Azerbaijan’s construction sector in anticipation of changes Review by Caliber.Az

The construction industry of the country ranks third in terms of employment and fourth among the areas of activity of small and medium-sized businesses (SMEs). Over recent years, the industry has been developing dynamically, including due to the “big construction project” in Karabakh, which stimulates the growth in the production of building materials and the development of other related areas. However, market participants still face difficulties regarding access to concessional financing, and construction raw materials, as well as problems such as incomplete simplification of the real estate registration procedure, etc.

Achievements, problems, and prospects for the development of the domestic construction sector were discussed at a conference organized the day before by the Small and Medium Business Development Agency (SMBDA).

The energy crisis of 2014-2017, which significantly reduced the effective demand of the population for real estate, as well as resulting in a sharp reduction in budget financing of investment programs (road, infrastructure, utilities), contributed to a protracted decline in housing and capital construction in Azerbaijan. The situation began to improve in 2019, but the pandemic crisis of 2020 again collapsed the construction market, which had a very negative impact on the industry that provides construction sites with raw materials and materials.

Nevertheless, in the past two years, the country's construction market, supported by the growth of mortgage lending, began to show signs of recovery. Well, the main driver for the revival of the industry has been the large-scale projects carried out for two and a half years to revive the Karabakh and East Zangazur economic regions.

Today, at the expense of multibillion-dollar budget injections in the territories liberated from occupation, road construction work is being carried out on about two thousand kilometers, energy and communal infrastructure is being restored, airports are being built, residential and administrative buildings are being constructed, the first production clusters are being formed in Shusha, Aghdam, Zangilan, Fuzuli, etc.

All this gigantic construction site provided jobs for many dozens of contracting, design, consulting, and other structures, and at the same time, stimulated the growth in the production of basic building materials. In particular, according to the State Statistics Committee, last year local enterprises increased the production of building materials by 12.6 per cent, and in January-May 2023 this figure increased by almost 19 per cent.

“Today, the construction sector ranks third in terms of value added created by SMEs in Azerbaijan. According to last year's indicators, about 15,000 small and medium-sized businesses carried out activities in this area. Over the past five years, the construction sector has remained the second most important area where business entities are involved.

All this testifies to the significant contribution of the construction industry to the economic development of Azerbaijan and emphasizes its importance in creating jobs and supporting small businesses,” Natig Hasanov, First Deputy Chairman of the SMBDA Board, said during the conference entitled, “Application of a unified form of contract between the subjects of the construction industry and settlement of disputes in this area through mediation” held the day before yesterday.

It should be noted that the construction sector ranks third in terms of employment in the SME sector, and over the past couple of decades, AZN18 billion of investments have been attracted to this industry.

Assessing the achievements of the construction industry, another participant in the conference, Chairman of the Board of the Center for Social Research (CSR), Zahid Oruj, recalled that over the past 20 years, the total area of the housing stock in Azerbaijan has increased by 1.6 times.

“Over the past 10 years, the area of housing per capita has increased from 17.6 sq. meters to 20 square meters, and when assessing the dynamics of the number of apartments per capita, an increase of 1.4 times is visible,” the CSR head emphasized.

However, despite the positive dynamics observed in the development of the domestic construction sector over the past two years, the level of capitalization of the housing and construction market is still significantly lower than the peak indicators of the pre-crisis period.

Thus, according to the State Statistics Committee, in January-May 2023, total investments in fixed assets in Azerbaijan increased by almost 16 per cent, exceeding 5.858 billion manats, but housing construction accounted for only 5.6 per cent of all investments or 327.9 million manats.

Various factors influence the insufficiently high activity of participants in the construction market in Baku and other cities of the country: for example, the energy and transport crisis, as well as global imported inflation provoked by the outbreak of the Russian-Ukrainian war in 2022, raised selling prices for almost all types of imported building materials and components coming from Europe, the CIS countries, and after the recent devastating earthquake in Turkey, building materials from this neighboring country also rose in price. And this is against the background of the fact that the share of imported building materials actively used by the local construction industry is still very high, and therefore the price of construction work has also increased. All this slows down market demand and, as a result, reduces the capitalization of the industry.

However, many subjective factors in this area hinder the development of housing construction and the attraction of additional investments here. “SMBDA receives requests from representatives of the construction sector due to limited access to concessional financing. SMEs operating in the construction sector are also hindered by rather complicated rules for the use of raw materials for construction purposes. But it is the construction sector that contributes to the development of other industries, and therefore, the mechanisms for using raw materials need to be optimized,” N. Hasanov, Deputy Chairman of SMBDA, believes.

At the same time, progress is gradually being made in the key industry issue - the access of construction companies to concessional financing:

“At present, the Azerbaijani Construction Producers Association (ACPA) has strengthened cooperation with the Banks Association of Azerbaijan (BAA) in this sphere of innovation,” said Ramiz Isayev, Chairman of the Board of ACPA.

According to him, due to the huge scale of activity in the construction industry, certain problems periodically arise here, including due to the many types of contracts concluded between industry participants.

“The use of various forms, including incomplete contracts, often causes dissatisfaction, complaints, and disputes among participants in the construction sector. That is why ACPA specialists consider it necessary to unify such documentation and apply a single form of contract to all subjects of the construction market. This will help to avoid many contradictions and disputes,” R. Isayev believes.

In the future, more efforts will have to be made to solve a common problem in our country - the sale of the same apartment to several buyers at once: according to some reports, the number of people who have become victims of such criminal schemes has reached 5,250 people.

“Up to 90 per cent of applications from Azerbaijan to the European Court are related to violations of property rights. It is necessary to provide legal guarantees to citizens, to insure them against fraud when buying real estate,” calls the head of the CSR, Zahid Oruj, citing foreign experience in creating registers to check the registration base of documents and property as an example.

At the same time, much in this area has changed for the better with the adoption of the law “On the State Register of Real Estate”: in 2022 alone, the ownership of 49,000 houses and 94,000 apartments in multi-story buildings was confirmed in Azerbaijan.

A significant step that contributed to the connection to utility networks and the commissioning of hundreds of multi-story buildings was the decree of President of Azerbaijan Ilham Aliyev "On simplifying the issuance of permits for the operation of some multi-apartment buildings," dated February 19, 2019. And on June 14, 2023, the president signed a decree "On additional measures in connection with the permit for the operation of certain non-residential construction projects".

The latest document provides for the issuance of a simplified procedure for permits for the operation of non-residential buildings, construction, and installation work in which, including the construction of all floors, side walls, and roofs, was completed before June 1, 2023, and the results of stability and strength checks were positive. With the adoption of the new decree, according to preliminary estimates, over 40,000 unregistered facilities will be able to receive an extract (purchase) in a simplified manner.

And from January 2024, to increase the efficiency and transparency of activities, individuals and legal entities will be able to obtain permits for the construction or operation of constructed facilities through an electronic portal, which will simplify and speed up the work of the construction sector, minimizing abuse and bureaucratic delays. At the same time, the presidential decree will significantly expand state control over the construction sector, and in the future will help identify illegal buildings (built after June 1, 2023). This will make it impossible to connect such unauthorized facilities to the engineering and communication systems, and even more so to their commercial operation.