Baku pushes Azerbaijan's high-tech sector

By bne IntelliNews March 26, 2013

Clare Nuttall in Astana -

A state-owned venture capital fund is poised to start making its first investments in Azerbaijan, where the government is aggressively pushing the development of its information and communications technology (ICT) sector as part of efforts to diversify the economy. In recent years, technology has emerged as one of the fastest growing bits of the Azeri economy, but with the growth largely driven by state spending, there are questions about whether this pace of growth can continue.

Aimed at IT start-ups in Azerbaijan, the State Fund for Development of Information Technologies is due to begin operations in the near future, the deputy minister for ICT, Elmir Velizadeh, told a mobile technology conference in Baku on March 13. The fund, which was created under a March 2012 government decree, will be financed through the state budget.

An official at Azerbaijan's ICT ministry, which manages the fund, confirmed it will start investing in the near future, but declined to comment on when the first investments would be made and how much money companies will be given. The fund's aim is to encourage innovation and entrepreneurship, Velizadeh said, according to Azernews. It also ties in with the government's policy of helping small businesses to develop in the Azeri market, which is dominated by giant holding companies spanning most sectors of the economy.

Humble beginnings

In recent years, ICT, starting from a small base, has grown rapidly. The sector has doubled in size every three years since 2004, data shows. In 2012, the ICT sector grew by 18%, far outstripping growth of 9.7% in the non-oil sector and just 2.2% in the economy as a whole, according to state statistics.

This hasn't always been the case. Back when Azerbaijan was part of the Soviet Union, the Azeri SSR was one of just four republics where computers and chips were manufactured. But when the Soviet Union broke up, the industry virtually disappeared, with the government of the newly independent country focusing instead on developing its oil and gas reserves.

It was not until more than a decade later, when it was becoming evident that Baku needed to diversify to ensure that the economy was sustainable even after the country's oil and gas stocks are depleted, that the government again turned its attention to the ICT sector. Venla Sipila, principal economist, Europe and CIS Economics at IHS Global Insight, points out that it is "extremely important" for Azerbaijan to diversify away from the oil and gas sector, since dependence on commodities makes the economy "very vulnerable".

"At the moment, the performance of the economy, including its fiscal and current account balances, are extremely dependent on the oil gas sector. This dependence has become all the more clear over the past years, when falling oil output has resulted in dramatic slowdown in overall growth, as the non-oil sectors of the economy have not been able to compensate for much of the oil output stagnation," Sipila tells bne.

According to a 2012 report by Rasim Aliguliyev, director of the Azerbaijan National Academy of Sciences' Information Technology Institute, and Galib Girbanov of the Azerbaijan Internet Society, "the industry is now experiencing a re-birth". While the launch of the Azersat communications satellite in February is the most high-profile event recently, on a smaller scale government investments into areas such as telecom networks have created opportunities for new companies. As of 2012, Azerbaijan had at least 16 medium- and large-sized companies producing computer hardware, accounting for 60% of hardware sold within the country. A further 40 companies are active in software development, web hosting and design and related areas, and 27 companies are involved in the production of telecoms equipment, Aliguliyev and Girbanov's report says.

International firms have also entered the Azeri market to supply the sector - most recently in March, South Korea's LS Cable & System announced plans to build an optical fibre factory in Azerbaijan. According to state investment promotion agency Azpromo, the telecom sector is the second largest recipient of foreign direct investment after the oil and gas sector.

Like other parts of the non-oil economy, to a certain extent the ICT sector's growth has been driven by the demand of Azerbaijan's increasingly affluent population for new products services. However, spending by the government and state owned AzerTelekom remains the primary driving force, which raises the question of how sustainable growth in the ICT sector is - and whether it will continue when Baku stops investing.

Sipila considers that the recent growth in the non-oil economy is mainly due to government spending. "The government has a plan for developing the ICT sector further, so it probably will continue growing rapidly in the coming years. However, with the development of also this sector so tightly controlled by the government, there really are no guarantees of a competitive operating environment in the long term," she says.

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