MAXIMUM SUPPORT

Practically all government programmes for the development of the economy in general, and strategic plans to accelerate individual sectors of the economy, which were adopted over the last decade, include separate provisions to maintain small and medium businesses (SMB).  Numerous funds and agencies - both those wholly government-sponsored and those maintained with support from international financial organizations, offer consultancy, technical and, naturally, financial support to small businesses.  However, the National Fund for the Support of Enterprise has occupied a special, perhaps even central, position among these organizations for the last eight years.

Business is money

The National Fund for the Support of Enterprise (NFSE) was founded in the early 1990s; it has undergone major reorganization since 2002 and has been operating since then under the aegis of the Ministry of Economic Development.  During this time, the NFSE and the authorized agent banks which work with it have released AZN435 million in low-interest loans.  This concessional and long-term funding played an important role in the implementation of the State Programme of Social and Economic Development of the regions from 2004-2008 and, first and foremost, fostered the agro-industrial and processing sectors, which were in most need of these preferential loans.

From late last year, the Ministry of Economic Development has initiated new, positive changes to the work of the NFSE and its selection of priorities in assessing the volume and direction of loans to SMB organizations.

Today, the NFSE issues credit via 30 authorized banks, four credit unions and one non-banking credit organization, Agrarkredit, in all regions of the country, without exception.  Just last year, entrepreneurs received AZN 87.8 million in low-interest credit, and almost 800 projects were implemented with that money.  This year, the NFSE budget is AZN 130 million (of which AZN 74 million is allocated from the national budget, the rest coming from the repayment of credit and interest).  Overall, since the beginning of this year, the fund has issued AZN 100 million in loans to 1,700 entrepreneurs.  The funding of projects with low-interest credit will help create about 7,000 new jobs.

We should note that the Ministry of Economic Development has decided to resume the practice of issuing loans by holding regional credit fairs.  In recent years, the NFSE issued large loans (larger than AZN 1 million) for the development of major projects in the production sector.  However, after assessing the results of credit fairs, the fund management decided to shift its emphasis towards increasing the number of borrowers and lowering the minimum amount for loans issued for this purpose.  The average figure for loans issued at the latest fairs was around AZN 20,000.  However, this is not the only change to the fund's work.  For example, the Ministry of Economic Development also prepared new rules for the issue of credit by the fund, which include 10 evaluation criteria.  To receive a low-interest loan from the fund, the business needs to score 60 qualifying points, because the applicants' business plans are appraised according to their importance.  For example, the highest score is given to projects which conform to the priorities of the state's economic policy; the second highest priority is the introduction of new technology in the manufacturing sector, the creation of new jobs and so on.

The maximum term for loans from the NSFE is 7 years, and the new edition of the rules does not envisage an extension of this deadline.  However, the ministry is also considering the possibility of reducing the maximum rate of interest from 7% to 6% and increasing the maximum amount of credit from AZN 3 to AZN 5 million.  Some changes will be made to the procedure for the submission of business plans.  In particular, the ministry proposes to introduce a system in which businessmen will go to the authorized banks, and the banks will go to the fund.  The banks will be given 15 days to study the feasibility of the loan application, and the total time from the moment of reception of the application to approval by the fund will be 28 days, but preference will be given to projects for production.  The government believes that all the recent changes to the work of the NFSE will help the organization to become the main source of funds to small and medium businesses.

Loan for loan

The system of aggregation of the fund's own money will also be changed.  Until now, its operations were funded from the national budget, but this year the Economic Development Ministry began negotiations to attract credit lines from international financial organizations.  "In particular, talks are under way with the World Bank to secure a $100-million loan to finance SMB via the NFSE," said NFSE Executive Director Sirzad Abdullayev.  He added that both the World Bank and the EBRD, as well as the OFID fund, are willing to fund the NFSE.  However, to attract their credit resources, in particular to the country's regions, the fund's operations need to be audited.  "Today, the international auditor Baker Tilly Audit Azerbaijan is conducting an audit of the fund's financial accounts and, after it produces its auditor's report, the NFSE's potential to attract foreign funds will increase considerably.  In the new edition of the rules for using NFSE funds, the fund is given the right to attract credit resources from foreign financial sources.  We have also proposed conditions for the utilization of the foreign loans attracted," Mr. Abdullayev stressed.

