COMPANIES OF AZERBAIJAN, UNITE!

Against the backdrop of the trend toward globalization and upsizing in the international economic arena, there has been much talk in Azerbaijan too, in recent years, about the effectiveness of the amalgamation of private companies for the development of the business sector. It has started in different sectors of the economy - banking, insurance, telecommunications and agriculture.

On the one hand, this trend might lead to a certain amount of monopolization and a desire to leave only a limited number of brands on the market. But, on the other hand, and from the point of view of the ordinary customer who finds it increasingly difficult to choose between the absolutely identical products of numerous local firms, upsizing will make mergers in the same sectors of the industry reduce competition in the market and improve the quality of goods.

At the same time, the Azerbaijani market is increasingly integrated into international markets. Perhaps it is not necessary to say that today, both players and customers in the Azerbaijani market are very different from those of 10 years ago. The requirements for the quality of the goods and services in the country are the same as in, say, European markets. This is the outcome of both integration and Azerbaijan's accession to the WTO. In a word, the market is maturing and ripening. Accordingly, small companies are struggling to survive in a highly competitive market which is dominated by the best companies. And to be the best, there needs to be further opportunity for development, which is certainly easier to achieve by combined efforts.

First Juice Corporation

The Azerbaijani Government approves of the desire of private companies which manufacture similar products to amalgamate and form alliances to consolidate their opportunities for export. Azerbaijani Economic Development Minister Heydar Babayev said that newly formed alliances are poised to pursue a common policy in the areas of quality control and pricing. "We still receive some complaints about the poor quality of exported goods and these initiatives might see this problem resolved and help increase productivity in the agricultural sector," the minister said.

In the agricultural sector, on the initiative of the Azerbaijani Fund for the Promotion of Export and Investments (AZPROMO), a proposal was made for the first time to combine the efforts of juice and vegetable producers. The idea won the general support of all producers, but they decided to familiarize themselves with the charter of the fruit corporation and the results of studies of the fruit processing sector, which were conducted by an international researchers' group at AZPROMO's request.

In the meantime, a memorandum of understanding was signed recently in Baku on the creation of the Azeri Fruit Co. Joint Stock Company. Participants in the project include the Azerbaijani Investment Company (AIC), AZPROMO, Qarnet Joint Stock Company (a member of the Milk-PRO Group) and the Saf Joint Stock Company. It will be the first consortium of its kind in the CIS.

Despite the fact that at the initial stage only two companies, which will be the main shareholders of the corporation, signed the memorandum, the list of participant companies will be longer by the time of its establishment and afterwards. The AIC's share in the corporation will be no more than 25%, because this investment company is always a minority shareholder.

Incidentally, companies do not have to amalgamate fully into the corporation and may instead transfer some of their facilities to it. Their share in the corporation will be allocated accordingly, but this process will have little effect on their independent activities. An auditing company will appraise the company's contribution at the time of joining.

As the head of AZPROMO's Export Promotion Department, Emil Aliyev said, a legal and auditing company will be chosen within a month to appraise the assets of companies joining the corporation and deal with the organizational issues of establishing the corporation. The first meeting of the working group formed to establish the corporation has already taken place, and the companies were given time to decide what assets they will turn over to the Azeri Fruit Co.

"The corporation will play the role of representative of local juice producers in foreign markets, create a single brand for export goods and help bring production facilities into line with international standards. Concentrating attention on a single brand will improve the quality of production and stabilize the export of juices to foreign markets," said Mr. Aliyev.

At present, the main problems of local juice producers are those of management, marketing and quality control, but there are no production line problems, as the republic has exemplary concentrate producers. Azerbaijani juice producers started buying production lines as early as 7-8 years ago and many production facilities in the country are more advanced and better-equipped than at similar companies in Turkey and Germany, which bought their production equipment 20 years ago. At present, there are 12 large and medium-sized producers of fruit processing products and some 40 small workshops. Because of the high profit margins in juice manufacturing, practically all canned foods and dairy and meat producers in the country also run juice production lines.

To deal with problems in this market, an alliance of juice exporters was created by nine leading companies in this sector (Milk-PRO, Gilan, SAF, Granet Haji, Gamalhan and others). The alliance will be involved in the introduction of modern technology, marketing and positioning Azerbaijani-produced juices in foreign markets. The German Technical Cooperation Agency (GTZ) supports the coordination council of the alliance and helps the companies to improve their material assets.

Oil and nuts

AZPROMO has initiated the creation in the country of two more alliances - exporters of oil services and exporters of hazelnuts - although founding the alliance of oil service exporters has been postponed for now. AZPROMO President Emil Macidov said that these plans mainly target Kazakhstan, where demand was great and therefore, in the initial stage, Azerbaijani oil services were to be exported to that country.

"We will have five or six companies which are already present in the Kazakhstani market or have good prospects there, and will form the alliance of oil services exporters with their help," said Mr. Macidov. Some of the oil projects of foreign oil companies are about to end in Azerbaijan and the highly qualified workforce which used to be employed in those projects will be exported to Kazakhstan. Azerbaijan also has a number of local companies which are subcontractors of British Petroleum. They have expertise and international certificates authorizing them to provide oil services. "Our goal is to open the Kazakhstani market for them and, eventually, other oil-producing markets too. We think that this is a very promising and interesting project," said the AZPROMO director.

