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     INFORMATION TECHNOLOGY




    Country Profile – Export Potential

THE REPUBLIC OF AZERBAIJAN




              Geneva, Switzerland
               September 2002
                                ACKNOWLEDGEMENTS


This Country Profile is published by the International Trade Centre UNCTAD/WTO (ITC) as
part of an ITC technical cooperation project on export capacity development for the
Azerbaijani information technology and E-trade sectors. The Country Profile is the result of
close cooperation between the ITC Technology Team and national project partners, namely,
the State Students Admission Commission (SSAC) and the United Nations Development
Programme (UNDP).

The principal authors were Nikolai V. Sëmine, ITC Senior officer on E- Trade, and Ram K.
Verma, ITC Senior International Consultant. The editor of the report was Geoffrey Loades.

Thanks are due to Ms. Maleyka Abbaszadeh, Chairperson SSAC and her team: Mr. Rauf
Aliyev, Resource Mobilisation Expert and Mr. Amir Abdullayev, Administrative Assistant.
Special thanks go to Mr. Elmir Velizadeh and Ms. Fatma Abdullazadeh, office of the
President of the Republic of Azerbaijan; Mr. Kamran Imanov, Copyright Agency, Mr. Nadir
Ahmedov, Ministry of Communications and Mr. Kamaleddin Heydarov, State Customs
Committee. All have provided invaluable input into the export strategy formulation activities
and have given excellent organizational support to the project.

Special thanks also go to the UNDP office in Baku and, particularly, to H.E. Marco Borsotti,
UN Resident Representative and Mr. Sultan Gadjiyev, Programme Officer, who helped to
launch and realize this project.
                                                   Abstract




                                                                                    MAP OF THE REPUBLIC
                                                                                       OF AZERBAIJAN




                       Country Case Study - The Republic of Azerbaijan
                                               Basic Parameters
                                                     2002

Population (January 2002)                                                                           8,141,400
Area (km.2)                                                                                            86,600
Per Capita GDP (2001) (US$)                                                                               680
GDP (% change2000/2001)                                                                                 9.9%
GDP Distribution (2001)
     Agriculture                                                                                        15.3%
     Industry                                                                                           40.0%
     Services                                                                                           59.7%
Merchandise Trade 2001 (US$ billion)                                                                       3.7
    Exports (2001) (US$ billion)                                                                          2.30
    Imports (2001) (US$ billion)                                                                          1.40
ICT in Merchandise Trade (in US$ million)                                                      162.00 (4.38%)

International Reserves (US$ million) (2002)                                                            1,300
Currency Units (Manat) (September 2002)                                                 1 US $ = 4,840 Manat
Penetration of ICT
    TV/100                                                                                               25.9
    Telephone/100                                                                                        9.27
     PCs/100                                                                                             1.50
     Mobile Cell Phone/100                                                                               6.44

National Information Infrastructure                                                       Being developed
National IT Policy                                                             Document being processessed
Accession to ITA/WTO                                                                                  N/A

Source: State Statistical Committee of Republic of Azerbaijan, USACC investment Guide to AZ 2001
        “Science and technologies develop fast. Therefore we all must seek to find our own place in this
development, to accelerate the speed and become the best in this sphere.”
                                             PRESIDENT OF THE REPUBLIC OF AZERBAIJAN
                                                                                  HEYDAR ALIYEV
                                          PREFACE


Information and Communication Technology (ICT) is one of the most dynamic and fastest-
growing global markets and the manufacturing and export capacities of developing and
transition economies are increasing. Despite the crisis in hi-tech markets, the total value of
exports of ICT products by developing and transition economies was still in excess of US$
300 billion in 2001.

In response to the growing requests from the business community as well as government
authorities, ITC launched a programme of research and dissemination activities in 1997 to
examine the implications of the WTO Agreements for Information and Communication
Technology sectors of developing countries and economies in transition. Based on the
findings of the empirical study, ITC published “International Trade in Information
Technology Products and the WTO Agreements” in 1999. This was widely disseminated
within developing countries and economies in transition, placed on the WTO website, and
translated into Japanese by JETRO ― the Japan External Trade Organization.


The findings of the study were successfully tested and disseminated in India, Thailand,
Pakistan, Malaysia, the Philippines and Sri Lanka through ITC Business Roundtables. More
than 600 representatives of the ICT sector, including local government authorities, senior
company executives, industry associations and trade promotion organizations, participated in
the events.


The 1999-2001 phase of the project focused on the ICT sector of economies in transition of
Central and Eastern Europe. Armenia, the Czech Republic, Poland, Russia and Slovenia
were the initial participating partners of the project. This resulted in five Country Profiles on
Information Technology Export Capacities, which were produced by ITC and endorsed by
the appropriate national authorities. Six National Business Roundtables on market prospects
for Information and Communication Technology industries were organized to address key
issues of trade and business development in ICT products, services and e-commerce. More
than 500 representatives of the public and private sectors participated in the events. In
addition, two Regional Business Roundtables were held during 2000 and 2001 with the
participation of high-level delegations from 18 countries of the region.

This proposed project builds on this work and presents a new
information technology country profile on the Republic of
Azerbaijan.
                                         FOREWORD
Information and Communication Technology represents a tremendous opportunity for
developing and transition economies. At the same time, it presents their ICT trade policy-
makers with the major challenge of introducing the incentives needed to get the private sector
to undertake business in new and different ways, effectively promoting the WTO rules-based
business environment.

The need for an assessment of their national trade and business capacities in the ICT sector
has been clearly identified as a priority by beneficiary countries. ITC’s empirical research and
its consultations with ICT industry representatives and trade policy-makers confirmed the
growing demand from all sectors to better understand the value and competitiveness of their
own ICT industries.

This lack of a clear understanding of national capacities and capabilities in the ICT sector has
been a major obstacle preventing policy-makers from developing national ICT strategies that
conform to WTO rules or EU accession requirements. Deficiency in this area of strategic
assessment has also tended to block both the development of effective public-private
partnerships involving the IT sector and the inflow of foreign direct investment. The primary
objectives of this report, therefore, are to quantify and present the trade and business potential
for the Republic of Azerbaijan in the Information and Communication Technology sector and
to identify the country’s technical cooperation needs.

An ITC technology team, consisting of international experts and working in close
cooperation with country authorities and national ICT industry associations, assessed the
current strengths, weaknesses, threats and opportunities facing the Republic of Azerbaijan as
it plans for export-led growth of the ICT sector. The team held in-depth consultations with
senior government officials, trade policy-makers, leading manufacturers and assemblers, ICT
service providers, software developers, importers and exporters, and professional, industry
and trade associations. From the information collected, and with the support of national
consultants, ITC prepared this “Country Profile” as a tool for use in the formulation of an
export strategy that will help to build the image of Azerbaijan as the “Trans-Caspian Cyber
Marketplace” and to emerge as a major source of hi-tech in the Caucasus region.

The report was endorsed by both the Government of Azerbaijan and the Chairperson of the
States Students Admission Commission (SSAC). It was first presented to the public in
September 2002 during the National Business Roundtable on international market prospects
for IT exporters from Azerbaijan. It has helped to consolidate the views of national ICT
stakeholders on a recommended “e-Business Vision” and on a national export strategy for the
ICT sector, as well as to strengthen effective partnerships between the public and private
sectors. The report also served to enhance the ability of the Azerbaijani ICT business
community to make informed decisions and adjust their assumptions of export potential for
the sector according to the requirements of the EU and global marketplaces.

The immediate beneficiaries from this project will be those small and medium-sized
enterprises across the country engaged in the development of the Internet-based new
economy. The report is also expected to promote better governance in line with the free trade
principles of the WTO and the Trans-Caspian cyber marketplace initiative, to help bridge the
“Digital Divide” by enhancing the leading role of the private sector, and to foster
transparency in the formulation of sound export and e-commerce strategies.
                                      Executive Summary

This report is the result of a unique international collaboration between the International
Trade Centre UNCTAD/WTO (ITC) and the Government of the Republic of Azerbaijan. The
Executive Summary presents salient features and findings of the ITC Technology Team’s
mission to Azerbaijan during the period 22-30 June 2002. Based on the request of the
Government of Azerbaijan and the country office of the UNDP, ITC undertook a field
mission to Baku, the capital of Azerbaijan, to prepare a national Country Profile on export
potential in the information and communication technology (ICT) sector.

The major objectives of the Country Profile were to help the government authorities, the
private sector and non-profit organizations of Azerbaijan to:

     -   assess the state-of-the-art of the local ICT industries;
     -   consolidate and synchronize the views and perceptions of the main national
         stakeholders on Azerbaijan potential in the ICT sector;
     -   identify challenges and opportunities for the country’s integration into the global
         information infrastructure and outline different growth scenarios for ICT in global
         markets;
     -   contribute to the formulation of a national ICT strategy and in particular a national
         export development strategy for the ICT industry and e-business.

Conclusions of the Executive Summary are based on in-depth analysis and consultations with
key national and international players active inn the ICT market in Azerbaijan. Consultations
and meetings were held with more than 50 policy-makers, experts and business leaders.

The Executive Summary introduces the full report that was presented to government
authorities in August 2002.

Part I POLICY ISSUES

1.   The ICT Vision of Azerbaijan

        Azerbaijan is now poised for ICT infrastructure modernization that promises to open
         up potentially rewarding opportunities both for national and foreign investors.
        Over the past few years, ICT development in the country has been brisk and there is
         currently    a     strong    demand    for    an     up-to-date    information      and
         communicationinfrastructure that supports networking, wireless services, Internet
         services and broadcasting, e-commerce and more. Much work remains to be done in
         the area of building a basic communications infrastructure and the capacity to use it.
         The projects of primary focus should be the privatization of telecom and network
         operators, internet infrastructure development, web security, hardware components
         production, software development and business process outsourcing, call centres, e-
         business, enterprise resource planning and customer relationship management .
        The leadership of the country recognizes that the ICT sector is not only an economic
         engine but also is an enabler of social and political progress. The reorientation of the
         country towards information and communication technology-based growth, with
         breakthroughs in the sector, is widely seen as an preferable alternative to the current
       national economic development strategy of, which is mainly based on commodities
       (oil and petrochemicals).
      As a result, the National Information and Communication Technology Strategy Team
       (NICST) was established in January 2002 as a coordinator and think-tank to prepare a
       country strategy to 2010, to state the government’s position on the creation,
       management and use of information technology and to set the direction for
       government action in support of this strategic goal.

      To develop an ICT vision statement for the country, as a mobilizing tool and an
       integrated part of the strategy, the ITC Technology Team discussed and proposed the
       following directional framework: Azerbaijan should become an e-business
       integrator of the Caucasus region. This vision could be realized through the
       establishment of a a “Trans-Caspian Cyber Marketplace” project with the
       participation of Georgia, Turkey, Kazakhstan, Uzbekistan, the Kyrgyz Republic,
       Russia and Iran.

      A national consensus should be formed around five fundamental principles that make
       the connection between ICT development and the future prosperity of the country:
       -   Liberalization and competition
       -   Commitment to the rule of law
       -   Private-sector led innovation
       -   Human capacity building
       -   Export-orientated growth in the technology sector

      Building up the necessary national human capital, education and training for people
       will be a key determining factor in the success of the transition to a knowledge-based
       economy. Regulators should consider bringing together the country’s IT elite as the
       cornerstone for enhancing Azerbaijan’s competitiveness in regional and global
       markets. For this to be realized, close cooperation between universities, R&D centres
       and industry will be required. The general education level in Azerbaijan is high and
       literacy is over 94%. The majority of the population is hardworking, dedicated and
       motivated.

2. WTO Agreements on IT and their Implications for Azerbaijan

      The successful application of information technology to economic development
       requires certain conditions, including market reforms founded on the rule-based
       business environment.
      It is clearly understood by the government authorities that a commitment to
       liberalization and competition in the ICT sector would open the door to productivity
       gains and sustainable wealth creation through increased private investment.
The process of accession to the WTO has been launched and the first meeting of the Working
Group on Azerbaijan accession was held in Geneva on 6 and 7 June 2002.                It is
recommended that an ICT Advisory Board to the Ministry of the Economy be established, to
focus on the implications of the WTO agreements for the national information technology
sector.

3. Policy-Making on ICT and e-Commerce
         The policy-making process for the IT industry is widely dispersed across a number of
          different government institutions, a situation which creates duplication and delays in
          the introduction of long-awaited decisions.

         It is proposed to establish a high-level policy body within the government (for
          example a Ministry of Information Technology). This body would be responsible for
          the overall promotion of IT sector development through the creation of a favourable
          regulatory environment and by monitoring the implementation of nation-wide IT
          projects.

Part II         STATE OF THE INDUSTRY

4. Diagnosis of Business Capacities

         Most of the industrial sectors that were buoyant during the Soviet period, with the
          exception except oil and oil production, have come to a halt.

         Privatization is under way, but a large number of enterprises are State owned and run
          with government supportbecause of the need for employment creation and a smooth,
          shock-free transition to a market economy.

         The IT industry is fragmented and consists of small segments of PC assembly and low
          –added-value telecom terminal equipment. Electronic process control equipment is a
          growing niche with promising prospects on the regional IT market.

         There were an estimated 27,500 software professionals working in this sector, 1,500
          network engineers, 10,000 programmers, 1,000 systems analysts and designers, and
          15,000 data entry operators and others.

         The computer software development sector has already demonstrated its product
          innovation ability and its potential for significant growth. A number of projects,
          including computerization of the election, tax collection, customs clearance, and
          student registration and examination systems show that a high level of IT capability
          exists.

         In the telecoms area, the main issue is the high levels of tariffs established by the
          State monopoly in this sector. International tariffs for fixed line telephony is US$ 2.5
          per minute, which is considered by most private operators as very high compared to
          international rates. Internet tariffs (unlimited usage) for one month are at US$ 50 per
          minute on average, which is also high according to international practice. Resolution
          of this issue (through de-monopolization and the introduction of competition) would
          accelerate the growth of the industry.

5. ICT Industry Consolidation

         The majority of the industry is currently comprised of micro enterprises with large
          companies being rare exceptions.. Policy makers should give priority to the
          consolidation of the sector and the establishment of a national IT industry
          association(s).
6. E-Business Readiness

     E-commerce and e-business are in only very early initial stages of development.

     E-regulations are in the process of being considered and debated. E-signature, e-
      commerce and e-document laws should be enacted shortly after approval by the Milli
      Mejlis (parliament).

     An e-banking infrastructure is developing. Selected initiatives were launched by the
      private sector to provide opportunities for purchasing PCs and components on the
      Internet, with payment through banks.

     The National Bank of Azerbaijan has launched a project to create an infrastructure for
      banking and e-commerce. This initiative will accelerate the introduction of e-
      signature and the establishment of certification authorities.

     Due to the size of the local market, regional cooperation on e-business is an essential
      element in the cost effective development of an e-marketplace (‘Trans-Caspian Cyber
      Marketplace initiative’)

7. Local Market Conditions (Players, Structure, Distribution and Competition)

     The local market for IT products and services is growing rapidly and is currently
      estimated to be worth around US$ 140 million.

     Major players in the ICT sector are representatives of trans-national groups such as
      IBM, Siemens, Motorola, Nokia, Microsoft, Compact, HP, Panasonic and Ericsson.
      At present, most of them distribute their products through local agents.

     Distribution channels are well developed.

     There is growing competition among national SMEs for ICT market share and
      government contracts.

     The market is concentrated in the city of Baku and neighbouring regions, accounting
      for 65% of the total.

8. FDI in the ICT Sector

     Azerbaijan offers a stable economic environment favourable to the expansion of the
      market economy and conducive to foreign investments and operations. Afterthe oil
      sector, the next largest amount of foreign direct investment was going into the
      Information and Telecommunications Sector (about US$ 35 million). Foreign direct
      investment (FDI is considered vitalfor economic development and growth. However,
      it remains a small fraction of total domestic investment in the ICT industry.

     To increase the level FDI into the ICT sector of Azerbaijan the following are needed:
      -   promotion of open competition in information technology and telecommunications;
      -   establishment and commitment to the rule of law, including enforceable contracts and
          clear, fair regulation, with consistency and predictability;
      - increased confidence in good governance;
      - incentives (fiscal, tax and FDI supportive services);
      - encouragement of local oil companies to support the development of the ICT sector
          by diversifying their activities.

Part III      INTEGRATION OF AZERBAIJAN INTO THE ICT GLOBAL MARKET

9.        Export Strategy Formulation

         A lack of international ICT market knowledge , unsatisfactory marketing capabilities
             as well as undeveloped business networking are considered the major
             impediments to export growth and diversification.

         The formulation of a national export strategy for the ICT sector has been identified as
          a national priority.

         The basic components of the national export strategy for the ICT industry should
          include:
      -   supply capabilities (software application development; IT-enabled services; business
          process outsourcing; contract manufacturing and services for e-commerce);
      -   cluster development (software technology park(s));
      -   export-orientated enterprise management development;
      -   business matching;
      -   ICT marketing and export markets identification and development

10.       Brand-Building

         The country needs a new look as a high-tech supplier to adequately reflect its
          scientific and engineering potential. Elements of a brand-building programme for the
          country are described in Chapter 10.

Part IV       SCENARIOS FOR GROWTH OF THE ICT INDUSRY AND E-BUSINESS

         The potential for ICT export growth has been estimated on the basis of current
          industry capacities.
          It is expected that exports of US$ 350 million could be reached by the year 2005 and
          US$ 1 billion by 2010, subject to a conducive business environment being created.

         To realize this potential short-, mid- and long-term action plans need to be prepared.
          The full report that follows provides further details.

Part V        PUBLIC-PRIVATE PARTNERSHIPS

         Constructive dialogue between government and industry has been initiated. The
          private sector has the flexibility and resources to offer innovative solutions to the
          unique problems facing Azerbaijan. Government is actively looking for opportunities
        for various forms of partnership with the private sector in order to make available the
        benefits of these new technologies.


                                           Contents
Acknowledgements
Preface
Foreword
Executive Summary
Note

PART ONE                    THE REPUBLIC OF AZERBAIJAN– INFORMATION TECHNOLOGY
                            EXPORT CAPACITIES

Chapter 1

GENERAL ECONOMIC ENVIRONMENT

Economic Structure
GDP Growth
Privatization
Foreign Direct Investment
Manufacturing Base
Foreign Trade

Chapter 2

NATIONAL EXPORT DIVERSIFICATION POLICY
Industrial Policy
Information Technology (IT) Policy
Telecommunication Policy
Trade Policy
Accession To European Union

Chapter 3
INTERNATIONAL TRADE IN INFORMATION TECHNOLOGY PRODUCTS
Global Trade
Azerbaijani Exports
Azerbaijani Imports
The Republic of Azerbaijan and WTO

Chapter 4

NATIONAL INFORMATION TECHNOLOGY MARKET
Global Market for ICT products
Central and East European Market
IT/GDP for Central and Eastern Europe
ICT Market in the Republic of Azerbaijan

Chapter 5

NATIONAL INFORMATION TECHNOLOGY INDUSTRY
Azerbaijani ICT industry
Electronic Data Processing
System Integrators
Computer Software Industry
Telecommunication industry
Electronic Components Industry
Leading National IT Manufacturers

Chapter 6

SALES, MARKETING AND DISTRIBUTION CHANNELS
Sales, Marketing and Distribution
Trade Fairs
Industry & Trade Associations
Chambers Of Commerce

Chapter 7

TECHNICAL REQUIREMENTS AND REGULATIONS
Legal Basis of the Standardization & Certification System
National Product Testing and Certification System
Software Quality Assurance and Testing
SW Reliability and Assurance
Chapter 8

EXPORT POTENTIAL - INFORMATION TECHNOLOGY INDUSTRY
DEVELOPMENT
Background
ITC’s National Export Potential Index
Assessment of the Azerbaijani IT industry
SWOT Analysis
Export product selection

Chapter 9

INFORMATION TECHNOLOGY EXPORT GROWTH SCENARIOS
Strategies
Foreign Direct Investment
Development of Human Resources
Role of Government, Association and Companies
Export Product Selection

Chapter 10

THE REPUBLIC OF AZERBAIJAN'S ICT INDUSTRY BRAND BUILDING
Elements in brand building
Steps in brand building

PART TWO                  WTO AGREEMENTS – REACTIONS OF PUBLIC AND PRIVATE
                          SECTORS
Chapter 11

REACTION OF INFORMATION TECHNOLOGY SECTOR TO THE WTO
AGREEMENTS

Background
Government’s Public Sector View On Post Uruguay Round Agreements (URA)
Information Technology Agreement
Agreement on Basic Telecom Services
Private Sector Views on Post-URA of the Business Sector
Needs of Technical Assistance

PART THREE               E-BUSINESS READINESS

Chapter 12

THE REPUBLIC OF AZERBAIJAN’S e-BUSINESS READINESS

Introduction
Methodology for deriving e-readiness
Analysis and Results
List of Tables
    Table                                               Subject
      1.1      Economic sector indicators for 1996-2001
      1.2      Companies listed for privatization – Phase II
      1.3      Structure of Foreign Direct Investments (FDI) by Sectors
     1.4:      Structure of Foreign Direct Investments (FDI) by Countries
      1.5      Industrial Output
      1.6      Foreign Trade (1997-2001)
      2.1      Key issues affecting business environment
      3.1      Global trade in ICT products
      3.2      Global export of ICT products
      3.3      Export of Electronic Products
      3.4      Regional Exports of ICT products
      3.5      Global import of ICT products
      3.6      Import of Electronic Products
      3.7      Regional Imports of ICT products
      4.1      Global markets for ICT Products and distribution in 1999
      4.2      Global market projections for ICT Products and distribution in 2001
      4.3      Central and East European Market* for ICT Products
      4.4      IT/GDP and per capita IT spending in Central and Eastern Europe, 2000
      4.5      Telecommunication penetration rates in different CEEC countries
      4.6      Market for ICT Products
      5.1      IT companies in the Republic of Azerbaijan
      5.2      Electronic Production
      5.3      Telecommunications Companies and Digitalization of PSTN Network
      5.4      Azerbaijan – Telecommunications Sector Investment and Income
      5.5      Leading National ICT Players
      6.1      Specialized IT Trade Fairs in Baku, Republic of Azerbaijan
      6.2      Major professional IT journals / magazines
      6.3      IT Trade and Industry Associations in the Republic of Azerbaijan
      6.4      Chambers of Commerce and Industry in the Republic of Azerbaijan
      8.1      Products identified for export promotion
     11.1      Business response to the URA’s
     12.1      Assessment of e-readiness of Azerbaijan and comparison with South Eastern Europe
     12.2      e-Readiness ranking by Economic Intelligence Unit Pyramid Research Report


                                              List of Figures
   Figure                                             Subject
     1.1      GDP Growth 1996-2002
     2.1      Role of ICT in National Strategies: A Typology
     4.1      Product-wise distribution of ICT Market
     4.2      Region-wise distribution of ICT Market
     4.3      Country-wise share of ICT Market
     4.4      Growth of ICT Market (1997-2001)
     4.5      Growth of Mobile Telephone subscribers (1993-2001)
     4.6      Growth of ISP (1994-2001)
     4.7      Internet Access Pricing (1997-2001)
     5.1      Growth of Income and Domestic Investment
     5.2      Growth of Investment in Telecommunications Sector
    10.1      The Republic of Azerbaijan as Trans Caspian Marketplace
    1 0 .2    Building A Strong Brand Requires Consistent Effort
    12.1      The Republic of Azerbaijan’s Networked Readiness
                                         List of Boxes
Box                                              Subject
 4.1   Major Telecommunication Projects
 4.2   Information Technology Projects
 5.1   Azerbaijan Electronics (Azel) – A Profile
 5.2   Sinam-Invest – A Profile
 5.3   R.I.S.K. - A Profile
 5.4   Azerbaijan Communications – A Profile
 5.4   ADaNET – A Profile
 7.1   National Normative Acts & International Treaties
 8.1   SWOT analysis of the Republic of Azerbaijan's IT industry
 9.1   Azerbaijan Emerging Market Openings
12.1   TopAz Company Profile

                                      List of Appendices
Appendix                                           Subject
   1         Azerbaijan National Champions in Information and Communications Technology
   2.1       Information Technology Policy in the Republic of Azerbaijan
   2.2       Agreements between CIS Countries from Mobile Telephony
   2.3       Telecommunication Policy in the Republic of Azerbaijan
   2.4       Trade Policy in the Republic of Azerbaijan
   2.5       Foreign Investment in the Republic of Azerbaijan – FDI
   3.1       Exports and imports of the Republic of Azerbaijan
   4.1       List of contacts
   5.1       Company profiles
   8.1       ITC’s National Export Potential Index
   8.2       ICT National Capacity of the Republic of Azerbaijan
   8.3       Assessment of the Republic of Azerbaijan’s R&D capability
   9.1       Code of Ethics for IS Cluster
  12.1       e-Readiness: Harvard University Guide
  12.2       e-Readiness: ITC’s Questionnaire Model
  12.3       e-Readiness: EIU Methodology
  12.4       ITU Recommendations
                                                     Note


Unless otherwise specified, all references to dollar ($) are to United States dollars

The following abbreviations are used:

AMCHAM           The American Chamber of Commerce of Azerbaijan
AZEL             Azerbaijan Electronics
AZPMA            Azerbaijan Project Management Association
B2B              Business to Business
B2C              Business to Consumer
BSTC             Baku Scientific and Training Cetre
BTA              Basic Telecommunication Agreement
CATV             Cable Television
CEEC             Central and East European Countries
CEFTA            Central European Free Trade Agreement
CEELEC           European Committee for Electrotechnical Standardization
CEN              European Committee for Standardization
CMM              Capability Maturity Model
CRCE             Azerbaijan Foreign Trade Centre, Ministry of Foreign Affairs
CTI              Calculus Techniques Institute
CTV              Colour Television
EBRD             European Bank for Reconstruction and Development
EFTA             European Free Trade Agreement
EIU              Economic Intelligence Unit
ERP              Enterprise Resource Planning
ESIS             European Information Society Project for Central & East European and Mediterranean
                 countries
EU               European Union
EDP              Electronic Data Processing
FDI              Foreign Direct Investment
GDP              Gross Domestic Product
GSM              Global System for Mobile Communication
IBM              International Business Machines
ICT              Information and Communication Technology
IDC              International Data Corporation
IEC              International Electromechanical Commission
ISDN             Integrated Services Digital Network
ISP              Internet Service Providers
ISO              International Organization for Standardization
ITA              Information Technology Agreement
ITE              International Trade Exhibitions, Azerbaijan
ITG              Information Technologies Group
IT               Information Technology
MEP              Main Export Pipeline
MFN              Most Favoured Nation
MNC              Multinational Company
OECD             Organization for Economic Cooperation and Development
PC               Personal Computers
PSA              Production Sharing Agreement
R&D              Research & Development
RDBMS            Relational Data Base Management System
SDD              Software Design Description
SMEs             Small and Medium Enterprises
SMS              Short Messaging Service
SRS              Software Requirement Specifications
SSAC             State Students Admissions Commission
SWOT             Strength, Weakness, Opportunities and Threats
TCGP             Trans Caspian Gas Pipeline
TRACECA   Transport Corridor Europe – Caucasus - Asia
TRIPS     Trade Related Aspects of Intellectual Property Rights
UNDP      United Nations Development Programme
URA       Uruguay Round Agreements
VAT       Value Added Tax
VSAT      Very Small Aperture Terminals
WTO       World Trade Organization
                Part One

       THE REPUBLIC OF AZERBAIJAN
INFORMATION TECHNOLOGY EXPORT CAPACITIES
                                             Chapter 1
                                   General Economic Environment


Economic Structure
The Republic of Azerbaijan is situated in the South Caucasus. It has a land area of 86,600
sq.km. and borders with Iran and Turkey to the south, Russia to the north, Armenia to the
west, Georgia to the north-west, and the Caspian Sea to the east. Azerbaijan is a country rich
in culture and history, with a wealth of natural resources including oil, gas and minerals.

From early in the nineteenth century, the Republic of Azerbaijan was first a part of the
Russian Empire and then more recently the Soviet Union. It declared its independence on 30
August, 1991 and has been officially recognized as an independent State since 18 October of
that year.

Positioned by geography and economics as a vital link between Europe, Central Asia and the
Middle East, the Republic of Azerbaijan is poised to become an important player in today’s
global marketplace. The sectors contributing most to its industrial output have been its food,
synthetic and natural textiles, leather goods, carpets, furniture, fuels, and machine- making
industries. Major food processing and cotton textile operations were located in Ganja in
western Azerbaijan. Its petro-chemical industry was concentrated near Baku. The city of
Sumgayit, just north of Baku, was the nation's main centre for iron, steel and other
metallurgical industries.

The cease-fire in the Armenia-Azerbaijan, Nagorno-Karabakh conflict in 1994 and the
implementation of an IMF-backed stabilization programme, together with a large inflow of
foreign investment in the oil sector, have all contributed to a sharp turnaround in the economy
in the last three years. Table 1.1 below shows the recovery process in terms of key economic
indicators:

Table 1.1:       The Republic of Azerbaijan - Economic sector indicators for 1996-2001
                                             1996       1997        1998       1999    2000    2001
 GDP Growth          (%)                       1.3       5.8        10.0        7.4     11.1    9.9
 Industrial production growth (%)
 Agriculture                                  -6.7       0.3         2.2        3.6      6.9     5.1
 Industry                                      3.0      -6.1         6.2        7.1     12.1    11.1
 Services                                     15.7      11.1        14.0        5.4      5.8     5.6
 Export Billion US $                           0.6       0.8         0.6        0.9      1.7     2.3
 Import US$ billion                            1.0       0.8         1.1        1.0      1.2     1.4
 Trade Balance                                -0.4        0         -0.5       -0.1      0.5     0.9
 FDI                                           0.5       1.1         1.4        0.8      0.7     0.9
 Current Account Balance                       0.1       0.0         0.1        0.1      0.1     0.1
 Unemployment rate                             0.9       1.0         1.1        1.2      1.2     1.5
 Inflation rate                               19.9       3.7        -0.8       -8.5      1.8     1.5
 Exchange rate (US$/AZM)                     4.098     3.987       3.869      4.373    4.565   4.774

Source: State Statistical Committee of the Republic of Azerbaijan, June 2002


In the latest reported full year, 2001, GDP grew by 9.9%, which can be attributed mainly to
the steady growth of the private sector. In 1999, the consumer price index actually fell by
8.5%, but then in the year 2000 the Republic of Azerbaijan’s economy was adversely affected
by the economic crises in Russia and Turkey, causing a 1.8% consumer price rise.
Unemployment has officially been reported as holding steady at between 1.1% in 1999 (i.e.
47,000 out of work) and 1.0% in 2001, but unofficial sources estimate the real level to be
more like 14%. The average annual income (GDP per capita) in 2001 was US$ 680 and the
exchange rate has remained relatively stable.

According to the American Chamber of Commerce in the Republic of Azerbaijan, there has
been a stable economic environment for some time and investors’ confidence is improving.
They report that, since its signing of the Stability Pact with the IMF in 1994, steady progress
has been made in almost all sectors of Azerbaijani society - law, government, business
cooperation, labour conditions, agriculture, international communications, information
availability, consumer goods, and many others. It is noted, however, that despite the
continued reform drive, the country remains over-reliant on the oil sector, making the
Republic of Azerbaijan a still somewhat risky destination for foreign investors.

GDP Growth

Economic growth in the Republic of Azerbaijan has been driven mainly by increasing oil
exports and a strong performance by the agriculture sector. GDP growth peaked at 11.1% in
the year 2000. It grew by another 9.9% in 2001, and the rate was expected to be about 9.5%
in 2002.

The industrial sector accounted for 40% of total GDP in 2001, compared to 32% in 2000.
Industrial production rose overall by 5.1% in 2001. According to the Statistical Committee of
Azerbaijan: "For the first 7 months of 2002, there was an investment of 5,321.5 billion
Manat in the Azerbaijani economy, which was more than double the amount of
investmentin the same period in 2001. It is worthwhile to note that 4,173 billion Manat
(78%) of all investment were in the form of FDI and 1,148 billion Manat (28%)was from
national capital. GDP growth for Azerbaijanover the period January – July 2002 was 9%,
which equalled 14,740 billion Manat. During the period, GDP per capita was 1,867,000
Manat, a growth of 8.2% over the same period of the previous year. In terms of GDP
structure, industrial production accounted for 38.8%, transport and communications 13.8
%, agriculture 12.5%, construction 7.2%, services 20% and trade 7%". In the same year,
the private sector’s contribution grew by 10.7% mainly because the world’s oil majors
increased their participation. Oil, gas and mining accounted for 53.7% of the whole industrial
sector in 2001, compared to 44.6% in the year 2000.
Figure 1.1 shows GDP growth for the period 1996-2002.


                      Figure 1.1 : Azerbaijan: GDP Growth 1996-2002
             12
                                                             11.1
             10                           10                           9.9
                                                                                9.5
                8
                                                  7.4
                6                5.8
                4
                                                        GDP (percentage growth)
                2

                0
                       -1.3
                    1996      1997     1998    1999       2000      2001     2002
             -2




           Source: State Statistical Committee of Azerbaijan, June 2002 and EIU

After oil, agriculture has been the next largest contributor to GDP growth. This sector was a
particularly strong component of total exports in the year 2000 and employed 42% of the
population. In 2001, the energy sector grew by 5.7%, chemicals & petrochemicals by 13.3%
and the food industry by 3.9%.

Privatization

The National Programme of State Property Privatization was designed to establish a self-
regulated market economy by encouraging economic development based on private
ownership and free competition. The privatization law was passed in January 1993 to
legitimise operations of the private sector and allow its expansion.

Privatization plans envisaged the sale and auctioning of State properties and the formation of
joint-stock enterprises. To facilitate private-sector development, the government has been
applying a set of legal regulations to market and environmental standards and eliminating
existing constraints, particularly with regard to access to credit, loans and office space. The
privatization programme also includes the de-monopolization of State monopolies and the
fostering of a competitive market environment.

Small retail establishments were privatized by auctions; medium to large-sized enterprises by
a combination of auctions and joint-stock programmes. By 1993, retail establishments were
completely privatized. Housing was privatized by transferring ownership to existing tenants.
A total of 1407 joint-stock companies have been formed from State companies since
privatization began. There were 272 joint stock companies of the Ministry of Agriculture; 16
under the State Concern Azeravtonagliyyat (Transportation), 96 under State Concern
Khidmet (Services), 99 under Ministry of Trade, 61 from Takhil Mehsullari (Wheat
products), 57 under Azeryeyintisanaye (Food Products Industry), 56 under the State Concern
Goods for People, 38 under Azergushsanaye (Poultry Industry), 32 under Sanaye-Tijaret
(Trade Industry), 41 on the basis of SOCAR, and 20 under Azerbalig (Fishing Industry).
The first stage of the programme, from 1993 to 2000, involved the transformation of State-
owned enterprises into joint-stock companies and then privatizing them. In this first stage,
167 joint-stock companies were founded.

The second stage took effect from 10 August, 2000. Seven different selling methods were
envisaged. On March 22, 2001 the Privatization of Enterprises Decree was signed by the
President of the Republic of Azerbaijan, to take effect in industries such as
telecommunications, airways, fuel and energy, machinery, chemicals and poultry, and on 29
March the Decree on the Establishment of the Open Joint-stock Company,
Azneftkimyamash, was also signed. These decrees stipulated privatization of State shares in
nearly 450 enterprises and 21 joint ventures. They were aimed at attracting investment in
order to improve efficiency in the privatized enterprises, to produce competitive products and
services, and create new jobs. It was a crucial decision, therefore, to authorize a public
offering of enterprises by means of individual projects and investment bids, at the same time
offering equal opportunities to both foreign and local investors.

In some industry sectors such as power, chemicals, machinery, publishing and printing,
communications and transportation, there have been commissions set up for companies
already earmarked for privatization. Their work was expected to complete the reorganization
of more than 100 companies into joint-stock companies. And for 16 other companies,
foundation documents were approved and the sale of their stocks was underway.

Three key criteria were established for this second stage of privatization, namely:

   the ability of an enterprise to increase exports or at least become a non-importer;
   the capacity to support high employment; and,
   the presence of a market to sell into.

A total of 40 enterprises would be selected for privatization, from the light industry, machine-
making, fuel, energy and metallurgy sectors. Tenders for financial consultants were being
announced to facilitate the privatization of business units of the AZAL State Concern of the
Transport Ministry. The terms for competition and investment were being prepared for the
Azerkimya State Company, a machine-making industry.

According to the Ministry of Economic Development, the slow pace of privatization has been
attributed to a lack of organization of certain scheduled events in the development
programmes of joint-stock companies, such as annual meetings of stockholders and the
distribution of profits. Other reasons cited include the high rate of unemployment and the
government’s reluctance to close insolvent firms for fear of putting undue strain on the social
fabric. Government efforts were also hampered by vested interests in disinvestments or in the
closure of some State companies. All of these resulted in the economy remaining heavily
dependent on oil.