What benefits will attracting MFO yield for our country?  First and foremost, this will make it possible to provide cheaper loans to Azerbaijani entrepreneurs and, at the same time, it will help broaden the fund's potential by making it less dependent on budget funding.  The point is that the credit resources of the World Bank and other financial institutions are issued at annual interest rates of only 2%-3%.  "Even given the banking margin and the 1% added by the NFSE, these loans will still be cheap enough for the development of business," said Mr. Abdullayev.  Today, commercial banks cannot provide sufficient financial support to businesses, because of high interest rates and the short terms for loans. Against this background, the NFSE's funding terms are the most acceptable for small business.

For the authorized banks to make sufficient revenues when they use NFSE funds to make loans to businesses, they must ensure that the loans are paid back in full, ruling out all possible delays, Mr. Abdullayev said.  The money received when earlier debts are paid back are accumulated in the revolving account of the NFSE and are then re-used to issue credit to businesses.  This is why delays in the repayment of loans lead to delays in the issuing of new loans

Major projects

This year the NFSE joined the implementation of the State Food Security Programme of Azerbaijan, which was adopted last August.  In particular, a network of special refrigerator facilities will be built in the country to store fruit, vegetables, meat and dairy products, and new grain silos will also be built.  In all, the NFSE received 33 projects - from businessmen in the Aran, Quba-Xacmaz, Ganca-Qazax and Lankaran economic districts.  The winning companies were selected on 31 July and, in August, the NFSE made a statement on the launch of funding of the private companies which had won contracts on these investment projects.  The NFSE selected 12 projects, and the construction of 11 warehouse facilities is already under way.

The total cost of developing the system of refrigerated storage facilities in four economic districts is AZN 40 million, and 70% of that sum will be funded by the NFSE.  The entrepreneurs will have to finance at least 30% of the project, and the remaining amounts will be acquired in the form of credit, and not only from the NFSE, but also from the Azerbaijani Investment Company (AIC).  In the process of selecting the contract companies, preference was given to proposals which envisaged the building of facilities using the latest technology.  According to the terms of the tender, every refrigerated facility must have a capacity of at least 2,000 tons of products.  For now, the NFSE has announced acceptance of proposals from four economic regions, which cover 40 administrative districts.  In the future, the government is prepared to provide financial assistance for a project to construct refrigerated storage facilities in all economic regions of the country, without exception.

Marketing studies conducted by the Ministry of Economic Development show that the Aran, Quba-Xacmaz, Ganca-Qazax and Lankaran economic districts have good potential for the production and export of agricultural produce.  However, in a number of cases, for example when supply exceeds demand or prices fall on foreign markets, seasonal prices of fruit and vegetables become disadvantageous for farmers and make their work unprofitable.

However, when refrigerated storage is available, farmers can keep perishable produce fresh and sell it later for more profitable market prices.  The refrigerated storage will be multifunctional, because these facilities will also provide triage, packaging, cleaning and other services.  This will make selling the produce easier, which is important for exports.  The availability of an extensive storage infrastructure in the country will make it possible to reduce dependence on imports and, in the autumn, winter and spring, the country will have a supply of locally grown fruits and vegetable.

Another area of NFSE operations is the building of large grain silos to store strategic reserves and to regulate the country's grain market.  This work is done in combination with the creation of a State Grain Fund.  Building grain silos is an expensive undertaking and cannot be handled by individual farms or small agricultural companies.  In this light, the government decided to use a system of mixed funding to build these facilities.  The NFSE recently examined investment proposals for building silos in the economic regions of the country, for the storage and cleaning of grain, with a single capacity of 10,000 tons.  The silos will be built in the Aran, Mountainous Sirvan, Saki-Zaqatala, Ganca-Qazax, Lankaran and Upper Karabakh economic regions of Azerbaijan.  Last year, these regions produced 89.5% of the country's total grain output.