In the meantime, AZPROMO expects significant changes by the end of 2008 in the hazelnut processing business and is about to suggest that producers merge into a corporation to increase the export potential of the sector.

The point is that Azerbaijan is the fifth largest exporter of hazelnuts in the world. The leader in this field is Turkey. The Azerbaijani product is competitive in terms of size and quality, but is in greater demand than Turkish hazelnuts because of their better shape and taste. "At present, the problem of the presence of aflatoxin in the produce of a number of hazelnut plants has already been resolved, but it resulted in a ban on Azerbaijani produce to Europe," said Mr. Aliyev.

At the same time, he thinks that the ban was no accident and followed an increase in the export of Azerbaijani hazelnuts, which was not in the interests of foreign producers. And although aflatoxin was found in the produce of only one manufacturer, the ban was imposed on all. In Aliyev's words, the problem has already been resolved and Azerbaijani producers have begun to supply their produce to foreign markets.

Together with producers, AZPROMO is currently considering the possibility of starting an alliance of hazelnut producers and the delays in this plan are caused by problems with its status. The alliance will be formed by five Azerbaijani producers of hazelnuts (BakFem, Gilan, ElFem, Zakatala-Findiq [a member of Azersun Holding] and Ali Said).

The alliance may be incorporated as a commercial organization, which is the standard legal status internationally for these types of association, a public organization, or a public union which will be run by a managing company. It is possible that the latter option will be preferred, with a foreign company being invited to be the managing company.

Financial sector supports

It has to be said that the process of consolidation was first tested in Azerbaijan in the banking sector. In early 2000, three state-owned banks, Sberbank (legal successor to the Azerbaijani branch of the Soviet Sberegatelnyy Bank [Savings Bank]), Prominvestbank [Industrial Investments Bank] and Agroindustrial Bank formed the Kapital Bank (which was previously known as the United Universal Banking Corporation). It is now among the top five banks of Azerbaijan and at the end of the first quarter of 2008 its assets amounted to 290 million manats.

Following this, a whole series of mergers and amalgamations ensued, and those financial institutions' share of the country's market is currently quite significant. Both international financial institutions and the National Bank of Azerbaijan (NBA) supported the upsizing deals. The NBA views the consolidation process as an important move to strengthen the position and improve the quality of service in the banking market.

With the new programme to increase the incorporation capital of insurance companies to be launched in 2009, under which insurance companies will have to increase their incorporation capital by 1 million manats annually, a process of upsizing will become inevitable in this sector too. The capitalization issue is the priority in the insurance market, all other factors are not so important when the insurer's capitalization is low. Without sufficient capital, the company cannot develop and win the trust of its customers, says Namiq Xalilov, head of the state insurance inspectorate department of the Finance Ministry.

In the opinion of the Finance Ministry official, the company's own capital is a buffer which protects the insurance company and, naturally, its clients too from bankruptcy. The availability of sufficient capital enables the company to invest and improve its services. Practice shows that companies which have problems with capitalization usually have problems with paying out insurance indemnity. With low capitalization, there is a high risk that sanctions may be imposed on the company, such as suspending or revoking the licence, which again is not in the insurer's interests.

In the meantime, the largest players in the country's insurance market have begun to voice their expansion plans. Isgandar Xalilov, president of ISR Holding and chairman of the Ateshgah Insurance supervisory board, said that the shareholders intend to develop and upsize the company by amalgamating with two small insurance companies. He refrained from naming those companies, however, noting that this information will be available in the near future.

IT sector resists, but...

As we know, mergers are a way of better meeting market demand. For example, in most cases IT companies do not want to merge. But market competition dictates the rules. In the opinion of representatives of the IT market, the number of companies in the sector has increased and the market needs some tidying-up. No other city in the world has the number of PC shops that Baku has. Computer sales are not sales of technology any more in Azerbaijan, they are sales of goods. In other words, the IT sector has become a trade sector. Experts think this wrong because the IT sector is different from ordinary trades. After all, what is sold here is not steel and what should be sold are integrated solutions. This means that the company should have expertise and, if it does not, selling computer hardware or services is impossible. That is why they predict that the majority of IT companies will simply disappear from the market rather than merging.

In the meantime, the Azerbaijani Government is considering the possibility of creating a single landline communications company by merging three existing companies, Aztelekom, Baku Telephone Communications and Teleradio. As Karam Hasanov, head of the State Committee for State Property Management and Privatization, said, Ernst & Young and local auditors, Omni, were invited to work on the issue of this deal and to study the situation. Tentatively, the Azertelekom Joint Stock Company will be created by merging the three companies.

As we can see, the process of upsizing and merging is gradually spreading into all sectors of the Azerbaijani economy which, as we said above, is only natural given international economic trends and growing demand in the local market.