The main companies listed for privatization in the telecom and industrial sectors are shown in
Table 1.2 below:

Table 1.2      The Republic of Azerbaijan: Companies listed for privatization – Phase II

Baku Telephone Communication Production Union     Azerelektromash Scientific Production Union
Aztelecom Production Union                        Azerelektroterm Scientific Production Union
Azermetbuatyayimi Production Union                Baki Kondisionerin Scientific Production Union
 Gasid Publication Distribution Company                   Azerelektroishig Production Union
 Material Support Department                              Azerdezgahsenaye Production Union
  Ground Stations of Communication Using for              Azyolmash Production Union
 Supporting of International (Long-Distance)               Chinar Production Union
 Communication                                             Mingechevirkompleksheymash Production
  Shares in Charter Capital of Joint Ventures             Union
   Created                                                 Orbita-Servis Production Union
 with Participation of Enterprises and Organizations of    Central Electrolytic Factory
 the Ministry of Communications.                           State Pad Factory No.7
 Orbita Station of Teleradio Production Union             Baku Automobile Factory
 (Garadag Settlement)                                      Zayamkendmash Factory
 Khazar-Lada Joint-Stock Venture of Closed Type           Moskvich Technical Service Union
 Baku Kamazavtomerkez Limited Liability Company           Baku Telegraph

 Source: Ministry of Economic Development, June 2002


 Foreign Direct Investment

 The oil sector attracted the major share of foreign direct investment (FDI) and led to the
 Republic of The Republic of Azerbaijan becoming one of the fastest growing economies
 among the CIS countries. Contracts worth US$ 60 billion, for the development of the oil and
 infrastructure sector over the next 20 years, have been concluded by oil majors. These include
 the construction of pipelines to Russia and Turkey at an estimated cost of US$ 25 billion.
 Projects underway and with further investment potential include the Main Export Pipeline
 (MEP) from Baku-Tbilisi-Ceyhan and the Trans-Caspian Gas Pipeline (TCGP) for carrying
 gas from Turkmenistan, under the Caspian Sea, across the Republic of Azerbaijan and
 Georgia, to the Trans-Caspian region. The investment inflow into the Republic of Azerbaijan
 from 1996 to 2001 amounted to US$ 10.2 billion. In 2001 alone, the inflow of FDI was
 valued at US$ 1.3 billion. This was expected to rise substantially (by US$ 4-5 billion
 annually) with the development of the hydrocarbon sector. Furthermore, an oil fund of US$
 500 million has been created to help diversify the base of economic development. Table 1.3
 shows the values and growth of FDI in different industry sectors of the Republic of
 Azerbaijan:


 Table 1.3: The Republic of Azerbaijan - Structure of Foreign Direct Investments (FDI) by Sectors
                                                                                    (Value: US $ million)
Sector/Year                         1994     1995    1996     1997      1998      1999    2000     Total
Industry                               44      147.4      472.4   871.7    990.1    622.3   296.5   3700.4
Oil Industry                           22      139.8      416.2   780.1    891.8    544.5   546.1   3288.5
Construction                           25       3.5        23     104.2    153.4    28.9    31.0     344
Trade & Service                        45       1.2        8.5    74.0     100.3    55.5    16.6    249.1
Transport & Communications              4       2.6       15.1    21.2      37.1    38.6    17.3    131.9
Other                                  32        -          -     39.9      41.1    429.6   452.7   116.3

 Source: Ministry of Economic Development, June 2002

 The oil industry accounted for 42% of the total FDI and industry in general for 47.54%. The
 Republic of Azerbaijan was an important link with the Caspian Sea region for many leading
 global energy companies such as BP, Exxon Mobil, Chevron Texaco, Elf Total and Fina. The
 Republic of Azerbaijan succeeded in signing 21 Production Sharing Agreements (PSAs) for
the exploration of its offshore oil fields, with estimated reserves of 200 billion barrels of oil
and 640 trillion cubic feet of gas – almost 15% of total world's reserves.

Over the period 1994 to 2000, the construction sector attracted FDI of US$ 344 million, trade
and services US$ 249.1 million and transport and communications US$ 131.9 million. It was
learnt that in 2001 telecommunications attracted FDI worth US$ 40 million. It was observed
that FDI has gone mainly into the traditional sectors. Investment in the services sector,
therefore, has yet to pick up. Table 1.4 shows the main sources of FDI in the Republic of
Azerbaijan:
   Table 1.4: The Republic of Azerbaijan - Structure of Foreign Direct Investments (FDI) by Countries
                                                                                    (Value US$ million)
   Country/Year           1994 1995 1996 1997 1998 1999                      2000          Total
   Turkey                  40      6.8    45.3   129.6   160.3    67.8      31.6          481.4
   USA                      3      2.1    41.5    97.5    56.7    29.8      11.2          241.8
   UK                       6      0.7     1.2    47.2    47.4    45.8       6.8          155.1
   Germany                  1      1.2     4.2     16     2.1     6.2        1.7           32.4
   Russia                   3      0.7     2.3     5.5    10.3     -          -            21.8
   Italy                    -      0.1     0.4     1.5      -      -          -            2.0
   Japan                    2       -       -       -       -      -        16.4           18.4
   France                   1       -       -       -       -     25.4      39.3           65.7
   Norway                   1       -       -       -       -      -          -            1.0
   Saudi Arabia             2       -       -       -       -      -          -            2.0
   UAE                     —       0.7     1.7     8      16.6    7.6        2.8           37.4
   Sweden                   1       -       -       -       -      -          -            1.0
   Iran                    0.6     0.9      1      2.6    40.7    9.2        2.9           57.9
   Other Countries         90      1.7     5.2     23    126.1    18.6       5.3          269.9

   Source: Ministry of Economic Development, June 2002

The US, the UK, Turkey and Norway were the main investors in the Republic of Azerbaijan.
US companies invested largely in the oil sector and Turkish companies in
telecommunications and services.

Azerbaijan was at the top of the league table among CIS countries in terms of foreign
investment per capita, and in second place among East European and Baltic countries. With
the creation of the National Oil Fund, emphasis was on diversification of the economy away
from the oil sector to knowledge-based industries such as information technology and value-
added services.

There were 1,300 foreign companies with a presence in the Republic of Azerbaijan taking
advantage of its natural resources and skilled manpower in a range of different sectors.
Efforts were being made to establish investment-friendly policies and a constructive business
climate to encourage companies to invest more in Azerbaijan, especially in terms of
technology and finance.

Manufacturing Base
The Republic of Azerbaijan's industrial economy was based on petrochemical-derived
products such as plastics and tyres, oil-drilling equipment, processed foods and textiles,
synthetic and natural textiles, leather goods, carpets, furniture, fuels and machine-making.
Table 1.5 shows industrial output from 1999 to 2001.
Table 1.5: The Republic of Azerbaijan -Industrial output in Azerbaijan
                                                                                (Value US$ billion)
                             1999       Growth        2000       Growth          2001     Growth
          Sector                         (%)                      (%)                       (%)
 Industries                    0.68          3.6        0.73           6.9          0.76         5.1
 Agriculture                   0.71           10        0.77           2.8          0.85         7.8
 Construction                  0.42           00        0.31         -33.6          0.33         3.1
 Transport and                 0.41           00        0.58          24,8          0.64         7.1
 Communication
 Trading                       0.25             30      0.32             14,7       0.37       11.5
 Other services                0.84             20       0.8             14.6       0.88        7.2

Source: Ministry of Economic Development, June 2002


Industrial growth was robust at 3.6 % in 1999, 6.9 % in 2000 and 5.1% in 2001. The reason
for the growth was that the telecommunications industry was taking off, with investment
flowing into fixed and mobile telephony systems.

The Republic of Azerbaijan also exported chemicals and machinery from its moderately
developed aluminium and metallurgy industry. A Japanese consortium was upgrading
Shimal(North) thermal power plant. Similarly, a Swiss company was working on the
Mingachevir hydroelectric plant with funding from the EBRD and the Islamic Development
Bank. A new Trans-Caucasian rail link was being built with help from the EBRD and the
World Bank. A number of transportation and infrastructure projects with regional cooperation
are underway, in efforts to create a “New Silk Road.”

Despite the above-mentioned ventures, the Republic of Azerbaijan’s economy was still
excessively dependent upon the primary products of the oil industry. An over-emphasis on
oil and gas extraction has meant that the development of the country’s infrastructure, already
in a poor condition from the Soviet era, has been somewhat neglected , Roads are inadequate
and in disrepair. Eighty percent of arable land is irrigated, but the irrigation system is falling
apart. The electrical generation and distribution system is barely functioning and shortages of
gas, water and electricity are routine.

As regards the telecommunication and information technology industry, the Republic of
Azerbaijan used to be the fourth largest centre for statistics in the former Soviet Union and
produced Corvet brand computers. Two main companies – M/s Azon Baku and M/s Billur
Ganja were manufacturing microchips and other electronic components for military
applications and radio equipment.

Foreign Trade

The total value of two-way foreign trade in the year 2001 was US$ 3.74 billion, compared to
US$ 2.92 billion in 2000, an increase of 28%. Exports were valued at US$ 2.31 billion and
imports at US$ 1.4 billion, resulting in a trade surplus of US$ 884 million, up by 46.5% on
the previous year. The private sector accounted for 52.6% of exports and 69.0% of imports.
In terms of product categories, oil and oil products together accounted for 90.8% of exports –
two-thirds crude oil and one-third oil products.

The main countries of destination for Azerbaijani exports of oil and oil products were Italy
(41.3%), the US (8.6%), Turkey (7.4%), Israel (6.3%), France (3.3%), Iceland (3.2%), and
the UK (3%). Table 1.6 shows the development of the Republic of Azerbaijan’s foreign trade
over the period 1997 to 2001:

Table 1.6: The Republic of Azerbaijan - Foreign Trade (1997-2001)
                                                                        (Value in US$ million)
                          1997           1998          1999         2000            2001
 Exports                   781            606           928         1745            2314
 Imports                   794           1076          1035         1172            1430
 Trade balance             -13           -470          -107         +573            +884

Source: The Economist Intelligence Unit, 2002

Imports consisted of mineral resources (16.9%), foodstuffs, consumer goods (16.1%),
machinery and equipment (24%) vehicles (15%) and chemicals (4.7%). Imports were mainly
from Russia (21.3%), Turkey (11%), the US (8.9%), the UK (5%) and Japan (1.4%). In terms
of trade with neighbouring countries, Russia accounted for 34.2% of turnover, Turkmenistan
21.2%, Georgia 17%, Kazakhstan 16.3% and the Ukraine 7%.

It may be noted that the Republic of Azerbaijan's dependence on CIS markets was
decreasing. Some 43.7% of export revenues came from Italy, through oil shipments to their
oil terminals. Of the CIS countries, Russia and the Ukraine remained the most important
trading partners. Russian goods were imported because of their low prices. In 1998, Turkey
accounted for a major share of Azerbaijan’s exports, but in 1999 these declined by about 6%
due to the recession in Turkey. Similarly, in 2000, Iran’s share of exports declined to just
4.8% of the Republic of Azerbaijan’s total exports, down from a peak of 12% in 1995. The
economic crisis in Russia of 1998 also had an impact but the overall pattern of Azerbaijani
exports has now begun to stabilize as a result of its diversification into more markets of
Western Europe.



                                    The Republic of Azerbaijan:
                                     Economic Development -
                                       Key Issues & Trends

         Business climate gradually improving, but needs revamping

         Economic policies hampered by frequent changes in legislations
         and implementation of policies inconsistent
         Economy heavily dependent on oil and oil products
         Other sectors like agriculture, industry and infrastructure in
          transition phase of development
         Exports dominated by oil and oil products
         Export market diversification initiated towards Western Europe
         Regional imbalance with high rates of poverty and unemployment
         Low rate of inflation and financial stability achieved
 Trade surplus achieved in consecutive years
 FDI mainly directed towards oil sector
 National Oil Fund created for diversification into other economy sectors
 Public-private partnership mechanism at initial stage of development
 Privatization process implementation is gaining momentum
Chapter 2

                          National Export Diversification Policy


The Republic of Azerbaijan used to be known for being on the “Silk Road” linking Asia with
Europe and for its large untapped reserves of hydrocarbon. It became a centre of attraction
for foreign investment, particularly in the hydrocarbon industry. The economy exhibited
robust growth. With its already established human capital, knowledge-based industries and
productive capacities, the Republic of Azerbaijan could become an ideal destination for
investment and development in ICT industries. According to the OECD, the Republic of
Azerbaijan ranked equal to Russia, Kazakhstan, and Turkey in terms of political and
economic stability. The American-Azerbaijan Chamber of Commerce stated that, among CIS
countries, large corporations placed an emphasis on Azerbaijani abilities to establish
industries that take advantage of natural resources and to train manpower .

With the aim of integrating the Republic of Azerbaijan’s economy with the global
environment, a wide range of economic reforms were initiated. Among the initiatives taken
were those designed to prepare the Republic of Azerbaijan to embrace a market economy, to
attract local and foreign investment, and to introduce modern technologies and management
practices. These would enable companies to produce competitive products, encourage the
reconstruction of existing ones and open new factories, thus generating employment and
regional development.

The Ministry of Economic Development prepared a 10-year short-term strategy for economic
development. The principles embedded in this strategy were:

   concern for the social direction of the reforms;
   improvement of people’s welfare;
   new job creation,
   the development of science as an instrument of economic progress;
   free competition;
   entrepreneurship;
   improvement of the investment environment; and
   legislation to comply with world practices.

To reduce the country’s dependence on the oil sector, the industrial policy envisaged
investment in the field of high-tech services and the production of technology-based
equipment, such as cordless phones, cell phones, radio-electric instruments, and special
communication devices. Emphasis was also given to machine-making, the chemical
industries, refrigeration, electrical appliances and the agriculture sector.

Efforts were made to improve the legal structure to facilitate the operation of market forces.
These included the deployment of information technology in government to enhance
transparency, the liberalization of telecommunications, an investment policy that opened
doors to foreign investors and a liberalized trading policy. The prohibition of unnecessary
audits, the liquidation of debts, the establishment of financial, credit and other structures,
were also among the initiatives being undertaken to improve the country’s business climate.
The aspects of these policies that had a particular impact on information technology,
telecommunications, international trade and industry are described in the following
paragraphs:
Information Technology Policy

The Ministry of Economic Development was responsible for economic policies in the
Republic of Azerbaijan. As the information technology sector affected all other economic and
social sectors, it was accorded high priority. Particular areas in need of attention were
identified as policy, awareness, capacity building, support for industry and collaboration with
the international community. It was recognized that the ICT sector had the potential to
improve e-governance, the government-citizen interface, productivity levels in the industrial
sector and expansion into a global marketplace - and the potential to develop new and
additional exporting sectors as alternatives to oil and oil products.

There is real need for the wide application of ICT in the Republic, and the conditions are
favourable. The existence of the following can already be demonstrated:

            Government has the resolution to build an information society.
            There are opportunities to render technical and financial support of ICT works
             planned by by UNDP and other international organizations.
            There is positive experience in the formation of a normative-legal base for an
             information society in the country.
            The process of admission of students to Higher and Secondary Special
             Educational Institutes is carried out with the wide application of ICT.
             Examinations are centralized with the use of a bank of tests, which functions
             successfully. Real opportunities to take the examination is provided on-line.
             Structured information resources are created on the basis of information
             collected for 10 years and extensive information services are rendered to citizens
             via the Internet. The of selection process for teachers in secondary schools is
             also beginning to be carried out with the application of ICT.
            Within the framework of the reform of courts in the Republic, ICT was being
             applied in the process of the selection of judges, and the aptitude of judges was
             also determined by the tests.
            ICT is used for the testing of attorneys and State employees.
            A State Automated System for “Elections” has been introduced and was used
             for the first time in 2000 during elections to the Milli Majlis (Azerbaijan
             parliament).
            A Regional Academy has been created to prepare certified specialists in ICT.
            In the “National Passport System of Azerbaijan” project, modern ICT systems
             are widely used. A “Frontier: departure-arrival” information system has been
             built, providing the opportunity to apply ICT at frontier points.
            An electronic system of inter-bank payments has been created in a project set up
             within the actual bank system of Azerbaijan.
            A number of regional ICT education centres have been created in the Republic
             with the assistance of international organizations.
            Within the framework of the TransAsiaEurope project, a network of optic lines
             of communication has been built in the country, thus increasing the application
             of digital technologies in the communications infrastructure.
            Within the framework of the Transport Corridor Europe-Caucasus-Asia
             (TRACECA) project, along with the Baku-Tbilisi railway, a fibre optic
             communication line being put into operation.
              With the aim of improving the management and procedures of the Customs
               system, a “network for the transfer of data and an automated system of
               control”has been built.
              A monument point for IST in the Programme of the European Community has
               been created in Azerbaijan.
              Azerbaijan participates in four IST projects: WISTCIS, TELESOL, TRISTIAN
               and EAST.
              A number of other useful ICT projects have been established in the private
               sector and non-governmental organizations.

The State Students Admission Commission with the help of the United Nations Development
Programme (UNDP) embarked on a national programme to develop a strategic operating
framework for guiding the direction of the ICT sector in the Republic of Azerbaijan. Out of
this, the National Information Communication Technology Strategy (NICTS) framework
evolved. In this framework, six working groups were set up – National Strategy, Normative
Legal Base, Usage of the Azerbaijani Language and Alphabet in the Information Space,
Projects, Regional Information Centres, and Internet Services. These groups were to identify
the national strategy for the ICT sector, the main laws on ICT for e-documents, e-signature
and e-commerce, the creation of fonts based on the Azeri language, software, a dictionary,
etc. The project would prescribe the ICT development roadmap for the Republic of
Azerbaijan to 2011.
To develop the national ICT strategy, a mixed approach was deployed, taking into account
the existing status of the country and attempting to provide a policy instrument that is
realistic, flexible and business-orientated. The policy aimed to serve:

              ICT as a production sector,
              ICT as a factor, enabling social-economic development.

Figure 2.1 shows the typology and linkages with various institutions and operators:

Fig: 2.1        Role of ICT in National Strategies: A Typology




The key points of the policy were:

Main tasks:
              Creating and developing the legal base of an information society,
              Developing human factors in the society, providing favourable conditions for
               high-quality education and medical services,
            Creating a favourable environment providing human rights and social
             institutions for the free collection, distribution and use of information,
            Realizing effective, transparent and controlled State regulation and local
             government, building e-government, forming and developing e-commerce,
            Strengthening the economic, social and intellectual potential of the country,
             building a competitive economy, creating and developing the information and
             knowledge market,
            Digitally preserving the historic, literary and cultural heritage of the nation and
             information about the world community,
            Forming and developing the information and communication infrastructure of
             the society, expanding information and communication services,
            Providing national information security,
            Integrating the country into the global e-information space,
            Introducing and developing new information and communication technologies,
             creating national software products, developing science-intensive production
             (ICT industries), eliminating the “digital divide”.

       Priorities:
         Provision of information needs of the citizens, development of theindividual,
            promotion of the intellectual potential of the country.
         Strengthening of economic potential of the country through introduction of
            information-communication technologies.
         Digital preservation and promotion of the national historic, literary and cultural
            heritage of the people.

       Main directions:
         Preparation of national ICT human resourses and provision of minimum level of
           ICT-literacy.
         Development of telecommunications industry.
         Formation and development of e-government.
         Creation of the normative-legal base to support informatization.
         Building and development of the e-economy.
         Formation and development of national information resources.
         Strengthening scientific, technical and production potential in information and
           communication technologies.
         Provision of national information security and personal data protection.

It was noted that a national plan of action would be prepared for the implementation of the
National Strategy. The plan will be implemented through programmes as well as projects.

Details of the policy may be seen in Appendix 2.1.

The National Strategy project lays greatest emphasis on the creation of favourable economic
conditions for foreign and local capital, the stimulation of investment in the ICT sector, and
the conducting of a flexible financial, tax, credit, and customs policy in this area. In this
context, the President’s Decree “on additional measures in the sphere of the State charge of
the development of business in Azerbaijan”, dated 10 September, 2002 provides support for
business andspecific instructions to State authorities to implement various measures that will
lead to the development of a robust SME sector.
Another important aspect of the strategy is the development of scientific-technical and
production potential of the country in the ICT field. The policy aims at export-led
development of the ICT industry with:

                the stimulation of innovation;
                the development of scientific research connected with ICT
                the formation of ICT-industry and stimulation of investments in ICT-
                 industry;
                the production of ICT-services, ICT-productions and stimulation of their
                 export;
                the stimulation of small and medium-sized ICTenterprises.

It is proposed to start to create pilot specialized techno-parks and incubators for the small
companies in the IT sector, oriented to the export of software products and services.

Telecommunication Policy

According to the decision of the Cabinet of Ministers No. 143, dated June 04, 1994, the
Ministry of Communications (MOC) was empowered to manage and coordinate the
broadcasting of all State TV and radio programmes, telecommunications and postal
communications. The Ministry is also responsible for ensuring the fulfilment of growing
demand by providing the means for uninterrupted communications services. The Ministry
was thus a regulator as well as a service provider.

The Ministry would ensure:

   equality of all physical and legal entities in this sphere of activity and service
    procurement;
   protection of free competition, limitation of unfair competition,
   provision of free access to and distribution of information on all subjects,
   separation of the subject of regulation from the economic practicalities in this sphere of
    activity.

The Republic of Azerbaijan is a member of the International Telecommunications Union
(ITU) and participates in various international forums. Not yet having become a member of
the World Trade Organization (WTO), it has not ratified the Agreement on Basic
Telecommunications Services. The Ministry is preparing to join the European Conference on
Postal and Telecommunication Administration (CEPT), which enable the Republic of
Azerbaijan to establish bilateral relations with legislative organizations in Europe.

The Law of the Azerbaijan Republic “On Communications” dated 20 June, 1997 defined the
organizational, economic and legal basis for activities in the field of communications.
An Inter-Ministerial Tariff Commission was set up, headed by the Minister of Economic
Development to provide a ‘level playing field’ for all operators. The Commission had
powers to control tariffs, manage frequencies and impose penalties on defaulters.

According to the decision of the Cabinet of Ministers No. 138, dated 12 December, 1997 “On
Rules for Protecting the Methods and Equipment for Communications in the Republic of
Azerbaijan”, communication equipment needed certification prior to installation.
The licensing of services such as international, inter-city and local cellular communications,
paging, radio-trunk, cable TV, and express postal services, was regulated by the Ministry of
Communications. It was also responsible for setting up joint ventures in telecommunications.

Aztelecom was the State monopoly provider for long distance and international calls,
including leasing of inter-city and international channels. It offered services such as, local,
inter-city and international telephony, data transmission, telegraph, telex, TV and radio
broadcasting, cable transmissions, leasing of frequencies, Internet access and a telephone
pay-card system. Three operators were providing domestic telephone services - the
AzTelecom, Azeurotel, and Ultel. In mobile telephony, two companies provided the
services, namely Azerbaijan – Bakcell and Azercell.

Internet services in the Republic of Azerbaijan were provided by 13 companies. These
included Adanet, Artel, Azcom, Azerin, Azeronline, Azeurotel, Azinternet, Azintex,
Aznetcard, Bakinternet, Baknet, Intrans and Sinam-Invest.

A number of telecommunication companies were to be privatized, according to the decree of
the President of 21 March, 2001. These included, AzTeleCom and the Baku city telephone
system, Tele Radio, Azermetbuatyayim, ground satellite stations and the State-owned share in
authorized capital of joint ventures, the co-founder of which was the Republic of
Azerbaijan's Ministry of Communications. It was understood that over 51 percent of
Aztelecom’s shares would be put up for privatization.

It was also noted that a modernization programme to 2006 for the national communications
system was being implemented in three stages with an investment of US$ 350 million. This
telecommunications development programme was based on accelerated improvement of the
international television network by switching to fibre-optic and satellite channels. Now,
direct channels connect the country to Rome, London, New York, Frankfurt, Ankara,
Moscow and other centres. In 1991 there were only 30 direct satellite channels; by 2001 the
number of channels exceeded 800.

It was planned to upgrade the communication network in the country to a digital system by the
year 2007. Today, digital equipment accounts for 37.1% of operating ATE - in the city of
Baku 41.2 % - with the remaining being analogue. The telecom system was concentrated in
the Baku region. The Ministry of Communications plans to enhance the penetration level of
telecommunications in the regions and villages of the Republic to 50 in every 100 families by
the year 2007.

Among CIS countries, the Republic of Azerbaijan is one of the leaders in the use of mobile
telephony (quantity per capita). In 1994, the number of mobile subscribers in the Republic of
Azerbaijan was just 2,000. This had increased to 610,000 in 2001. And Internet access was
available throughout the country. Appendix 2.2 gives details of Multilateral Agreements
within CIS countries and bilateral agreements with Ukraine, Uzbekistan and Kazakhstan
signed for enhancing interconnection of mobile communications.

The details of the Telecom policy may be seen at Appendix 2.3.

Trade Policy
The Republic of Azerbaijan’s trade policy revolved around oil sector exports. It also aimed
at diversification into high-tech knowledge-based sectors such as IT, textiles and agriculture.
Market diversification was also given high priority as a means of moving away from reliance
on the former Soviet Union countries and building trade with other nations, including the
European Union.

The Republic of Azerbaijan developed its customs legislation with the Customs Code, the
Law on Customs Tariff, the Tax Code and a number of Decrees issued by the Cabinet of
Ministers.

A Partnership Cooperation Agreement with the European Union entered into force in 1999.
The Agreement provided a framework for cooperation, elimination of trade quotas, Most
Favoured Nation (MFN) status, movement of direct capital, legal benefits to employees and
intellectual property protection. The Republic of Azerbaijan had agreements on free trade
with Moldova, Georgia, Kazakhstan, Uzbekistan, Ukraine and Russia. Under these
agreements no duties would apply to imports originating from these countries. The Republic
of Azerbaijan was in the process of expanding free trade cooperation with other countries
throughout the region and saw Turkey, in particular, as a window of opportunity for
developing the economy as well as exporting products to Europe. A special preference
agreement was being negotiated with Turkey.

The Transport Corridor Europe-Caucasus-Asia (TRACECA) link between Central Asia, the
Caucasus and Europe aimed to create a two-way corridor from Europe across the Black Sea
to Central Asia. It was considered to be the fastest and cheapest way of accessing the
Caucasus and Central Asia from Europe, while complimenting traditional routes.
Development of the TRACECA trade route would prove to be a cornerstone for future
economic growth. The multilateral transport agreement was signed at the Baku summit in
September 1998. Trade in textiles was covered by a specific agreement, which is currently
being re-negotiated.

The Republic of Azerbaijan started the accession process to the WTO by establishing
Azerbaijan's Working Party on 16 July 1997. A Memorandum on its Foreign Trade Regime
was submitted in April 1999. The first meeting of the Working Party was held on 7 June
2002. Depending on the outcome of negotiations, tariffs would be adjusted and commitments
undertaken. In January 2002, the Tariff Council was established by a Resolution of the
Cabinet of Ministers of the Republic of Azerbaijan with the aim of determining the optimal
levels of tariffs.

At present, a differential tariff system is applied to import operations, with import duty rates
of 0%; 0.5%; 5%; 10% and 15% on a CIF basis. Alternatively, duty may be assessed as a
fixed rate per unit of imported goods. The level of customs duty applied depends upon the
type of goods imported. If the value of imported goods as declared significantly varies from
the market prices for similar goods, customs authorities have the right to adjust the customs
value accordingly.

Goods exported from the Republic of Azerbaijan are exempt from customs duties, with the
exception of products derived from metal. The export duty rates varied between US$ 0.00
and US$ 15.00 per 1000 kg.
As regards ICT, the Republic of Azerbaijan is not yet a signatory to the WTO Agreements on
Information Technology and Basic Telecommunication. Tariffs are governed under the
Customs law. All tariff headings are aligned to HS codes.

The details of the trade policy frameworks may be seen at Appendix 2.4

Industrial Policy

In accordance with the Decree of The President of the Republic of Azerbaijan, dated 30
April, 2001, the Ministry of State Property, the Ministry of the Economy, the Ministry of
Trade, the State Committee for Anti-monopoly and Entrepreneurship Support and the Agency
of Foreign Investments were all amalgamated to form the Ministry of Economic
Development, which was responsible for development of the industrial sector of the national
economy. The Ministry was defined as the central executive body for forming and carrying
out State policy in the sphere of socio-economic development and international cooperation,
macroeconomics, trade, investment, development of entrepreneurship, the privatization and
management of State property, the restriction of monopoly and the development of
competition.

The industrial policy was directed towards attracting investment into the economy, promoting
entrepreneurship and competition, the privatization of State property and implementation of
the programme, and directing as well as implementing the mechanisms of the structural
policy. The emphasis was on developing alternative sectors of the economy with the
potential to reduce its current over-dependence on oil and oil products. The main areas
identified for development include information and communication technologies, textiles,
agriculture, cement, tobacco and tobacco products.
The policy aimed to achieve a balanced regional development through the promotion of the
small and medium-sized enterprise sector, upgrading agro industries, increasing the skills of
human resources through better education, developing good labour relations, the integration
of regions through better transport and the improved movement of goods. A “State
Programme for the development of small industry businesses for 2002 to 2004” was signed
on 17 August 2002 by the President of the Republic of Azerbaijan. This was expected to
enhance entrepreneurship, increase exports, provide regional employment and involve more
of the population in the economic life of the country.


Foreign Direct Investment Policy

The Republic of Azerbaijan has developed an “open doors” policy to attract FDI. The policy
aims at social-economic development by leveraging the country’s competence in export
development, production capacities and employment generation. Under Azerbaijani law,
international treaties prevail over local legislation except for the Constitution and Acts
adopted by referendum. The Republic of Azerbaijan concluded 17 bilateral investment
treaties with countries such as the US, the UK, Germany, France, Austria, Italy, and Turkey,
as well as a number of multilateral foreign investment treaties. Bilateral investment treaties
have established a favourable investment climate for investors and provide additional
guarantees. The climate for investment was further enhanced by the OECD giving the
Republic of Azerbaijan a No. 6 ranking in terms of investment risk, along with Russia and
Turkey.
To speed up the process of attracting FDI, a foreign investment Council reporting to the
President was set up. The Council provided support to the Ministries on the basis of
consultations with representatives of foreign companies, international organizations and State
companies. The Council was expected to develop appropriate policies, particularly to
address the following needs for:

   Urgently securing an influx of capital to develop the economy
   Increasing employment and strengthening social stability
   Restructuring industry and the utilization of natural resources
   Developing exports and the transfer of professional skills
   Developing the agricultural and special recovery sectors
   Dealing with the pressure from international donors and especially the IMF to create
    stable and predictable policies

Foreign investment in the Republic of Azerbaijan was regulated by a number of legislative
acts, including the Law On Protection of Foreign investments dated 15 January, 1992 (the
"Foreign Investment Law"), the Law On Investment Activity dated 13 January, 1995 (the
"Investment Activity Law"), the Law On Privatization of State Property and the Second
Programme for Privatization of State Property in the Republic of Azerbaijan, adopted 10
August, 2000 (the "Second Privatization Programme"), in addition to laws that regulate
separate sectors of the Azerbaijani economy. The FDI law was being amended and was
under debate in Milli Majlis (Parliament).

A number of incentives were provided for setting up facilities in the Republic of Azerbaijan.
These included tax incentives, fiscal benefits in free trade zones, bonded warehouses and in
trans-shipment to the Caucasus region.

The detailed law may be seen in Appendix 2.5

Partnership Cooperation Agreement with the European Union

Azerbaijan - EU relations had been developing since 1992. A Partnership Cooperation
Agreement (PCA) with the EU was entered into by the Republic of Azerbaijan at the
Luxembourg Summit in June 1999, which would last for 10 years. The PCA listed all areas of
cooperation between the EU and the Republic of Azerbaijan, including political and
economic cooperation.     It also provided a framework for all types of non-military
cooperation. The PCA would act as the reference point from which the EU-Azerbaijani
relationship could grow.

In practical terms, the PCA laid down an institutional framework of cooperation between the
EU and Azerbaijan through the establishment of a Cooperation Council and Cooperation
Committee. It also provided for:

   Elimination of trade quotas and the provision of most-favoured-nation treatment at
    borders.
   EU companies that invest in the Republic of Azerbaijan will be treated at the same level
    as any local or third nation’s company. Azerbaijani companies will be treated likewise in
    the EU.
   Neither the EU nor the Azerbaijani governments could stop payment of goods and
    services being made or block direct capital movement from the EU to the Republic of
    Azerbaijan or EU- owned companies
   Employees from the EU and/or The Republic of Azerbaijan, if legally employed, should
    benefit from non-discriminatory working conditions
   Owners of intellectual property can expect or have the equal legal protection of their
    rights in jurisdictions of the EU and the Republic of Azerbaijan within five years.

The EU provided different types of aid to the Republic of Azerbaijan in order to overcome
the hardships of the transition period. One major EU programme in which the Republic of
Azerbaijan is a key partner is the Transport Corridor Europe-Caucasus-Asia (TRACECA)
link between Central Asia, the Caucasus and Europe. Under this programme, funds would be
available to finance projects aimed at improving road and rail links within the region.
TRACECA has improved the Georgian-Azerbaijani border crossings by building a new
bridge as well as restoring the old masonry arches of the Red Bridge, which dates from the
12th century.

The EU was also facilitating the Republic of Azerbaijan’s accession to the WTO through the
TACIS programme of giving assistance to the preparation of their documentation and setting
up necessary mechanisms.

The Republic of Azerbaijan was the EU’s largest trading partner in the Caucasus region for
cotton, oil and gas. EU countries took an active part in the privatization process and in
investment tenders in the Republic of Azerbaijan. The EU remained committed to deepening
the trade relationship with the Republic of Azerbaijan. As the trade levels were relatively
low, a major aspect of the EU-Azerbaijani relationship was assistance. Since gaining
Independence, the Republic of Azerbaijan has benefited from a total of EUR 304 million of
EU assistance. With the PCA in place and improvements in the Republic of Azerbaijan’s
economic situation, the focus was moving to rehabilitation and restructuring of the economy,
and the promotion of trade and investment links.

Discussions were held with the American Chamber of Commerce, the Chamber of
Commerce and Industry of Republic of Azerbaijan and many small and medium-sized
enterprises to identify the key issues relating to the business environment. It was learnt that
the transport, irrigation and electricity infrastructure was weak and needed restoring. During
winters some serious energy shortages, with occasional complete power black-outs in the
capital, as well as severe gas shortages were being experienced throughout the country.
Assistance from the EBRD, IMF and the EU’s TRACECA scheme was being used to
improve the infrastructure facilities. Problems with quality, reliability, transparency of
governance, abuse of the regulatory system and poor contract enforcement were among those
highlighted. Table 2.1 shows, by sector, the key issues affecting the business environment in
the Republic of Azerbaijan.

A number of pieces of legislation by Decree of the President of the Republic of Azerbaijan
have been enacted to facilitate the development of small and medium-sized enterprises.

Table 2.1      Azerbaijan - Key issues affecting business environment

Banking                    - Barriers to credit, collateral laws, enforcement of collection
Communication Ministry   - High tariffs for calls;
                         - Inferior quality service/ lines
                         - Registrations required based upon regulations that don’t exist
                         - Regulator as competitor / partner
                         - Vested interests hindering privatizations
                         - Monopolistic and unfair competition environment
                         - Conflicting interest obstructing business
                         - Video conferencing tariff calculated on minutes
                         - Satellite communications obstruction

Economic Development     - Inadequate incentives for production
                         - Undue delay in responses to business inquires
                         - Unclear plans for infrastructure improvement
                         - Licensing formalities - cumbersome with multiple authorities
                         - Neighbouring countries attract investors bound for Azerbaijan
Tax                      -“Negotiable” taxes
                         - Unhealthy attitude toward business
                         - Tax process not streamlined
                         - Incompetent qualified auditors /Inspectors for interpreting law
                         - Lack of transparency
                         - Misinterpretation of VAT (Value Added Tax)
                         - Inconsistent Tax Code interpretation
Privatization            - Lack of organization of scheduled events in join-stock companies
                         - High rate of unemployment
                         - Government’s wariness of closing insolvent firms as it could strain
                            the social fabric
                         - Vested interests in disinvestments / closure of some State
                            companies
Real Estate              - Real estate concept undeveloped - Buying/selling/transfer

Labour                   - Visa processing – taking long-time
                         - Registration of foreign workers/ PSA exemption
Justice                  - Rule of Law / Court rulings contradict law
                         - Lack of impartial courts
                         - Court system is slow and biased
                         - General processes are too complicated and not followed
                         - Registration process cumbersome / lacks transparency
                                              Chapter 3

                 International Trade in Information Technology Products


Global Trade

The Republic of Azerbaijan’s international trade in information and communication
technology products (ICT) was valued at US$ 162 million in 2000 compared to US$ 111
million in 1999, representing a year-on-year increase of 45%, as can be seen from Table 3.1

Table 3.1 The Republic of Azerbaijan: Global trade in ICT products          (Value US$ million)
                                                          1998                1999        2000
  TOTAL IMPORTS                                            194                 105         156
  TOTAL EXPORTS                                              9                   6            6
  TRADE DEFICIT                                           -185                 -99        -150

Source: ITC /PCTAS database & State Statistical Committee of Azerbaijan, 2001

It will be noted that the trade deficit was widening. This can be attributed primarily to
imports of electronic products, computer systems and software products for equipping
government offices, universities and other corporate enterprises. The other major items were
telecommunications products needed for upgrading the telecom infrastructure inherited from
the Soviet Union. GSM cellular operators were also importing systems to provide mobile
communications. The local production in this sector was marginal, therefore exports were
low.

Azerbaijani ICT Exports

Azerbaijani global exports of ICT products, by product category, can be seen in Table 3.2

Table 3.2 The Republic of Azerbaijan: Global export of ICT products (Value US$
million)
  Product Category                     1996          1997            1998       1999        2000
  Semiconductors                        NA            NA              NA         NA          NA
  Electronic Data Processing              0             0               1          1           1
  (EDP)
  Office equipment                        0             0               0          0              0
  Telecommunication                       0             0               4          2              3
  Other components                        0             0               1          0              0
  Scientific equipment                    0             0               3          3              2
  Total                                   0             0              9           6              6

Source: ITC/PCTAS database 1996-2000

Analysis of the ITC/PCTAS data revealed that Azerbaijani ICT exports were valued at US$ 6
million in 2000. The level was stagnant because of the attractions of the local market and the
fact that existing technologies for the manufacturing of products were outdated.

