TECHNOLOGY DOES MATTER

One of the most important components of the state program for economic diversification is the development of high-tech IT industry. The progress achieved in this area includes the establishment of business incubation centres within several universities and the National Academy of Sciences of Azerbaijan. Thanks to the support of the State Fund for the Development of Information Technologies, Azerbaijani start-ups are developing innovative products. In addition, local companies have intensified cooperation with global manufacturers of IT equipment. Azerbaijan continues the construction of infrastructure for the high technology park (HTP), which will develop and implement its own road maps mainly focused on the establishment of favourable investment climate for IT companies.

Replacing imports

The integration of Azerbaijan's Information and Communication Technologies (ICT) sector into the global high-tech market began about a decade ago. The local developers of software solutions and the integrators of network infrastructure who have actively promoted intellectual products to neighbouring countries were the pioneers in this direction. In particular, the leaders of Azerbaijan’s software market - Sinam, RISK, AZEL, Ultra, Caspel, CyberNet and a number of other companies, confidently win tenders and act as subcontractors in the markets of the post-Soviet countries, primarily in Central Asia, Georgia, Afghanistan, and other countries of the world.

The activities of Azerbaijani software companies are still relatively profitable in terms of the export of domestic IT products.

The experience of China and the countries of South-East Asia shows that significant capital investments are required for the development of assembly enterprises, and especially the manufacture of computer elements such as the processors and chips. Due to a number of objective reasons in the global division of labour, Azerbaijan is not considered a country with a significant potential to assembly and to produce IT equipment and components. Nevertheless, over the past decade, Azerbaijan has introduced a series of measures to localise the production of IT equipment.

In fact, the start of the production of computer equipment in Azerbaijan was marked with state programs aimed at the universal computerization of schools, ministries, departments, etc. To optimize procurement logistics, the assembly of some equipment for these projects took place in Azerbaijan. In particular, KUR assembly plant, which is the only IT plant in the South Caucasus to start mass production of IT equipment, was commissioned in 2005 in Mingachevir. In addition to personal computers, this plant has later extended its production line with the assembly of computerized photo kiosks, information and payment terminals, decoders for digital TV, ADSL modems and other IT equipment. Some of the products were exported to Georgia, Turkmenistan and other post-Soviet countries.

In fact, all import substitution programs depend on state financing, and the existing demand in such a relatively narrow domestic market (mainly state enterprises and schools) make it difficult for the producers to increase production volumes significantly. Undoubtedly, state orders are highly demanded by start-up companies, since they make it possible to launch production chain and to ensure sales at initial stages of production. However, IT-production becomes really profitable only with access to large external markets. The best option in this case is to attract the leading world vendors to the processes of serial assembly. Their experience would contribute to the improvement of the production experience, introduction of expertise, marketing and service support for marketed products.

Technology Park

The reforms of recent years providing for the establishment of technology parks and business incubators, as well as the development of high-tech products with a gradual access to foreign markets have contributed to the localization of IT enterprises in Azerbaijan. Fiscal preferences to resident companies, the availability of necessary infrastructure and devaluation of the national currency, which reduced production costs associated with the localization of the assembly of IT equipment in Azerbaijan, contributed to the growing interest of local companies and world vendors in such undertakings.

The first step was the establishmentof High Technologies Park (HTP) LLC on Pirallahi island. Two more large local IT enterprises have received the status of HTPs - KUR plant and HTech Invest. About two years ago, HTech Invest signed an agreement with a well-known Taiwanese brand Acer and, with the financial support of the State Fund for the Development of Information Technologies (₼1.2m), started the production of desktops, nettops and monoblocks with both conventional and touch screens.

"The company's turnover exceeds ₼2m, and considering the growing demand, we are planning to increase this indicator in 2018 to ₼10m. With existing capacity, we can assembly up to 500 computers per day, but if necessary, this volume can be increased," said HTech Invest’s Commercial Director Latif Maharramov. The main buyers of its products are ministries, departments and other corporate clients. At the same time, the company expands its sales in the retail segment and makes its first steps to foreign markets. "For instance, we have already delivered the first batch of products to Uzbekistan, and will start the export of computer equipment to other countries of Central Asia and to Georgia," said Maharramov.

Recently, HTech Invest resumed talks with Lenovo to start the assembly of this brand's computers. If it is possible to reach favourable terms with Lenovo regarding their pricing policy, it will be possible to start the assembly of a wide range of computer equipment of this Chinese company in the Mingachevir branch of HTP.

Yet another resident of HTP is CRM Group, which also produces technology products under a brand name Made in Azerbaijan. The company is known by its AzToner cartridges for printing devices, which are also supplied to a number of state institutions within Azerbaijan. In 2018, CRM Group can start localization of printer production and is holding talks with a foreign company that granted CRM Group a patent for the production of cartridges.

Tax preferences

According to experts, the real development of IT sector in Azerbaijan depends on state benefits provided to industrial parks.

Existing preferences granted to HTP residents include only the exemption from customs duties for the import of production equipment. However, it is equally important for potential investors to be exempted from customs payments, in particular from a 15% duty on the imported raw materials and components used in the assembly process. According to local companies, this would be an optimal solution given that Azerbaijan does not have its own production line of microchips and other computer components. Accordingly, there is no need for measures to protect the domestic market. On the other hand, the introduction of a zero customs duty in the import of electronic components would make it possible to deliver competitive products to domestic and foreign markets.

Apparently, the leadership of HTP is considering the expansion of preferential regime for importers and their local partners through the implementation of their own road maps, mainly focused on the establishment of favourable investment climate for IT companies. Thus, according to the Executive Director of HTP, Tural Kerimli, it is envisaged to create acceptable conditions for foreign vendors in order to encourage foreign investment, so that they are interested in producing their products in Azerbaijan. These proposals, as well as the aspects of legislative regulation will be submitted to higher state authorities.

It is also necessary to solve a number of issues related to attracting foreign specialists for obtaining best practices in the industry and training local personnel (this is a regime of preferences in taxation and social payments). We can use the experience gained in Azerbaijan in the implementation of oil contracts, by the way.

Concessional financing

Along with fiscal relief measures, it is important to ensure that IT companies have access to preferential financing. Today, local companies and start-ups can count on preferential financing through the State Fund for the Development of Information Technologies. However, the loaning facilities of the State Fund are very limited: in 2018, it is planned to allocate only about ₼2m for this purpose. It is clear that this amount is appropriate for grant financing of small software projects, but it is completely inadequate for the implementation of a large-scale production project. Moreover, the State Fund is extremely cautious about financing projects, avoids unnecessary risks and selects projects that have the potential to enter international markets.

A solution for local IT companies seeking sources of concessional financing could be the establishment of venture funds (investment structures investing in securities, participation in innovative enterprises or commercialization of business ideas of start-up projects). However, until recently, this issue was hampered by the absence of relevant legislation in Azerbaijan, as well as the need to address a number of issues related to tax regulation. The State Fund for the Development of Information Technologies also fully supports the idea of ​​developing venture financing, and this year the relevant state authorities will develop proposals for regulating the activities of such funds.

Private companies should play an instrumental role in the establishment and operation of venture funds but investors in Azerbaijan are extremely cautious in taking part in such undertakings, as venture financing involves high or relatively high risks. As a rule, 70-80% of projects do not bring returns, but profit from the remaining 20-30% pays for all losses.

Either way, Azerbaijan is exploring the feasibility of establishing a club of IT investors (a sort of venture capital fund), where large local IT companies can become members. It is planned that the club will be used to commercialize promising start-up projects through equity participation.