REAP AS YOU SOW

With the onset of the global economic crisis, which significantly reduced production and consumption in the agricultural sector, fundamentally new problems emerged in the global market. There is currently a slowdown in prices for agricultural raw materials, which provided a relatively high level of profitability over past years. Costs and risks in agriculture are rising and this leads to a reduction in the volume of bank loans, or tighter conditions. Fortunately, these processes have generally not affected Azerbaijan, where preferential lending to the agro-industrial complex (AIC) remains the cornerstone of the government's economic policy.

For a number of reasons, preferential financing of agricultural development in Azerbaijan is carried out mainly by the state and partly by international financial organizations and various donor projects within the framework of intergovernmental agreements. In the past 15 years alone, the development of the agrarian sector in our country has been supported by more than twenty international projects, including the European Union - TACIS, the World Bank, the German GTZ organization, PSO programmes of the Dutch government, the International Fund for Agricultural Development (IFAD), as well as the governments of Japan and several other countries. Typically, these financial resources are allocated to support specific infrastructure projects in various sectors of the agricultural industry or pilot programmes aimed at developing agricultural communities and forming cooperatives and credit unions.

International support

A good example of such cooperation is the work of the IFAD in Azerbaijan. Through this international organization, four major loans totalling 49.3 million dollars have been allocated since 1997. The most important undertaking of the Fund was the project "Agricultural development of mountainous and highland areas" with a total budget of approximately $10.3 million, which was completed in late 2007. Thanks to the implementation of this pilot project, numerous farming credit unions were established in the Qabala, Lerik, Gadabay and Sahbuz districts, a micro-credit programme for farmers was implemented, assistance was provided in the establishment of centres for the artificial insemination of cattle and for the development of animal husbandry, beekeeping, seed potato-growing, the planting of orchards, as well as assistance in creating mini-enterprises processing agrarian products. Another loan agreement for $17.9 million was signed with the IFAD in 2008; these funds were aimed at developing irrigation systems and increasing the productivity and competitiveness of small farms in Agstafa, Qazax, Samkir and Tovuz. From 2010-2015, the Fund intends to implement two similar projects for the development of the agrarian sector in several regions of Azerbaijan, and it is in ongoing negotiations with the government.

The Islamic Development Bank (IDB) is also ready to give financial support to the mountainous regions of Azerbaijan. It will allocate $30 million for this purpose. Talks are ongoing with the Azerbaijani government.

However, most loans for the agrarian area have been received from the World Bank (WB) - cooperation here began in 1997 with the start of the project "Privatization of Farms". Under this project, more than 23,000 farmers from six pilot areas received counselling and, most importantly, $28.8 million in financial support from the WB. The distribution of funds and project management for the next seven years were entrusted to the specially established National Agency for Assistance to the Private Sector in Agriculture. The structure has since been renamed the State Agency for Agricultural Credit (SAAC) and operates under the Ministry of Agriculture. The successful experience of this project prompted the government to implement, together with the World Bank, a more ambitious project to loan to farms and develop appropriate infrastructure projects. In 2000, the parties signed an agreement on a new project named "Development and Crediting of Agriculture". The project is divided into three phases and the World Bank plans to provide than $100 million for its implementation: the first phase of the project started in 2002 and ended in June last year and, overall, $33.6 million were allocated for its implementation. The project was aimed at crediting farms through credit unions, registering farmers' real estate, establishing regional offices for land registration and counselling centres, as well as assistance in the development of veterinary services. The second phase should start soon and it will also be implemented within four years, while the WB's share in this project is $28.4 million. These funds will be used to finance leasing companies and commercial banks, through which special loans will be allocated to enterprises for processing agricultural produce.

A number of other international donors preferred to finance the agricultural sector directly, using the potential of banks and non-banking financial institutions. Such lending schemes were preferred, in particular, by the German Development Bank KfW, which last year expanded direct funding to our agricultural sector within the framework of intergovernmental agreements concluded in August 2006. The KfW system of funding local banks' operations in the agricultural sector does not require intergovernmental agreement or state guarantees. The conditions of funding - rates and other terms of the loan - are determined by individual agreements with selected banks. KfW allocated 6 million euros for this programme: it is planned to invest in the capital of banks that are most active in agricultural lending and have the most extensive network of branches in the regions. KfW's partners in these transactions were AccessBank, UniBank, and Bank Respublika, as well as the non-banking credit organization CredAgro.

State support

The most tangible success in the modernization of the agriculture, processing and food sectors has been achieved in the past seven years - during the implementation of the state programme on the socio-economic development of the regions. The first phase of regional regeneration was carried out successfully in 2004-2008, while the implementation of the second stage of the state programme began last year and will last until 2013. The second key element of the development of agricultural production in the country is the state programme to supply safe food to the population, which has already been in process for about one and a half years and is designed to continue until 2015. The main lever for the implementation of these state programmes has been the allocation of preferential government loans to farmers and small and medium-sized enterprises involved in the processing and production of food. The key role in addressing these issues is played by state institutions - the National Fund to Support Entrepreneurship (NFSE) and the Azerbaijan Investment Company (AIC). These organizations were established to attract investment from overseas and local sources to the most promising sectors of the economy, stimulating the private sector to invest in innovative technologies and create innovative forms of management. The main emphasis should be placed on the formation of a modern export-oriented agriculture and processing complex in the regions. "In a few years, Azerbaijan will become 100 per cent self-sufficient in basic foods, thus addressing the problem of food security. However, the relative limitations of the local market can be an obstacle to the development of the agricultural industry, which makes it an all-important task to increase export volumes. Moreover, Azerbaijan's agricultural industry should improve technology, enhance quality standards and, in parallel with the development of the traditional markets of the former Soviet Union, enter more actively into the world market, primarily markets in Europe," said Azerbaijani President Ilham Aliyev, while formulating the problems of the second five-year state programme on the socio-economic development of the regions and support for small and medium-sized enterprises.