The main products exported were electronic calculators, counting devices, cash registers,
digital telephones and other access devices, microwave stations, telephone cables, satellite
antennas, semiconductor devices for military applications, PCBs and scientific instruments.
Many companies initiated turnkey projects in the trans-Caspian region and were undertaking
applications development, the supply of computer hardware and systems integration.

According to national statistics, exports of electronic products were valued at US$ 9.74
million in 2001 as compared to US$ 5.97 million in 2000, a growth of 63%. Exports of
electronic calculators in 2001 were only US$ 100 and counting devices were US$ 481,300.
While exports of calculators have declined substantially, exports of counting devices declined
by 26%.

Electronic process control equipment worth US$ 9.25 million were exported in 2001
compared to US$ 5.31 million in 2000, a growth of 74%. Watches and spares exports were
US$ 2,500 in 2001, a marginal decline on the US$ 4,200 in 2000. Table 3.3 below shows
details of the exports of various ICT and electronic items from the Republic of Azerbaijan.

Table 3.3        Export of Electronic Products                  (Value US$ thousands)
 Item                                              1999              2000            2001
 Electronic calculators                             0.11              0.03            0.1
 Counting devices                                 217.1             651.1           481.3
 Watches & spares                                    4.9               4.2            2.5
 Electronic process control equipment           10067.2            5317.9          9251.5
 Photo and cinema products                           0.1               0.2            2.6
 Total                                          10289.4            5973.4          9738.0

Source: State Statistical Committee of Azerbaijan, June 2002.
Table 3.4 lists the major destinations of Azerbaijan's export in the year 2000

Table 3.4 The Republic of Azerbaijan: Regional Exports of ICT products
(Value: US$ million)

Country/              Electronics       EDP        Office             Telecom.       Other       Other misc.
                                                   equipment                         comp.       products
Product
USA                              NA            1                  0              1           0               0
UK                               NA            0                  0              0           0               0
Netherlands                      NA            0                  0              0           0               0
UAE                              NA            0                  0              0           0               0
Turkey                           NA            0                  0              0           0               0
Germany                          NA            0                  0              0           0               0
China                            NA            0                  0              0           0               0
Switzerland                      NA            0                  0              0           0               0
Norway                           NA            0                  0              0           0               0
India                            NA            0                  0              0           0               0
France                           NA            0                  0              0           0               0
Russia                           NA            0                  0              0           0               0
Japan                            NA            0                  0              0           0               0
Korea                            NA            0                  0              0           0               0
Kazakhstan                       NA            0                  0              1           0               0
Others                           NA            0                  0              1           0               1
Total                            NA            1                  0              3           0               2

Source: ITC/PCTAS database 1996-2000

Exports were mainly to the US and Kazakhstan. Exports to the US were of specialized
devices for computers and telecommunication antennas. Exports to Kazakhstan were of
computers and related system integration components. Software applications were being
developed for companies in Turkey, Georgia and Kazakhstan.


                                          The Republic of Azerbaijan:
                                         ICT Export Growth Summary

                     Export growth stagnant
                     Exports mainly to Caucasus and Central Asia regions
                     Computers, antennas for earth stations, electronic calculators, counting devices and
                      semiconductor devices.
                     System integration and application development




Azerbaijani ICT Imports

Table 3.5 details Azerbaijani imports of ICT products for the period of 1996-2000.
Table 3.5         The Republic of Azerbaijan: Global import of ICT products
                                                                                      (Value US$ million)
  Product Category                         1996            1997            1998         1999        2000
                                        0          0            2           2          3
  Semiconductors
  Electronic data processing            0          0           15            9        17
  Office equipment                      0          0            1            1         0
  Telecommunication                     0          0          122           55        82
  Other components                      0          0           31           17        19
  Scientific equipment                  0          0           23           21        35
  Total                                 0          0         194           105       156

Source: ITC/PCTAS database 1996-2000

Azerbaijan imports were valued at US$ 156 million in 2000 compared to US$ 105 million in
1999, an increase of 48%. The growth in imports resulted from the modernization of the
telecommunications system, automation in government departments and an increase in
demand for testing and measuring equipment for the oil industry and educational institutions.

Imports of telecommunications equipment in 2000 were valued at US$ 82 million, compared
to US$ 55 million in 1999, a growth of 49%. In this segment, imports included switching &
transmission equipment, EPBXs and other terminal equipment. Mobile communications was
a rapidly expanding sector in the Republic of Azerbaijan. Companies imported switching
systems, radio communication systems and handsets. Another industry that fuelled the
growth of imports was that of Internet service providers, importing access devices, routers,
modems, switches, etc.

Imports of scientific equipment amounted to US$ 35 million in 2000, a growth of 66% over
the previous year. This was accounted for by imports of testing and measuring instruments,
process control systems, calibration equipment and other related accessories. The oil sector
was the main customer for scientific equipment.

Imports of computers and related products were valued at US$ 17 million, compared to US$
9 million in 1999, representing significant growth. Products included servers, desktops and
network products.

Imports of other components, valued at US$ 19 million in 2000, also grew because of an
increase in the number of computer assemblers importing sub-assemblies and piece-parts for
making finished computers.

Table 3.6 below details imports of various ICT and electronic items into the Republic of
Azerbaijan according to national statistics.

Table 3.6:       The Republic of Azerbaijan - Import of Electronic Products
                                                                    (Value in US$ thousand)
 Item                                            1999              2000              2001
 Electronic calculators                         293.7               77.6            395.5
 Counting devices                              7289.7            7693.4           12193.7
 Watches & spares                               189.3             343.7             342.5
 Electronic process control equipment         15732.3          155641.7          121087.7
 Photo and cinema products                        83.4            181.7             239.6
 Total                                       165188.1          163938.1          134259.0
Source: State Statistical Committee of Azerbaijan, June 2002

Electronic process control equipment was the other main category of imported items. These
included controls for heating devices, process control systems for utilities and electronic
devices for electrical appliances.

Table 3.7 shows the main sources of Azerbaijani imports.

Table 3.7:        The Republic of Azerbaijan: Regional Imports of ICT products
(Value in US$ million)




Country/                 Semiconductors     EDP      Office         Telecom    Other        Other
Product                                              equipment      Equipmen   Components   misc.
                                                                    t                       products
US                                      0        5              0         18            1          4
UK                                      0        3              0         15            1          3
The Netherlands                         0        1              0          0            1          1
UAE                                     0        1              0          1            1          0
Turkey                                  0        0              0         27            2          5
Germany                                 2        1              0          3            1         12
China                                   0        1              0          3            3          0
Switzerland                             0        1              0          0            0          1
Norway                                  0        1              0          1            0          1
India                                   0        0              0          0            2          0
France                                  0        0              0          0            1          1
Russia                                  0        0              0          1            1          1
Japan                                   0        0              0          0            0          1
Korea                                   0        0              0          1            1          0
Israel                                  0        0              0          4            1          0
Others                                  1        3              0          8            3         10
Total:                                  3       17              0         82           19         35

Source: ITC/PCTAS database 1996-2000

Imports came mainly from Turkey, the US, the UK, Germany and certain sources in Asia.
Specifically, equipment and products for the telecommunication sector were imported mainly
from Turkey, the US, the UK and Germany. Computers and related products were imported
mainly from the US, the UK and other Asian sources. Most semi-conductor products came
from Germany and Asia. Scientific equipment was imported mainly from Germany, the US,
the UK and Asia.


                                       The Republic of Azerbaijan:
                                      ICT Import Growth Summary

                             Imports grew by 48% in 2000
                             Imports value – US$ 156 million in 2000
                             Telecom & EDP equipment
                             Semiconductors & other components
                             Computerization in government
                             Modernization of telecom sector
It can probably be concluded that the Ministry of Communications and the private sector ICT
expansion programmes for telecommunications have been fuelling import demand.
Similarly, the two cellular phone operators have increased their reach and coverage by
installing both switching stations and cells in the major cities and towns of the Republic.

With the continuing development of the oil sector, foreign companies have signed 21
production-sharing agreements. These have been setting up their offices in the Republic of
Azerbaijan, thus the further further fuelling demand for imports of computers and process
control instrumentation. The government has launched initiatives to computerize various
departments and improve its public interface and transparency through some massive
projects. These have called for the supply of computer hardware and networking accessories.
Statistics from the Azerbaijani authorities, as well as analysis based on the PCTAS import
and export database, are appended to the end of this chapter.

The Republic of Azerbaijan and the WTO Ministerial Agreement on Trade in
Information Technology Products (ITA)

The Republic of Azerbaijan is not a member of WTO. Neither has it yet signed the
Information Technology Agreement (ITA). Consultations with the Ministry of Foreign
Affairs revealed that it is preparing to apply for WTO membership, following which it would
then intend to ratify the ITA. The view of policy-makers is that they would like to keep
tariff walls in order to sustain the local industry and encourage the creation of job
opportunities.




                                      The Republic of Azerbaijan:
                                        Trade in ICT Products
                                         Key Issues & Trends

       - Trade deficit widening
       - Exports stagnating because industry is occupied with local market
       - Technological obsolescence making Azerbaijani industry uncompetitive
       - Software development and system integration - growth areas
       - Potential of Trans-Caspian Electronic Marketplace
       - Grey market flourishing
       - Pirated products easily available
       - Trade agreements with Moldova, Georgia, Kazakhstan, Uzbekistan, Ukraine and Russia
       - Partnership Cooperation Agreement (PCA) with EU
                                             Chapter 4

 The Republic of Azerbaijan and the International Market for Information Technology



4.1      Global Market for ICT products

A breakdown of the global ICT market by product-type and by region is shown in Table 4.1.

Table 4.1          Global markets for ICT products by region in 1999
                                                                        (Value US$ billion)

                          Western    Eastern                           Rest of        World
            1999          Europe     Europe*       US     Japan      the World

 IT hardware               8.08      5.77      126.04     39.57     49.38            308.84
 Software                 38.85      1.10       60.91     11.76     20.77            133.39

 IT Services              69.32      3.55      126.24     33.11     38.96            271.18
  Telecom equipment       51.86      5.98       21.25     10.78     39.62            129.49

  Components               6.56      3.28       97.15     71.79     101.67           280.45

 Total                   254.67     19.68      431.59    167.01     250.40          1123.35

Source:     Electronic Year Book 1998 / European IT Observatory 2000

Market projections for the year 2002 may be seen in Table 4.2:

Table 4.2      Global market projections for ICT products and distribution in 2002
                                                                            (Value US$ billion)

                          Western    Eastern                           Rest of        World
           2001           Europe     Europe*       US       Japan      World
IT hardware               100.23     6.46       140.97    42.62         62.07       352.35

Software                   50.72      1.93       79.85    14.91         27.15       174.56

IT Services                86.91      3.98      153.73    36.90         46.93       328.45
 Telecom equipment          69.94     6.87       22.31    11.47         50.67       161.26
 Components                  7.35     3.68      118.81    80.40        113.87       324.11
Total                     315.15     22.92      515.67   186.30       300.69       1340.73


Source:     Electronic Year Book 1998 / European IT Observatory 2000

The global market for ICT products was valued at US$ 1123.35 billion in 1999 and by the
end of 2002, this figure was expected to have grown to US$ 1340.73 billion in.
The product breakdown of the global IT market shows that IT hardware accounted for 27%,
followed by components at 25%, IT services 24%, telecom equipment 12% and software
12%.
Figure 4.2 below shows the region distribution of the market. It may be noted that the US
accounted for 38%, followed by Western Europe 23%, Japan 15%, East European countries
2% and the Rest of the World accounted for 22%.
            Fig 4.1 Product-wise distribution                     Figure 4.2 Region-wise distribution of ICT
                     of ICT Market                                                 Market

                25%                     27%
                                                                          22%                 23%

                                                                                                    2%
          12%
                                              12%
                                                                    15%
                           24%
                                                                                           38%
            IT hardware          Software
                                                                          West Europe     East Europe
            IT services          Telecom equpt                            USA             Japan
            Components                                                    Rest of World

                 Source:   Electronic Year Book 1999 / European IT Observatory 1999




4.2    Central and East European Market
The market for IT products in selected East European countries, including the Baltic States,
was valued at US$ 24.93 billion for 2001, compared to US$ 21.9 billion in 2000. Poland,
the Czech Republic, Slovenia, Hungary, Romania, the Baltic States and Russia together
accounted for about 86% of the region’s market in 1999. Their combined share was expected
to have come down only slightly in 2001, to around 84%. Table 4.3 shows market trends by
ICT product type for the region between 1997 and 2001.

Russia, followed by Poland, the Czech Republic, Hungary and Romania led the total Central
and East European market for ICT products. In electronic components, Poland, followed by
Russia and the Czech Republic were the leading markets. In telecommunications, Russia,
Poland and the Czech Republic were dominant. The market for IT products in Russia and
Poland offered great potential. In EDP, Hungary, the Czech Republic and Slovenia were
moving towards integrated solutions.
Table 4.3  Central and East European Market* for ICT Products                              (US$ million)
 S. No ITEMS                     YEAR
                                                      1997         1998     1999    2000       2001
 1.0      Computer Hardware                          5644        4477       4308    4795       5451
          Servers                                   1125           913       968    1150       1269
          PCs*                                      3510         2688       2462    2682       3316
          Workstations & Other add-ons              1009           876       878     963       866
 2.0      Data Communication Hardware                912           818       857     969       1199
          LAN Hardware                               533           483       529     583       702
          Other data communication                   379           335       328     386       497
 3.0      Software                                  3011         2971       3210    3846       4381
          Software Products                         1067         1059       1167    1361       1628
          Software Services                         1944         1912       2043    2485       2753
 4.0      Telecom Equipment                         3984         4227       4777    5628       6786
          Public Network Equipment                  3482         3568       4045    4695       5731
          Private Network Equipment                  502          659        732     933       1055
 5.0      Office Equipment                           649          438        424     401        455
          Copier                                     425          315        290     275        301
          Other Office Equipment                     224          123        134     126        155
 6.0      Semiconductors                            1156         1259       1477    1633       1802
 7.0      Passive Components                        1542         1701       1749    1902       1933
 8.0      Scientific Instruments &                  2040         2327       2520    2735       2928
          Control Equipment
          TOTAL                                    18938       18218       19322   21909      24935

  Source: Electronics Year book 1998 / European IT Observatory 2000
  * Market for Poland, Czech Republic, Slovenia, Hungary, Russia, Baltic States
    and Romania


Figure 4.3 illustrates shares of the region’s ICT market accounted for by the selected Central
and East European countries, with the Baltic States at 4%. The Azerbaijani market for ICT
products was negligible in comparison to CIS countries.



                           Figure 4.3     Country-wise share of ICT Market




            Czech                         4%
                                           12%             16%
            Hungary                  4%                      11%
            Poland
            Russia
                                          33%              20%
            Slovenia
            Romania
            Baltics

       Source: Electronics Year book 2000 / European IT Observatory 2000
The Role of ICT in the National Economies of Central and Eastern Europe

Even though total expenditure on information technology in the region has grown remarkably
over the last decade, when the average levels of spending on IT are expressed either as a
proportion of GDP or on a per-capita basis they are revealed to be far lower than those in the
country markets of Western Europe.

Table 4.4         IT/GDP and per capita IT spending in Central and Eastern Europe,
2000
             Countries                        IT/GDP              Per capita IT spending
                                                (%)                       (US$)

 Bulgaria                                      1.19                       11.60
 Czech Republic                                2.74                      106.25
 Hungary                                       2.50                       80.35
 Poland                                        1.49                       41.07
 Romania                                       0.56                        6.25
 Russia                                        0.61                       12.50
 Slovakia                                      1.90                       53.57
 Slovenia                                      1.64                      109.82
 Estonia                                       3.21                       73.21
 Latvia                                        2.00                       64.00
 Lithuania                                     1.40                       45.00
 Azerbaijan                                     0.50                      23.30

Source: IDC, USA, 2000; Digital Planet 2000

Table 4.4 above illustrates that only the Czech Republic, Hungary and Estonia exhibit
spending levels that match those of many Western European countries. The vast majority of
Central and Eastern European countries are still spending less than 1.5% of GDP annually on
information technology, with the figure for Azerbaijan being 0.5%.

Similarly, per capita spending across the region was relatively low, from Slovenia at the top
end with approximately US$ 109 in 2000 down to Romania with just US$ 6.25. Per-capita
spending in Azerbaijan was US$ 23.3, well above that of Russia. Given these ratios, it will
be a long time yet before most of the States in the region attain IT penetration rates on a par
with many of the countries of Western Europe.

The market in the region, once driven by the basic demand for hardware to compensate for
years of minimal investment in obsolete technology, has now moved into a more mature
stage of development, in which user requirements are to find relevant solutions to the
problems of operating more efficiently and profitably in a free market economy. As a
consequence, spending has increased sharply on packaged software, IT services and
communications technologies.

While demand for basic hardware remained weak, increasing expenditure in the markets was
being generated by sales of data communications, software, professional services and
maintenance or support services. It has been observed, however, that even in spite of these
developments, the region’s IT market was still largely oriented to hardware, which continued
to account for the major share of IT spending in the year 2000.
Developments in the different sectors of the ICT market are detailed in the paragraphs below:

IT Hardware

The countries of Central and Eastern European spent the last decade investing in basic
information technologies to establish modern national infrastructures. While a general trend
was taking place where more spending was devoted to software and services to utilize this
hardware base more effectively, the region’s IT markets remained heavily oriented to basic
IT hardware such as personal computers and PC-related technologies (PC add-ons,
peripherals, etc.).

This characteristic of the market across the region reflected in part the still relatively low
levels of IT penetration in many Central and Eastern European countries. It also mirrored the
requirements of the solution-driven era of IT market development, in which the greater usage
of packaged software applications, networking solutions and the Internet demanded higher
processing speeds and storage capacity. In the year 2000, IT hardware, including data
communication, accounted for 27% of IT spending across the six countries, amounting to a
total of US$ 5.195 billion.

Personal computers

Within the hardware segment, personal computers continued to be the driving force of
demand for information technology in Central and Eastern Europe. Shipments of PCs,
according to the European Information Technology Observatory, reached 2.1 million units in
1999, equivalent to that of Italy.

The ongoing boom in regional PC sales reflected a number of factors, including:

   the relatively low base of machines installed;
   some notable investment in IT by small and medium-sized enterprises from the services
    sector;
   rising real wages influencing demand among home users;
   major IT investment projects in sectors like public administration, insurance,
    banking/financial services and manufacturing; and
   general economic growth and rising Internet usage.

Despite rising sales, the personal computer markets of Central and Eastern Europe were still
relatively small. Moreover, the regional market remained extremely price sensitive in view of
low per-capita incomes. Partly reflecting a modest recovery in Russia, the PC market of the
six countries examined in this survey is expected to continue to grow strongly.

Systems and servers

The trend towards sharing resources, network sites, access to the Internet, and implementing
cross-industry application solutions has generated a significant amount of extra demand for
computer systems and servers in Central and Eastern Europe. The systems and server market
was estimated to be worth in the order of US$ 1.06 billion in 2000, a growth of 18.7% over
1999. Servers comprised 23.5% of the region’s total market for computer hardware. While
systems such as NT made notable inroads into markets oriented to low-end PC servers, Unix
continued to account for the highest share of annual server revenue, particularly in the mid-
range and high-end server segments.

Packaged software

In line with worldwide trends, packaged software represents one of the fastest growing
segments of the ICT market in Central and Eastern Europe, now that software piracy rates are
dropping and users require more structured applications support. Particularly strong growth
has been seen in the market for basic operating systems, PC application software, integrated
Enterprise Resource Planning (ERP) applications and application tools for database
development and management. The value of the packaged software market in the region
reached US$ 3.62 billion in 2000, a growth of 20% over the previous year.

While demand for packaged software had noticeably increased, the ratio of software sales to
overall IT spending in most countries in the region was still low compared to Western
Europe, with Romania being the lowest.

IT services

The IT services market in Central and Eastern Europe was valued at US$ 2.37 billion in
2000, representing 12.3% of IT spending in the region. Implementation services accounted
for the largest share with nearly 46%, followed by support services and IT consulting.
According to European Information Technology Observatory, IT services will represent one
of the most dynamic ICT market segments over the next few years in terms of growth
potential.

Factors driving the demand growth for IT services in Central and Eastern Europe include the
pace of technological change, the growing popularity of packaged application solutions,
Internet/Intranet usage, the limited skill base of user sites and a trend towards networking and
connectivity. In view of the growing sophistication of technology, external providers (IT and
other) are being increasingly viewed as the best solution to implement required changes,
despite the relatively low wage rates of local employees.

Evolving Internet Market

The Internet is quickly becoming an important element in the everyday life of Central and
Eastern Europe and its use is growing steadily in terms of both penetration and intensity. The
region’s Web population is expanding rapidly and the Internet was beginning to overtake the
PC as the engine of growth for the information technology in the region. According to the
Information Society Indicators in the CEEC Countries Report by ESIS II, of January 2001,
the number of Internet users in 12 selected countries was 9.467 million in the year 2000. This
user base in the region was expanding at an average annual rate of 23%.

While this rate was lower than the 27% annual rise projected for the more dynamic markets
in Western Europe, the number of Internet users in Central and Eastern Europe was expected
to exceed 10 million by 2003. There is potential for this figure to be higher depending on
developments in the region’s two largest markets, Russia and Poland, which together
accounted for the major share of all Internet users in the region. An economic recovery in
Russia would facilitate higher Internet usage, while further liberalization of
telecommunications would drive up penetration rates in Poland.
The percentage share of Internet users in 12 selected countries is shown in Figure 4.4.

           Figure 4.4 Breakdown of Internet users in the CEECcountries


                                        2%   3%
                                                  4%                     Azerbaijan
                                                         5%
                                                                         Bosnia
                                                                         FYRMacedonia
                                                              7%
                                                                         Latvia
                                                                         Slovenia
                                                                   7%    Estonia
                       54                                                Bulgaria
                                                                         Lithuania
                                                              7%
                                                                         Hungary
                                                                         Romania
                                                       11%
                                                                         Czech Republic
                                                                         Poland



Source: ESIS II Report, Information Society Indicators in the CEEC Countries, January 2001



Here, it is worth noting that the Internet penetration rate in Azerbaijan was 2.4%. By the end
of 2002 this is expected to reach 9%. Networks across the region are now being consolidated
and crystallized as InternetService Providers (ISPs) race to grab early market share and the
new catalyst for growth is the small and medium-sized enterprises (SMEs) sector. Currently,
more than half (51 %) of all Internet users in the region have free access through schools or
government organizations. This trend is projected to decline over the next few years as
SMEs start using the Internet. Thus ISPs should become more cost effective as their shares of
paying customers gradually increases.

Over the next few years, Internet growth in Central and Eastern Europe will be driven by four
key factors:

   The availability of Internet-ready PCs
   Decreasing access fees
   A plethora of cheap bandwidth
   Free access to the Internet

While only 25% of the PCs installed in the region were connected to the Internet in 2000, this
figure was expected to exceed 75 % by 2003.

Telecommunications

The telecommunications market in Central and Eastern Europe was estimated to be worth
US$ 4.68 billion in 2000 compared to US$ 3.9 billion in 1999, a growth of 20%. It was
observed that the most dynamic growth areas were mobile infrastructure and services,
followed by CATV, telephone and switched data and leased line services.

East European countries made great strides in improving their fixed-line communications
infrastructures and service offerings. In the early nineties, all the countries had long waiting
lists for phone lines, low digitalization rates, poor access line quality and low customer
satisfaction levels. However, most countries in the region attracted foreign investment and
expertise through national operator privatization involving a combination of public share
offerings and tenders for strategic investors.

This strategy helped to increase revenues in the profitable areas of domestic and international
long-distance calls, as well as to improve penetration rates and infrastructure quality. The
average penetration rate increased from 22% in 1995 to 30% in 1998. A recent survey by
ESIS II of the European Commission showed telecommunication penetration rates (Table
4.5) in the different countries in the CEEC region at the end of 2000.
Table 4.5      Telecommunication penetration rates in different CEEC countries
                           1996          1997        1998           1999           2000
Azerbaijan                  1.5           4.5         9.0            9.4           9.48
Albania                     1.5           2.4         3.5            4.5           5.2
Bosnia                      8.1           9.3        22.3           26.0          24.8
Bulgaria                   32.2         33.0         35.1           38.9          44.3
Czech Rep                  29.3         36.9         45.8           57.1          77.6
Estonia                    34.9         43.7         53.9           64.1           2.0
Hungary                    30.6         37.4         44.0           51.7          60.8
Latvia                     30.6         33.2         37.3           42.6          46.9
Lithuania                  28.4         35.8         39.0           39.4          43.0
Poland                     17.5         21.8         26.7           36.9          44.5
Macedonia                  38.9         39.7         40.4           42.2          45.6
Romania                    14.2         16.4         19.0           23.5          32.3
Slovenia                   35.6         41.0         48.7           76.1         104.7
Slovakia                   23.7         29.6         37.3           47.9          52.9
CEEC Average               20.1         23.9         28.5           35.9          45.0

Source: ESIS II Report, Information Society Indicators in the CEEC Countries, January 2001

Azerbaijan’s telecommunication infrastructure was gradually improving. Tele-density had
reached 9.48% in 2000 and was expected to reach 45% by the end of 2002. Mobile
communication penetration was expected to overtake fixed -ine telephony and reach 45% by
the end of 2002.

Despite this progress, some countries fared better than others in the telecommunications
arena. In markets where foreign investors had been able to enter early in the 1990s, such as
the Czech Republic, Hungary and Estonia, many obstacles were quickly overcome.

In the Czech Republic and Hungary, waiting periods for phone lines decreased from 10 years
to a matter of weeks. In Poland, by contrast, where privatization did not occur until 1998, the
average customer waiting period for phone installation was still 34 months, and the
penetration rate was less than 25%.

One of the highest growth areas for telecommunications in Central and Eastern Europe was
the mobile sector, for both services and equipment. Market liberalization combined with
increased requirements for mobility, more prepaid services and the licensing of several
competitors in each major market, has helped to push mobile telecommunications into the
mass market.
Components
The market value for semiconductor components in 2000 was estimated at US$ 1.43 billion
and for passive components US$ 1.50 billion. These were expected to reach US$ 1.6 billion
and US$ 1.6 billion respectively in 2001. The market for components was growing strongly
as a result of contract manufacturing facilities being located by large corporations in
countries like Poland, Hungary, Czech Republic, Slovenia and Romania. Another notable
development was that almost 50% of the PC market was served by local assemblers that
imported components from Asian sources to service demand in their domestic markets.

From consultations with the principal national IT players, it was concluded that the major
factors driving the ICT market in the region were:

     Large-scale public infrastructure in government administration, banking, financial
      services, and insurance.
     Emergence and fast growth of small and medium-sized private companies
     Investment made by enterprises undergoing restructuring and cost cutting measures
     Advancement in technology necessitating changes and upgrading in manufacturing
      processes
     Demand for standard software solutions – client server solutions and Enterprise Resource
      Planning
     The fast modernization of telecommunications infrastructures.

4.3    The ICT Market in Azerbaijan
Of the countries in the CIS region, Azerbaijan’s ICT market was comparatively small. In
2001, its market for ICT products was worth US $ 138.5 million compared to US $ 131
million in 2000, a growth of some 6%. In the year 2002 the market was estimated to be
worth about US$ 200 million and was expected to grow to US$ 350 million in 2005. The
breakdown of the ICT market by product category is shown in Table 4.6.

Table 4.6               Azerbaijan: Market for ICT Products
                                                                                (Value US$ Million)
No.       Items                                  1998   1999    2000    2001       2002   2005
1.        EDP Computer Hardware                  30      28      32      38        40      60
1.1       Servers                                  8       6      7      10        10      15
1.2       PC& Workstations/Other add-ons         22      22       25     28        30      45
2.        EDP         Data      Communication      6      5       5       7.5       8      10
          Hardware
2.1       LAN Hardware                            4       3       3      4.25       6       7
2.2       Other data communication                2       2       2      3.25       2       3
3.        Software & Services                     4       3.5     6       7.5      10      50
3.1       Software Products                       2.5     2       3.5     4         5      20
3.2       Software Services                       1.5     1.5     2.5     3.5       5      30
4.        Telecom Equipment                      65     61.5     60      58.5      50     200
4.1       Public Network Equipment               40.5   38.5     38      36        20.5   150
4.2       Public Network Equipment               24.5    23      22      22.5      29.5    50
a)        Terminals Cell Phones
b)        Phone, Faxes
5         Office Equipment                       11      10      12      11.5      12       15
5.1       Copiers                                 7       6.5     6.5     6.5        8      10
5.2       Other Office Equipment                  4       3.5     4.5     4          4       5
6.        Semiconductors                          2       2       2       1.5        1      ---
7.        Passive Components                      2       2       2       1.5        1      ---
8.        Scientific Instruments & Control and   10     12      12       12.5       12      15
          Measurement Equipment
                   TOTAL                          130     124      131        138.5   200   350

Source: ITC project file / European Information Technology Observatory 2000
Figure 4.4 illustrates dramatic ICT market growth in Azerbaijan from 1998 to 2005.

                Figure 4.4 Azerbaijan: Growth of ICT Market (1998-2005)


         350                                                               350
                               Value : US$ million

         300
         250
         200                                                      200

         150                130                 131     138.5
                                      124
         100
           50
            0
                           1998     1999      2000     2001      2002     2005

                            Source: EUROBIT 2000 and ITC Project File, June 2002

Azerbaijan’s ICT market growth was influenced by several factors. The first was
modernization of the telecom sector both by the monopoly provider as well as joint venture
companies. An investment programme of US$ 870 million has been planned to modernize
the telecom infrastructure by the year 2005.

In mobile telephony two joint-venture companies were using GSM 900 and GSM 2000
technology and were investing heavily to increase their coverage beyond 45%. Azercell had
already invested US$ 145 million and there are plans to increase this. The long waiting list
for telephone services in Baku (100,000) was also stimulating growth.

The second major factor was the improvement in purchasing power as a result of economic
development and the expansion of petroleum operations, leading to improvements in the
quality of life.

The introduction of automation to government departments to make improvements in the
areas of governance and interface with the public, was the third factor contributing to market
growth.
Box 4.1 shows the major telecom projects launched by the Azerbaijan government:


       Box 4.1 Azerbaijan: Major Telecommunication Projects

       - Investment of $ 870 million up to year 2005 for:
             Upgrade of Digital Switch for IP-telephony
             ISDN, Broadband network, Frame Relay, ATM
             New services SDH, ads, ADSL

       -    TRACECA project on supply of fibre-optic cable system for signalling
           for the railways of Caucasian Countries (1 phase $15 million, 2 phase $20 million)

       -   EBRD project Trans-Asia Europe fibre-optic cable highway ($28 million)

       - BP (British Petroleum) project laying fibre-optic cable along Baku-Tbilisi-Ceyhan pipeline (in all
          total US$ 2.3 billion, of which US$15 million for telecom)

       - Ministry of the Economy - 300 projects identified for privatization



   Source: ITC Technology Team Mission Report, 2002



The following sections provide an analysis and assessment of ICT market demand in
Azerbaijan by different product sectors.


Electronic Data Processing
The EDP market consists of computer hardware and data communication networks. In 2001,
the market was valued at US$ 45.5 million, of which computer hardware was US$ 38
million and data communication equipment US$ 7.5 million. The combined total was
expected to grow by 5% to US$ 48 million in 2002. International and Trade Exhibition
(ITE), Azerbaijan, are projecting an annual growth for the EDP market of 10%, reaching
US$ 70 million by 2005.

The market has been dominated by brands like Hewlett Packard, Compaq, Dell, IBM, Canon
and Silicon Graphics. Multinational corporations’ (MNCs) brands accounted for about 42%
of the market. There were many local assemblers. Among the more popular was the CEN
Group. Locally manufactured projects accounted for 58% of the market. Most local
assemblers imported components from Asian sources or obtained them from Dubai to hold
down the costs of the final product.

The price advantage (20-25%) was one of the factors that made local brands popular,
particularly among students and home users. Large corporations operating in the oil, tobacco
and cement sectors preferred MNC brands. Institutional buyers in the government, statistical
institutes, universities, SACC, and the customs and banking sectors also preferred MNC
brands as they came with three-year comprehensive warranties. This type of advantage -
comprehensive maintenance, etc. - was now starting to persuade younger students as well to
choose MNC brands. Hewlett Packard-Compaq in particular now account for a major share
of the computer market.
As far as networking products are concerned, Cisco and 3Com were catering for the
professional market segment of banks, the corporate sector and government institutions.
Networking products sourced from Dubai (switches, hubs and modems, etc.) were most
popular among small companies, home users and universities. The market for networking
products was small, and expected to reach just US$ 10 million by 2005.

Computer software

The software and services market grew from US$ 6 million in 2000 to US$ 7.5 million in
2001, an increase of 25%. This growth was mainly due to the containment of piracy and the
procurement by institutional buyers of standard products. The market for standard software
products was valued at US$ 4 million and software services at US$ 3.5 million in 2001.

The software services market was expected to grow rapidly and reach US$ 30 million by
2005 as a result of the e-programme and cyber marketplace initiative of the government. .
The main players in the packaged software sector were Microsoft, Oracle, Unix from HP and
open source software, Linux. The major oil and tobacco companies, the banking industry,
customs department, the election authority and other institutions wanting state-of-the-art
software for their applications, were responsible for stimulating the demand.

IT projects initiated by international organizations were also enhancing demand for software.
The Eurasia Foundation had initiated Private Enterprise Development Programmes with
several implementing partners and institutions such as the Ganja Society, Businessmen
Bulletin, the Centre for Information Technologies and Informational Systems, Khazar
University, Western University, the Independent Consumer Union, the Beylagan Union of
Agrotechnical Consultation, the Akhundov National Library of Azerbaijan and the Union of
Economists of Azerbaijan. The latest software was also needed by the Initiative for Social
Action and Renewal programme, the Internet Access Training Programme, the Children’s
Director Programme, the Internews Network Baku programme, and the Open Society
Institute Assistance foundation programme.

Other influential factors were the migration of legacy systems to enterprise-wide networking
applications, the use of ERP solutions such as SAP by the oil majors, the need for Azeri
language software based on Unicode fonts and converters and the development of
applications using open source software.

In terms of market segments, the most buoyant was the banking and financial sector. These
were introducing credit card and online payment systems for conducting e-commerce. The
government initiatives on e-documents, e-signature and e-commerce were also fuelling
demand for standard software products and software application services.

Box 4.2 shows the major projects initiated in the information technology sector
                       Box 4.2 Azerbaijan: Information Technology Projects

          National Information Communication Technology Strategy ProjectUNDP and Azerbaijani
       Government mutual project US$ 1.2 million
      Capacity Building and Data Transmission Network Implementation for the
       State Customs Committee (phase 1 –US$ 575,000; phase 2 – US$ 700,000)
      Regional Academy for Online Network Governance and System Administration
       US$ 80,000
      Establishment of Nakhchivan Computer Centre for Training and Business Information Services
      Strengthening of Computer Technology and Training Centre of Sumgayit
      Computer Centre for Training and Information and Telecommunication Services US$ 990,000
      National Bank Automatic Banking Check Clearance Project US$ 5 million
      Tax Systems Project by Ministry of Finance Government of Azerbaijan US$ 15 million
      State Oil Computer Automation Project US$ 15 million
      BP project for Enterprise Resource Planning implementation US$ 10 million
      National Computerized Election System “Sechkilar"



   Source: ITC Technology Team Mission Report, 2002


Telecommunications
The market for telecommunication equipment in 2001 was worth US$ 58.5 million,
compared to US$ 60 million in 2000, a decline of 2.5%. The market for public network
infrastructure was estimated to be some US$ 36 million and private network equipment US$
22.5 million in the year 2001. The telecoms market was expected to grow to US$ 200
million by 2005 with public network infrastructure accounting for US$ 150 million and
private network equipment for US$ 50 million.

Currently, there are four joint venture companies offering telephone services - two cellular
operators, and 13 Internet Service Providers. Aztelecom was the national telecommunications
operator and had a monopoly of long distance and international calls, including the leasing of
inter-city and international channels.

In Baku city, out of the total 420,000 telephone lines, PO BGTS, the national operator,
accounted for 375,000 lines (an 89% share of the market), Ultel 9,000 lines, Catel 10,000
lines and Azeurtel 20,000 lines. It was noted that in Baku, telephone penetration had reached
95%. Also in Baku, digital transmission penetration was 85% and digital exchanges 42%.
SDH technology was in operation. Siemens System 12, Marconi’s System X, Nortel and
Alcatel’s switching systems were installed in Baku. Catel (Caspian American Telephone
Company) and a joint venture between the Ministry of Communications and Metromedia
International Communication (US) utilized wireless in local loop and CDMA technology for
providing telephony services. Azeurotel utilized the Marconi System X for developing their
network.

Aztelecom invested US$ 17.3 million of its own resources in 2001 for the development of
telecom systems, and was planning to invest a further US$ 22 million in 2002. By 2005 it
was expected that a total of US$ 870 million would have been invested in the telecoms
sector. US$ 261 million of this would be from the Ministry of Communications’ internal
resources, US$ 483 from foreign investors and US$ 126 million from foreign credits.

