the next year at least eight to 10 districts will have a completely new system of sewage and water supply. And these are just the districts we are financing. Other districtsare also using the methodology we have prepared; necessary environmental and social studies have been carried out with our assistance.

Under the new strategy the bank has already approved three projects and $125.4 million has been allocated for their implementation. Of this amount,$80 million has been approved for a project to support the development of water-users associations of Azerbaijan, $9.2 million for the modernization of the judicial system and $12 million for stockmarkets. The signing of loan agreements on these projects is expected in the near future.

Besides, four new projects are being prepared for approval by the bank's Board of Directors in 2012. This includes economic development of internally displaced persons (there are plans to allocate $50 million), construction of a deepwater sewage effluent from the HovsanWWTP to the Caspian Sea ($80-90 million), continuation of the Azerbaijan Rural Investment project ($30-50 million) and Phase III of the agricultural lending program ($30-50 million).

Incidentally, now the World Bank is also conducting an analysis of the technical assistance provided to the Azerbaijan Mortgage Fund. After the general framework has been determined, the bankmay providesupport and, depending on the needs, the form of assistance will be identified - a loan or technical assistance.The technical analysis will take six months to a year to complete.

- Is the bank considering working with Azerbaijan in other areas? 

The bank's current portfolio in Azerbaijan consists of 20 projects worth $2.3 billion.Azerbaijanhas been a member of the World Bank since 1992. To date, the bank has allocated $2.9 billion to Azerbaijan to finance 43 projects, which puts the country's portfoliointo third place in the world after Turkey and Kazakhstan.

At present, our strategy is to focus more on areas that have already achieved success, to improve the implementation of ongoing projects, but in the future we may identify new areas of cooperation.

By the end of 2012, we plan to conduct an interim evaluation of the existing strategy of cooperation with Azerbaijan. The evaluation will be conducted to determine the need for change.

As evident from the strategy, we are balancing our program in a new way. Along with providing funds, we are interested in supporting the government in carrying out economic and sector studies and analyses, analysingpolicies andtransferring the best practices of other countries. An example of this is the participation of our bank in the discussions on reforms in education, health care, pensionsand agriculture.