The NFSE provides substantial support for the development of rural entrepreneurship. For example, last year the fund financed the investment projects of over 2,100 small and medium-sized enterprises in 55 cities and districts of Azerbaijan to a total amount of 130 million manats. The volume of loans issued in 2009 was 1.5 times more than in 2008. This helped many private companies to get over the peak of the global crisis with relatively good figures. This year, the fund plans to allocate 115 million manats to concessionary financing of business projects, while the relative decrease in the volume of loans is related to the overall reduction in the revenues of the state budget; it was planned to a conservative scenario. It is notable that in the current year, the NFSE has chosen the tactic of earmarking loans, focusing on several priority areas. In particular, this applies to investment projects for the production of baby food, the establishment of livestock and poultry farms and to small or medium-sized enterprises which process grapes.

Another strategic area for the fund is the creation in the regions of a network of specialized refrigerator bases to store fruit, vegetables, meat and dairy products. Work on the construction of refrigerators began in autumn last year and the head of state recently attended the opening of one of these complexes, with a capacity of 10,000 tonnes, in Salyan. In total, the NFSE is implementing 12 similar projects: in the Quba-Xacmaz economic region six warehouses will be established, while four more refrigerators will be built in the Central economic district and one each in the Lankaran and Ganca-Qazax regions. The total cost of the project to create a complex of refrigerators in the four economic zones is 40 million manats, and 60 per cent of this amount will be provided by the National Fund. Entrepreneurs have to finance projects to at least 30 per cent, while the remaining funds may be received in the form of loans, and not just from the National Fund, but also from the Azerbaijan Investment Company.

Along with the NFSE, the AIC is also involved in supporting medium and large business projects. For example, it finances projects for the construction of grain elevators in seven economic zones. Together with Milk PRO, the AIC financed the construction of dairy plants in the regions and together with Azersun Holding - the Masazir plant to produce iodized salt. Late last year, the Azerbaijan Investment Company accepted applications for new investment projects - the establishment of enterprises for processing agricultural produce and for producing various types of packaging - cardboard, aluminium or plastic packaging, and the development of alternative energy sources. Earlier this year, the first agreements were signed: the AIC, the British Marcin International and Israeli Myba Agro Project established a joint venture called AzAgro Export for the construction of greenhouses, refrigeration warehouses and a sorting and packaging workshop in Xacmaz District.

State support for development projects in agriculture this year decreased slightly compared with last year: against the backdrop of the global crisis, the government took a conservative line with regard to the financing of agriculture. In the current year, it is planned to allocate 383 million manats for agriculture, against 408 million last year. However, the amount of subsidies granted to farmers will increase and total 115 million manats this year. 35 million manats have been reserved to finance the JSC Agroleasing, while the State Agency for Agricultural Lending will get 10 million manats and the National Fund to Support Entrepreneurship - 44 million manats. The remainder will be used to support the Ministry of Agriculture and other agricultural development projects, in particular, funding for infrastructure improvements in reclamation and irrigation management. Nevertheless, the government believes that the slight decline in budget financing of the agricultural sector and the development of small and medium-sized enterprises in the regions is of a temporary nature, and domestic investment will significantly increase in subsequent years. By 2015, our country will establish a profitable agro-industrial complex, predominantly export-oriented, based on intensive technologies.

The country's chief agrarian bank

However, investment in the relatively risky and insufficiently profitable agricultural sector is of little interest to some commercial banks in the country. It is high time to create a full-fledged agricultural bank in order to secure purposeful funding for agribusiness in Azerbaijan. Efforts to create such a specialized bank began two years ago and it was proposed to use the structure of the non-banking credit organization AqrarKredit as a base.

AqrarKredit, a non-banking credit organization (NCO), established in the late 1990s, allowed farmers access to low-interest and long-term loans. Following the merger of AqrarKredit and the Agro-Credit Fund in October 2003, the scope and financial capacity of the NCOs expanded considerably. At present, this structure is working in almost all parts of the country, carrying out several credit projects, including through the NFSE. Today AqrarKredit's capital stands at 18.5 million manats, which is enough to create a new bank. The organization ended 2009 with a profit, and the four months of this year have also been successful. "The Cabinet of Ministers of Azerbaijan continues to transform AqrarKredit into a full-fledged agrarian bank: the main issue here is the privatization of the structure and consultations on this issue are being held with the World Bank, the International Finance Corporation (IFC), the EBRD and other donor agencies. The final decision will be made by its shareholders - the Ministries of Finance and Economic Development," says Mammad Musayev, chairman of the AqrarKredit non-banking credit organization.

Earlier, it had been planned to transform AqrarKredit into a bank by selling its shares to a foreign investor, and Credit Agricole, Rosselkhozbank and other international agricultural financial institutions expressed their willingness to provide technical assistance in establishing a specialized agricultural bank, to share experience etc. However, due to the global economic crisis, the European banks which negotiated the purchase of shares in the capital of the NCO halted the process. The IFC and EBRD retained their interest in this process longer than all others. According to the preliminary privatization scheme, it was initially planned to privatize 25 per cent of shares in AqrarKredit and eventually to privatize it completely. "I think that in the long run, it will be a bank with foreign participation, because this type of bank requires high capitalization. However, in the initial stage the bank can be created with public funds," Musayev noted.

In either case, the experience of agrarian reforms in the last decade has shown that in market relations, it is only possible to set up farms if there is a system of preferential credits.