Aztelecom, the monopoly service provider, was due for privatization, and was therefore
considered likely to attract foreign investors. This move was expected to lead to a general
improvement in the telecoms system and thereby create a market for more advanced
technologies.

Bakcell (GSM 2000) and Azercell (GSM 900) were the two mobile operators in Azerbaijan.
Currently, there are 700,000 mobile telephone subscribers with a geographical coverage of
63%. In 2002, Azercell plans to increase its subscriber base up to 700,000 and its coverage to
95%. Bakcell had 150,000 users and invested US$ 10 million in 2001 to enlarge its capacity
to 200,000.

Figure 4.5 shows the pattern of Azeri mobile subscriber growth between 1993 and 2001:

  Figure 4.5 Azerbaijan - Growth in numbers mobile telephone subscribers (1993-2001)


  500

           Value: ‘000
  400



  300



  200



  100



    0
    1993      1994       1995    1996     1997      1998     1999     2000     2001


Source: Azerbaijan Development Gateway: e-Readiness Assessment Report 2001

Both operators offered international roaming, which was relatively expensive. Prepaid
mobile communications services, mobile banking, Internet, SMS and other value-added
services allowed operators to attract customers from other telecom sectors, such as paging
and trunking. In July 2001, Azercell, in cooperation with ISP Azeronline, introduced the
mobile Internet in Azerbaijan. Mobile Internet was at the time one of the most sought-after
services in the area of Internet development. In Azerbaijan it was a new and innovative
opportunity.
It was noted that the density and coverage of the mobile telephone services in Azerbaijan
varies considerably from region to region, with the highest at 50% in Baku, the national
capital, and the lowest still at 10-15% in small towns. This offered market growth
opportunities for the telecom manufacturers as well as the software developers. A third
mobile operator was expected to appear shortly in the Azerbaijan market.
The market for Internet service providers in Azerbaijan was growing rapidly. The increasing
use of computers in Azerbaijan has stimulated demand for Internet use. In 1996 and 1997
new ISPs were established that started to offer basic services. At the start, the services
offered were expensive and of poor quality, but constant growth in the numbers of ISPs in the
country has resulted in a highly competitive ISP industry in the Caucasus region. Figure 4.6
shows the growth of ISPs in Azerbaijan.
                           Figure 4.6 Azerbaijan - Growth of ISP (1994-2001)
        16

        14

        12

        10

         8

         6

         4

         2

         0
Sou        1994 1996 1997 1997 1997 1998 1998 1998 1999 2000 2000 2000        2001 2001
rce
:
Azerbaijan Development Gateway: e-Readiness Assessment Report 2001


Competition among the ISPs in the country has been growing and many have opened service
branches in other cities to diversify and gain market outreach. The ISP firms expressed views
that Internet market growth was hindered by the monopoly of Aztelecom. As a result, large
ISPs were switching to satellite channels in order to provide affordable services.

Internet Affordability

Discussions have been held with a number of ISPs in Azerbaijan. From these, it was learnt
that the Ministry of Communications planned to reduce the prices of calls and to charge users
on a per second rather than a per minute basis. The Ministry has imposed a fixed telephone
charge of US$ 4.32 for Internet access. The average price of an Internet connection varied
between $ 0.70 and $ 0.50 per hour in 2001. Some ISPs provide unlimited access to the
Internet for $ 50-30 per month, compared to $ 150 in 2000.

The rates for leasing dedicated lines varied according to the speed and average compared
with channel load incoming customer traffic. Overall, Internet access prices in Azerbaijan
were falling, as can be seen in Figure 4.7.
                                      Figure 4.7 Azerbaijan - Internet Access Pricing (1997-2001)
                 14

                 12             12

                 10
    Price in $




                 8
                                                6
                 6

                 4                                             3
                                                                              2
                                                                                            1              0.65
                 2
                                                                                                                            0.5
                 0
                                           97




                                                          98




                                                                         99




                                                                                                      00
                            7




                                                                                        0




                                                                                                                        1
                          /9




                                                                                      /0




                                                                                                                      /0
                                         1/




                                                        1/




                                                                       1/




                                                                                                    1/
                        30




                                                                                    30




                                                                                                                    31
                                       /3




                                                      /3




                                                                     /3




                                                                                                  /3
                      6/




                                                                                  6/




                                                                                                                  1/
                                     12




                                                    12




                                                                   12




                                                                                                12
Source: Azerbaijan Development Gateway: e-Readiness Assessment Report 2001

The lower price of Internet access was one of the main reasons for the growth in the numbers
of Internet subscribers in Azerbaijan. Today, it is becoming more convenient for individuals
and organizations to have unlimited access, and this is now available for about $50.00. The
same service is being offered in Turkey for $20.00, and in Russia for $30.00-45.00,
depending upon the region. In European countries the price for the same service was found
to vary between $16.00 and $25.00 in 2001.

Components

The market for semiconductor and passive components was negligible and declining because
of the closure of industries functioning under the erstwhile Soviet State. Many SMEs
imported populated PCBs for assembly of computers as well as other electronic equipment.
There were a few companies assembling PCBs based on imported components. These were
mostly for power control instruments, process control and other electronic products.

Office and scientific instruments

The market for office and scientific instrument was estimated to be worth US$ 12.5 million in
2001 compared to US$ 12 million in 2000, a growth of 6%. The market was expected to
grow to US$ 15 million by 2005. Demand was coming from the processing and cement
industries, oil majors, laboratories and educational institutions.

The Prospects for ICT Growth

The Republic of Azerbaijan ICT market in 2001 was poised for expansion. According to ITE
Azerbaijan, a value of more than US$ 870 million was expected for the telecoms sector.
Modernization of the broadcasting network system would be realized with investment
projects of US$ 183 million. The initiatives of the government to launch a national policy on
ICT, to improve its interface with the public and to establish e-governance would stimulate
the demand for ICT products.
The vision for Azerbaijan is that it will emerge as a source of high-tech products for the
whole Caucuses Region with a flurry of trade taking place in the region, especially in the
Trans-Caspian areas including Russia, Iran, Turkey, Kazakhstan, Turkmenistan, Tajikistan
and Georgia.



                                         Azerbaijan:
                                    Key Issues and Trends
                                 Information Technology Market

          Azerbaijan market is small but fast evolving
          IT market for telecom equipment to grow substantially
          Local language application - a growth area for business development
          Mobile telephony growing rapidly; introduction of third cellular operator soon
          Structure of IT market changing with many local companies providing software
           applications
          Growth potential for main wholesalers and distributors; (AZEL & RISK)
          Growing demand for systems and software application by foreign companies –
           oil and tobacco
          Government strategy on ICT development – growth for software sector
          Opportunities for application development - registry, I-cards, customs
           automation, election system, student enrolment, tax administration and e-banking.
          Long-expected privatization of the monopoly service provider - development of
           telecom sector and market growth.
          Cellular penetration driven by growing economy
          Large capital investment by telecom companies - tariff reductions
          Broadcasting network modernization to provide market growth
          System integrators to enhance market reach to Trans-Caspian region
          Shift towards implementing IT solutions to improve enterprise productivity/e-
           governance
          Germany – outsourcing of IT specialists for development of applications
                                          Chapter 5

                          National Information Technology Industry



Azerbaijan ICT industry

Azerbaijan used to be one of the four countries doing computing and statistical work for the
entire USSR. Over the period 1980-1990, the Azerbaijani electronics industry was developed
into two major sub-sectors, process control instrumentation, and electronic systems and
components. In Baku and other regions, a number of high-tech industries were set up for the
manufacture of these products. EVM plant manufactured computer systems. There was a
large production base for military electronic and radio equipment. Several companies, such as
Azon, Billur, Radio Factory and Ulduz, were manufacturing semiconductor products, radio
equipment and other hi-tech products. They continued production but only at low levels
because, with their outdated technologies, they were unable to compete internationally.

In another sector, machine-making for the oil sector, operations date back to the end of the
19th century. Azneftchimmash, a public stock company, consisted of four scientific research
and design institutes, and 14 machine-making plants. They manufactured instruments and
equipment to 90 different specifications and 600 sizes for the petroleum industry. This sector
was growing rapidly and has been doubling its annual output over the last two years.

The Azerbaijan industry revived after the stability pact with the IMF. Many hardware system
integrators emerged, assembling computers and other systems from parts imported from
Malaysia, Singapore, Dubai and Asian countries. In addition,HP, Compaq, IBM, Dell, Canon,
Xerox, Panasonic, Nokia, Ericsson, Siemens, Oracle and Microsoft all established a presence
through franchises, distributors and authorized resellers to supply products to the local
market.

In system design and development, many companies developed software applications and
web-hosting applications. In the retail business, RISK and DIVI were the most successful
hardware suppliers. AZEL was the leading company in the Caucasus region for system
integration and application development. The RISK/INTRANS alliance acquired the web
design service contract from British Petroleum and was one of the leading service providers.
Table 5.1 shows the numbers of IT companies by sector operating in Azerbaijan.
 Table 5.1           ICT companies in Azerbaijan
  Number of companies        1997        1998          1999       2000
  Telecommunication          12          12            15         17
  Hardware                   10          12            16         20
  Software                   22          28            34         40

Source: Trade Registry Azerbaijan, 2000



According to the State Statistical Committee of Azerbaijan, 285 legal entities were engaged
in the information and communications technology sector. Out of these, 172 enterprises
provided telecom services and the rest were engaged in the manufacture of
telecommunication equipment, the assembly of PCs and the development of computer
software applications. The production levels in the ICT sector over the period 1997-2001 are
shown in Table 5.2.

 Table 5.2                Azerbaijan ICT Production                              (Value in US$ million)
   Products                                     1997            1998    1999          2000      2001*
   Electronic Data Processing                   22.4           20.8     19.2             23      25.8
   Semiconductors                               1.96            1.8      1.7               2     2.25
   Telecommunication (‘000 nos.)                24.9           23.2     21.4             25      28.7
   Other Component / sub assembly                4.9            4.5      4.2               5       5.6
   Office Equip.                                   --             --       --             --         --
   Scientific Instruments & Control and          4.9            4.5      4.2               5       5.6
   Measurement Equipment
   Software and services                          9.8           9.1        8.4         10.2      11.3
   Total                                           70            65         60         70.2      80.5

Source: State Statistical Committee of Azerbaijan, June 2002

It can be seen that production level of ICT products was improving gradually over the period.

The following paragraphs provide some analysis of trends in the different product sectors of
the Azerbaijan ICT market - electronic data processing, semiconductors, telecommunications,
computer software, and others:

Electronic Data Processing

The EDP industry featured several local firms providing the latest IT technologies and full
integrator services. There were about ten companies in 2000 offering system integration and
the assembly of computers. CEN Group of companies was one of the local assemblers of
computer systems. The numbers of small retailers/assemblers had mushroomed in Baku and
other cities. However, no properly organized industry emerged to locally manufacture
computer hardware.

Azerbaijan Electronics (AZEL) was a leading player in system integration, delivering
complete integrated solutions and service support for corporate clients. AZEL had alliances
with Hewlett-Packard, Microsoft, APC, Toshiba, Compaq, Daewoo, Oracle, AutoDesk, JVC,
BASF, IBM and other suppliers. They had established a strong presence with their products
and services in the local ICT market. The success story of AZEL is described in Box 5.1.

The R.I.S.K. COMPANY offered a comprehensive range of business solutions. These
included business process re-engineering, software application development and consultancy,
and IT infrastructure. CenTelCom Ltd was a major assembler of computers in Azerbaijan.
They marketed their products under the brand name of CENPAQ, and at the same time
distributed HP, Galaxy Ltd and Digiturk brands. Cash registers and calculators were
manufactured locally to meet the demands of VAT regulations. As the government’s
programme, however, could not be implemented successfully, production of these machines
declined.

                            Box 5.1 Azerbaijan Electronics (AZEL) – A Profile
        Azerbaijan Electronics (AZEL), established in 1991, has become the leader in the market for
        computer and office equipment and consumer electronics in Azerbaijan. It provides a full
        range of products and services with guarantee and warranty support for computer hardware
       and networking solutions. Customer care and satisfaction is the motto of the company.
       Reliability and expertise have been the basic strengths that have helped AZEL to achieve its
       objectives. The basis of Azel’s reliability has been its highly qualified technicians who
       trained in the world’s leading companies for which they were distributors. Their core
       competence was skilled technical manpower such as systems analysts, programmers, software
       specialists and electronic engineers. AZEL had a wide range of product offerings from their
       partners Hewlett-Packard, Microsoft, APC, Toshiba, Compaq, Daewoo, Oracle, AutoDesk,
       JVC, BASF, IBM and other suppliers.

       The company specializes in providing such services as enterprise resource planning from
       SAP, Oracle database applications, Microsoft application solutions and e-commerce software
       applications. The success of the company has come from the expansion of its market towards
       the whole Caucasus region, providing a comprehensive range of system integration services
       and building a team of specialists to deliver applications meeting customers’ specifications, on
       time. AZEL and Marco recently implemented a major project for the Ministry of Taxes to
       connect regional tax centres with the central office.

       The turnover of AZEL was US$ 3.7 million in 2001. In software application development, its
       turnover was US$ 1.5 million in 2001, and this was expected to multiply in the coming years.



The hardware industry in Azerbaijan was at a nascent stage and extremely assembly oriented.
Many manufacturers were engaged in importing computer parts and sub-assemblies in order
to reduce the cost of the end product.

System integrators

Azerbaijan contains many small system integrators and distributors typically employing
between 2 and 5 persons. The system integrators sourced hardware and related software from
various vendors and provided a total service to customers according to their requirements.

The operations of system integrators included:
 Purchase of the required hardware items:
 Purchase of a number of retail packages covering accounts, purchasing, inventory, sales
   and MIS reporting functions;
 Installation of hardware systems;
 Creation of customized links and an Azerbaijan interface for the software packages;
 Installation of software systems;
 Client staff training; and
 Continuing support.

The work of such firms have tended to be more software than hardware-focused and to
represent an important pool of Azerbaijan’s current software capabilities. As the IT market
was growing, many existing companies were converting themselves into being service
providers for large corporations such as IBM, Compaq, HP, Dell, Acer, Cisco and 3COM.

Sinam Invest company is one of the leading system integrators. They provide turn-key
solutions involving system integration, services and support, software application
development and multi-media. Box 5.2 tells the story of Sinam Invest’s success.


Box 5.2                  Sinam Invest – Company Profile
       Founded in 1993, SINAM-INVEST is a reliable and respected partner in the computer market,
       operating in the field of telecommunication technologies. The strategic goals of the company
       were to implement the use of advanced information technologies in State and private enterprises,
       and in the banking sector and educational institutions, through the creation of data
       communication networks, Internetservices, the development of large telecommunication projects
       and integrated systems, and the support of information databases.

       Sinam Invest have successfully delivered computer and network equipment and installations for
       the Statistics Committee of the Azerbaijan Republic and the TACIS project of the European
       Union’s "Strengthening Management Training Capabilities in Azerbaijan" programme. Other
       computerization projects s included: Sumgait Computer Centre, the World Food Programme, the
       Committee for Struggle with Narcotics and Narcobusiness, and the Customs Committee.
       Software development projects established automatized registration and control of cargo customs
       declarations, an automitized legislation system and an automatizer registration and financial
       resources system for the Aqua Vita company.

       A leading distributor of Unisys, Motorola Inc, Netassist Program, Fujitsu and ACTEBIS, an
       official network partner of Novell Inc. and an official dealer for Hewlett Packard, ICL, Siemens
       Nixdorf (bancomats), Loral Orion (VSAT satellite earth stations) and Lucent, Sinam-Invest has
       emerged to be one of the major system integrators in the Republic of Azerbaijan. It has been a
       member of the American Chamber of Commerce in Azerbaijan since July 1998.

       The success story of the company is based on providing turnkey solutions to major customers for
       the development of software applications and on supplying of hardware to, for example, the
       World Bank, to State sponsored projects and UNDP assisted projects.



Presence of large corporations

Brands of the Multinational Companies (MNCs) accounted for 42% of the market in 2000.
MNCs remained cautious in Azerbaijan because of the continuing high-risk business
environment. IBM, Compaq, Cisco and HP operated through local distributors, franchisees
and authorized resellers. AZEL, RISK, Bestcomp and Unitech were the main distributors of
the products of MNCs in Azerbaijan. They were importing the hardware and supplying it to
customers through their local distributors.

Computer Software Industry

The software industry has been developing rapidly in Azerbaijan and employs about 10,000
professionals. It was observed that the university system was providing adequate manpower
to the industry. The software industry in Azerbaijan consisted of specialized software
developers as well as system integrators. Leading computer organizations were R.I.S.K.,
AZEL, Sinam-Invest, Bestcomp, BSTC, GLOBAL, AzCom, UNISOFT, Link & A,
AzLingvo Small Enterprise, ARAZ Computer, Peter-Service, BIN Soft Ltd, MiniCom, STC
"Informatika" and MARCO.

About 90% of the companies developed software applications and distributed the computers,
communication equipment and software products of the world’s leading companies. These
companies had 7-9 years’ experience and had established modern facilities, e.g. equipment,
space, communication channels.

The companies rarely used copyright protection because: (i) the copyright legislation was
adopted only recently (1996) and enforcement mechanisms were evolving; and (ii) most of
the software products were designed for specific users and were not intended for general sale.
In addition, software development companies believed that software protection was not
adequately reflected in the law, and it needed to be further improved. The copyright agency
of the Republic of Azerbaijan stated that the “Law on copyrights and related rights” has been
in effect since 1996 and was one of the first laws in the post-CIS era, meeting the criteria of
democratic societies. The law has has acted as a mechanism for realization and numerous
interested companies registered programme and multimedia products. State registration is
free of charge. Mechanisms for the provision of rights include policy measures at frontiers
and in trials (hearings). The law completely embraces the protection of software and
databases, which are the result of creative work.”

Azerbaijan’s software and service industry for PCs is very young. In the ‘80s, however, STC
“Informatika” was one of the leading service centres in the Soviet Union for software and
hardware for mainframes. They have experience in creation, development and support of e-
commerce solutions. Furthermore, the market for these products was quite small. The
industry could emerge as a promising sector for offshore development because intellectual
resources were available at a lower cost than in CIS countries and other developed markets.
The software industry provided opportunities for highly paid jobs and the inflow of foreign
currency.

In a world where there is a shortage of programmers, Azerbaijani programmers should be in a
position to penetrate the global market more easily than specialists from other sectors.
Azerbaijani specialists are highly qualified and mostare graduates of Baku State University,
the State Oil Academy and the Technical University. Modern information and
communication technologies provide Azerbaijani programmers with the opportunity to gan
and deliver foreign orders.

There are some organizations in the State sector that are professionally involved in software
development. One of the leading organizations in this sphere is the State’s Students
Admission Commission, which developed by its own                 strengths and successfully
implemented automated systems for organizing and conductingexaminations, applying
modern information technologies. This system, (with language adaptation) can be used in
other countries as well.

R.I.S.K., Sinam-Invest and AZEL are the leading software application developers in
Azerbaijan. There were found to be 40 other companies developing software applications
and providing web-hosting and web-designing services. The turnover of most of these
companies was small. Box 5.3 below describes the success of the R.I.S.K. company .

               Box 5.3                           R.I.S.K. Company ---A Profile
       R.I.S.K.Company, established in 1993 in Baku, was one of the leading IT companies in the
       Central Asia and Caucasus market. Its key focus was on improving efficiency, productivity
       and customer satisfaction. Its range of services included enterprise networking, geo-
       information systems, system integration and data communication, application development,
       web and multimedia. It had a dedicated team of 80 professionals with wide experience in
       research and development, complete system design (LAN, WAN, wireless, ATM, Frame
       Relay, VoIP, VoFR), performance analysis and network tune-up, disaster recovery solutions,
       advanced security solutions, wireless networking and multi-node corporate networks project
       consulting. Many were qualified engineers from world’s leading organizations, such as
       CISCO, IBM and Microsoft.
        R.I.S.K. has proven its competence and won many projects from the World Bank, EBRD, as
        well as other international and local corporations. Many projects have been successfully
        completed for ministries, banks, embassies, oil companies and other private sector businesses.

        R.I.S.K. was poised to deliver software applications including GIS and CAD services to
        discerning clients in Azerbaijan, the Caucasus region and Asia. The success of the company
        was in developing the capabilities to manage large software projects with a contemporary skill
        set, to deliver projects on time and maintain excellent quality standards.



Advanced information technology solutions for financial institutions, governments and large
businesses were provided by a number of companies. Products based on international
accounting practices were also being developed for banking software, as well assoftware
applications for oil processing.

Service and Support

ICT maintenance and technical support services were widely available in Azerbaijan. The
software industry in the country was emerging, with growing numbers of hardware
technicians and web developers. It was observed that the highest concentration of computers
was in Baku and the oil establishments in and aroundit.

Telecommunications industry

According to the Ministry of Communications, the number of enterprises providing services
in the telecommunications field in 2001 were:

        State enterprises:          172
        Joint ventures:              11
        Private sector:              21

Of these, 166 provided telecom services, 13 Internet-based services, 3 data services and 1
paging services. Details of the telecom companies and the percentage of digital PSTN are
shown in Table 5.3 below:

Table. 5.3      Telecommunications Companies and Digitalization of the PSTN Network
         Figures             Units          1997            1998          1999            2000           2001
 Number of
 communication                              182/            178/           178/           178/            172/
 service organizations      In pieces       5/ -            8/3            10/9          11/15           11/21
 (State/joint/private)
 Including:
         Communication       << >>           168            165            170            170            166
                  Service
    Internet Companies       << >>            5              6              8              12             13
            Date service     << >>            2              3              3               3             3
           Pager Service     << >>            -              -              1               1             1
 Percent of digital           %              7.4            21.0           24.3           30.6           37.1
 PSTN
         Including Baku        %             13.5           28.6           29.3          35.1            41.2
 Price of Internet            US$            6             3             2             1.3            0.4
 access

Source: Ministry of Communication, Republic of Azerbaijan
The telecommunications industry was very small, with only about 17 mostly small and
medium-sized enterprises operating in this sector.. They were engaged in the assembly and
manufacture of professional mobile radio stations, microwave stations, multiplexers, earth
stations, amplifiers, telephone cable/distribution boxes, terminal blocks, AC frequency
converters and communication cables.

BAHAR Ltd was engaged in the assembly of cable and satellite broadcasting systems, and
the production of satellite antennas and azimuth direction indicator devices.

Azerbaijan Communications was one of the leading consultancy and system integration
companies. The company’s success is described in Box 5.4 below:
                               Box 5.4 Azerbaijan Communications – A Profile
        Azerbaijan Communications was the leading consultancy and system integration service
        provider. Its services included the creation and operation of digital communication services
        using high technology equipment, plus communications advice; design, installation and
        operation of telecommunication services to international standards; establishment of specific
        telephone networks, and installation, operation and repair of radio, electronic and electric
        equipment and communication systems; creation and operation of digital information
        networks on the basis of Frame Relay, X.25 and ATM technologies; installation, adjustment
        and repair of office facilities and programming of technical systems; realization of various,
        design, research and development projects; establishment of special purpose digital networks,
        digital communication services using optic-fibre and digital channels, plus related services;
        design, installation and operation of communication systems, digital information transmission
        networks and provision of various related services; Internet operation and development; works
        planning, design, manufacture and operation of communication devices and equipment.

        The success of the company was built on its comprehensive range of services for telecom
        installations and system engineering, optimising the network possibilities and undertaking
        turnkey installation of systems.


The communications network in Azerbaijan has developed significantly in the period since
the country’s independence. The pace at which telecommunications facilities were being
established quickened from 1998. Modern electronic automated exchanges (ATEs) with a
total capacity of about 300,000 subscribers have been built and are in operation. In 1991
there were just 30 direct satellite channels; by 2001 the number of channels exceeded 800.
Table 5.4 provides details of the investment attracted to the telecommunications sector.


Table 5.4:       Azerbaijan - Telecommunications Sector Investment and Income
                                (Value: billion Manats unless otherwise stated)
           Indicators               1997 %         1998 %          1999 %          2000 %         2001 %
 Type of investment
 Domestic                            37 2           101 1            79 1           103 6          125 3
 Foreign (US$ million)               24 7            90 2            72 1            78 0           44 3
 Income
 Total earnings from                 465 2          644 3           612 5           769 8          854 6
 communications sector
 Including: State enterprises     316 2 (68%)    390 1(60.5%)    327 7(53.,5%)    369 4 (48%)   390 2(45,7%)
            Joint ventures        149 0(32%)     254 2(39.5%)    284 8(46.5%)     400 4(52%)    464 4(54 3%)
 Consumer services (State-run
 enterprises)                        166 4          194 2           156 7           161 5          166 1

Source: Ministry of Communications, Republic of Azerbaijan, June 2002
The growth in the value of income from the telecommunications sector and the growth in
domestic investment are shown in Figure 5.2:

Fig 5.1- Growth of Income and Domestic Investment:
             Incom e of Com m unication Sector                       Volume of internal investment to sector

                                                               140
  1000                                                 854.6
                                             769.8             120
    800                 644.3      612.5                       100

    600        465.2                                           80

    400                                              464.4     60
                                           400.4
                                                               40
    200                254.2
                                 284.8
          316.2
              149   390.1      327.7     369.4     390.2       20
      0
                                                                 0
            1997       1998      1999      2000      2001              1997     1998    1999     2000     2001



Source: Ministry of Communications, Republic of Azerbaijan, June 2002

Over the period 199l-2001, a total of $365.7 million worth of investment has been made in
telecommunications in Azerbaijan. With the participation of the world's leading
telecommunication companies, 17 joint ventures have been established to provide fixed,
mobile and Internet services. The amount of investment from these joint ventures totalled
US$ 211.8 million: Azercell invested US$ 142 million; Bakcell US$ 40 million;
Baku&Boston US$ 1.5 million. A number of other companies have invested about US$ 14
million to provide wireless telecommunication services. In 1995, AzEuroTel, a subsidiary of
LUKoil, introduced System X - the digital switch from Marconi. Over the last ten years, as a
result of work done on matching internal and international digital communication channels,
networks and equipment to modern requirements, the share of PSTMs (E-ATS) was
increased to 41% (Baku 43%). It was noted that all residential property in Baku had
telephone connection. The situation varied across the rest of the country , with 42 towns and
central regions of the republic provided with on-line connection to the information centre.
The Azercell network covered approximately 95% of the country. All residential areas, State
and private structures were provided with digital channels with inter-city and international
connection possibilities according to their needs. Enterprises and organizations under the
direction of the Ministry for Communications of Azerbaijan employed about 207,000 people.
The telecommunications sector is further being developed according to the 2006 Concept of
Telecommunication Development. A number of companies have displayed interest in
investing in the telecommunications sector. Figure 5.3 below shows the growth of
investment in the sector over the last decade.

Fig. 5.2 – Growth of Investment in the Telecommunications Sector
  100
   90
   80
   70
   60
   50
   40
   30
   20
   10
    0
        1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001



Source: Ministry of Communication, Republic of Azerbaijan 2002

Construction of the following sections of the Azerbaijan segment of the Trans-Asia-Europe
(TAE) link, which joins together 24 countries with fibre-optic cable, has been completed, in
these three directions:

   1. 600 km section Baku-Kazakh-Georgian border.
   2. 400 km section Baku-Astara-Iran.
   3. 120 km section Baku-Siyazan.

The programmes of the national TV channel AzTV-1, republican radio, private radio and TV
are all broadcast via cosmic satellites. There are 150 TV stations operating in Azerbaijan.

The Internet network, started in the Republic in 1997, was a rapidly growing segment, with
13 companies currently providing Internet services. These included Adanet, Artel, Azcom,
Azerin, Azeronline, Azeurotel, Azinternet, Azintex, Aznetcard, Bakinternet, Baknet,
INTRANS and SimanInvest. The growth of this sector was attributed to the fact that tariffs
were affordable and reach was being enhanced. Box 5.4 describes the success story of one
leading company in this field, Adanet.

               Box 5.5          Azerbaijan Data Network (Adanet) – company profile
          Azerbaijan Data Network ("ADaNet"), a leading Internet Service Provider, is a joint stock
          company of the closed type, constituted by the enterprises of the Ministry of Communications
          (Production Union TeleRadio, Baku Telegraph) and the German company ALKOM
          Informational Technologies. Registered on 12.06.1998, licence N 005991 with 51% equity
          participation by the Ministry of Communications and 49% by ALKOM. ADaNet provides
          connection to the Internet through dialup, by using TCP/IP protocols and through assigned
          asynchronous/synchronous communication channels. Services are rendered for web-site
          development and software. 2nd and 3rd level domain names registration is conducted in the
          .com, .net, .org, .in-baku.com, .co-az.net zones. The success of ADaNET lies in its coverage
          of customers, in both the governmental and private sectors, with quality services
Electronic Components Industry

In the Republic of Azerbaijan, the production of semiconductors and electronic components
dates back to the Soviet era of the 1970s and ‘80s involving several enterprises in the Baku,
Ganja and other regions. Only a few companies manufactured semiconductor devices for
space applications and military equipment. Most of the semiconductor devices were
imported in fully assembled form.

Leading National IT Manufacturers

The ITC team, after extensive research, identified companies for inclusion in the country’s
export potential profile. The companies included in the profile, shown by sector, are listed in
Table 5.5 below:

Table 5.5 Azerbaijan:                  LEADING NATIONAL ICT PLAYERS - 2002

  Software         Hardware                    Telecom     Internet Services     Internet Services
                                                           and Applications          Providers
R.I.S.K.       R.I.S.K. Company      Caspian American     Artel Incorporated     Azeronline
Company                              Telecommunications
Azerbaijan     Azerbaijan            Azeurotel            Azerbaijan             Adanet
Electronics    Electronics (Azel)    Telecommunications   Communications JV
(Azel)                                                    (Azcom)
Sinam Invest   DIVI                  Bakcell              Azerin                 INTRANS

Corvus         Bestcomp Group        Azercell             Azeurotel              Azeurotel
Technology                                                Telecommunications     Telecommunications
Link-A         Azerbaijan            Akhundoff            Azintex                Bakinternet
               Technology
               (AZTECH)
Unisoft        Computer              Aztelecom            Sinam- Invest          Global
               Technologies
               Company


                                        Azerbaijan:
                                   Key Issues and Trends
                              Information Technology Industry

         Software companies small and fragmented
         Skilled software capability to develop competitive products/services
         Telecom manufacturing catering to specialized segments
         Assembling of computers based on imported sub-assemblies
         ISP sector growing due to tariff reduction
         Industry not developing due to monopoly of Aztelecom
         Content creation and IT enabled services – a growth area
         Azeri language software – opportunity for growth
         Replication of Azeri computer systems and applications in Caucasus
          region
         Azerbaijan as e-marketplace - online shopping to Caucasus and Trans-
          Caspian region.
                                          Chapter 6

                       Sales, Marketing and Distribution Channels


Sales, Marketing and Distribution

It was found that distribution and sales channels were not very well established in Azerbaijan.
Baku dominated the market and the Baku-based firms handled onward distribution
throughout the country. For information technology products there were established national
firms locally distributing products sourced from Turkey, the European Union, and Russia.

Firms looking for opportunities in Azerbaijan should focus on medium-sized, private local
companies with a minimum three-year track record and credit history. State enterprises were
unlikely candidates for performing distribution and sales activities on behalf of foreign firms
as they lacked the necessary financial resources to cover product inventory maintenance costs
for the local market. The cash flow of Azeri firms tended to be poor due to a lack of
affordable credit and other structural disincentives. Training and flexible stock/inventory
options would help foreign goods and services penetrate the Azeri market.

In Azerbaijan, a distinct absence of marketing by company-owned branches of distribution
companies was observed, or selling by teams attached to production departments. Western
entrepreneurs acted as agents for foreign companies in Azerbaijan, and an increasing number
of Azerbaijani trading firms had established track records as partners of western firms. The
best initial approach to the Azerbaijan market may be through an agent or distributor, and
goods and services that were relatively unknown or untested in the market were at an
advantage.

Franchising was largely unknown, except for the hypermarket group Ramstore (Turkey) that
had several outlets in Baku. In the information technology sector, companies like Azel,
RISK, Bestcomp, UNITECH and Azeurotel were franchisees of American, European,
Japanese and Korean companies, distributing their products in the local market. DIVI, a
distribution company of AZEL, was marketing and distributing computer hardware and
software products across the country.

As for direct marketing, it was common in Baku to find B2B telemarketing and fax marketing
but by all reports it was not effective. In contrast, person-to-person direct marketing was
working. Direct marketing through other channels such as catalogues, the Internet and the
regular mail service was still in its infancy. Many shippers were reluctant to send goods
without prepayment. The number of customers with credit and direct debit cards was
increasing, but card scarcity remained a key constraint to the growth of mail-order and e-
commerce. IBM, through the US consulate, had launched a portal. BuyUSA.com , in
Azerbaijan for the direct on-line marketing and sale of computers, peripherals and other
products.

For setting up a local presence in Azerbaijan, the best option was to establish a joint venture.
This, however, involved a wide variety of licensing procedures. It was learnt that the
application of licensing regulations was inconsistent and non-transparent, with State agencies
delaying the issue of licences, or not responding to licensing applications at all.
As far as selling methods and techniques are concerned, it was noticed that Azerbaijan was
primarily a trading country, with retailing largely unregulated and of the “street” variety.
There were three primary market segments: a low-income group, a middle class and the
“new-rich“ - conspicuous consumers of top-priced items. The new-rich market segment had
purchasing power equivalent to many developed countries. Turkish or European goods were
generally well known in the market, but products from the US and Japan were also accepted
as “reliable” - a key factor in national shopping culture. Counterfeiting of consumer goods
was a problem. CDs, western videos, dubbed into the Russian and Azerbaijani languages,
were sold for less than 15% of their market values in the West. Well-heeled Azeri shoppers
were known for their impatience and desire to buy immediately, and in cash, rather than wait
for shipments to arrive from warehouses in nearby countries.

Advertising was also still in its infancy in Azerbaijan and largely confined to newspapers,
television and billboards. Outdoor billboards and light boxes were used in Baku. Outdoor
advertising of tobacco and alcohol products was prohibited. Newspapers in the Azeri and
Russian languages were published daily (except Mondays). English newspapers were
published weekly. Newspapers were widely sold and read, and they represented the best
method of reaching the Azeri consumer. Television advertising was possible on Azerbaijan’s
two State-run and four private TV stations, as well as Russian TV channels and Turkish TV
channels. The seven private FM radio stations could also be used. The advertising of
alcoholic products was permitted, with restrictions only after 10:00 pm on local TV and radio
stations. Companies in the information technology sector were advertising in the media, and
through websites and e-commerce portals.

The two main ICT trade fairs in Azerbaijan, both held in Baku, are shown in Table 6.1.

Table 6.1:            Specialized IT Trade Fairs in Baku, Azerbaijan
                     Name                                    Content

  Baku Telecommunications                     Telecommunication and computer technology


  International Trade Exhibitions             Trade exhibition on IT industry


Source: Azerbaijan Country Commercial Guide, 2002

Table 6.2 shows the major professional IT journals and magazines available in Azerbaijan.

Table 6.2:     Azerbaijan: Major professional IT journals / magazines
             Name              Period                      Content
 Internet News                      Weekly             Internet technology and related
                                                       information
 Techno news                        Monthly            Information Technology news and
                                                       current events
 Azerbaijan Market                  Monthly            IT market news and events
 Business World Newspaper           Monthly            Business news and current
                                                       developments
Source: Azerbaijan Country Commercial Guide, 2002


The leading IT trade and industry associations in Azerbaijan are listed in Table 6.3.
Table 6.3:              IT Trade and Industry Associations in Azerbaijan

 NICTS (National Information Communication Technology Strategy Project)
 Academician H. Aliyev str. 17 370078, Baku Azerbaijan
 Tel./ Fax: 99412- 402940
 Tel: 99412 - 404069
 E-mail: nicts@az.in-baku.com
 Web: www.nicts.az


 U.S. Embassy in Azerbaijan Commercial Service
 83 Azadlyg ave, Baku Azerbaijan 370007
 Tel: 99412 – 980335
 Fax: 99412- 986117
 E-mail: baku.office.box@mail.doc.gov
 Web: www.ustrade.gov


 Azerbaijan Confederation of Entrepreneurs (Employers)
 85 Salatin Askerova Street
 Tel: (994-12) 94-99-76; 92-07-05;
 Fax: (994-12) 94-99-76
 Web: www.ASK.org.az
 E-mail: azerenterprise@artel.net.az
 Contact: Dr. Alekper Mammadov, President
 Igor Yakovenko, Vice President
 Azerbaijan Project Management Association
 9 A, Aliyev Street
 Baku 370001, Azerbaijan
 Tel: (994-12) 926251
 Fax: (994-12) 920998
 Web: www.azpma.net
 Contact: Dr. Igbal A. Babayev

 Azerbaijan Entrepreneurs Association
 Baku, Azerbaijan
 Tel: (994-12) 949976
 Fax: (994-12) 925471
 Contact : Alipasha Gaybaliyev,
 info@azerinvest.baku.az
 Alliance of Manfacturers Businessmen of Azerbaijan
 Baku, Azerbaijan
 Tel: (994-12) 678881
 Fax: (994-12) 412142
 Contact: Arif Orujov
 Azerbaijan Marketing Association
 Baku, Azerbaijan
 Tel : (994-12) 948775
 Contact : Jahangir Najafov

Source: Azerbaijan Country Commercial Guide, 2002
The main Chambers of Commerce and Industry in Azerbaijan are shown in Table 6.4

Table 6.4:    Chambers of Commerce and Industry in Azerbaijan

 Chamber of Commerce and Industry of Azerbaijan
 31/33 Istiglaliyat str. Baku 370001 Azerbaijan
 Tel: (99412) 925126
 Fax: (99412) 971997
 E-mail: zmurad@azeronline.com
         expo@chamber.baku.az


 American Chamber of Commerce in Azerbaijan
 96 Nizami Street Baku, Azerbaijan 370010
 Tel: 99412 – 971333
 Fax: 99412- 971091
 E-mail: timothy@artel.net.az



Source: Azerbaijan Country Commercial Guide, 2002
                                      Chapter 7

                                Standards and Certification


Standardization

The standards and certification procedures in Azerbaijan were found to be based on the
centralized practices of the USSR period. Currently, products were adapted to the national
system of standards and certification of Azerbaijan. The Committee on Standardization,
Metrology and Patents (CSMP) in Baku, was the authority responsible for standardization in
Azerbaijan.

