The activity of the European Bank for Reconstruction and Development (EBRD) in Azerbaijan can be assessed as rather active. Since the beginning of cooperation with the country the bank has allocated credits to the total sum of 600.4 million Euros for the implementation of 48 projects. Within the state program on reduction of poverty, the government proposed concrete measures on support of Azerbaijan - development of the infrastructure, the bank sector, as well as improvement of the mechanism of management of the oil revenues within SOCAR to the bank. But the basis of the strategy of EBRD`s activity in Azerbaijan is to support development of the private sector in non-oil sector of the economy of the country. So, 60 per cent out of the total financing of the bank is sent to the private sector.
As to the state sector, according to the by-law agreements, the volume of crediting to this sector by EBRD cannot exceed 40 per cent of the total volume of investment activity of the bank. In this situation when means are saved, prior to financing these or those directions of the state sector of Azerbaijan, EBRD starts determining the most priority objects, as well as objects of the state importance which require investments most of all.
For example, after the long studying, as if by the principle of a national proverb: Measure thrice and cut once, the Board of EBRD has finally approved the allocation of the credit at the rate of $115 millions on the project of reconstruction of the Azerbaijan Heat Station of Mingachavir.
This heat station which was constructed in 1980s is the largest power station in Azerbaijan. It has 8 power units with the capacity of 300 MW each. However, as a result of the deterioration of the equipment the capacity of the station decreased. Urgent modernization is required at the station, since it is one of the key suppliers of power in the country. This year Azerenerji JSC jointly with the Russian Silovyye Mashyny reconstructed the fifth power unit that allowed achieving the capacity of 330-340 MW in it.
Thus, the purpose of the project of modernization is to increase general efficiency of the plant to achieve its designed capacity. The project of reconstruction of the power station includes modernization of its seven power units, overhaul of the water-intake system and chimney. The cost of these reconstruction works on the 1st -8th blocks of the plant, except the fifth block is estimated in $135 millions (without taking into account taxes), $115 millions out of the total sum will be granted by EBRD. EBRD`s credit means will be mainly sent to the rehabilitation of the turbine equipment and the realization of measures on improvement of the environment. As a result, the reconstruction of the heat station will allow reducing fuel expenditure on producing of electric power, as well as improving ecological situation by the increase of its capacity since 2400 up to 3000 MW.
The credit will be granted on standard conditions of Eurobank: the term of the credit is 15 years with the delay on payment within three years, and the interest rate LIBOR+1 per cent%. Moreover, the part of the credit which will not be mastered of the interests under the rate LIBOR+0,5 per cent will be charged to activate the capital.
On June 30, 2006, EBRD submitted a copy of the credit and guarantee agreements on the project to the Government of Azerbaijan. In particular, the credit agreement was sent to Azerenerji JSC, and the agreement on granting of the state guarantee was sent to the Finance Ministry. The signing of the credit agreement is expected to be at the end of August, 2006.
Meanwhile, the Eurobank is very cautious when it grants credits to Azerbaijan, though it estimated the credit status of Azerbaijan as high itself. For example, just remember a EBRD credit to the Azerbaijan State Railways where the bank`s mandatory requirement was the state guarantees. Raymond Convey, the Head of EBRD Azerbaijan points out three main aspects his bank seeks in Azerbaijan. First, EBRD seeks rendering of assistance to remove barriers for business development in the regions of the country, to improve the investment climate in the country in particular. One of the barriers, in R. Convey`s opinion, is corruption. Secondly, EBRD seeks improvement of the administrative climate in the country; particularly it concerns the process of business building and its management in Azerbaijan. Thirdly, EBRD is interested in principles of the domination of law. In addition R. Convey thinks that the efficiency and validity of law is very important issues.
For example, on June 27, i. e. two days prior to the approval of the credit, the Board of EBRD did not make a decision on the granting of the credit aimed at the reconstruction of Azerbaijan Heat Station of Mingachavir. According to the Cabinet of Ministers, EBRD`s Board could not consider this project, since there was no official letter on approval of the prospect of the financing from the Azerbaijani Government.
It is very important to note that the increase in the experience of the Azerbaijan Government in laying down counter-requirements during signing credit agreements, that make international organizations to be more prepared. So, the reason of the unsuccessful negotiations with EBRD was unacceptable condition in the granting of the credit took off his requirements, and the negotiations on the granting of the credit were resumed. Head of EBRD Azerbaijan R. ConveyР№ points out that the bank still wants the power rate to be brought to its prime cost by 2010.
But let us return to the details of the project again. The beginning of the reconstruction works on the power units is scheduled in the first quarter of the next year. Prior to this moment it is necessary to choose the consultant, hold a tender, and to determine the general subcontractor.
So, the winner of the tender for rendering of consulting services within the project of reconstruction of the Mingachavir Heat Station became the Japanese-German Alliance of the Companies TEPSCO and Fichtner. The alliance of the companies was approved by EBRD. The consultant will prepare the technical specification on the project. The tender offers of the subcontractors of the project will be based on the basis of it. The consultant will hold a tender and determine the general subcontractor as well.
According to the agreement, the company involving for delivery, installation, testing and start of the equipment and components of the type Turbine Island should have experience in reconstruction works at least three turbines made in St. Petersburg (The Plant of Silovyye Mashyny). Besides, the company should specialize in reconstruction of steam and gas generators (Boiler Island) made in Taganrog (Russia), since EBRD`s credit stipulates the delivery, installation, and input of these generators. After the signing of the contract between Azerenerji and the subcontractor, EBRD will give advance of money on all kinds of the equipment, and the remained means will be allocated as they are made and delivered to the country. It is necessary to not detain the beginning of construction works to be carried out till the end of 2006.
Earlier EBRD had a restriction on financing of projects depending on its sum. Therefore, the sum of the credit should not exceed $5 millions, and 1/3 parts of the total cost of the project, i.e. the bank might finance projects to the total sum not to less than $15 millions. Later, EBRD`s representatives addressed to its management and initiated support of countries with transitive market economy. Taking into account the importance of the support to the countries with transitive economy the South Caucasian and Central Asian countries (excepting Kazakhstan) belong to which, the bank gave a permission on granting relatively less credits to beneficiaries ($1 m. in particular). However, the above-mentioned measures are timely, i. e. until that moment when the banking sector of Azerbaijan can finance such projects itself.
But in the case of the above-mentioned project, EBRD expressed its readiness to grant a loan at the rate of $115 millions that practically means that the bank would totally incur all expenses.
The Transport Ministry of Azerbaijan also thinks that the reception of the credit on the project of modernization of locomotive depot of the State Railways from EBRD will be effective for Azerbaijan, since, besides the credit the European bank also offers grants on preparation of other projects within improvement and reconstruction of the railway infrastructure. Notably that the approval of the credit on improvement of locomotive depot of the Azerbaijan Railways to the sum $50 m. by the Board was postponed from July 25 to October 17, 2006.
Until the end of this year, EBRD will grant 116 m. Euros on projects in the field of infrastructure, agriculture, support of small-scale and average entrepreneurship in Azerbaijan. Since the beginning of this year, the bank has granted the sum of 13 m. Euros to five commercial banks of Azerbaijan. The main purpose of EBRD is to reduce Azerbaijans dependence on its oil sector