Investment Incentive Certificate: how does it work? Unleashing potential of private-public partnership

Economic reforms in recent years have sought to create an attractive business climate, including optimising legal frameworks to support investment. And there is every reason to believe that this year will see a breakthrough along these lines. For example, President Ilham Aliyev recently signed a decree approving the "Guidelines for strategic investment projects that provide for the issuance of an investment incentive certificate". The foreign direct investment strategy is expected to be approved in the first half of 2024, the "Investment Roadshow" will be held in Tokyo in March, and the first Azerbaijan Investment Forum will be held at COP29 by the end of the year. On the eve of this year's event, the first investment promotion documents were handed over to entrepreneurs at KOBIA House No. 3 in Baku.

In the eight years since the investment promotion system was established, 588 projects have been implemented in Azerbaijan, mostly of a production nature. This mechanism has played an important role in supporting the capitalisation of industrial clusters and now tourism clusters. So, what does the Investment Incentives Mechanism look like, and how can entrepreneurs benefit from obtaining the relevant certificates?

Companies (legal entities) and individual entrepreneurs who have received such a certificate are exempt from 50 per cent taxation on profits for legal entities and income for individuals for seven years from the date of receipt of the document. No less importantly, a certified business entity that intends to start production based on a confirmation document issued by the Ministry of Economy is also exempt from customs duties (at least 15 per cent) and VAT (18 per cent) for seven years when importing machinery, equipment and other technological equipment necessary for the production process into Azerbaijan. At the same time, such incentives apply only to new machinery and technology imported from abroad. Crucially, a seven-year exemption from property and land taxes is granted to entrepreneurs who obtain the certificate.

In most regions of the country, including enterprises located outside special industrial and agricultural clusters, these preferences have played the role of an engine for the development of production and service projects.

However, the greatest effect was achieved by the holders of Investment Incentive Certificates combined with the preferential regime created in half a hundred agro-parks, seven industrial parks and five industrial districts, as well as in the first phase of the production and logistics FEZ in Alat, which was launched last summer. All of the above-mentioned diversified industrial zones provide their residents with many additional tax, customs, utility and other concessions, as well as making available to businesses for their use the necessary energy infrastructure, production and office space, access to transport communications, etc., created at the expense of the state.

Unsurprisingly, the preferential regime for investors, combined with cheap loans from the Entrepreneurship Development Fund (SIF), has effectively unlocked the potential of public-private partnerships using the investor incentive certificate mechanism.

"As part of the implementation of the investment incentive mechanism, more than $3.2 billion has been invested in Azerbaijan's economy since 2016, and more than 38,000 new jobs have been created. So far, machinery, technological equipment and devices worth around $1.1 billion have been imported into the country on preferential terms, thanks to which modern production facilities have been created and the production of new competitive products has been launched," said Mammad Musayev, President of the National Union of Business Organisations of Azerbaijan, at a recent conference in Baku.

This process is continuing. On February 5, the first investment support documents for 2024 were handed over to entrepreneurs at KOBIA - Baku House of Small and Medium Enterprises (SME) No. 3. The certificates were awarded to projects in the field of food production in the districts of Gusar, Imishli and Samukh: "Production and packaging of fruit juice", "Construction of a plant for the production of barley malting and high-quality ingredients" and "Organisation of processing of various fruit", with a total investment of $11.7 million and the creation of more than 60 new jobs.

However, there is a need for reforms in the field of investment certification, taking into account the economic reforms of recent years and the accelerated development of the non-oil sector of the economy, including in the liberated territories of Azerbaijan. Recently, in particular, within the framework of the decree of the head of state dated December 20, 2022, additional measures were taken to improve the mechanism of investment promotion. The document defined new rules for obtaining certificates on minimum investment volumes attracted to a company, thus certifying the most promising projects for capitalisation. A new list was also approved, reflecting the minimum volume of economic activity in certain areas of the country, including those carried out in industrial zones and agro-parks, as well as in tourist and recreational zones.

At the same time, the entire system is initially designed to support the private sector: Investment Incentive Certificates are not issued to legal entities established by the state, including public legal entities in which the state directly or indirectly owns 30 per cent or more of the shares.

On February 1 this year, President Ilham Aliyev signed a decree approving "the directions of strategic investment projects providing for issuing Investment Incentive Certificates". The document lists local resource-based manufacturing sectors as priority areas to receive investment certificates. These include metal ore mining, manufacturing aluminium products, oil and gas, chemicals, building materials, cotton processing and creating private industrial zones.

The list of areas for first-time certification also includes projects for the operation and maintenance of aircraft, the repair of railway vehicles and the production of spare parts, private investment in the production of military goods, and the development of non-oil enterprises privatised through investment tenders after January 1, 2023. It also includes "First in Azerbaijan" projects, under which entrepreneurs will establish for the first time in Azerbaijan companies in one or another of the non-oil sectors, thus ensuring the growth of the country's import substitution or export potential.

The priorities also include the environmental sector, including all green energy projects, desalination of seawater, waste management and recycling, as well as efforts to increase the country's hotel potential to accommodate guests for the international event COP29. The recent decree by the head of state has also provided clear guidance to the business community on the priorities for public-private partnerships and the identification of areas for capital investment where the chances of obtaining investment promotion certificates are highest.

However, investor support efforts do not stop there and several important steps will be taken in this area this year. In particular, the Foreign Direct Investment (FDI) Promotion Strategy will be adopted to make the investment environment in the country more attractive. The document has been developed by specialists from the Ministry of Economy and the Azerbaijan Export and Investment Promotion Agency (AZPROMO) and aims to implement international best practices in this area.

"The FDI promotion strategy is due for approval in the first half of 2024," Yusif Abdullayev, executive director of AZPROMO, said recently. The long-term goals of the strategy include improving the investment climate and increasing the efficiency and return on investment by modernising investment mechanisms and instruments. It is also planned to increase the share of portfolio investors (including transnational corporations) in the inflow of FDI into the real sector of the economy. The focus will be on implementing efficient, high-tech, export-oriented projects with high value-added production.

For its part, AZPROMO plans to hold an "Investment Roadshow" in Tokyo (Japan) on March 5-6 this year, with the participation of up to 150 officials, businessmen and guests, which is aimed at organising business meetings in B2B format and demonstrating Azerbaijan's investment potential.

"The first Azerbaijan Investment Forum is planned to be held in Baku this year within the framework of the COP29 international conference. One of our goals is to bring large foreign companies to our region," said AZPROMO's director Yusif Abdullayev.