The government adopted the Law No: 60-IG, the Law of the Azerbaijan Republic on
Standardization in April 1996, which established the legal and economic basis for
standardization in the Azerbaijan Republic. This made standardization obligatory for all
executive authorities, local self-governing bodies, enterprises, organizations, entrepreneurs,
as well as public associations. The interests of consumers, as well as governmental and
economic entities, were covered by existing legislation, normative acts and treaties. The rules
were adopted by the government and implemented by its regulatory authorities.

The main purpose of the CSMP was to develop standards, rules, general technical norms and
requirements, mandatory requirements pertaining to the quality of products, processes and
services, and methods of testing products. In addition, it developed standards for reference
materials, and uniform requirements for protection of the environment. Another goal was to
harmonize normative technical standards that were being developed in Azerbaijan with
international organizations such as ISO and IEC. Standards were being based on the Code of
Good Practice on the Development, Adoption and Application of Standards.

Azerbaijan adopted several basic laws and regulations designed to promote the development
of the telecommunications and IT sector. In 1998, Azerbaijan adopted the law on
Information, Informatization and Protection of Information (the "Information Law"), which
created the legal framework for regulating information resources, processes, systems and
technologies. The Information Law authorized the use of electronic signatures only if it was
possible to properly authenticate them. In the banking sector, the Civil Code of Azerbaijan
established a more rigorous electronic signature authentication system than that required
under the Information Law.

The Information Law imposed further restrictions on the use of "classified" information.
Unauthorized use of classified information was strictly prohibited. Information was deemed
classified if it contained State secrets or was confidential. State secrets included information
concerning the military, foreign policy, the economy, science and technology, intelligence,
counterintelligence, and investigations. Confidential information included personal databases
on individuals or entities not available to the public.
Box 7.1 shows details of national normative Acts adopted by the Azerbaijan government to
develop the information communications and technology sector.
Box 7.1 National Normative Acts & International Treaties
 Law on Communications, dated 20.06.97;
 Law on Information, Informatisation and protection of information, dated 03.04.1998;
 Law on Mass Media, dated 08.02.2000;
 Code on Administrative Infringements, dated 01.09.2000;
 Law on Creation of the Azerbaijan Republic State Commission “On Radio Frequency”, dated 15.08.96
 Resolution of the Cabinet of Ministers of the Azerbaijan Republic № 136 “On approval of the
    Provision of the Azerbaijan State Commission on radio frequency”, dated 03.10.96;
 Resolution of the Cabinet of Ministers of the Azerbaijan Republic № 138 «On approval of the
    protection of the means and devices of communication of the Azerbaijan Republic”;
 Resolution of the Cabinet of Ministers № 22 “On approval of the Rules on issue of the special
    Permission (licence) for communication services (international, intercity, urban, rural, cellular, paging,
    radio-trunk, creation and exploitation of the cable television, rapid post service) of the Azerbaijan
    Republic, dated 05.02.1998;
 Resolution of the Cabinet of Ministers № 90 “On approval of the rules on use of transport means for
    post service of the Azerbaijan Republic”, dated 20/04/1998;
 Resolution of the Cabinet of Ministers № 175 “On approval of the rules of certification of the
    communication means of the Azerbaijan Republic”, dated 21/08/1998;
 Law of the Azerbaijan Republic “On approval of the treaty on cooperation in the development of
    cellular-mobile systems and their use”, dated 30.03.1999;
 Law of the Azerbaijan Republic “On annexation to the Charter and Constitution of International
    Telecommunications and correction documents”, dated 14/03/2000;
 Law of Azerbaijan Republic on approval of treaty “On cooperation in the field of Governmental
    communication” between the government of the Azerbaijan Republic and Ukraine Cabinet of
    Ministers, dated 24/04/2000;
 Decree “On measures of improvement of special permission (licence) issue on some types of business
    activity in the Azerbaijan Republic”, dated 28.03.2000;
 Law of Azerbaijan Republic “On annexation to provision for establishment of the Conference of the
    European Post and Telecommunication Administrations and fixed procedure rules”, dated 02.05.2000
 On joining of the Azerbaijan Republic to the provision for establishment of the European Post and
    Telecommunication Administrations, adopted on September 7, 1992 and to the procedure rules of
    mentioned Conference, adopted on September 6, 1995;
 Resolution № 93 “On change of rules of issue of special permission (license) for communication
    services (international, intercity, urban, rural, cellular, paging, radio-trunk, creation and exploitation of
    cable television, rapid post service) in Azerbaijan Republic, approved by resolution of the Cabinet of
    Ministers, dated 22.05.2000;
 Decree of the Azerbaijan Republic President № 389 on issues of approval, came into effect and
    regulation in connection with this Code of administrative infringements, dated August 29, 2000;
 Resolution of the Cabinet of Ministers “On conduct of the measures, proceeding from the provisions of
    the treaties, signed between the government of the Azerbaijan Republic and government of Russian
    Federation in Baku on January 9, 2001, resolution dated 07/02/2001;
 Decree of the Azerbaijan Republic President dated 16/03/2001 “On conduct of the State regulation of
    the modern communication services in Azerbaijan”

Source: Ministry of Communication of the Republic of Azerbaijan

The government has ratified a number of international treaties with Regulatory Bodies, some
of which are listed below:

   The Charter and Convention of International Telecommunication Union, adopted on
    22.12.1992 in Geneva, and amendments, signed in Kyoto on 14.12.1994;
   The Treaty “on Cooperation in the Sphere of Governmental Communication between the
    government of the Azerbaijan Republic and the Ukraine Cabinet of Ministers” 2000;
   Provision for the establishment of the Conference of the European Post and
    Telecommunication Administrations, adopted on 07.09.1992 and procedure rules of the
    mentioned conference, adopted on 06.09.1995;
   The Treaty “on cooperation in the Sphere of Provision of Governmental Communication
    and Information Safety between the Ministry of National Security of the Azerbaijan
    Republic and the Federal Agency of Communication and Information under the President
    of the Russian Federation, dated 2001;
   The Treaty “on Cooperation in the Sphere of Provision of Governmental Communication
    between the Azerbaijan Republic and Government of the Russian Federation”, dated
    08.01.01

Information communications and technology in Azerbaijan were found to be highly
regulated. Telecommunications, Internet services and subscriber television installation and
operation were all subject to licensing by the Ministry of Communications.

The Ministry of National Security licensed the production of information protection devices
and software programmes. The Ministry of Communications regulated all legal and physical
entities using communication services, and those rendering such services. All information
systems, technologies, databases and equipment used in the IT market must also be certified
as to their compliance with State technical standards and safety requirements under the
Ministry of Communications.

According to the list given in the attachment to “Rules of certification of communication
services in Azerbaijan Republic”, approved by the Cabinet of Ministers, dated 25/08/1998,
more than 119 types of equipment in the following 15 groups were subject to certification by
the Division on Certification, Ministry of Communications:

   Final cable equipment;
   Communication cables and wires;
   Final subscriber equipment;
   Transmission systems, systems of synchronous/plesiochronous digital transmission,
    microwave systems of rapid/mid-speed/low-speed digital transmission of the
    main/domestic/local nature;
   Analogue microwave systems of TV signals transmission, systems of networks
    management.
   Systems of subscriber’s radiotelephone distribution, automatic intercity/city telephone
    stations; telephone stations (IATS, IIATS, KATS, SATS) of different purposes; intercity
    communication centres, compensators, communicators, reference/order/calculation
    systems.
   Equipment of mobile systems of radio communication, systems of mobile
    communications of GSM, NMT-450, AMPS/NAMPS/SDMA standards, analogue or
    digital trunk system; wireless digital/analogous telephone systems; transmitting digital
    radio systems.
   Telegraph equipment.
   Digital transmitting systems; digital channelling telephone systems; digital systems of
    transmission by telephone channels.
   Systems of wire transmission; mono/multi – programmed/multichanneled systems of
    transmission.
   Systems of electric power.
   Satellite systems of communication; transmitters-receivers in 6/4; 14/11, 18/12 Hhz range
    for HUB/GATEWAY- type of land stations of satellite communications; wide-range
    compact transmitting / receiving land (VSAT) satellite stations; channelling equipment
    for satellite communication; apparatus for control and registration on satellite channels of
    communication; re-translators in 6/4, 14/11, 18/12 Hhz diapason; control-measuring
    apparatus for satellite communication.
   Antenna – feeder equipments; transmitting – receiving antennas for
    microwave/satellite/NTV/radio communication
   Equipment for radio transmission
   Equipment for telecasting

Services, however, were not subject to certification. Services rendered in the communications
field could be certified according to the law “on Communications” (art.19). A certification
laboratory existed, accredited to international systems of quality. There were no non-State
organizations or laboratories in Azerbaijan carrying out certification or other types of
evaluation. It would therefore be necessary to create a modern, multi-profiled laboratory for
certification.

Further regulation of the information technology and communication sector was anticipated
after the draft law on E-Commerce was adopted by the national parliament (the Milli Mejlis).
Regulation of procedures on the development of the normative-legal Acts was partially on the
basis of the Act of the the Ministry of Communications entitled “Rules on the Conduct of
Record–Keeping at the Ministry of Communications”. According to the approved provision
relating to the Council of Informatization under the Ministry of Communications, this
Council was also authorized to develop the normative-legal Acts project.

The Ministry of Communications systematically conducted analyses of the efficiency of Acts
and either made the necessary modifications or abolished the Acts altogether. It was
considered that closer coordination was necessary in the law-making process between the
national parliament and the Ministry of Communications.

                                         Azerbaijan:
                                      Standardization
                                    Key Issues and Trends

                       - Conflicting national standards (outdated)
                       - Coordination between legislative institutions and the regulatory
                         authorities was weak
                       - Enforcement mechanism to ensure compliance was weak
                       - Clarity on specifications and standards was missing
                       - Shift towards EU regulations and standards systems
                                            Chapter 8

                  Export Potential - Information Technology Industry Development



Background

The Republic of Azerbaijan provides a vital link between Europe, Central Asia and Middle
East and it is poised to become an important player in the global marketplace.

Azerbaijan’s ICT market was found to be evolving rapidly. It was valued at US$ 138.5
million in 2001 and was expected to grow to US$ 200 million in 2002. The projection is that
the market will grow to be worth US$ 1 billion by 2011. It was further concluded that
development of the ICT industry hinged on export-led growth, supplying in particular the
markets of the Caucasus and Trans-Caspian region. Azerbaijani ICT specialists had found
channels for work in Germany, the US and other well-developed countries. Azerbaijan could
have a robust ICT sector by creating an attractive working environment for its IT
professionals and by developing a state-of-the-art infrastructure ready to handle off-shore
projects and IT enabled services.

The ICT industry was relatively young and was being promoted by “techno-savvy”
entrepreneurs. There were 80 companies operating in telecommunications development, the
assembly of computers, software application development, web designing, content creation
and system integration. The software application industry was growing rapidly. Already 40
companies produced a variety of software applications. There were also about 10 companies
that offered system integration and the assembly of computers. ICT maintenance and
technical support services were widely available in Azerbaijan. There were many companies
producing cash registers and counting devices. The hardware sector was very small and
assembly-oriented. Some 20 SMEs in the telecommunications sector were actively engaged
in the assembly and manufacture of small components for the telecoms network.

ITC’s National Export Potential Index was designed to assess comparative advantages and
the export potential of the most active players in the global market for information and
telecommunication technologies. It was based on the views of professional experts, opinion
leaders and industry associations across the regions. The principal objective of this tool was
to provide IT policy-makers, the business community and eventual investors in IT with an
objective, qualitative assessment of the major factors affecting IT sector development.

Delphi methodology was used for the assessment. In each country, an average of 10
professionals were interviewed, from the industry, government, academia and the mass
media. A points score on the scale of 1 to 10 was given to describe a country’s
competitiveness on the selected parameters listed below. The scale is applied as follows:

   from 1 to 4 – lower country capacities
   from 5 to 6 - average country capacities
   from 7 to 10 – high country capacities

On the basis of ITC’s assessment, Azerbaijan’s current national export capacity in the ICT
sector was given a points score of 4.5.
For more details see Appendix 8.1.
SWOT Analysis

The ITC team had extensive consultations with the Ministries of Foreign Affairs, Economic
Development and Communications, as well as the State Students Admission Commission, the
Department of Economic Cooperation and Development, the Copyright Agency,
Azerbaijan’s State Statistical Committee, the Azerbaijan Republic State Customs Committee,
the Office of the President of the Republic of Azerbaijan, leading industry players, and others
involved in government, trade and industry associations.

The ICT sector in Azerbaijan has potential for development.

Box 8.1 shows an analysis of the Strengths, Weakness, Opportunities and Threats (SWOT) of
Azerbaijan’s ICT industry.
 Box 8.1        Azerbaijani -         SWOT analysis of Azerbaijan IT industry


                          Strengths                                              Weaknesses

     Evolving economic environment conducive to ICT             Business environment–influence by vested interests
      development                                                Lack of strong investment policies for attracting
     ICT sector – high priority for national development         foreign investment in ICT
     Location - Caucasus & Trans Caspian Region                 Copyright law exists; enforcement mechanism
     Silk Road linking Asia & Europe - Transport corridor        evolving; piracy is 80%
     Entrepreneurial spirit in ICT sector                       Taxation / Registration process unclear and time
     Privatization of telecom sector – competition               consuming
     Well established Internet service provision                Telecom regulator – policy maker, service provider
     Rapid growth of Internet sector                             & partner
     Highly literate & qualified manpower (94%)                 High telecom tariff & inferior quality of
     Low cost of human resources                                 service/lines
     English speaking workforce                                 Internet tariffs relatively high
     Young people ready to learn new skills                     Fragmented IT market – led by projects of
     High mobility and flexibility of manpower                   government
     Motivated workforce with entrepreneurial skills            Lack of financial support to IT companies for
     Well developed education system churning out 350+ IT        starting projects and developing supports,
      professionals per annum                                     marketing and brand building
     Access by IT companies to US & European markets             Understanding of software quality, certification
     Cluster based IT industry development in Baku               and development methodologies – missing
                                                                 Support programme lacking for industry promotion
     Software industry employing over 10,000 professionals
      and 15,000 services professionals                          Lack of networking and communication between
     Use of open source software                                 Government and industry
                                                                 Industry in nascent stage of development –
     Roadmap for e-governance implementation
                                                                  focusing on local market.
     Projects for developing credentials & credibility
                           Opportunities                                              Threats

         Trans Caspian Cyber market place development, Baku to      Commodity dependent country - remains oil
          become “Dubai” of the region                                and agro-based economy
         WTO accession - large emerging global IT market            Growing unemployment - a reality
         Off shore development, R&D IT enabled services, oil &      Market to be dominated by foreign goods and
          gas related processes and applications                      services leading to over dependence on MNCs
         Shortage of skilled IT professionals in US & Europe –      IT specialists – brain drain
          opportunity for Azeri talent                               Lack of networking and communication between
         Telecom privatization offers investment avenues             government & industry
         Productivity improvement for oil, gas, agriculture,        Lack of a coherent image of the industry
          textiles, cement etc


Azerbaijan’s IT industry was compared with other countries in the region on the basis of the
SWOT analysis. The observation of the team was that the ICT industry in Azerbaijan was
still in the early stages of its formation.

ITC’s Assessment of Azerbaijan’s ICT industry

As already mentioned, Azerbaijan had a small ICT market, but one which was growing
rapidly. It was expected to reach US$ 1 billion by 2011. The growth of the ICT industry in
Azerbaijan would essentially be export-led, supplying in particular the Caucasus and the
Trans-Caspian region. It was observed that several projects initiated in the ICT field had
already led to the establishment of a good fibre-optic infrastructure in Azerbaijan.
Possibilities existed for enlargement of the hardware production facilities of companies like
Azon, Billur, Radio Factory and Ulduz. One example of success that could be replicated in
the ICT industry was that of Azneftchimmash, a company employing 3,150 professionals,
and exporting instruments for the petroleum industry.

Education would be the springboard for the revival and development of the industry. The
education system had already made significant strides and was providing well-educated and
trained skilled manpower to the industry. The other key development factor was the extent to
which Azeri IT specialists were being invited abroad to set up ventures involving Azeri
resources.

The oil sector was the backbone of the Azebaijani economy, led by MNCs who were heavily
dependent on ICT applications. This sector should provide the necessary impetus for the ICT
sector by providing it with the appropriate methodologies for developing and managing large
projects. Interaction between academia and industry could enable the creation of innovative
products in the oil sector: optimal placement of platforms, automatic process control, multi-
colour indicators, etc.

The industry in Azerbaijan was broadly analysed under the following segments.

          Hardware assembly for manufacture of computers, assemblies and piece parts
          Telecommunication and radio communication equipment production
          Software application development and system integrators to provide turnkey solutions
          IT enabled services
          Components and sub-assemblies
An assessment of the ICT industry in the Republic of Azerbaijan, by each these sectors, is
described in the paragraphs that follow:.

Hardware assembly of computers, sub-assemblies and piece parts

There were only about 10 companies producing computer hardware, assemblies and piece
parts. Most of them were small, with the main exceptions being AZEL, the Cen Group and
R.I.S.K. Companies basically imported components and assembled them into finished
products. The manufacture of cash registers and counting devices was gradually declining, as
users turned to machines available from NCR and several other Japanese firms.

The ITC team observed that the hardware industry in Azerbaijan was at a nascent stage of
development and was assembly-oriented. Furthermore, it was competing in a market based
on tariff protection. The hardware sector, in particular, would therefore find it difficult to
compete internationally once Azerbaijan accedes to WTO membership and the ITA
agreement.

Telecommunication and radio communication equipment production

This was a speciality sector in Azerbaijan. Some 20 companies, most of them SMEs, were
engaged in assembly and manufacture. The technology and well-trained skilled manpower
existed for system integration services and the production of digital telephones and access
devices, as well as satellite antennas, professional mobile radio stations, microwave stations,
PCM multiplexers, Ku-band low-noise amplifiers, terminal blocks, telemetric equipment for
oil sector, etc.

The ITC team considered that it would be possible for Azeri companies to concentrate on this
segment and develop products for the international market. Given the depth of experience
from the oil sector and from the establishment of oil and gas pipelines, telemetry applications
might be an interesting sub-segment for development.

Software application development and system integrators to provide turnkey solutions

Azerbaijan had 40 companies in software application development and system integration.
These companies were providing services to government, the corporate sector and to MNCs
in the oil sector. It was noted that the majority were providing turnkey solutions to their
customers, based on imported products. Only a few companies had experience in delivering
large applications such as an election automation system, a student admission system, an
online customs administration, or a banking software system.

The range of products offered included system integration projects, software application
development on different platforms and languages, engineering application software such as
modelling processes, diagnostics applications for the oil industry, automatic control systems,
signal and noise optimization techniques, multicolour indicator panels, e-governance
applications, and e-commerce applications. Areas of application included: software for
national languages and a bridge for Turkish, Russian, English languages, as well as
outsourcing and web-design.

The IT sector appeared to the ITC team to be one of the most promising sectors of the
Azerbaijan national economy. There existed a large pool of intellectual resources available at
low cost. Another factor in this sector’s favour was that it was the one that was least
controlled by government regulations in its performance of trade operations.

Of the many companies providing system integration services, the major ones were AZEL,
R.I.S.K., DiVi, Best Comp. and Marco Computing Technology. The system integrators
sourced hardware and related software from various vendors and provided a total service to
customers that was tailored to their requirements. The work of such firms tended to be more
software than hardware focused, and they represented an important pool of Azerbaijan’s
current software capabilities.

The ITC team also felt that in general the system integrators were concentrating mainly on
Azeri markets. By contrast, AZEL was developing the whole Caucasus region market for
their products and services and had also been successful in sourcing projects from
neighbouring countries.

ICT-enabled services

ICT-enabled services provided a major opportunity for Azerbaijan. Several small companies
were engaged in the development of web applications, hosting websites and designing and
creating content for oil companies and other Azeri companies. Multimedia applications
featuring local talent as well as Azeri literature were being developed.

ICT-enabled companies could concentrate on developing and delivering services such as
business process outsourcing, call centre applications, medical and legal transcription, GIS-
based services for creating maps and objects, content creation, web designing, and hotline
support for computers and office equipment.

Components and sub-assemblies

The ITC team observed that this sector was still based on the manufacture of semiconductors
and electronic components for the Soviet-related needs of the past. It was therefore in
decline but could possibly be revived if sub-assembly oriented production were to be
adopted, adopt of and if it moved into the design of semiconductor devices.

Many national companies had been successful in transforming their business and they were
now manufacturing products and services for international uses, particularly in the fields of
radio communication and instrumentation for the oil sector. The development of engineering
applications based on the expertise from the oil sector could be the cornerstone of explosive
growth of the software industry in Azerbaijan.

Key components of this growth would be the national education system, strong cooperation
between industry and academia to commercialize innovations, and encouragement by the
government of clusters in the ICT sector.


Revival of Azerbaijan through external inputs

Azerbaijan’s ranking by the Organization for Economic Cooperation and Development
(OECD), which placed it at the same investment risk level as Russia, Kazakhstan and Turkey,
had the effect of attracting the interest of leading external international institutions in
providing input to the development of its economy. Azerbaijan was being assisted through
joint programmes with a number of international economic and financial organizations
including the International Monetary Fund, the World Bank, the European Bank for
Reconstruction and Development, the Organization for Economic Cooperation of the Black
Sea Countries and the Economic Cooperation Organization. Azerbaijan had signed a stability
pact with the IMF under which it received assistance for economic restructuring. Under the
World Bank assistance programme (second tranche), technical assistance of US$ 9.45 million
would be provided to Azerbaijan for infrastructure development.

The United Nations Development Programme (UNDP) office in Azerbaijan has been
providing technical assistance for the development of the ICT sector in Azerbaijan with the
objective of reducing the digital divide. Successful cooperation with the State Customs
Committee had resulted in the implementation of the data transmission network across the
country. The application of ICT was introduced into the election process by the Central
Election Commission in order to build a transparent and effective election system. UNDP
also assisted the State Students Admission Commission in utilizing ICT in the processing of
student admissions. With the help of UNDP expertise, a plan was drawn up for a national
strategy using ICT in the development of Azerbaijan, and for e-readiness assessment.



Assessment of Azerbaijan’s R&D capability

Consultations with academic and scientific institutions revealed that substantial potential
existed for scientific R&D in Azerbaijan. There were 44 universities in Azerbaijan providing
education in science, architecture, the arts, management, engineering, etc. (see Appendix
8.2.). In the 2001-2002 academic year, there was an output from these universities of about
1,800 graduates with the basic knowledge and skills related to the ICT industry.

The Institute of Cybernetics of the National Academy of Sciences of Azerbaijan and the
Institute for Information Technology were the leading scientific institutions with training
programmes in IT as well as fundamental and applied researches. Training and research was
conducted in computer science, control systems for process industries and the application of IT
in the communications sector, including satellite and fibre optics.

Efforts were being made through organizational restructuring to make Azerbaijan’s scientific
research and development more competitive and more focused on resolving problems in the
industry, and on completing projects on time and within stipulated budgets. Government would
assist the institutions through budget support to carry out high-tech R&D programmes and to
provide the human resources trained to Doctorate and Masters levels that were needed in
information technology.

The Azerbaijan Education and Research Network Association had been set up to share
research ideas and projects, and to develop appropriate techniques to improve the IT sector
and its application in the oil, gas and other industries. A scientific research and education
network was being established to integrate the universities using fibre-optics for local
connections, radio for the 5 to 6 km range, as well as satellite and other communications
techniques. This would enhance the quality of the research output. It was further noted that
during a meeting of NATO held in the Trans-Caspian region, Azerbaijan’s R&D potential
was rated as being among the highest and there were distinct possibilities of NATO awarding
projects to Azerbaijan R&D institutions.

One of the major achievements of the R&D institutes was their development of a strong
mathematical model based on fuzzy logic for the optimal placement of platforms in the oil
fields. Application software was also developed based on the analysis of noise accompanied
by signals to improve the effectiveness of the different types of signalling processes in the oil
industry.

According to the Institute of Cybernetics, other intellectual achievements and software
applications included:

      Diagnostics of sea oil and gas production platforms;
      Diagnostics of the process of drilling;
      Control and diagnostics of technical states of cyclic processes;
      Determination of seismic stability of the sea deep-water stationary platforms;
      Multi-channelled telemeter for the transfer of information with delta modulation;
      Device for the control over dynamic characteristic systems of drilling of wells;
      Device for the management of work of marginal well;
      Intellectual information-measurement system of determination of the weight of oil
       products in reservoirs;
      Multi-channelled device for the registration and analysed of seismic signals;
      Device, revealing vessels of bad capacity in circulatory system of the human at the
       appearance of thrombus;
      Device and software for submission of information through electronic multi-coloured
       panel of indication;
      Software for the solution of the problem of identification of parameters of
       technological processes robust methods and algorithms;
      Software for calculation of supplies of liquid oil;
      Software for modelling of the process of research of oil and gas fields, deposits of
       liquid oil; underground storage facilities, created in aquifers;
      Software for optimal distribution of sea oil and gas purifying platform;
      Software for minimization of vibrations of oil and gas pipelines, created by the
       internal hydrodynamic forces and other wave factors;
      Software for the regulation of systems of transportation of gas, including system of
       calculation;
      Optimisation of adopted decisions in the systems of transportation of oil products;
      Software for the modelling of the processes of multi-phased filtration and diagnostics
       of contiguity of the water with oil during the movement of oil;
      Software for diagnostics of professional diseases in oil industry.

Export product selection

Based on the capacities and the technology available in Azerbaijan, the ITC Technology
Team identified the products for export promotion shown in Table 8.1 below:

Table 8.1 Azerbaijan: Products identified for export promotion
Software products      LINK-A's commercial product for accounting, namely GUNESH SYSTEMI –
                       (Multilingual Interface based on international rules for accounting)


Computer software      System integration projects, software application development on
                       different platform and languages, engineering application software
                       such as modelling process, diagnostics applications for oil industry,
                       automatic control systems, signal and noise optimisation techniques,
                       multicolour indicator panels, e-governance applications and e-
                       commerce applications, software designed by SSAC for automation
                       of organization and conduction of test exams, and its linguistic
                       adaptation


Hardware Assembly      Electronic calculators, counting devices, cash registers, assembly of computers

                       Business process outsourcing, call centre application, medical / legal transcription,
ICT enabled services   GIS based services for creating maps and objects, content creation, web designing,
                       hotline support for computers and office equipment


Telecommunication      Assembly of digital telephones and access devices, satellite antennas, Professional
                       mobile radio stations, microwave stations, PCM multiplexers, Ku-band low-noise
                       amplifiers, terminal blocks, telemetric equipment and system integration


Components and sub-    Printed circuit boards, semiconductor devices for military applications for CIS
assemblies             countries
                                          Chapter 9

                    Information Technology Export Growth Scenarios

Vision for the Azerbaijan IT industry

Azerbaijan’s IT industry, in cooperation with policy-makers and stakeholders, should develop
a vision for the future. ITC’s Technology Team presented and discussed with Azerbaijani
authorities and the IT business community possible ways in which the ICT industry could be
developed.      The following vision was proposed by the Team on the basis of in-depth
consultations with the major national and international players on the Azerbaijan IT market.

Azerbaijan should aspire to become the Trans-Caspian Cyber marketplace and emerge as a
major source of high-tech in the Caucasus region.

By leveraging its national competitive advantages, Azerbaijan’s IT industry should be a
recognized regional supplier of software applications and ICT-enabled services by 2011.

Effective public-private partnership in the IT sector will ensure a competitive and predictable
rules-based business environment, advantageous inflows of foreign direct investment and a
recognized image for Azerbaijan as a centre of IT excellence.

Goal

Azerbaijan had a well-educated society, with the English, Turkish and Russian languages
widely spoken. Its ingenuity, ability in mathematics and experience in solving the complex
problems of the oil sector makes it a potent force in software development and IT-enabled
services. These assets could be utilized in the development of the ICT sector as an alternative
to the oil sector and could turn Azerbaijan into the Trans-Caspian cyber marketplace.
Azerbaijan should increase its IT industry exports from the existing level of US$ 10 million
in the year 2001 to:

       -   US$ 100 million by 2005,
       -   US$ 300 million by 2008, and
       -   US$ 500 million by 2011.


Niches for the IT Sector: Core Products, Services and Target Markets

 On the basis of the ITC’s SWOT analysis and in-depth consultations with the policy-makers,
industry, trade and others concerned in the ICT sector, the following niche market areas were
                                                 identified for rAzerbaijan to concentrate on:

   Software application development and system integration
   ICT-enabled services
   Telecommunication and radio communication equipment
   Hardware Assembly and manufacture computers and subsystems
The paragraphs that follow are devoted to describing in more detail these areas of strategic
focus.

Software and services

National software companies and State organizations such as the State Students’ Admission
Commission (SSAC), possessed expertise in developing software applications initiated by the
Government of Azerbaijan with the help of UNDP and other donor agencies. The oil sector
initiated projects based on their worldwide experience of using applications throughout their
enterprises. Companies were engaged in customizing applications, web design, hosting and
content creation.

The skill set of Azeri companies was based on RDBMS such as Oracle 8i/9i, Microsoft SQL
server and Informix, as well as object-oriented programming languages like Visual Basic,
Java, Linux and others. They lacked experience in delivering application solutions to
overseas clients, with the exception of some on-site work by software specialists with
companies in Germany, the US and Turkey. AZEL had experience of system integration
implementing hardware, software and applications in the Trans-Caspian region.

Based on Azerbaijan’s particular stock of experience, a triple axis growth plan was proposed.

The first was to leverage current capabilities in the oil sector and extend government
applications into new, rapidly growing service lines such as e-commerce, knowledge
management and telecom infrastructure applications.

The second was to tap the experience of new emerging customers in the oil sector both
within Azerbaijan and in the Trans-Caspian region, in order to replicate what has been learnt
through projects such as on-line customs administration, the election administration system,
the students’ admission and registration system, an air ticket sales accounting system and
information systems for other sectors of the economy.

The third was to move up the IT services value chain from piece part maintenance work to
full project implementation. IT-enabled services such as call centres, transcription systems,
business process outsourcing could be developed as a cluster in Baku.

Market openings were emerging across four broad sectors – IT Services, software products,
IT-enabled services and e-commerce. In addition to the global export market, all these
opportunities had a domestic market component as well. (see Box 9.1).


Box 9.1            Azerbaijan: Emerging Market openings

          Sector                                          Opportunities


 IT-enabled services           Business process outsourcing, call centre application, medical / legal
                                transcription, GIS based services for creating maps and objects, content
                                creation, web designing, hotline support for computers and office
                                equipment


 Software products             Process modelling, diagnostics applications for oil industry, automatic
                                control systems, signal and noise optimisation techniques, multicolour
                                indicator panels


 IT services                   Consultancy for system requirement and analysis
                               Business process reengineering
                               Turnkey implementation of projects
                               Multimedia application for enabling convergence technologies


 E-commerce                    Domestic business to business
                               Trans-Caspian marketplace for e-commerce


Source: ITC Project File, June 2002

Telecommunication and radio communication equipment

The telecommunications and radio equipment sector had potential for the assembly and
manufacture of digital telephones and access devices, satellite antennas, professional mobile
radio stations, microwave stations, PCM multiplexers, Ku-band low-noise amplifiers,
terminal blocks, telemetric equipment for the oil sector, etc.

Many companies possess expertise in system design, and installation and commissioning
based on products supplied by international companies like Ericsson, Nokia, Siemens, CIT
Alcatel and Motorola. This experience included the establishment of large switching centres,
digital transmission networks and mobile communication base stations. Based on this
expertise, companies could develop the Trans-Caspian market for the supply of system
engineering, installation and commission, maintenance and software application
development.


Hardware assembly and manufacture of computers and sub-systems

A good employment-creating strategy could be to revive existing companies by taking up the
manufacture of hardware and sub-assemblies based on Asian sources to cater for the Trans-
Caspian market demand. The low cost of assembly of electronic hardware could capture the
attention of large companies wanting to serve Iran, Turkey and other CIS countries.

The areas of prime focus for contract manufacturing could be:

        -      PC assembly,
        -      Consumer electronic products,
        -      Process control instruments for the oil and gas sector, and
        -      Design of integrated circuits and piece parts.

Research & Development

The Ministry of Economic Development identified areas for research and development by
universities and R&D institutions. Areas of focus included information technology,
agriculture-related biotechnology products, and instrumentation for the oil sector. Budgetary
support for the research programmes was provided by the government with a view to
improving the competence of the institutions to develop technologies that would enable the
industries to be at the forefront of economic development.

NATO had been holding discussions with Azerbaijan’s R&D institutions on the development
of innovative products and services for which the necessary financial and technical support
would be forthcoming. Similarly, EU funding under the PHARE programme was available
for developing applications in government and other institutions. UNDP had put together a
package for development of e-governance in Azerbaijan, necessitating software application
development by the academia and institutions.

The focus of research and development was on developing technologies, benchmarked with
international standards and their relevance to Azeri development.

IT Export Growth Scenarios

Currently the total exports of Azerbaijan’s IT sector amounted to about US$ 10 million. It
was was projected that this could rise to US$ 100 million by 2005, through a doubling of the
growth rate each year .

In order for Azerbaijan’s vision to be the Trans-Caspian cyber marketplace to be realized, a
step-by-step, three-pronged strategy has been proposed. The strategy is designed is to
achieve the following targets for exports of software and services, including hardware:

   US $100 million by 2005
   US $300 million by 2008
   US $500 million by 2011

a) Strategy for achieving US$ 100 million exports in IT hardware, software and services

Time horizon: 2005

According to the analysis by ITC and based on consultations with the Ministry of Economic
Development, the Ministry of Foreign Affairs, UNDP, opinion-leaders, international experts
and trade and industry leaders, it should be possible for Azerbaijan to achieve the IT exports
target of US$ 100 million in 2005. This conclusion was based on the following assumptions:
 Availability of manpower – 10,000 software & 15,000 service professionals
 Productivity to increase from US$ 10,000 to US$ 25,000 per year in 4 years
 Addition of manpower - 350 software and 500 service professionals per year

To achieve the target, an annual growth rate for the software industry of 100% would be
required. The mission, objectives and strategies to be pursued to ensure this growth rate are
described below:

Objective

Azerbaijan to become an exporter of IT hardware, software and services to the value of US$
100 million by 2005.

Priorities
To achieve the strategy objective, Azerbaijan’s authorities and industry will have to act on
the following priorities:

   Organize hardware, software and IT-enabled services into clusters
   Create aa policy environment conducive to attracting FDI
   Develop human resources in computing techniques, assembling and services
   Develop the Trans-Caspian region as an economic market zone for ICT products and
    services
   Accelerate the process of the country’s accession to the World Trade Organization

Action Plan

To accomplish the strategic priorities, a set of organizational and legislative measures needs
to be initiated by Azerbaijan IT firms and policy-makers, as follows:

   Changing the mindset of national business managers to focus on the Trans-Caspian
    region by leveraging the experience and inherent expertise gained out of developing large
    projects in Azerbaijan oil and government sectors.
   Creating a structure and mechanism for the administration and monitoring of the IT
    sector by setting up a Ministry of Information Technology within the government.
   Setting up an Information Technology Park in Baku with modern infrastructure,
    telecommunication facilities, single window clearance, export facilitation and incubation
    centres.
   Establishing training programmes to enhance the skill set relating to software
    development, methodologies, project management techniques and software quality
    assurance.
   Attracting foreign direct investment in the software and services sector by providing
    apackage of incentives and retaining talent through the network of embassies overseas.
   Developing promotional programmes staging commercial events and displaying the
    profile of companies through exhibitions
   Creating an industry association to bring out the common voice of industry
   Establishing linkages with R&D institutions like the National Academy of Sciences to
    develop innovative products by commercializing the outcome of research projects.
   Eliminating tax barriers and providing incentives to the software industry by tax
    reductions on the purchase of hardware by individuals and tax exemption for IT
    professionals engaged in software exporting.
   Initiate an image-building programme to brand Azerbaijan’s national and corporate ICT
    products and services

b) Strategy for achieving US$ 300 million exports in IT hardware, software & services

Time horizon: 2008

To achieve this target, Azerbaijan’s industry must consolidate their experiences of developing
projects by turning them into software products. The ardware sector would also need to
leverage core competencies such as the development of satellite antennae, low noise
amplifiers and other speciality products. The creation of content for worldwide applications
based on Azeri literature, as well as multi media, also needed to be developed.
ICT-enabled services should be provided across the globe with emphasis on the Trans-
Caspian region and the Middle East.       Cooperation with Turkey and Russia should be
enhanced to attract production facilities to take advantage of Azerbaijan’s low cost of
manpower and infrastructure. The markets of Kazakhstan, Russia, Iran and Uzbekistan could
be exploited by leveraging the large groups of Azeri people that have gained a foothold for
Azeri products in these countries.

Objective

Azerbaijan to become an exporter of branded software and services to the value of US$ 300
million by 2008.

Priorities

In order to achieve the strategy objective, Azerbaijan industry will have to recognize the
following priorities:

   Concentrate on developing software products for the oil and government sectors.
   Develop Azerbaijan as a base for the manufacture of telecommunication and radio
    communication products
   Create a network to promote the Azeri software industry in the Trans-Caspian and EU
    marketplaces through companies in Turkey
   Attract research and development operations from Europe, Russia and Turkey.

Action Plan

To accomplish the priorities, action needs to be initiated in the following areas:

   Develop a cooperation mechanism (code of conduct) in a cluster (software technology
    park) to take on large software development application projects within the country and
    overseas
   Focus on delivering IT-enabled services such as call centres, business process
    outsourcing and transcription systems leveraging English, Russian and Turkish.
   Create a strategy to attract foreign direct investment to develop the IT industry both for
    hardware manufacture and application development. This would include motivating
    Azeri professionals working in large corporations abroad to bring in those corporations to
    Azerbaijan to take advantage of its low-cost skilled manpower and itsmarket potential in
    Trans-Caspian region.
   Stabilize economic policies and the tax structure to make Azerbaijan the preferred source
    of supply for the Trans-Caspian cyber marketplace.

c) Strategy for achieving US$ 500 million exports in IT hardware, software & services

Time horizon: 2011

Objective

Azerbaijan to become a recognized source of specialized software and services to the value of
US$ 500 million by 2011.
Priorities

Azerbaijan will have to lay emphasis on the following priorities to achieve the objective:

   Integration of Azerbaijan into the Trans-Caspian region and Europe
   Development of specialized human resources
   Project Azerbaijan’s brand image as the Trans-Caspian Cyber marketplace and the high-
    tech source of supply for the Caucasus region

Action Plan

Azerbaijan could emerge as the Trans-Caspian Cyber marketplace - or the “Dubai” of the
Caucasus region - by delivering online products and services to the Trans-Caspian region.
Online services could also be provided to the European Union by way of system integration
and other added-value services. Azerbaijan could also emerge as the preferred provider of
IT-enabled services and business process outsourcing for the region.

With highly talented and skilled manpower, it would be possible for Azerbaijan to become a
leading supplier of software applications and IT-enabled services. This would require
favourable and transparent economic policies and adequate incentives such as tax holidays,
customs-bonded warehouse facilities, the speeding up of business transactions and the
offsetting of investment incurred in the early phases of the project.

An analysis of the country’s potential and the scenarios for growth revealed that to become
the main supplier to the Trans-Caspian cyber marketplace, Azerbaijan would need to pursue
initiatives at various levels, including government, associations, companies and other IT
players.

The required action is summarized below:

Government initiative

A national IT Vision - Azerbaijan should become an e-business integrator of the Caucasus
region – should be built around the following five fundamental principles that make the
connection between ICT and the prosperity of the country:

- Shift from oil-based to technology-led growth
- Liberalization and competition
- Commitment to the rule of law
- Private-sector led innovation
- Human-resources capacity-building
- Export-orientated growth in the technology sector

      Forming National IT Elite
Building of national human capital, education and training for people would determine the
success of the transition process towards a knowledge-based economy. Country regulators
should consider the formation of a country IT elite as the cornerstone for enhancing country
competitiveness in the regional and global markets. These should be realized in close
cooperation between universities, R&D centres and industry.
      ICT Advisory Mechanisms
Commitment to liberalization and competition in the ICT sector would open the door to
productivity gains and sustainable wealth creation through increased private investment.
Government should establish an ICT Advisory Board to the Ministry of the Economy to
workon theimplications of WTO agreements for the national information technology sector.

      Ministry of Information Technology
The policy-making process concerning the IT industry is widely dispersed acrossdifferent
government institutions, creating duplication and delays in the introduction of long-awaited
decisions. A “Ministry of Information Technology” should be established as a high-level
policy body within the government. This body would be responsible for promoting
development of the IT sector overall through creating a favourable regulatory environment
and monitoring the implementation of IT projects nation-wide.

      De-monopolization
To accelerate the growth of the telecoms industry, tariffs should be reduced and quality and
coverage improved. The government should de-monopolize the State telecoms service
provider and introduce competition. Effective measures should be initiated to regulate the
telecoms sector through an independent regulator in place of the Tariff Commission operating
under the Ministry of Economic Development.

Association initiative

      Consolidation of the ICT Sector
The majority of the industry currently consisted of micro-enterprises, with large companies
being rare exceptions. The consolidation of the sector should be considered as a priority in
policy-making along with the establishment of a national IT industry association(s).

       Lobbying of ICT Interests
The ICT Association would need to prepare an agenda for promoting the exports of
information technology products. Intensive discussions with the government would be
required on the creation of an economic environment that encouraged innovation and
provided support for young entrepreneurs to develop software products and services for
international markets. It should also joininternational associations such as the European
Association of Manufacturers of Business Machines and Data Processing Equipment
(EUROBIT) and the Information Technology Industry Council in the US to get closer to
technology and market trends and opportunities.

       Aggressive Marketing
The ICT Association should create a marketing forum forfor products in the local, Trans-
Caspian and EU markets. ITE organizes a fair in Azerbaijan on a regular basis and the ICT
Association should not only support it but make it an event for the Trans-Caspian region. It
should participate in international trade fairs such as CEBIT, Hanover, and similar
exhibitions in the US. Contact promotion and business matching activities should be
initiated.

      Attract Foreign Direct Investment into Azerbaijan
Specific action will be needed to increase the flow of FDI to the ICT sector of Azerbaijan,
such as:
 promote open competition in information technology and telecommunications;
   establish and commit to a consistent and predictable rule of law, including enforceable
    contracts, and clear and fair regulations;
   build confidence in good governance;
   provide incentives (fiscal, tax and FDI-supportive services);
   encourage local oil companies to support the development of ICT sector by diversifying
    their activities.

Trans-Caspian cyber marketplace

The National Bank of Azerbaijan launched a project to create an infrastructure for banking
and e-commerce. This initiative would accelerate the introduction of an e-signature system
and the establishment of certification authorities. With the size of the local market being so
small, regional cooperation on e-business would be essential for the e-marketplace to be
developed cost-effectively..

Company initiatives

To capture the market in the Trans-Caspian region, national companies needed to change
their mindsets. The strategy should be based on the industry’s core competencies and
experience of undertaking large projects in Azerbaijan with oil sector companies, and
executing projects for government utilities.

Basic components of this strategy could include:

   supply capabilities (software application development; IT-enabled services; business
    process outsourcing; contract manufacturing and services for e-commerce);
   cluster development (software technology park[s]);
   export-oriented enterprise management development;
   business matching;
   ICT marketing and export markets identification and development
   IT project management
   software quality assurance

Azerbaijan’s brand image as a high-tech supplier needed to be developed and projected to
communicate Azeri scientific and engineering potential.

Public-PrivatePartnership

Constructive dialogue between government and industry had been initiated. The private
sector had the flexibility and resources to offer innovative solutions to unique problems
facing Azerbaijan. The government was actively looking for opportunities for various forms
of partnership with the private sector to make available the benefits of these new technologies

R&D capability and human resources development

To keep pace with technology, R&D institutions needed to be nurtured and their linkages
with industry. The potential for commercialization of R&D and the establishment of R&D
ventures by MNCs should be vigorously explored. Azerbaijan’s competitive advantage in
software was based on its highly qualified, cost-effective human resources. Currently about
10,000 software professionals were working in various parts of the industry. Azerbaijan
needed to train professionals in application development, software methodologies, project
management and quality certification.

A three-pronged strategy was needed to achieve this:

The first step should be to expand the base of people with fundamental skills in IT.
The second step should be to ensure the continuous and rapid upgrading of skills.
The third step should be to launch a concerned effort to improve Azerbaijan’s value
proposition as a workplace of choice so that people who are trained do not migrate.

Conclusion

The ITC team concluded that a concerted effort on the part of government, companies and
academia was needed if the potential of Azerbaijan to become the Trans Caspian cyber
marketplace is to be realized.
                                             Chapter 10

                     Brand Building for the Azerbaijan ICT Industry



To achieve the vision of Azerbaijan being the supplier to the Trans-Caspian cyber
marketplace and the emerging high-tech platform of the Caucasus region, the government
had started on the process of enhancing the capabilities and strength of the IT industry.
Accession to WTO membership would be an important step in this process.

Azerbaijan’s ICT industry brand image had to be developed and projected to help Azeri
companies to achieve market growth, retain share and command price premiums. The oil
sector potential in Azerbaijan attracted the attention of the world’s oil majors. Many had
already signed long-term production-sharing agreements with Azerbaijan, and two major
pipelines were being constructed. Thus, Azerbaijan had already emerged as a potential oil
producer of high grade and quality, meeting international requirements. Azeri companies
needed to leverage their country’s oil sector brand image to popularize Azerbaijan as an
alternative source of software development and IT-enabled services for the oil sector.

The brand image of Azerbaijan designed to fullfil the following two objectives:

   To boost export revenues to US $500 million by 2011. This will require Azerbaijan to
    position itself as a skills-surplus nation with the ability to work on complex problems.
   To increase FDI to US $100 million by projecting ICT in Azerbaijan as an attractive
    investment opportunity.

Elements in brand building

Figure 10.1 shows the elements needed in building the Azerbaijan brand as a cyber
marketplace for the region.
                Figure 10.1: Azerbaijan As Trans Caspian Cyber Market Place


                                                  $500 million revenues
                                                  $100 million FDI




                       Increased Value                 Developer of           New location for IT
                       addition in IT                   Software                   enabled
                       services & telecom               Products                   services
                       manufacturing                    and R&D




                                  IT-savvy country Image (including e-governance)

                                               Attractive location for FDI

                                    Exciting opportunities for world-class talent



            Source: ITC Project File, June 2002
The three clear pillars of the proposed global IT business would be:

   Increased value addition in IT services and telecom manufacturing
   Emerge as developer of software products as well as R&D
   New location for IT enabled services

It was essential to articulate and communicate the desired value proposition. In IT-enabled
services, this meant skilled technical manpower, labour costs and a telecoms infrastructure. In
IT services, it was Azerbaijan’s skilled manpower, reinforced by continual improvements in
domain knowledge, from legacy systems to cutting-edge technologies. In telecoms
manufacturing, the value proportion was the low cost of assembly and technology for radio
communication systems and the existing infrastructure.

The value proposition needed to be built and communicated on a strong base of three other
elements:

   An overall perception of Azerbaijan as an IT-savvy country with e-governance.
   The preferred choice for FDI, in all aspects of IT, telecoms and assembly of IT products.
   An exciting environment for top talent, to ensure that Azerbaijan retained its best people,



High quality manpower and attractive price performance had been key components of
Azerbaijan’s value proposition up to now and should continue to be an important part of the
brand. In addition, the brand should be associated with state-of-the-art skills i.e. RDBMS
such as Oracle 8i/9i, Microsoft SQL server, and Informix; Visual Basic, Java, and other
object oriented programming languages; operating systems such as Linux. The audience
should recognize that manpower in Azerbaijan not only had world-class skills but also had
upgraded its quality as opportunities emerged elsewhere in the world.

The brand had to stand for a “hassle-free” business environment. This could include the
infrastructure (e.g., telecom) as well as the regulatory framework of labour laws, taxation
and social security laws, etc. Azerbaijan was in the process of developing a business
environment which should attract large corporations to set up their activities there.

The industry should establish a national IT industry association(s) as a priority, in order to
consolidate the industry structure.. An association would bring the voice of the local ICT
business to policy-makers as well as to its counterparts in other countries.

The new value proposition to customers and investors must be centred on providing
continued benefits in terms of cost-effective, high-quality talent, and the associated logistical
environment for the movement of goods and services. This would mean projecting
Azerbaijan as the preferred location for new ventures as well as widening and deepening its
e-trade activity in the Caucasus region. The possibility of representing European firms
throughout the region, as well as in the Middle East may also emerge.

A further benefit would arise from the software technology parks and clusters within it to
deliver to customers complex projects on time at reduced costs. As the availability of trained
manpower increases year by year , Azerbaijan workforce is likely to remain competitive, at
least for the next decade.

Steps in brand-building

There were four key steps to building a strong Azerbaijan brand:

   A distinctive, credible proposition consistent with the brand properties was a necessary
    ingredient for success.. For Azerbaijan, this would be its low labour costs, high software
    skills and the large market in the Trans-Caspian region.

   Given the global audience, it was important to have an aggressive communication style,
    that gets heard above all the competing messages from other countries.

   Thirdly, the actual changes in Azerbaijan should reflect the claims being made. For
    example, talking about a “hassle-free” environment without making the necessary
    telecom reforms would not only undermine the impact of the brand-building effort, it
    would also have long-term consequences on the credibility of the brand. Effective
    implementation of policies in a transparent manner would enhance the credibility of
    Azerbaijan.

   The final requirement was the facilitation of an effective feedback system, which
    reinforced the value proposition. For many brands, feedback allowed led to a “virtuous
    cycle” where small gains were significantly reinforced and the impact enhanced.

Figure 10.2 gives maps out the steps to building a strong brand. For each element of the
“Azerbaijan, Inc.” brand, the method of delivery is important.
             Figure 10.2: Building A Strong Brand Requires Consistent Effort



            Distinctive                          Aggressive             Consistent, align
            Credible                           Communication               execution
            proposition

                  High quality                  Targeted CEO/CIO
                   manpower                       meetings              Word-class telecom
                  Attractive price-             Broad-based image     Cutting-edge
                   performance                    devpt.                 education
                  State-of-the-art skills       Sponsored road        Removal of
                  Hassle-free                    shows                  regulatory hurdles
                   environment

                                                    Reinforcing
                                                  ‘word-of-mouth’
                                                        loop

                              Success story preparations
                              Proactive endorsements




          Source: ITC Project File, 2002
The First component would be to build an “IT-savvy image”. Key to this initiative would be
to become a cutting-edge player in the high-tech rapidly emerging IT world. This would
necessitate appropriate IT penetration within the country. Publicizing a thriving domestic
B2B and B2C sector would significantly build Azerbaijan’s position as a high IT-literate
country. Azerbaijan’s e-readiness was low and effective steps needed to be taken to achieve
substantial improvements.

The second component would be a broad-based campaign leveraging multiple touch-points
to target at CEOs. This would involve events and the leveraging of many forms of media.
Strong public relations firms should be used. Touch-points could include an ICT conference,
Internet sites and linkages, ad campaigns, direct mailers, press releases, etc.

The third component would be to demonstrate successful implementation of niche areas both
at domestic and overseas level. This would provide assurance to leading IT players that
Azerbaijan could deliver quality projects and products. The success stories of Azel, R.I.S.K.,
SinamInvest, and Azneftchimmash needed to be leveraged

The fourth component would be identify a champion within Azerbaijan who would lead the
campaign to attract FDI of US$ 100 million into Azerbaijan and reinforce Azerbaijan as an
attractive FDI proposition. Chairman, AZEL could be one such person who could turn the
country’s ICT industry into a vibrant sector.

The fifth component would be setting up of world-class technology parks with state of the art
infrastructure. This would need appropriate regulatory changes to alleviate the concerns of
international community about consistency of regulatory regime, discipline of implementing
planned changes and market-friendly environment.

The sixth component would be to build a credible IT-enabled services proposition around a
cost effective labour and robust telecom infrastructure. While Azerbaijan recognized labour
cost advantages, lack of telecommunication infrastructure and high interconnection costs
prevented development of this sector. The campaign should convey strong signals about
changes in telecom reforms. Besides, a proactive package should be developed to
demonstrate cost savings from IT enabled services for key industries / services to convince
overseas customers about Azerbaijan’s seriousness.

The seventh component could be creation of an ICT association to focus on development of
applications by members in the fields of tele-services, remote operations, remote software
development, electronics manufacturing, and offshore funds management

Finally, it was imperative to get the dynamic loop working in terms of testimonials. Proactive
facilitation of the entry of high-profile target investors into Azerbaijan and strong support to
ensure successful start-up operations will be crucial to communicate the message that
Azerbaijan is serious about achieving its mission. Here Azeri companies should leverage
their well-established image in the oil sector.
                                        Chapter 11


          Reaction of the Information Technology Sector to WTO Agreements


Background

The ITC team had meetings with more than fifty policy makers, industrialists and others
invoved in ICT. The State Student Admission Commission distributed a questionnaire to the
participants..     The report was based on feedback from the questionnaire and the
consultations held with the various organizations.

The Ministry of Foreign Affairs was the coordinating agency with the World Trade
Organization on the Uraguay Round agreements (URAs). Meetings were held with:
      The State Students Admission Commission
      The Copyright Agency
      The Ministry of Foreign Affairs
      The Dept of Economic Cooperation and Development
      The Milli Mejlis (parliament)
      Azercell
      The Azerbaijan State Statistical Committee
      The Ministry of Communications
      The State Customs Committee of the Republic of Azerbaijan
      Azerbaijan Research Educational Network Association
      Catel JV
      NICTS
      The Institute of Cybernetics
      Azerin
      The Ministry of Economic Development
      The Office of the President of the Republic of Azerbaijan (Centre for Information
       Resources and Technologies)
      The American Chamber of Commerce
      The Chamber of Commerce and Industry
      Iteca Caspian
      Flexible Solutions
      Azerbaijan Electronics
      Caspian American Telecommunications
      Azeronline
      International Trade Exhibitions (Azerbaijan)
      Azerbaijan National Academy of Sciences
      SinamInvest

The views of the public and private sectors described on the following pages are based on
information gathered by the ITC team from their various consultations and from analysis of
the questionnaires.
Public Sector views on the Post-URAs

It was pointed out that Azerbaijan should become a member of the WTO at the earliest
opportunity, in order to stimulate the necessary radical economic reform and the transition to
a free market economy. The positive benefits would be the free access of national products
and services to the world market, the prevention of rights infringement by Azerbaijan in
international trade, the creation of trade relations with other countries on equal terms, and the
general improvement and expansion of export potential for Azerbaijan.

On the negative side, Azerbaijan would have to face economic and social challenges during
its adaptation to the rules of international competition, which would involve the reduction of
customs tariffs and the fulfilment of other commitments.

Many officials felt that during the negotiations, the country should seek to extend the staging
of commitments relating to bound tariffs on goods and services. It should also negotiate
conditions favourable to the attraction of FDI by leveraging the development of Azerbaijan’s
internal market and that of the whole Caucasus region.

Policy-makers mentioned that preparation of the “Programme on the stimulation of national
production” within the process of Azerbaijan’s accession to the WTO was an important issue
for negotiation. Equally important was the development of an executive mechanism for the
effective transition of the black market. These measures would lead to the integration of
Azerbaijan into the multilateral trade system the international labourmarket and the
development of economic relations, and help to bring about the transformation of the
economy.

   Information Technology Agreement

Azerbaijan was not a signatory to the Information Technology Agreement (ITA) of the WTO.
The view expressed by the policy-makers was that they would like to participate in the ITA
with extended staging to develop a base for the local industry. The ICT industry was at a very
early stage of development and was providing system integration, software application
development and web-hosting services to government and the corporate sector in Azerbaijan
in order to develop and harness its capacities. The hardware industry was non-existent except
for a few companies, which were specializing in providing products to erstwhile Soviet
Union and neighbouring countries. Already the tariffs were very low on assemblies,
components and sub-systems. The broadening of product coverage as well as non-tariff
barriers had little impact on Azerbaijan.

   Agreement on Basic Telecom Services

Azerbaijan was not a signatory to the WTO Basic Telecoms Agreement. On 10 April 1992,
Azerbaijan became the 167th member of the International Telecommunications Union (ITU),
and was developing laws and policies in accordance with international obligations.

In compliance with international telecommunication standards, Azerbaijan was granted
international code "994". Intra-republican codes were brought in line with the international
network code system. There were four local telephone communication service providers, and
two mobile communication service providers in Azerbaijan. There were 13 Azeri companies
providing Internet services.
The Ministry of Communications of the Republic of Azerbaijan issued licences for
communication services such asinternational, long-distance, regional cellular, paging, radio
trans-cable TV establishment and operation, and fast postal services, as well as other services.

As a member of the International Postal Union, Azerbaijan currently had bilateral postal
relations with 41 countries around the world and stamps exchange with 17 countries.
Throughout the Republic, a total of 1355 postal offices were in operation.

The privatization programme of the monopoly service provider was announced in March
2001. In order to ensure fair play and decide on the level of tariff, a commission under the
Ministry of Economic Development had been set up. The government’s aim was to liberalize
the telecommunications sector – fixed telephony, mobile telephony and internet services – to
improve telephone density, reach, availability, quality of service, and achieve a reduction in
the tariff.

Private Sector Views on Post-URA

It was observed from the consultations that many business representatives had insufficient
knowledge of WTO Agreements and URAs. It was mentioned that the terminology of
agreements was difficult to understand and hence they were unable to analyse their
implications. Table 11.1 records the business response to the various URAs:
Table 11.1            Azerbaijan: Business response to the URAs

 Type of URA            Response

 TARIFF                 The tariff rates on all industrial products remained steady at 15%. As
 REDUCTION              regards ICT products the tariff levels were
                                - Computers and PCs 15%
                                - Computer parts 3%;
                                - Telephone instruments,
                                - Mobile phones and other terminals 15%,
                                - Switching and transmission equipment 5%,
                                - Electronic subassemblies 5%,
                                - Telegraph and telephone radio devices for civil aviation
                                     0.5%;
                                - IC’s and semiconductors 10%;
                                - Memory capacity over 4MB 10% and
                                - above 64 MB 5%;
                                - Electronic micro assemblies 10%;
                                - Electronic instrument, office equipment 10%;
                                - Computer software 0%


                        The industry felt tariff reduction was likely to affect industry
                        unfavourably as government collected a large part of their budget
                        through customs duties. The competitive advantage of industry would
                        be eroded and they would not be able to sustain competition from
                        foreign suppliers. It was opined that authorities, many time, interpreted
                        tariff rates, arbitrarily.
MARKET ACCESS   Azerbaijan adopted the Harmonized System codes. It had trade
                agreements, namely, with Russia, Moldova, Ukraine, Turkmenistan,
                Uzbekistan, Georgia and Kazakhstan for favourable duty, taxes and
                charges on reciprocal basis.

                Customs duties were not applied to goods imported from Georgia,
                Kazakhstan and Ukraine.

                All quantitative restrictions were eliminated.

                Azerbaijan had free trade agreement with CIS countries, however,
                provisions of this agreement were yet to be implemented.

                Partnership Cooperation Agreement with EU enabled protection of
                intellectual property rights, assets and investments, and corporate and
                personal belongings against abuse. With this EU awarded Azerbaijan
                MFN status.

                The view of the private sector was that the customs duty and processing
                fees were not applied consistently at all port facilities in Azerbaijan. In
                addition a VAT of 18% was levied.


CUSTOMS         The basic legislative acts that governed customs regulations were
VALUATION       Customs Code, Law on Customs Tariff, Tax Code and various Decrees
                issued by the Cabinet of Ministers. Valuation of goods imported into
                Azerbaijan was based on declared value of goods and assessed based on
                Customs Tariff schedule of Azerbaijan Republic. Import licenses were
                required for food products of animal origin, large-scale satellite dish,
                communication equipment and military related items.

                On the export front, license was required for petroleum products,
                cotton, electric power and non-ferrous metals. Importers were required
                to provide the Customs authorities with signed import contract, customs
                declaration, invoice, import license, bill of lading, sales invoice,
                packaging lists, certificate of origin and certificate of quality. Similar
                requirements also existed for exports of goods and services.

                Industry representatives opined that procedure was cumbersome and
                full of bureaucratic hurdles. Customs clearance was problematic, time
                consuming. Many companies had deployed clearing and forwarding
                agents to interact with customs and other legal agencies to obtain
                permission and smoothen business operations.


TECHNICAL       Type approval of the Ministry of Communications was necessary for
BARRIERS TO     import of dish antenna and other telecommunication equipment. The
TRADE           Ministry of Communications also regulated Testing and certification of
(TBT)
                components for the network.

                Azerbaijan used metric systems for weights and measures. For low
                voltage electrical appliances, European standards were used.

                Labelling and marketing requirements included certificate of origin, list
                 of ingredients, production and expiry dates and warning certificate.
                 While no language requirement existed, but labels in Azeri, Turkish or
                 Russian languages were preferred.

                 The industry was not clear about the standing of the various statutory
                 provisions and specifications needed for conformity, particularly
                 demanded by the Ministry of Communication. On the export front,
                 many participants mentioned that ISO 9000 was not adequate to
                 develop software applications to qualify export to EU markets.
                 Regarding environmental issues, respondents felt that it added to cost
                 through demonstration of bio degradability and elimination of waste
                 packaging material of components.


SUBSIDIES        Azerbaijan was in the process of transition to a free market economy.
                 Many State industries could not be closed because of increasing
                 unemployment and they were being subsidized through State budget.
                 In the ICT sector, Aztel was continuing with overstaffing.

                 Azerbaijan treated foreign and local companies alike. In the free trade
                 zones incentives were offered to the small and medium enterprises, in
                 terms of space, delayed payment of taxes and exemption from certain
                 other taxes. Most of these were budget funded. Similarly funding was
                 being provided to industry through the National Academy of Sciences
                 e. g. Cybernetics Institute for undertaking R&D projects with focus on
                 development and competitiveness of SME sector. A programme for
                 SME development was initiated by government to develop productive
                 assets and involve the non-working population in growth of national
                 economy.

                 Government had 51% equity participation in many entities like
                 Omnitel, Azeronline, Catel etc.




COUNTERVAILING   There was no countervailing and anti dumping cases declared.
MEASURES AND
ANTIDUMPING

                 Azerbaijan investment policy was in developing phase. The
TRADE RELATED    Government initiated reforms for attracting FDI in a market-oriented
INVESTMENT       framework with the help of World Bank’s structural adjustment credit
MEASURES         and IMF’s poverty reduction and growth facility programme. Effective
(TRIMs)
                 implementation of these programmes and creating rule-based economy
                 would lead to predictable business environment for attracting FDI. An
                 investment council was proposed to be established to support increased
                 foreign and domestic investment. FDI was permitted in all sectors of the
                 economy except national security and defence.

                 Industry representatives felt that conducting business in Azerbaijan was
                 challenging and problematic barring the oil sector. Bureaucracy, weak
                 legal institutions and predatory behaviour by politically connected
                 monopoly interests hindered attraction of FDI.
 TRADE RELATED         Azerbaijan is a member of the World Intellectual Property Organization
 INTELLECTUAL          (WIPO) and enacted the Law on Copyright and Related Rights in 1996,
 PROPERTY              Law on Patents in 1997 and Law on Trademarks and Geographic
 (TRIPs)
                       Names in 1998. In practice however, IPRs were started to be
                       implemented from 2001. Effective enforcement mechanisim and the
                       judicial system became operative. The justice system was slow because
                       of unfamiliarity of judges with updated civil and criminal codes. Piracy
                       was 80%. Customs authorities and Police started to work together to
                       enforce IPR's

                       Respondents felt that enforcement mechanism for IPRs was in great
                       demand. Pirated software, cassettes and luxury items were available in
                       Azerbaijan. Azerbaijan was placed on the Watch List by the US
                       government for not providing adequate and effective IPR protection for
                       American goods, just like other countries of the CIS.


 GOVERNMENT            Azerbaijan was yet to shape their policy on the issue of government
 PROCUREMENT           procurement.

                       Respondents felt that selling to government or State enterprises was
                       difficult as government lacked financial resources. Many domestic
                       suppliers mentioned that they could not receive their payment arrears.
                       It was opined that selling to government should be approached with
                       extreme caution except for tenders backed by UNDP/EBRD/IMF etc.


 COMPETITION           In the ICT sector, competition among local and foreign companies was
 POLICIES              growing. MNCs were conducting business through franchisees. Local
                       manufactures were assembling products and were largely concentrating
                       on the home segment and students. Views were expressed that large
                       firms resorted to cartels, dishonesty, countering foreign competition,
                       abuse of power, and uncompetitive practices in the marketplace.

                       Respondents mentioned that government was a major buyer of ICT
                       products. National rules on competition needed to be brought closer to
                       multilateral rules for industry to maintain standards. Azerbaijan
                       recognized the importance of their negotiations with WTO for
                       accession to provide them with a large overseas market.



Need for Technical Assistance in the ICT sector

Azerbaijan was in the process of adjusting to the global economy. National government
authorities and business community representatives suggested that a package of export
orientated technical assistance was needed to assist Azerbaijan with its transition to a free
market economy.

The components of the assistance package included:
   Technical assistance to understand the WTO rule-based environment and to facilitate the
    preparation of a memorandum for submission to the WTO
   Creation of awareness of the WTO rule-based system and various URAs, and their
    implications for the ICT sector.
   Assessment of the impact of WTO accession on the level of bound tariff and other non-
    tariff barriers in the ICT industry
   Human resource development for the marketing of locally developed IT products and
    services in the international marketplace.
   International market development by way of business matching between SMEs in
    Azerbaijan and SMEs in the EU.
   Testing and certification facilities for electronic, IT and telecom products.
   Training and in-depth understanding of methodologies for software development, quality
    control procedures and project management techniques.
   Setting up of National Information Technology Parks with an adequate world-class
    infrastructure
   Setting up of an IT association to bring the voice of business to government.
   Setting up of a new product incubator project on e-trade to enable industry to transact
    business in the Trans-Caspian region.
                                          Chapter 12

                             Azerbaijan’s E-Business Readiness

Introduction

A national development strategy was evolving, which would focus on improving e-
governance, the e-competency of enterprises and the availability of the infrastructure to
allow e-business and e-commerce to be conducted. Internet penetration in Azerbaijan was
the highest in the Caucasus region.

The Azerbaijan Internet services market was growing rapidly. National organizations were
showing more and more interest in the Internet. According to Azerbaijan Development
Gateway (AzDG) (2001), there were 12,000-15,000 Internet subscribers in Azerbaijan. But it
was estimated that each of the 13 ISPs in Azerbaijan had about 2,500 subscribers, making the
likely total of subscribers some 35,000. The number of active Internet users was now more
than 240,000, mainly as a result of the widespread establishment of Internet cafés and
universities providing Internet facilities for students.

The presence of a relatively large number of Internet users is attributed to the extensive use of
leased-lines and dial-up connections. In addition to corporate access, other major sources of
Internet access for local communities were Internet Clubs, Training Centres, High Schools,
Higher Learning Institutions, etc.

The primary users of the Internet were in the 18-25 year-old age group (36.1%). The second
group (27.8%) was those between 14 and 18 years of age. Users accessed the Internet mainly
for chatting (22.1%), e-mailing (21.2%), searching (18.3%), playing games (11.5%), and
participating in a forum (8.7%). The most favourite search engine was Yahoo.com (28.2%).
The second was Rambler.ru (23.5%), a Russian search engine. Forty-one percent of users
visited Bakililar.az , an Azeri entertainment portal.

The reduction of the Internet access price was one of the main reasons for the growth in the
numbers of Internet subscribers in Azerbaijan. Today, it was more convenient for individuals
and organizations to get unlimited access, now for about $50.00. The same service is offered
for $20.00 in Turkey, and $30.00-$45.00 in Russia, depending on the region. In European
countries the cost of the service varies between $16.00 and $25.00.

The application of ICT in education was growing steadily. Higher learning institutions used
IT not only for educational but also for marketing purposes. About 50% of the private
universities and 20% of the State universities in Azerbaijan had their own websites. Private
universities were more advanced in this respect as they could better afford the expense.

University websites featured information on academic programmes and courses offered,
academic departments and centres, facilities, news and events and contact information. A
few websites had information on the faculty, staff and online application forms. Some
private universities, Khazar University for example, used their websites for on-line
admissions. This is proving an effective tool for attracting students from Pakistan, India, the
Lebanon and other overseas countries.

To facilitate the transition of high school students to higher learning institutions and prepare
them for entrance examinations, the State Students Admission Commission has developed the
website http://www.tqdk.gov.az. This site features sample entrance tests and registration
processes. It also provides students with the on-line opportunity to take a trial test, which is
scored free of charge.

About 60% of the local and international private organizations in Azerbaijan have placed
information about their resources on the Internet; and about another 4% were in the process
of developing their websites. A wide variety of organizations were represented, from
consulting and IT companies, to banks and insurance companies, transportation companies,
mobile telecom operators and ISPs. A few websites represented dealers in various
manufacturing products.

Many organizations were currently in the process of updating their websites to make them
more interactive, and were applying more advanced tools. The bank websites contained
financial news, services offered, etc. Banks were not yet able to offer their clients home
banking services via the Internet because e-banking in Azerbaijan was still only in its
embryonic stage (no e-commerce and e-banking legislation, law on digital signature, e-
commerce tax regulations, online payments, etc.). Most businesses accepted orders by
telephone or fax, but not online. Transactions were still mainly paper- or phone-based. Very
few transactions occurred via Internet.

Many business organizations, however, were using Internet innovations and fostering e-
commerce development. The International Bank of Azerbaijan had introduced an Internet
Card that facilitated the purchasing of goods and services online. Businesses constituted the
main driving force for e-commerce development.

TopAz – A Company Profile




The TopAz company was established in 1999. Its main lines of activity are providing business information
services, Internet was a recognized leader in introducing e-solutions and B2C e-commerce in particular. This
Top.az Company marketing and advertising, Internet technology development, creating and hosting corporate
websites was the first in programming in C+, Perl, Java, PHP, and the development of cosmetics. This B2B
company and web-portals,Azerbaijan to introduce online shop “Sabina” for perfume and B2C e-stores and e-shop
e-marketplaces. The company as it offered 15% discounts provides the Internet connection.
was popular among customers develops local networks and in comparison to its offline prototype. The payment
was performed offline through cash on delivery and through credit cards. As online payment system was still
On in May 2000 TopAz Top.az Company was currently developing a payment system for its new online shop
not 28 use in Azerbaijan, launched the Business Portal of Azerbaijan. This is the first project of its kind in the
“Megashop”, launched in June 2001. This shop sold Azerbaijani carpets, souvenirs and CDs of Azerbaijani
country.
music to foreigners.
Some more facts about TopAz:
There are also a growing number of other initiatives, like for example auction sites. Many Azerbaijani portals
1. It big sites were trying to trade and conduct auctions. These sites as for offered others: insurance
and has developed more than 60 Internet projects for its own portal, as wellusuallynumerousadvertisements with
description of goods for sale or purchase. There were two sites www.auction.az and www.bazar-az.com that
companies, banks, automobile dealers, news agencies, etc.
2. The company pioneered e-commerce service infrastructure development and information exchange that
were supposed to encourage e-trade andin the country by developing and successfully operating the e-shops will
Sabina (sells perfumes and make-up) and Topaz and Europe.
embrace countries of the Caucasus, Middle Asia (sells carpets, arts items and souvenirs).
3. The portal supplies the daily news for the Caspian region, Central Asia and the Caucasus, as well as business
news from Europe. It has more presented at www.Bazar-az.com. It
Various industries were than 1000 subscribers from all over the world. also featured databases of
4. About 1500 goods, products’ description and the server that are accessible from anywhere in the
producers ofsubscribers use free mailboxes hosted by prices. Moreover, it contained information on
world.
products delivery and transportation infrastructure. This site supported Russian, English,
5. In addition, it should be mentioned that sinceopening, the number of hits for the portal has been more than
2,000,000. The portal's languages. It was possible to sell and buy very diverse products such as
Persian and Turkishdata volume exceeds 2 GB.
cars, paper, oil and corn via this site. The problem was that there were very few participants
The most popular items are could be explained by the absence of an e-banking is who in
from Azerbaijan. Thisthe following: the on-line directories 'All of Azerbaijan' and ' Who and e-payment
Azerbaijan', the e-store 'Topaz', the e-marketplace 'Topaz Auction'. Today it is the only Azeri company
accepting credit card payment for services and goods.

Starting August 2001, it implemented a new project 'Internet for the Young Generation'. The project offers
packages consisting of an inexpensive computer lease with Internet access on favourable terms that will bring
about a sharp increase in the number of Web-users among pupils and students, and will help to make them
computer literate.
From May 2002 TopAz has represented Azerbaijan (\vww.azerbaijanEmarketplace.com) in a network of B2B
system in the country. www.Auction.az also offered a wide variety of goods for sale, but
dealing operations were frozen due to the above-mentioned problems and thus no demand.

A number of other B2C sites were underway. B2B transactions in Azerbaijan were still being
done in traditional form, through oral or paper-based communications. Some companies had
started developing B2B e-commerce applications in Azerbaijan.

A number of government websites exist, providing basic information. There is no on-line
interaction between government and suppliers, contractors or citizens.

Methodology for deriving e-Readiness

Many methods have been used to assess the e-readiness of countries. The ITC team utilized
three comparative methodologies, namely:

    The Readiness for the Networked World model of Harvard University
    ITC’s Questionnaire model
    The Economist Intelligence Unit Model

The ITC team conducted its study based on the above three methodologies to arrive at the e-
readiness index for Azerbaijan, descriptions and results of which are given in the paragraphs
that follow.

Analysis and Results

1.         Harvard Model

The ITC team utilized the “e-Readiness for the Networked World: A Guide for Developing
Countries” of the Information Technologies Group (ITG) at the Centre for International
Development at Harvard University (Appendix 12.1). The report looked at five groups,
namely, Network Access, Network Learning, Network Society, Network Economy, and
Network Policy. Within these groups, the following criteria were examined:

Information infrastructure              Internet availability               Internet affordability
Network speed and quality               Hardware and software               Service and support
Schools' access to ICTs                 Enhancing education with ICTs       Developing the ICT workforce
People and organizations online         Locally relevant content            ICTs in everyday life
ICTs in workplace                       ICT employment opportunities        B2C electronic commerce
B2B electronic commerce                 e-Government                        Telecommunication regulation
ICT trade policy

The team obtained information for the criteria from Information Society Indicators in the
Countries of Central and East Europe, An ESIS Report, January 2001. Information on
Azerbaijan was obtained from operating personnel and telecom operators. Table 12.1 gives
details of the self-assessment ratings of Azerbaijan on each of the parameters.
Table 12.1 :       Assessment of e-readiness of Azerbaijan and comparison with
                   South Easter Europe

Category       Description                      Azerbaijan Bulgaria Croatia    FRY   Monte-   Lithuania    Macedonia
                                                                                     Negro
Network        Information infrastructure           2         3         3       3      3         2.4          3
Access         Internet availability                1         2         3       3      2        2.18          3
          Internet affordability                1         3       2,5    3                           4            2.0             2
          Network speed & quality              1.5        3        4     2                           3            2.4             4
          Hardware and software                 2         3        4     2                           2            2.6             3
          Service and support                   2         4        4     3                           2            2.4             3
Networked Schools access to ICTs               2.5        2        3     2                           2             3              2
Learning  Enhancing education with ICTs        2.5        2        3     2                           2             3              2
          Developing ICT workforce              3         3        3     3                           2             3              3
Networked People & organizations online         2         3        3     3                           3            2.4             3
Society   Locally relevant content              2         3        3     3                           2            2.6             3
          ICTs in everyday life                 2         3       3,5    3                           2            2.4             3
          ICTs in workplace                     2         3       3,2    3                           3            2.0             2
Networked ICT employment opportunities         2.5        3        3     3                           3            3.8             3
Economy   B2C electronic commerce               2         2       3,2    2                           1            1.2             3
          B2B electronic commerce              2.5        3       3,1    2                           1            2.0             2
          e-government                         1.5        3        3     2                           2            1.2             1
Network   Telecommunications regulation        1.5        3       2,7    2                           4            2.0             2
Policy    ICT trade policy                     2.5        4        3     3                           1            3.0             2
          Average:                             2.0       2,9      3,2   2,6                         2,3          2.31            2,6
Source: Self-assessment 2001 e-SEEurope, Version: 9 May 2001 by e-SEEurope and
       ITC Technology Team assessment, June 2002.


Based on the information and analysis, Figure 12.1 shows the matrix of network readiness of
Azerbaijan on a scale of 1 to 4.

                                 Figure 12.1            Azerbaijan’s Networked Readiness


                                                                 Access: Infrastructure
                                                 Policy: Trade        3    2           Access: Internet Availability
                                                                 2.5
                                      Policy: Telecom               2.5                         Access: Internet Affordability

                                                                      2
                       Economy: E-Government               1.5                                           Access: Speed & Quality
                                                     1.5            1.5        1
                                                                      1               1      1.5
                            Economy: B2B
                                       2.5                                                                  Acess: Hardware & Software
                                                                    0.5                             2

                                           2
                                                                      0
                            Economy: B2C                                                             2       Access: Service & Support


                                                     2.5                                                 2.5
                    Economy: ICT Employment                                                               Learning: Schools Access
                                                       2
                         Society: ICT in Workplace           2                                     2.5
                                                                                                    Learning: Enhancing through ICTs
                                                                       2       2
                              Society: Info & Comm in Life                                   Learning: Developing ICT Workforce
                                              Society: Local Content                          3
                                                                                   Society: People & Orgs on line




              Source: ITC Team Assessment, June 2002



The e-readiness scores on individual criteria may be seen in Table 12.1. The average score
for Azerbaijan was 2.0. It can be seen, therefore, that Azerbaijan’s state of e-readiness was
rated as very low, and indeed proved to be the lowest rating in the league table of six
countries in South East Europe.

2.     ITC’s Questionnaire Model

The ITC team also prepared and circulated a questionnaire among opinion leaders,
businesses, government and industry associations (Appendix 12.2). Based on the analysis of
responses to the questionnaire and discussions with trade, industry, government and the e-
associations, the following was concluded about the state of e-readiness of business and
government in the areas of B2B and B2C.

It was noted by enterprises that gaining e-competency improved communications between
customers and suppliers, as well as pre-transaction knowledge, the ability to manage
customer relationships and to monitor logistics, and to manage their commercial activities.
The analysis revealed that B2B was being conducted by few organizations and B2C was in
the initial stages of evolution. Some innovative methods were being used by organizations to
collect payment on delivery.

The Law on Electronic Signature was being debated in the Milli Mejlis (parliament). The
main problems surrounding B2C and B2B electronic commerce development in Azerbaijan
are the absence of e-payment and e-banking systems, and a very poor legislative base and
infrastructure. This impedes the application of advanced technologies by Azerbaijani
businesses and is seriously slowing down e-business growth in the country. Moreover, there
was a problem with local payments on-line because of the absence of a processing centre for
the AzeriCard owing to the high cost of the equipment. Thus, e-competency at enterprise
level was evolving slowly, but restricted to the development of websites for the exchange of
information.

The overall result indicated that Azerbaijan was at a very early stage of e-readiness.

3.     EIU Model

The ITC team compared their results with the Economist Intelligence Unit Pyramid Research
Report, which assessed the e-readiness of countries in May 2001 to normalize their findings.
The research was based on the criteria of connectivity (30%), business environment (20%), e-
commerce, consumer and business adoption (20%), legal and regulatory environment (15%),
supporting e-services (10%) and social and cultural infrastructure (5%). The Economic
Intelligence Unit/Pyramid Research e-readiness rankings methodology used for deriving the
scores can be found in Appendix 12.3.

The detailed results of these country comparisons may be seen in Table 12.2.
Azerbaijan was found to be among the e-business laggards, having scored 2 on the e-
readiness scale of 1 to 10.The level of e-commerce readiness of Azerbaijan was one of the
lowest of 60 countries that were analysed. The result shows Azerbaijan with an e-readiness
score of 2.72 in 59th place out of the 60 countries surveyed. This indicates that there is much
work to be done in Azerbaijan to improve its e-business readiness.

Table 12.2:    Azerbaijan E-Readiness ranking by Economist Intelligence Unit
               Pyramid Research Report
The Economist Intelligence Unit/Pyramid Research e-readiness rankings (May 2001)

   E-readiness                         Country                  e-Readiness
  Ranking of (60)                                               Score (of 10)
                               E-business leaders
        1                US                                         8.73
        2                Australia                                  8.29
        3                UK                                         8.10
        4                Canada                                     8.09
        5                Norway                                     8.07
        6                Sweden                                     7.98
        7                Singapore                                  7.87
        8                Finland                                    7.83
        9                Denmark                                    7.70
        10               Netherlands                                7.69
        11               Switzerland                                7.67
        12               Germany                                    7.51
        13               Hong Kong                                  7.45
                             E-business contenders
        14               Ireland                                    7.28
        15               France                                     7.26
      16(tie)            Austria                                    7.22
      16(tie)            Taiwan                                     7.22
        18               Japan                                      7.18
        19               Belgium                                    7.10
        20               New Zealand                                7.00
        21               South Korea                                6.97
        22               Italy                                      6.74
        23               Israel                                     6.71
        24               Spain                                      6.43
        25               Portugal                                   6.21
                              E-business followers
        26               Greece                                     5.85
        27               Czech Republic                             5.71
        28               Hungary                                    5.49
        29               Chile                                      5.28
        30               Poland                                     5.05
        31               Argentina                                  5.01
        32               Slovakia                                   4.88
        33               Malaysia                                   4.83
        34               Mexico                                     4.78
        35               South Africa                               4.74
        36               Brazil                                     4.64
        37               Turkey                                     4.51
        38               Colombia                                   4.24
        39               Philippines                                3.98
      40(tie)            Egypt                                      3.88
      40(tie)            Peru                                       3.88
        42               Russia                                     3.84
        43               Sri Lanka                                  3.82
        44               Saudi Arabia                               3.80
        45               India                                      3.79
        46               Thailand                                   3.75
        47               Venezuela                                  3.62
                              E-business laggards
        48               Bulgaria                                   3.38
        49               China                                      3.36
      50(tie)            Ecuador                                    3.30
      50(tie)            Iran                                       3.30
      52(tie)            Romania                                    3.20
           52(tie)             Ukraine                                    3.20
           54(tie)             Algeria                                    3.16
           54(tie)             Indonesia                                  3.16
             56                Nigeria                                    2.91
             57                Kazakhstan                                 2.76
             58                Vietnam                                    2.76
             59                Azerbaijan                                 2.72
             60                Pakistan                                   2.66

Source: The Economist Intelligence Unit/Pyramid Research e-readiness rankings report,
       May 2001

It may be concluded from the above comparisons that in terms of e-readiness, Azerbaijan had
yet to start its programme. Major policies needed to be implemented in order to prepare the
infrastructure, the legal mechanisms and the competitiveness of its ICT enterprises for joining
the global digital economy.

ITU Recommendations

ITU initiated a project for developing countries to assist in improving their e-readiness. Its
conceptual note on the requirement for e-commerce infrastructure is given in Appendix 12.4.
APPENDICES
                                       Appendix 1




       ICT INDUSTRY

NATIONAL CHAMPIONS
INFORMATION AND COMMUNICATION TECHNOLOGY




       THE REPUBLIC
            OF
        AZERBAIJAN
           NAME OF COMPANY

Company Name:                     Company "Araz Computer"

                                  Nizami street, 94
Address:


Phone:                            (+99412) 982525, 983489, 983486, 930 358
Fax:                              (+99412) 982 737
E-mail:                           arazcom@online.az


Web-site:                         www.arazsoft.com

                                  Director                                          - Aida Odjagova
President/Director                Deputy & Chief of Software developping department – Taleh Adigezalov
and other key personnel:          Sales Manager                                      - Naila Mirzayeva
                                  Service Manager                                    - Ilgar Aslanov

Core competence:                  Sales of IT Technology, PC's and office equipment, software developping, service

                                 1. PC: Fujitsu Siemens, Compaq, HP
                    2.
Range of products or services:                2. Office Equipment: Brother, Samsung, Canon, Oki, Ricoh, APC,
                    3.                             Xerox
                                 4.           Assembling of PC's on demand
                                 5.           Service center: warranty and past warranty service of all equipment
                                 6.           First Commercial Accounting Programmes in Azerbaijan "Azmuhasib" and
                                     "Azmuhasib – Ticaret" (receiving orders for developping software)
Turnover (1999/2000):             450 380 $ / 628 000 $
Number of employees:              10 (in staff)
                                  5 (working with contract)
Target markets:                   Local IT market, Caucasus IT Market
Export revenues (2000):
                                  49 000 $
International certificates         Sales : COMPAQ official dealer
obtained:                                    Fujitsu Siemens Computers Official Distributor in Azerbaijan
                                            APC – Master Distributor
                                            Brother International Gulf (FZE) Official Distributor
                                            Ricoh Official Dealer
                                   Service : Compaq authorised Service Center
                                              Fujitsu Siemens Computers Service Center
                                              Brother International GULF (FZE) Service Center
                                   Personnel: Sufitsu Siemens Certified Specialist
                                                HP Certified Specialist
                                                MCP Certified Specialist
                                                CCNA (CISCO) Certified Specialist
                                              XEROX Certified Specialist
Success indicators:               Creating of Software products:
                                   Azerbaijan Computer Accounting programme, local version – Azmuhasib
                                   Network version – Azmuhasib – Ticaret
                                   Receiving orders for the software developing
Company Name:                    AZEL Company
                                 5th floor, 65 Fizuli Street, Baku, 370014 , Azerbaijan Republic
Address:

                                 +99412 974040(4lines)
Phone:                           +99412 974042
Fax:                             newmail@azel.net
E-mail:


Web-site:                        www.azel.net


President/Director               Mr. Igor Yakovenko
and other key personnel:         President


Core competence:                 System integrator, projects, key accounts sales and service providing.


Range of products or services:   Computer equipment, Office euipment, Telecommunication technologies IT service &
                                 support.


Turnover (1999/2000):            5.782,3 thousands US$/ 3.682,7 thousands US$


Number of employees:             87


Target markets:                  Computer equipment, Office equipment, IT service


Export revenues (2000):          Not available


International certificates       Hewlett-Packard Authorized Corporate Reseller and Authorized Service Center,
obtained:                        Compaq Authorized System Reseller and Service Provider, Microsoft Certified
                                 Partner, 3COM Authorised Solution Partner, Silicon Graphics Authorized Reseller,
                                 IBM Business Partner, Samsung, Legrand, BASF, Pioneer, Symantec Software
                                 Partner

Success indicators:              Financial stability, reliability and expertise based on the work of highly qualified
                                 certified specialists.
                                 AWARDS: UGUR 2000, 2001" – awarded by business magazine "Consulting &
                                 Business" in nomination "Reputation"
Company Name:                    Azeronline Ltd JV
                                 Tbilisi Ave., 61 A, Baku, 370122, Azerbaijan
Address:


Phone:                           (994 12) 96 70 07
Fax:                             (994 12) 30 05 75
E-mail:                          info@azeronline.com


Web-site:                        www.azeronline.com


President/Director               Cem S. Nalbantoglu (acting General Manager)
and other key personnel:         Farida Safarova (Sales & Marketing Manager)

                                 Internet Access Services (wireless and fixed)
Core competence:                 Internet Content Management
                                 Internet Hosting Services (including e-commerce services)

Range of products or services:   Internet connection through dial-up, leased line via PSTN, leased via mobile switches,
                                 web hosting, mail hosting, co-location, domain name registration, web design and
                                 maintenance, WAP


Turnover (1999/2000):


Number of employees:             18


Target markets:                  Corporate customers, middle and upper class families and individuals, students


Export revenues (2000):          US$


International certificates       (bullet points)
obtained:


Success indicators:                   One of the leaders in ISP market after just 1.5 years of operation
                                      The best known brand in ISP market
                                         7. Largest geographic coverage
                                         8. www.azeronline.com – the only professional 3 language portal in
                                             Azerbaijan
                                         9. Offers one of 2 operational WAP sites in Azerbaijan
                                         10. First to introduce real reseller network for Internet access products in
                                             Azerbaijan
                                         11. And many other firsts in ISP market of Azerbaijan
Company Name:                    Computer Technologies Company


Address:                         9 Inshaatchilar ave, Baku – 370065


Phone:                           (99412) 386553/385266
Fax:                             (99412) 330828
E-mail:                          ctc@ctnet.az


Web-site:                        www.ctc.net.az


President/Director               Dr. Mamed Jamalbayov (president)
and other key personnel:         Vugar Bayramov (administrator)


Core competence:                 Software development


Range of products or services:   Hardware/Software/Internet Services, computer &computer equipment


Turnover (1999/2000):            ---


Number of employees:             10 (in staff)
                                 5 (working with contract)

Target markets:                  Software


Export revenues (2000):          0


International certificates        ---
obtained:


Success indicators:              "Ideal Style" (Registration No. 05/R3 Certificate No. 43, 08.02.1999);
                                 "Market Manager" (Registration No. 05/R15 Certificate No.68, 20.04.2000),
                                 "Market Manager2" (Registration No. 05/R9 Certificate No. 264, 08.01.2002)
Company Name:                    DIVI Distributor Company


Address:                         4th Floor, 65 Fizuli Street, Baku, 370014, Azerbaijan Republic


Phone:                           +99412 973121
Fax:                             +99412 977371
E-mail:                          mail@dividc.com


Web-site:                        http://www.dividc.com


President/Director               Mr. Emin Kuliyev
and other key personnel:         General irector


Core competence:                 Ditribution


Range of products or services:   Computer Euipment, Office Equipment


Turnover (1999/2000):            1.874,1 thousands US$/ 1.535,9 thousands US$


Number of employees:             24


Target markets:                  Computer Equipment, Office Equipment


Export revenues (2000):          Not Available


International certificates       Distributor of Compaq, HP, IBM, Microsoft, Sun Microsystem, Canon, APC
obtained:                        Dealer of 3Com, Sony, Merlin Gerin
                                 Symantec Software Partner

Success indicators:              Financial Stability and Reliability based on the work of highly qualified staff.
Company Name:                    N-LINK

Address:                         Inshaatchilar pr.,149, Baku, Azerbaijan, 370136


Phone:                           (994 12) 389370
Fax:                             (994 12) 389371
E-mail:                          n-link@azdata.net


Web-site:                        www.nlink-az.com


President/Director               Dmitry Tigiev
and other key personnel:


Core competence:                 Office equipment – sales and sevice


Range of products or services:   Computers, copiers and other office equipment. Network. internet


Turnover (1999/2000):            US$ 300 000 / 400 000


Number of employees:             10


Target markets:                  Azerbaijan


Export revenues (2000):          US$ -


International certificates       (bullet points) HP, APC, Intel, Canon,Lexmark
obtained:


Success indicators:              (Bullet points)
Company Name:                    R.I.S.K. Company
Address:                         24 Samed Vurgun Street,
                                 Baku, Azerbaijan, 370000
Phone:                           +994 12 973737;
Fax:                             +994 12 981993;
E-mail:                          info@risk.az;
Web-site:                        www.risk.az
President/Director               Anar Aligioulov, Managing Director;
and other key personnel:         Jabir Joumshoudov, General Manager;
                                 Teymur Akhundov, Projects Director;
                                 Nofal Rzayev, Marketing Director.
Core competence:                     IT Consulting and ICT System Integration;
                                     IBM, HP, Dell, Cisco Systems, RAD Solution Provider and IT lead companies
                                      Service Center;
                                     Corporate Solutions for TeleCom market;
                                     Software Application Development for corporate Customers;
                                     GIS Center: Scientific-Commercial Research, Development and Implementation
                                      of Geographic Informational Systems
Range of products or services:       System Integration;
                                     Solution Providing basing on Hardware and Software of industry leading
                                      companies: IBM, HP, Dell, Cisco Systems, RAD, Oracle, ESRI, ERDAS, Leica;
                                     Authorized Service Center of IBM, Dell, Tektronix, Cisco Systems, Hewlett
                                      Packard, PowerCom, Leica, ESRI, ERDAS, Oracle;
                                     Application Software Development for corporate Customers;
                                     GIS Application Development
Turnover (1999/2000):            US$ 7.9m/8.2m (approx.)
Number of employees:             112
Target markets:                      Government Sector;
                                     Finance;
                                     Oil and Gas;
                                     Telecom;
                                     Diplomatic;
                                     Private Businesses and others
                                     Enterprises
Export revenues (2000):          US$1.6m
International certificates           IBM Business Partner (1998);
obtained:                        - IBM PC Reseller;
                                 - IBM Solution Provider;
                                 - IBM Reseller;
                                 - IBM Azerbaijan Authorized Solution Provider for AS/400, RS/6000, networking
                                 systems, printing systems, storage products, displays;
                                     Dell Distributor (1997);
                                     Cisco Systems Authorized Distributor (1998);
                                     Cisco Systems VPN/Security specialized partner
                                     Cisco Systems Wireless specialized partner
                                     HP Certified Business Partner (1998);
                                     RAD Data Communication Distributor (2000);
                                     Microsoft Certified Partner (1999);
                                     ESRI Distributor(1998);
                                     ESRI application partner
                                     Oracle Programme Partner(2000)
                                     Autodesk Authorized Dealer
                                 Financial:
Success indicators:                  percent of budget devoted to R.I.S.K. Company material and human resources
                                      development;
                                     accumulative percent of R.I.S.K. Company budget
                                 Customer Satisfaction:
                                     24X7X365 user support (also applies to business process improvement);
                                     turn-key solutions;
                                     stockholding policy;
    servicing;
    consulting;
Learning and Growth:
    training participation;
trainers/consultants invitation;
on-line Internet resources;
R.I.S.K. Company and employee certificates achievement
Business Process Improvement:
ISO 9001:2000 based Quality Management system implementation;
staff number increment
Work in Progress:
Collect baseline data;
Set targets;
Determine timeframes
Company name                 TopAz

Address:                     26, Gasim Medjidov str., 370065, Baku, Azerbaijan


Phone:                       (99412)941308, 942995, 948930
Fax:                         (99412)948413
E-mail                       office@top.az

Web-site                     www.top.az

President/Director           Namik Asgarov - president
And other key personnel

Core competence              Inernet technologies


Range of products or         Providing business information services, Internet marketing and
services:                    advertising, the Internet technology development: creating and
                             hosting corporate web sites and web-portals, programming in С+,
                             Perl, Java, PHP, as well as development of B2C e-stores and
                             B2B e-marketplaces.
Turnover (2000/2001)         US$ 100000

Number of employees:         8 (eight)

Target markets:              Local and foreign companies doing business in Azerbaijan


Export revenues (2001)       None

International certificates   None
obtained:

Success indicators:          Web site has about 500 visitors a day
                                                                                                  Appendix: 2.1

INFORMATION AND COMMUNICATION TECHNOLOGIES STRATEGY FOR THE DEVELOPMENT
                OF THE REPUBLIC OF AZERBAIJAN (Draft, June 2002)

                                                  (2003 - 2012)

1.   Introduction

        During the last decade of the XX century information and communication technologies (ICT) became
one of the most important factors that influence the development of a society. Its impact covers State structures
and civil society institutions, economic and social sectors, science and education, culture and people's living.
Many developed and developing countries have derived great benefit from the many advantages of ICTS. Now
there is no doubt that a way to the information society is the way leading to the future of human civilization.
       The followings may be referred as the main features of the information society:
        .     Establishment of global information environment,
        ·    Mass usage of ICTS; creation of new social and economic activity forms (distance learning,
             electronic commerce, electronic democracy, electronic government, etc.),
        ·    Conversion of information to commodity, forming and development of information and knowledge
             market,
        ·    Improvement of educational system, growth of professional and overall cultural level due to
             enhancement of information exchange systems in international, national and regional level,
        ·    Establishment of environment to ensure the right of citizens and social institutions, which is an
             important factor for democratic development, to get, share and use information.

         Information communication development is one of the main indicators of every country's intellectual and
scientific level, State regulation transparency and democracy in country. The importance of electronic
commerce in world market is increasing and generally in future competitiveness of the countries will depend on
level of their ICTs development level.
         Global experience clearly shows that broad usage of ICTs serve to the overall development of the
country, and these technologies are effective means in reducing poverty and solving social-economic problems
of population.
         Recently in Azerbaijan significant steps in utilization of ICTs were taken, in some spheres this
technology is successfully applied and generally information communication development became one of the
priorities of country's economic policy.
         The followings indicate interest and willingness to apply ICTs in Azerbaijan, as well as possibilities for
its realization:
  ·      The Government of Azerbaijan is willing to accelerate the information society building, UNDP and other
         international organizations are ready to provide technical and financial support in this sphere,
  ·      The Government of Azerbaijan already has some positive experience on the information society
         legislative base construction,
  ·      Modern ICTs was widely used during admission process to the institutes of higher and vocational
         education, online knowledge assessment was applied, appropriate information resources were created
         and the information services were provided via Internet,
  .      ICTs was successfully implemented in election process of judges,
  .     "Sechkiler" ("Elections") Information Center was established and the most progressive election
        technology was used during 2000 Milli Mejlis (Parliament) elections;
  .     Project on establishment of regional Academy for preparation and training of experts for ICTS, was
        implemented,
  .      Modern ICTs was widely applied in the project "National Passport System of Azerbaijan",
  .     In the banking system of Azerbaijan project for online interbank electronic national payment system was
        implemented, and project for automated clearing system was launched,
   .     Through support of international organizations several information - education regional centers were
         established in the republic,
  ·      National fiber optic communication network was created In the framework of TransAsiaEurope project,
         owing to it most communication channels in Azerbaijan were transferred to digital mode,
  ·      "Data Transmission Network and Automated Control System" was created in customs system to improve
         management and procedures,
        ·     Important projects on ICTs were implemented in some State and private institutions, etc.

              Analysis of overall E-Readiness preparation of the country, including existing information
        communication infrastructure, hardware and software, information resources, information services, legislative
        base, show that initial conditions for acceleration of the information society building process exists in the
        country, at the same time there are still objective difficulties.

        Positive factors characterizing - Present situation;

              -    High level of population's literacy and education,
              -    Opportunity for lowering Internet connection prices in the country; existence of private
                   telecommunication operators and their growth,
              -    Positive experience in applying ICTs in national projects,
              -    Existence of favourable investment environment and its recognition by international organizations,
                   including Organization for Economic Cooperation and Development, and readiness of foreign
                   investors to participate actively in applying ICTS,
              -    Favourable geographic location of Azerbaijan and crossing of international transport highways and
                   communication channels through the country,
              -    Stable development of economy and rich energy resources,
              -    Successful continuation of widely applying ICTs in the banking system of Azerbaijan,
              -    Modernization of the hardware and software as a result of Y2K problem resolving activity formation
                   of cellular phone network covering overall republic and its permanent development,
              -    Upgrade and expansion of wired phone network and digital communication channels development,
              -    Opportunities of the Internet connections via long distance telephony in most regions, etc.


    Negative factors characterizing,- Present situation;

    ·        expedient State policy defining directions for work connected with usage of ICTs and its priorities,
             ensuring coordination of activities, hasn't been fully determined,
    ·        legislative base regulating the usage of ICTs is not yet comprehensive,
    ·        in connection with transition period of the country and existence of over one million refugees and IDPs as
             a result of occupation of 20% territory of Republic of Azerbaijan by Armenian Republic, the government
             can't allocate sufficient financial means for ICTs application,
    ·        "brain-drain" to the developed countries in connection with transition period,
    ·        little awareness of the population about advantages and opportunities of the ICTS,
    ·        insufficient number of high level experts in ICTs sphere,
    ·        low level of computerizing in whole Azerbaijan,
    ·        the disciplines connected with ICTs at all levels of educational process don't meet the up to date
             requirements,
    ·        the "digital divide" between rural and urban areas of Azerbaijan,
    ·        serious problems in broad usage of Azerbaijani language and alphabet in the ICTs sphere, especially lack
             of Azerbaijani language support in operational systems, office programs, modern programme languages,
             etc. I insufficient literature in Azeri on ICTS,
    ·        very slow process of nation-wide information resources formation,
    ·        the republic stays behind of many international integration projects on ICTS,
    ·        telecommunication tariffs existing in the republic create serious obstacles to using of ICTS.
.           the existence of government monopoly hampers the innovations and fair competition in the
            telecommunication sphere.

           The above-mentioned factors will stipulate the steps taken by the government for the information society
    building in Azerbaijan.

    2. State Administration's Role in Information Society building

          At the usage level ICTs are the main indicator of State's military-political and social-economic potential.
    Azerbaijan is not exception in this meaning and creation of favourable condition for the evolvement into the
    information society is one of the main political objectives of the Government of Azerbaijan.
Information society building is a complex process which includes scientific-technical, organizational,
technological, economic, sociological and political factors. Its successful implementation requires effective use
of the involved political-administrative, financial, human, technical, other resources, the priorities and activity
directions definition, control and coordination of all conducted work.

Therefore it has become necessary to adopt long-term and well-considered national strategy
for implementation of policy set out in the Republic's of Azerbaijan Law on "Information,
informatisation and Information Security" in the sphere of information communication
application and development.
The Government plays key role in creating favourable conditions for the information society building, and its
main activities include:
             ·     Creating admissible environment for new situation, which will serve for attracting foreign and
                   local investments and for fair competition,
             ·     Creating equal conditions for all participants, usage of political, legal, economic and
                   administrative mechanisms to involve people in strategy implementation, and coordinating
                   their activity,
             ·     Ensuring protection of citizen's rights and freedoms and security of private information,
             ·     Creating opportunities for citizens to access to State information resources;
             ·     Ensuring the national information security,
             ·      Mobilizing financial resources required for strategy implementation, providing
                   financial support to governmental and socially oriented projects and programs,
             ·     Conducting flexible policy for fair competition support in information communication market,
                   Creating favourable condition for producing national ICTs products, hardware and software
                   production, and stimulating their promotion at the world market,
             ·     Creating favourable environment for private companies, especially small and medium- sized
                   enterprises acting in the sphere of ICTS,
             ·     Creating favourable environment for ICTs usage in all fields of economy,
             ·     Using modern ICTs in State administration and local self-administration, conducting activities
                   for forming electronic government,
             ·     Enhancing international cooperation for ensuring national interests in ICTS.

3.   Key Goals and Objectives of the National ICTs Strategy

The strategy reflects State policy in usage of ICTs and its broadening, determines key objectives, duties,
priorities and main activity directions. The strategy will take into account society's requirements, advanced
global experience and facilitate Azerbaijan's integration into the world community.

The key goal of the strategy is to assist country's democratic development and to create favourable environment
for the evolvement into the information society through widely applying of ICTS.

As a result of strategy implementation, transparency will be ensured in State administration, sustainable
economic growth will be achieved, the living standard of population will be improved, a unified information
exchange will be formed in the country, people will get easy access to information, and the country will be
integrated to the international information society in according to the national interests.

The followings are the key objectives of the national strategy:
       - Create and develop legislative base of the information society,
       -   Develop human resources in the country, create favourable environment for the
           population to get qualitative education and medical service;
       -   Establish environment to ensure the opportunities to the citizens and social institutions to get, share
           and use information;
       -   Conduct effective, transparent and controllable State administration and local selfadi-ninistration,
           create electronic government, form and develop electronic commerce; Enhance country's economic,
           social, and intellectual potential, create competitive economy, set up and develop information and
           knowledge market;
       -   Protect and widely popularize people's historical, literary and cultural heritage;
       -   Create advanced information communication infrastructure, form electronic information exchange in
           the country, increase information communication services;
               -    Ensure country's information security;
               -    Integrate country into the international information society;
               -    Develop and apply new ICTS, create software production, develop production of ICTs outputs (ICTs
                    industry), eliminate the "digital divide" for the country.

        4.   Key Principles

        The National Strategy is multifold and its scope covers government policy, social-economic sphere, techniques
        and technology, science and culture.National Strategy determines the following key principles to ensure
        effectiveness of ICTs application and development, and to create favourable and equal conditions for all
        participants (State structures, National Academy of Sciences, private enterprises, NGOS, public organizations
        and citizens):
·       Strategy implementation activities correspond to the Republic of Azerbaijan Legislature, serve to defend
        national interests.
·       Strategy implementation activities take into consideration corresponding standards, demands and
        recommendations of UN, Council of Europe, other international organizations , and international agreements
        adopted by the Republic of Azerbaijan.
·       ICTs popularization - to gain public support, to ensure effective activity and to facilitate ICTs implementation.
·       Transparency - all the activities conducte openly, rules, arrangements concerning activity disclosure to
        community through all means, public discussions are conducted, the ideas of all parties are defined and taken
        into consideration.
·       Equality - irrespective of the position in society and type of ownership, interests of all participants are
        considered equally.
·       Security - national security of information exchange is ensured.
·       Innovation - innovations of scientific, technical progress is taken into consideration, research activities is
        supported.
·       Stepwise implementation - to ensure effective use of financial resources, the implementation activities are
        conducted in stages.
·       International experience - the strategy implementation activities is coordinated with the international
        information society development.
·       International cooperation - to ensure high level of the strategy implementation the government participates in
        international ICTs projects preparations and implementations, assists local experts' participation in international
        forums, involves international experts to preparation of the national projects.
        ·      "First leader" principle -the leaders of State administration and local self-
        administration, organizations and enterprises are interested and participate in the strategy
        implementation activities.
    -   Professionalism - environment for training local experts, especially certified experts is
        created. ICTs disciplies in all stages of education are thoroughly improved, preparation of
        new curricula, textbooks, teaching aids for teachers is considered priority in education.
-       National principle - development of information resources in Azerbaijan, creation of Azerbaijani supported
        software are the considered priorities, creation of information resources of the national minorities is stipulated.

        5.   Priorities and Main Activity Directions

        The Strategy reflects government policy in use and development of ICTS, determines priorities and activity
        directions through taking into account requirements of democratic society and country's potential.

        The key priorities of the national strategy are the followings:
               -    Meet information requirements of a person, ensure comprehensive development of
                    a person, improve intellectual potential of the country;
               -    Create legal environment to ensure the evolvement into the information society,
                    conduct effective, transparent and controllable State administration and self-
                    administration;
               -    Strengthen country's economic potential through ICTs application;
               -    Protect and popularize historical, literary and cultural national heritage via ICTs
                    usage.
National strategy determines the following key activity directions:
      - Training national staff in ICTS, and provide national minimal ICTs literacy;Develop
            telecommunication infrastructure;
      - Form and develop electronic government;
      - Create and develop legislative base in connection with the information society building;
      - Form and develop electronic economy;
      - Develop national information resources;
      - Strengthen scientific, technical and production potential in ICTS;
      - Ensure information security on national level and protection of private data.

The main works conducted for activity directions are the followings:

Training of National ICTV Personnel and ICTs Literacy Enhancement
       ·       Improve personnel training through ICTs applications in science and education, monitoring
               education development, distance learning and lifelong learning and improving;
       ·       Develop and apply knowledge ICTs-literacy standards for all levels of education;
       ·       Develop computer network ensuring information and knowledge exchange in research and
               education;
       ·       Create and develop regional and local information resources and training centers to enhance
               people's opportunities to access to information resources, create environment for the poor to get
               ICTs free services;
       -       Train people to use the up to date ICTs and their application.

Development of Telecommunication Infrastructure
       -       Create and develop new telecommunication networks;

       -       Commutation and management of information streams,

       -       Form national level data operators who will be involved in organization and
               exploitation of data transmission network and channels, and create favourable
               condition for their activities;

       - Conduct liberalization policy in telecommunication and create
         environment for fair competition;

       - Conduct flexible tariff policy in telecommunication services.

Electronic Government
       -       Wide usage of electronic documentation exchange;
       -       Broad usage and development of ICTs in State administration bodies and organizations and local
               self-administration bodies;
       -       Create automated data systems, thematic information data warehouses, national, regional and local
               databases and corresponding portals serving people;
       -       Develop and apply mechanisms for regular improvement of government officials' knowledge in
               ICTS;
       -       Develop election network technology.

Information Society's Legislative base ICTs

           ·     ICTs legislative base construction to ensure the evolvement into the information society;
           ·     Develop State standards connected with ICTS;
           ·     Ensure transparency in the activities connected with licensing in ICTS, taking into account
                 international practice;
           ·     Create legislative database for public use.

Electronic economy
        - Create suitable condition for carrying out electronic commerce, using electronic payment on large
             scale;
        - Create favourable environment for information business development;
        - Stimulate widely applying of ICTs in State and private sectors of economy;
        - Create conditions for knowledge based economy development.

National information resources
      - Form national electronic information exchange enviroment;
      - Ensure wide usage of the Azerbaijani language in electronic information exchange;
      - Save and popularize historic, literary and cultural heritage using ICTS;
      - Create conditions for creating information resources serving cultural development of national
           minorities;
      - Integration of the national information resources to the international information society;
      - Provide network information support for Azerbaijani Diaspora;
      - Increase Azerbaijani Internet segment, develop national search engines;
      - Create and develop software applications with Azerbaijani support.
Improvement of Scientific- Technical and Industrial Potential
       -       Develop sciences ensuring creation and widely applying of ICTS;
       -       Stimulate ICTs innovations activities;
       -       Form and develop ICTs industry, and attract investments to this sphere;
       -       Stimulate ICTs services, ICTs productions and their export;
       -       Establish model training-consulting centers to popularize ICTS;
       -       Stimulate establishment of small and medium-sized enterprises producing ICTs means.

Information security
      - Ensure national security in information, struggle against electronic crime;
      - Create conditions to ensure civil rights to obtain and use electronic information according to the
          national interests;
      - Ensure the private information protection.

Due to the transition period in economy, the complexity of the conducted work, large financial resources
requirement the national ICTs strategy will be implemented in stages.As the strategy determines main activities
directions and the conceptual content action plans in every direction - national ICTs programs have to be
developed and concrete actions have to be conducted through projects.

The successful strategy implementation depends directly on its correct management. This process is
coordinated, controlled and governed by State institutions conducting Government policy in ICTs use and
development. To ensure implementation of unified policy in international relations cooperation with other
countries and international organizations in implementation of this strategy is coordinated by the Ministry of
Foreign Affairs.

The scope of the national strategy opens the commencement and development of a national
dialogue, launching of open discussions and consultation, undertaking an objective
assessment of all considered proposals. Providing the equal and supportive participation of
all parties which are interested in development and implementation of the information and
telecommunication projects will ensure to the strategy's successful implementation. These
principles require skillful, efficient and democratic management and administration.

In order to implement the strategy on the scientific basis and with democratic principles a
Scientific Technical Council, Experts' Council, monitoring Council and public supervisory
Council needed to be established. All parties irrespective of their ownership interested in the
usage and development of ICTs in Azerbaijan are represented in these Councils with equal
rights.In order to determine the level of progress of the country towards the information
society, it's crucial to conduct regular monitoring of the ICTs usage level. Therefore on the
basis of world practice national success indicators must be developed.Regular monitoring of
national ICTs usage level and its assessment must be one of the main duties of Government's
policy.

6. Results

A favourable environment for the evolvement into the information society which will meet interests of
government, social institutions, NGOS, private companies, overall society and its members will be established
as a result of the strategy implementation and the following strategic results will be achieved in IO years period:
        - The Republic of Azerbaijan is among leading countries in the sphere of ICTs applications;
        - Effective, transparent and controllable State administration and local self-administration is
             conducted, citizens participate in administration process;
        - Easy access to information resources and services are provided for the citizens;
        - The country's economy experiences forward leap as a result of ICTs applications, poverty and
             unemployment are considerably reduced;
        - Favourable legal environment, intellectual potential, telecommunication infrastructure and national
             electronic information environment are established for the evolvement into the information society;
        - Azerbaijani Internet segment is developed, national information security is ensured, Republic of
             Azerbaijan is successfully integrated to the international information society;
        - National information resources are developed, the Azerbaijani language is widely used in national
             information exchange, broad usage of ICTs to save and popularize historical and cultural heritage of
             the Azerbaijani people and other peoples living in the country;
        - Irrespective of the ownership all organizations and enterprises use ICTs infrastructure,
             telecommunication market with fair competition is formed and functions effectively, country
             participates directly in world's electronic commerce and business processes;
        - ICTs part of the GDP (gross domestic product) has considerably increased.

7.   Financial Support

Successful implementation of the strategy, full achievement of its goals and objectives requires large financial
resources. This problem can be solved by mobilization of Azerbaijan Government's internal finances and
attracting foreign investments. In key administration and socially oriented spheres ICTs applications may be
financed from State budget.

To achieve long-term stable progress in this sphere effective financial policy shall be developed. In general the
strategy implementation is financed from the following sources:
       - Resources in State budget allocated for ICTS;
       - Various government and non-government funds;
       - Resources of central and local administration, State organizations allocated for ICTS;
       - Foreign and local investments;
       - Financial and technical support of international and foreign organizations

The following principles shall be ensured in usage of allocated funds of the strategy:
       - Creation of favourable condition by the Government to attract additional local and international
           finances to the implementation of the ICTs application;
       - Develop and apply favourable credit-financial, customs and tax mechanisms for ICTs applications;
       - Preliminary assessment of economic effectiveness of allocated funds for the information society
           building, giving preference to self-financed projects and programs, broad usage of tenders;
       - Conduct unified and coordinated policy by appropriate government institutions to attract foreign and
           local investments, assist for getting preferential credits and grants for the ICTs development;
       - Implement monetary, legal and organizational actions to attract domestic investments to ICTS,
           control activity and conduct fair competition conditions in this sphere;
       - Apply flexible economically stimulated mechanisms to eliminate "digital divide" in various regions,
           cities and rural areas;
       - Allocate necessary finances for ICTs applications in the national projects and programs planned and
           implemented in the country;
       -   Create economic mechanisms to attract finances for applying ICTs in science, education, culture,
            health care and other social oriented spheres.

Taking into account the role of the strategy in future development of the Republic of Azerbaijan, its national
value, the Government of Azerbaijan ensures regular monitoring of effective and purposeful use of resources
allocated to ICTs and permanently informs the citizens about it.
                                                                                          Appendix 2.2

       THE LAW OF THE REPUBLIC OF AZERBAIJAN ON COMMUNICATION

    This Law regulates organizational, economic and legislative basis of communication activities in
the Republic of Azerbaijan.


                                             CHAPTER I

                                    GENERAL REGULATIONS

Article 1. The basic concepts used in relation to communication activities in this Law must be understood
as following:

     "Electric communication" - any method of reception, transmission and broadcast of signs, signals,
written texts, voices, images and any information through electric cable, radio, optic, radio optic and
other electromagnetic systems;
     "Optic communication" - reporting, transmission and reception of various signals, signs and
information by means of light;
     "Ultimate equipment and devices" - the corresponding instruments and equipment, devices and
appliances used by subscriber to receive, send and transmit the information, that is delivered directly
to users;
     "Communication network" - the corresponding instruments or aggregate of various
communication devices and appliances united into single technological and technical system to ensure
the information exchange;
     "Communication enterprise (operator)" - judicial or physical person obtaining the right for
offering electric and postal communication services and offering such services, irrespective of
organizational-legislative and ownership forms;
     "Essential and guaranteed communication service" - communication services that are considered
obligatory for listing in the legislation and regulations (patents for physical persons) of
communication enterprises (operators);
     "Communication activities" - aggregate of activities related to offering communication services to
communication users and the establishment, foundation and operation of the corresponding
communication devices and networks.

Article 2. Objects and subjects of communication activities

     All postal and electric communication networks used for provision of communication services to
judicial and physical persons, State governmental institutions and other subjects, are considered the
objects of communication activities.
     All physical and judicial persons, as well as other structures that use or provide postal and electric
communication services are considered objects of communication activities.
     Objects and subjects of communication activities of the Republic of Azerbaijan may exist on the
territory of the Republic of Azerbaijan as well as beyond its borders within the legislation of the
Republic of Azerbaijan and international agreements.


Article 3. The definition of communication


    Communication, as the only production-economic complex of bilateral relations, forms an
integral part of the production and social infrastructure of the Republic of Azerbaijan and is organized
to cover demands for electric and postal communication services of physical and judicial persons,
State authorities, including defence, security and social security institutions within its territory.

Article 4. Basic principles of communication activities


     The activities in the sphere of communication are conducted as production activities on base of
the following principles:
     - equality of physical and judicial persons in conduction of activities in the sphere of
communication and exercising the results of activities;
     - freedom of information reception, transmission and transit by means of electric communication
networks and devices, and postal transfers;
     - protection of interests of communication users;
     - ensuring the administration, stability, quality and safety of communication networks working
within the territory of the Republic of Azerbaijan on the base of international and State national
standards of the Republic of Azerbaijan;
     - protection of the competition, restriction of illegal competitions and monopolism;
     - giving preference to development of communication devices corresponding to the world leading
scientific and technical inventions;
     - separation of State administration functions from economic functions in the sphere of
communication and liberation of the corresponding executive authority institution from conduction of
economic functions;
     - application of the leading technologies and administration experience on due stages of
development of the existing communication networks, and active drawing of foreign investments to
the country;
     - providing assistance to the development of the international communication, participation in
international projects in the sphere of communication and establishment of conditions for extension of
the international cooperation;
     - ensuring the secrecy of communication services.
     Communication activities and application rights may be restricted in cases of and under
conditions outlined in the legislation of the Republic of Azerbaijan, including the periods of war time
and cases of emergency, natural disaster (accident).


Article 5. Communication legislation

    Communication legislation comprises of the Constitution of the Republic of Azerbaijan, this Law,
and other laws of the Republic of Azerbaijan and corresponding normative-legislative acts and
international agreements based on these documents.
    When the corresponding international agreements of the Republic of Azerbaijan provide different
regulations that those provided by the legislation of the Republic of Azerbaijan, the regulations of
international agreements are applied.



CHAPTER II


COMMUNICATION NETWORKS AND ADMINISTRATION ISSUES

Article 6. Individual (isolated) communication network of physical and judicial persons.
    Physical and judicial persons within the territory of the Republic of Azerbaijan may establish
individual (isolated) communication networks without access to the general communication network,
to cover their demands in order provided by the legislation.
    Individual communication networks may connect to the general communication network on base
of the corresponding agreement. This connection is conducted upon presentation of a certificate of
accordance of the individual communication network's communication devices and equipment to the
existing standards and norms set for communication devices and equipment of the general
communication network.
    When individual communication network is connected to the general communication network, is
considered entered into the category of general communication network.
    The regulations of connection of individual communication networks to general communication
network are set by the corresponding executive authority institution.


Article 7. Interrelated communication network

    Interrelated communication network irrespective of its organization-legal form and the form of
ownership (except for individual, intra-production and technological communication networks)
comprises the complex of communication network in general use and communication network of
State authority institutions, enterprises, institutions and organizations.
    The development and maintenance of interrelated communication networks within technological
capacity of the whole scope of network and equipment of electric communication is aimed at complex
application, growth of efficiency and safe operation of these networks.
    It is the duty of the corresponding executive authority institutions to develop interrelated
communication networks and take measures to increase their safety.


Article 8. General communication network

    General communication network, as integrated component part of interrelated communication
network, or organized to provide the essential and guaranteed communication services to all physical
and judicial persons within the territory of the Republic of Azerbaijan. It integrates all of the
connected electric communication networks irrespective of the organizational-legislative form and the
form of ownership (except for individual, intra-production and technological communication
networks).
    The use of general communication network may not be restricted to anybody.
    The regulations for use of general communication network are set by the corresponding executive
authority institution.

Article 9. Departmental communication network

    Departmental communication network, connected to the general communication network is
established to meet the production and special demands of State institutions, and is operated and at the
disposal of these institutions. Departmental communication networks could be used to provide
communication services to population and other communication users on base of contracts and in the
order prescribed by the legislation.

Article 10. Communication networks for State authority institutions, defence, security
and social security needs

    Special communication network is established to meet the demands of State authority institutions
for communication services. The operation of this communication network and provision of such
communication services may be placed on the corresponding executive authority institution.
     The corresponding communication networks could also be established for defence, security and
social security needs in the Republic of Azerbaijan. Such communication services are provided by
communication service structures of the corresponding executive authority institutions in the order
described in the legislation. Communication services provided by these structures could also be used
for commercial purposes unless these cause any damage to basic activities. When such necessity
occurs, these structures provide the corresponding communication services in the order described in
the legislation.
     Channels of general and departmental communication networks could be rented on base of
contracts and in the order described in the legislation for the needs of State authorities, including
defence, security and social security protection institutions of the Republic of Azerbaijan.
     All communication operators must first and foremost provide safety of communication channels
used for the needs of State authorities, including defence, security and social security protection
institutions, and immediately conduct the urgent measures for replacement and restoration of damaged
communication channels.


Article 11. Local communication network

    Local communication network, aimed at providing local individual communication services of
any specific kind of electric and postal communication to one or several administrative-territorial
areas of the Republic of Azerbaijan, is organized in the order described in the legislation unless it
causes any damage to the communication network that is in general use in the Republic of Azerbaijan.
    Local communication networks are established by decree of the corresponding executive
authority institution upon correspondence to the existing communication standards.
    Local communication networks could also be used for distribution of the information of State
importance.

Article 12. Intra-production and technological communication network

    Various enterprises, institutions, organizations and other subjects may establish intra-production
and technological communication networks, isolated from the general communication network to
ensure rapidity of management of technological processes and intra-production relations.
    Such communication networks are established provided that they do not cause damage to work of
the general communication network and correspond to the corresponding standards of communication
services.

Article 13. Postal communication

     Postal communication provides reception, sorting, storage, shipment, sending and delivery to
specific addresses of letters, telegrams, open letters, wrappers, printed issues, cash and other transfers.
     Postal communication network operates on base of agreements as a special-regime complex of
integrate technological unity of communication enterprise offering postal communication services, its
transport vehicles and other devices.
     Services of special messenger, courier (herald) and diplomatic courier may be established as kinds
of live communication to provide State authorities, including defence, security and social security
institutions, as well as diplomatic representations of the Republic of Azerbaijan with reliable
communication services.


Article 14. State administration in communications sphere

    State administration in the sphere of communication of the Republic of Azerbaijan is conducted
by the corresponding executive authority institution.
    This institution connects the activities of State-run and non-governmental communication
networks and introduces State control into reliability of communication systems and protection of the
rights of consumers of all communication networks irrespective of their organizational-legislative
form, nor the form of ownership.


Article 15. Application of radio frequency spectrum

    Radio frequency spectrum belongs to the State on the territory of the Republic of Azerbaijan.
Radio frequencies are allocated for use by the corresponding State authority institution.
    In order to ensure electric-magnetic coordination of radio electronic devices, the regulations for
allocation of radio frequencies, special conditions of projecting, production, assembling, operation
and importation of radio electronic equipment and high-frequency devices, as well as the conditions
for implementation of complex measures for protection of radio waves reception from radio
interferences, are determined by the corresponding State authority institution.
    Communication devices considered sources of electric-magnetic radiation, including devices used
for broadcast and transmission of radio and TV programmes and other technical devices must pass
through State registration in the order described in the legislation.


    The transfer from radio frequencies allocated for various subjects to other radio frequencies to
meet the demands of defence, security and national security institutions, is within regulations
provided by the legislation.
    The regulations for use of radio frequencies are determined by the corresponding executive
authority institution.

Article 16. Administration over communication networks during wartime and in cases
of emergency

    All communication networks are managed in a centralised way by the corresponding executive
authority institution and in relation to defence forces, civil defence headquarters and State institutions
responsible for elimination of sequences of cases of emergencies and natural disasters, as well as
special communication networks, during wartime and in cases of emergency.
    The corresponding State authority institutions have the right to use all communication networks
and methods irrespective of organizational-legislative form and the form of ownership, as well as
temporary restriction or suspension of the activities of these communication networks in the order
provided by the legislation of the Republic of Azerbaijan during natural disasters and quarantine
periods.



                                               CHAPTER III

               BASES OF ECONOMIC ACTIVITIES IN SPHERE OF COMMUNICATION


Article 17. Property of communication networks and systems

    Communication enterprises on the territory of the Republic of Azerbaijan are established and
operate on the basis of economic unity, various forms of ownership and under competitive conditions.
    Communication networks and systems of the Republic of Azerbaijan may be in State and
municipal ownership, as well as be owned by various citizens, physical and judicial persons who
perform as communication operators, as well as foreign physical and judicial persons.
   The regulations for communication networks and systems that belong or are related to State
ownership are determined by the corresponding State authority institutions of the Republic of
Azerbaijan.


Article 18. Change of form of ownership over communication networks and systems

    The form of ownership over communication networks and systems that are owned by the State,
may be changed in the order provided by the legislation.
    Foreign investors may contribute to privatization of communication networks in the order
provided by the legislation.
       The change of the form of ownership over communication networks and systems is
allowed provided that these changes do not derange technological working regime of
communication networks, nor restrict the rights of physical and judicial persons to use
communication services.


Article 19. Bases of certification of communication systems

    All communication systems used at inter-related communication networks in the Republic of
Azerbaijan are subject to obligatory examination and certification in accordance with provided
standards, norms and technical requirements.
    Communication services offered by general communication networks could also be certified. The
regulations for certification of communication systems are determined by the corresponding executive
authority institutions.
    Infringers of the regulations for certification of communication systems bear the responsibility in
the order provided in the legislation.


Article 20. The peculiarities of activities conducted and services provided in the sphere
of communication


    Communication activities and services that are offered in this sphere are conducted by permission
obtained from the corresponding executive authority institutions in the due order.


Article 21. Competition in the sphere of communication activities

    Equal legislative regime is established for all subjects of communication activities irrespective of
their organizational-legislative forms and the form of ownership in the Republic of Azerbaijan.
    Health competition environments must be organized in the sphere of communication activities
with the exception of preservation of the State secrecy, national security, defence and social security
provisions.


Article 22. Prices and tariffs for use of communication services and radio frequencies

    The tariffs for use of communication services and radio frequencies in the Republic of Azerbaijan
are determined in accordance with contract prices on base of the corresponding legislation.
    Possible limits of tariffs set on the base of contract prices, may be determined by the government
for maintenance of the market of communication services and coordination of interests of producers
and consumers.
    Free use of any communication networks to call up the first aid services (anti-fire protection,
police, first medical aid, gas and electricity incident services, et cetera) must be organized in the
Republic of Azerbaijan. All communication operators and their executives bear the responsibility
provided by the legislation for restriction of these rights of communication consumers.
    The rights for enter-network connection are determined on base of the conditions and regulations
of agreement concluded in due order between the sides.


Article 23. Issues of making investments into communication development and
financing of its activities

    Making investments into communication activities is conducted in accordance with legislative
acts on investment activities in the Republic of Azerbaijan.
    The decisions on transfer of investments for communication development into State budget
accounts are taken in the order provided by the legislation and on base of State programmes providing
for communication development.
    The corresponding executive authority institutions conduct specific activities for communication
development at the expense of local budget amounts within social-economical development
programmes at the corresponding areas.
    The drawing and protection of foreign investments into communication development is provided
by international agreements and the corresponding legislation.
    Communication expenses of State authority institutions are included into the corresponding
budget resources allocated for these institutions.
    The development of communication networks belonging to physical and judicial persons is
organized at the expense of their own resources.



                                             CHAPTER IV

         MUTUAL RELATIONS BETWEEN COMMUNICATION ENTERPRISES AND
           ORGANIZATIONS AND EXECUTIVE AUTHORITY INSTITUTIONS


Article 24. Mutual relations between communication enterprises and organizations and executive
authority institutions

    The corresponding executive authority institutions and projecting organizations must under the
existing normative consider the construction of buildings for placement of communication enterprises,
in process of projecting of various living districts and complexes, public buildings and constructions
aimed at development of city infrastructure and establishment of newer living areas.
    The corresponding executive authority institutions must lease in the due order only special rooms
that meet technological norms in completed or constructed living or administrative buildings to
communication enterprises.


Article 25. Use of ground and other immovable properties for development of
communication networks

    Communication networks and systems may be placed at State, municipal and special territories of
the Republic of Azerbaijan under the land legislation.
    Therefore, the allocation of land sites, outlining of defence zones and lines and the regimes of
application of the above-mentioned, are determined by the corresponding legislation.
     Areas of land sites including defence zones and lines, allocated to physical and judicial persons
for their communication activities, must be determined in the due order on the base of projecting-
technical documents and norms for allocation of land for this kind of activities.
     Communication enterprises may construct communication buildings and systems in accordance
with the legislation on the allocated territories, as well as install communication devices at roofs of
houses, poles, bridges, tunnels, reservoirs, underground systems and other construction-engineering
sites upon obtaining of permission from land-owner (leaser).
     The movement or re-assembling of communication systems during re-establishment of living
areas, repairs of various houses, roads and bridges, melioration works and other cases is conducted at
the client's expense with regard to the existing standards and technical conditions of owner of the
communication network.
     Projecting, construction, repairs, re-assembling, re-installation and re-location of communication
networks and systems are conducted with regard to the corresponding State and real standards and
existing norms and regulations.



Article 26. Elimination of sequences of accidents at communication networks

     Sequences of accidents that take place within communication networks are eliminated by the
corresponding State establishments with the participation of communication operators.
     The corresponding executive authority institutions offer urgent assistance to communication
enterprises with elimination of sequences of accidents and provide them with labour power,
transportation vehicles, et cetera.
     The works for elimination of sequences of accidents at communication networks are carried out
by permission from leaser, owner of the land site, building or construction where the communication
system is located. However, no permission from such persons is needed in urgent cases and for
protection of State or social interests.
     Damages caused to landowner and leaser are compensated at the expense of the corresponding
communication enterprise. After compensation of damages, communication enterprise may bring a
suit to the court in the due order provided by the legislation, against person who caused the damage.
     The elimination of sequences of accidents at communication networks, along with restoration or
re-installation of communication systems, also provides for conduction of activities that are essential
for the environmental protection.



Article 27. Protection of communication systems and devices

     The protection and security of communication systems and devices is guaranteed in the Republic
of Azerbaijan. The regulations for protection and security of communication systems and devices are
set by the corresponding executive authority institutions.
     Physical and judicial persons who tolerated cases of damaging of communication systems and
devices, illegal connection to communication networks and systems; violated the regulations for
production, manufacturing, operation and registration of radio electronic systems and high-frequency
devices; created obstacles to use of frequencies for the operation of all appointed radio-electronic
systems and high-frequency devices as well as hindered the reception of TV and radio broadcasts,
must bear the responsibility in the order provided by the legislation, and compensate the expenses for
elimination of damages and lost benefits to the communication enterprise.



Article 28. Peculiarities of use of transportation vehicles in communication services
     Postal communication enterprises have the right to organize post shipments at the responsibility
of their employees or transportation organizations on base of contracts and by means of railroad,
water, air and motor road transportation vehicles in all directions and by all routes.
     No transportation enterprise may refuse to conclude the corresponding contract for regular long-
distance and international post shipments.
     Communication enterprises are out of turn provided with transportation vehicles during
conduction of emergency technical works in process of restoration of damages communication
networks and communication systems.
     The use of transportation vehicles belonging to communication enterprises for outside jobs, and
services not related to the sphere of communication, is not allowed unless the corresponding
permission from the enterprise has been obtained.
     Post shipments to consumers residing outside of living areas, is at the expense of enterprises,
institutions and organizations where they work, or else delivered by their own transportation vehicles.
     The use of transportation vehicles in communication services is determined by the corresponding
normative legislative acts.


Article 29. Custom and quarantine control on sphere of communication

     Custom and quarantine control over international postal shipments and parcels crossing the border
of the Republic of Azerbaijan is regulated by the corresponding legislation.
     Communication enterprises must beforehand notify the consumers about the list of postal
shipments and goods that are not allowed to cross the border.
     The secrecy of communication is provided in process of custom and quarantine control. The
violation of these regulations could cause the corresponding responsibility provided by the legislation.


                                               CHAPTER V

                      PROTECTION OF RIGHTS OF COMMUNICATION USERS




Article 30. Bases of the rights to use communication

    All users of communication have the right to freely send information in the due order through
electric and postal communication networks to any area within the Republic of Azerbaijan as well as
foreign countries, and access the international communication network, except for the cases
prohibited by the legislation.
    Except for cases provided by the normative legislative acts, the corresponding communication
enterprises may not refuse to provide their services to consumers.
    Communication operators and consumers have the right to connect their own communication
networks and ultimate equipment to the general communication network in the order provided by the
legislation.
    Only certified communication systems could be connected in the due order to communication
networks.
    Communication consumers have the right to use quality communication services, obtain the
information about these services, tariffs and executors, as well as bring the corresponding sues to
courts when such necessity occurs. The protection of rights of users of communication, as well as the
mechanism for implementation of the rights has been determined by the Law of the Republic of
Azerbaijan "On Protection of Rights of Consumers" and other normative legislative acts.
    According to the Law of the Republic of Azerbaijan "On Advertisement", advertisements in
phone reference services could only be made after answer to subscriber's question (questions) was
given.
    Advertisement in paid phone reference service and other services could only be made by consent
of a subscriber.



Article 31. Secrecy of communication

    Secrecy of letters, phone conversations, postal shipments, telegrams and other information sent
through electric and postal communication networks is protected by the Constitution of the Republic
of Azerbaijan and other normative legislative acts.
    All communication operators must provide protection of the secrecy of communication.
    The information about postal shipments and information transmitted through electric
communication network, as well as these shipments and information could also be given to senders,
recipients and their legal representatives.
    Bugging telephone conversations, familiarization with electric communication information,
opening and moving of postal shipments and parcels, getting the information about these as well as
any other method of restriction of the right for secrecy of communication are determined by the
corresponding laws of the Republic of Azerbaijan.


Article 31-1. Mutual relations between communication enterprises and institutions
involved in operative research activities

    Communication enterprises and communication operators that are operating within the territory of
the Republic of Azerbaijan, irrespective of their organizational-legislative form or the form of
ownership, must take measures to keep in secret the organization and actual methods of conduction of
operative research activities within the legislation of the Republic of Azerbaijan, in process of
establishment and operation of communication networks.
    Not taking the measures to keep in secret the organization and actual methods of conduction of
operative research activities causes responsibility provided by the legislation of the Republic of
Azerbaijan.

     Electric communication systems (except for networks of institutions and departments without
access to the general network) must be completed with special equipment so that they could transmit
the information.

         The third paragraph of this article applies also to operating subjects of communication
activities.



Article 32. Privileges and concessions in sphere of communication

     The corresponding privileges and concessions may be provided in the determination of taxes and
tariffs for the use of communication systems, to subjects of communication activities in the Republic
of Azerbaijan.
     The list of specific subjects, as well as privileges and concessions is determined by normative
legislative acts of the Republic of Azerbaijan.


Article 33. Guarantees for postal shipments
    Communication operators bear the responsibility for guarding and timely delivery to indicated
address of postal shipments.
    The list of goods that is prohibited from sending by mail is determined by the corresponding
executive authority institutions.
    Postal communication enterprises have the right to remove, annihilate or allow to annihilate
parcels that are prohibited from sending, as well as freights and goods that present a threat to lives and
health of postal employees or the third persons, unless it is possible to eliminate the threat in a
different way.
    Sender of a parcel by post may announce its price when sending.
    When parcels with announced price are lost or damaged, communication operator compensates
the damage to sender in the order that is defined by the legislation.
    Advertisement on parcels sent by mail may be made by consent of the corresponding executive
authority institution in the order defined in the legislation.


                                               CHAPTER VI

                  PECULIARITIES OF OFFERING OF COMMUNICATION SERVICES


Article 34. Service language, record keeping and addressing of information

    Operative management and controlling communication, services, record keeping, registration,
accounting, commercial and technical documents, as well as postal and telegraph correspondence are
in Azerbaijani language at all communication enterprises and networks of the Republic of Azerbaijan.
    International information sent through electric and postal communication is in languages
stipulated by the corresponding international agreements of the Republic of Azerbaijan.



Article 35. Time of registration and accounting in the sphere of communication

    The Baku time is used as the single time of registration and accounting in technological processes
of submission and reception of information of communication enterprises operating in the sphere of
communication in the Republic of Azerbaijan, irrespective of the place of specific location.
    The time of registration and accounting in international communication of the Republic of
Azerbaijan is determined by the corresponding international agreements of the Republic of
Azerbaijan.



Article 36. Production and distribution of postal stamps and other postal payment signs

     Production and publication of postal payments signs (postal stamps, stamped envelopes and open
letters) is conducted by the corresponding executive authority institutions and is State monopoly.
     Themes, arrangement, price and circulation of postal payment signs is determined by the
corresponding executive authority institutions.
     Collections of postal stamps and catalogues of other philately products and price lists are
published in the Republic of Azerbaijan.
     The regulations of production, publication and circulation of postal stamps, other postal payment
signs and other philately products are determined by the corresponding normative legislative acts of
the Republic of Azerbaijan.
                                              CHAPTER VII

                   LAW VIOLATIONS AND RESPONSIBILITY IN THE SPHERE OF
                        COMMUNICATION ACTIVITIES AND SERVICES


Article 37. The responsibility for law violations in the sphere of communication
activities and services

     Communication employees and enterprises bear the responsibility provided by the legislation for
violation of consumer rights in process of execution of communication services, for failure to meet
the existing standards, norms and regulations as well as contract conditions, and for offering
unsatisfactory communication services.
     Communication operators bear financial responsibility for committing such violations as loss and
damaging of postal parcels with announced price, delivering postal parcels worth lower price than
previously announced, causing change of content of the text of telegram, non-delivery of telegrams or
failing to meet the time schedule for delivery to the right address (except for telegrams for delivery to
districts without electric communication).
     Employees of State communication enterprises bear financial responsibility before their
communication enterprises within the financial responsibility that communication enterprises bear
before the consumers for loss or delay of postal and telegraph deliveries through their fault, loss or
damage of some of goods sent with mail, unless otherwise indicated in the legislation.
     Communication operators have the right to suspend offering electric communication network
services after the corresponding notification until shortcomings are eliminated, to communication
consumers who violated the regulations of use of ultimate devices at electric communication
networks, used uncertified equipment within the network, as well as did not cover postal services fees
in due time.
     Lost benefits and casualties caused by damaging of equipment or idle-time must be compensated
by communication consumer.



Article 38. Compensation for damages related to execution of communication activities

    Damages caused to any subject in relation to execution of communication activities are
compensated in the order provided by the legislation.
    Compensation for the caused damage is determined by either bilateral agreement or by the court
decision in the order provided by the legislation of the Republic of Azerbaijan.



Article 39. Resolution of disputes that occur in relation with execution of
communication activities

    Disputes that occur between communication consumers and communication enterprises, as well
as between these enterprises are resolved in the order provided by the legislation.
                                              CHAPTER VIII

                                    INTERNATIONAL AGREEMENT




Article 40. Principles of international communication in the sphere of communication

     International Cupertino is implemented on base of international agreements and treaties of the
Republic of Azerbaijan.
     Foreign physical and judicial persons involved in communication activities on the territory of the
Republic of Azerbaijan are provided with legislative regime provided to physical and judicial persons
of the Republic of Azerbaijan in the order determined in the legislation of the Republic of Azerbaijan.


Article 41. Resolution of disputes occurring in process of use of international
communication networks

     Disputes that occur between the corresponding communication enterprises located on the territory
of the Republic of Azerbaijan and territories of foreign countries are resolved in the order determined
in the corresponding international agreements and treaties of the Republic of Azerbaijan.



Article 42. Legislation attached to international communication in the sphere of
communication

     Physical and judicial persons of the Republic of Azerbaijan, who participate in execution of the
international agreements in the sphere of communication, conclude agreements with foreign
organizations and citizens on base of the legislation of the Republic of Azerbaijan unless application
of the legislation of foreign companies is provided by concluded agreements.


    President of the Republic of Azerbaijan
    Heydar Aliyev

    Baku City, 20 June 1997
    N: 328-1Q
                                                                                                 Appendix 2.2


Agreements signed by CIS Countries for Mobile Telephony

The CIS Agreement on the cooperation, development and utilization of systems of cellular mobile
communication 30.03.99

The Protocol on corrective action in the Agreement on Cooperation in development and utilization of systems of
cellular mobile communication 24.10.00

The Agreement between the Government of the Azerbaijan Republic and the Cabinet of Ministers of Ukraine
on Cooperation in the sphere of government communication 24.03.00

Agreement between the Azerbaijan Republic and Uzbekistan on Cooperation in               communications and
telecommunications sphere.25.07.97

Agreement between the         Azerbaijan Republic and Kazakhstan on cooperation in communications
sphere.01.02.99

The Law of the Azerbaijan Republic on Corrective and Supplementary actions to communications, operating
and searching activities 17.05.2002

The implementation of the Law of the Azerbaijan Republic “On Information, Informatisation and Information
Security” 04.07.00

Decree of the President of the Azerbaijan Republic “On privatization of some enterprises and establishments
under the Ministry of Communications of the Republic of Azerbaijan” 29.03.01

The Decree of the Cabinet of Ministers of the Azerbaijan Republic “On Establishment of Tariff(Price) Board”
and the Statute of Tariff(Price) Board of the Republic of Azerbaijan 31.01.02

The Decree of the Cabinet of Ministers of the Azerbaijan Republic on the           Statute of the Ministry of
Communications of the Azerbaijan Republic 04.04.1994

The Order of the Ministry of Communications on rules of the utilization of general communications network
31.08.99

The Order of the Ministry of Communications of the Republic of Azerbaijan on Rules of Internet Utilization .

The Presidential Decree on Suppression of Interferences hampering the progress of entrepreneurship (decree
dated:28 September 2002) Article10, Paragraph 3 “ Support the improvement of material-technical equipment
of Taxation Structures, establishment of the computer network meeting the modern requirements”

The State Programmeme on Development of small and medium sized entrepreneurship. (The
Presidential Decree dated August 17, 2002) Paragraph 4.2 To provide the assistance to SME
in the sphere of “Internet-business” services
                                                                                        Appendix 2.3



                                             CHAPTER IV

         MUTUAL RELATIONS BETWEEN COMMUNICATION ENTERPRISES AND
           ORGANIZATIONS AND EXECUTIVE AUTHORITY INSTITUTIONS


Article 24. Mutual relations between communication enterprises and organizations and
executive authority institutions

    The corresponding executive authority institutions and projecting organizations must under the
existing normative consider the construction of buildings for placement of communication enterprises,
in process of projecting of various living districts and complexes, public buildings and constructions
aimed at development of city infrastructure and establishment of newer living areas.
    The corresponding executive authority institutions must lease in the due order only special rooms
that meet technological norms in completed or constructed living or administrative buildings to
communication enterprises.


Article 25. Use of ground and other immovable properties for development of
communication networks

     Communication networks and systems may be placed at State, municipal and special territories of
the Republic of Azerbaijan under the land legislation.
     Therefore, the allocation of land sites, outlining of defence zones and lines and the regimes of
application of the above-mentioned, are determined by the corresponding legislation.
     Areas of land sites including defence zones and lines, allocated to physical and judicial persons
for their communication activities, must be determined in the due order on the base of projecting-
technical documents and norms for allocation of land for this kind of activities.
     Communication enterprises may construct communication buildings and systems in accordance
with the legislation on the allocated territories, as well as install communication devices at roofs of
houses, poles, bridges, tunnels, reservoirs, underground systems and other construction-engineering
sites upon obtaining of permission from land-owner (leaser).
     The movement or re-assembling of communication systems during re-establishment of living
areas, repairs of various houses, roads and bridges, melioration works and other cases is conducted at
the client's expense with regard to the existing standards and technical conditions of owner of the
communication network.
     Projecting, construction, repairs, re-assembling, re-installation and re-location of communication
networks and systems is conducted with regard to the corresponding State and real standards and
existing norms and regulations.


Article 26. Elimination of sequences of accidents at communication networks

    Sequences of accidents that take place within communication networks are eliminated by the
corresponding State establishments with the participation of communication operators.
    The corresponding executive authority institutions offer urgent assistance to communication
enterprises with elimination of sequences of accidents and provide them with labour power,
transportation vehicles, et cetera.
     The works for elimination of sequences of accidents at communication networks are carried out
by permission from leaser, owner of the land site, building or construction where the communication
system is located. However, no permission from such persons is needed in urgent cases and for
protection of State or social interests.
     Damages caused to landowner and leaser are compensated at the expense of the corresponding
communication enterprise. After compensation of damages, communication enterprise may bring a
suit to the court in the due order provided by the legislation, against person who caused the damage.
     The elimination of sequences of accidents at communication networks, along with restoration or
re-installation of communication systems, also provides for conduction of activities that are essential
for the environmental protection.



Article 27. Protection of communication systems and devices

     The protection and security of communication systems and devices is guaranteed in the Republic
of Azerbaijan. The regulations for protection and security of communication systems and devices are
set by the corresponding executive authority institutions.
     Physical and judicial persons who tolerated cases of damaging of communication systems and
devices, illegal connection to communication networks and systems; violated the regulations for
production, manufacturing, operation and registration of radio electronic systems and high-frequency
devices; created obstacles to use of frequencies for the operation of all appointed radio-electronic
systems and high-frequency devices as well as hindered the reception of TV and radio broadcasts,
must bear the responsibility in the order provided by the legislation, and compensate the expenses for
elimination of damages and lost benefits
to the communication enterprise.


Article 28. Peculiarities of use of transportation vehicles in communication services

     Postal communication enterprises have the right to organize post shipments at the responsibility
of their employees or transportation organizations on base of contracts and by means of railroad,
water, air and motor road transportation vehicles in all directions and by all routes.
     No transportation enterprise may refuse to conclude the corresponding contract for regular long-
distance and international post shipments.
     Communication enterprises are out of turn provided with transportation vehicles during
conduction of emergency technical works in process of restoration of damages communication
networks and communication systems.
     The use of transportation vehicles belonging to communication enterprises for outside jobs, and
services not related to the sphere of communication, is not allowed unless the corresponding
permission from the enterprise has been obtained.
     Post shipments to consumers residing outside of living areas, is at the expense of enterprises,
institutions and organizations where they work, or else delivered by their own transportation vehicles.
     The use of transportation vehicles in communication services is determined by the corresponding
normative legislative acts.


Article 29. Custom and quarantine control on sphere of communication

     Custom and quarantine control over international postal shipments and parcels crossing the border
of the Republic of Azerbaijan is regulated by the corresponding legislation.
     Communication enterprises must beforehand notify the consumers about the list of postal
shipments and goods that are not allowed to cross the border.
    The secrecy of communication is provided in process of custom and quarantine control. The
violation of these regulations could cause the corresponding responsibility provided by the legislation.
                                             CHAPTER V


                      PROTECTION OF RIGHTS OF COMMUNICATION USERS


Article 30. Bases of the rights to use communication

    All users of communication have the right to freely send information in the due order through
electric and postal communication networks to any area within the Republic of Azerbaijan as well as
foreign countries, and access the international communication network, except for the cases
prohibited by the legislation.
    Except for cases provided by the normative legislative acts, the corresponding communication
enterprises may not refuse to provide their services to consumers.
    Communication operators and consumers have the right to connect their own communication
networks and ultimate equipment to the general communication network in the order provided by the
legislation.
    Only certified communication systems could be connected in the due order to communication
networks.
    Communication consumers have the right to use quality communication services, obtain the
information about these services, tariffs and executors, as well as bring the corresponding sues to
courts when such necessity occurs. The protection of rights of users of communication, as well as the
mechanism for implementation of the rights has been determined by the Law of the Republic of
Azerbaijan "On Protection of Rights of Consumers" and other normative legislative acts.
    According to the Law of the Republic of Azerbaijan "On Advertisement", advertisements in
phone reference services could only be made after answer to subscriber's question (questions) was
given.
    Advertisement in paid phone reference service and other services could only be made by consent
of a subscriber.


Article 31. Secrecy of communication

    Secrecy of letters, phone conversations, postal shipments, telegrams and other information sent
through electric and postal communication networks is protected by the Constitution of the Republic
of Azerbaijan and other normative legislative acts.
    All communication operators must provide protection of the secrecy of communication.
    The information about postal shipments and information transmitted through electric
communication network, as well as these shipments and information could also be given to senders,
recipients and their legal representatives.
    Bugging telephone conversations, familiarization with electric communication information,
opening and moving of postal shipments and parcels, getting the information about these as well as
any other method of restriction of the right for secrecy of communication are determined by the
corresponding laws of the Republic of Azerbaijan.
Article 31.1. Mutual relations between communication enterprises and institutions
involved in operative research activities

    Communication enterprises and communication operators that are operating within the territory of
the Republic of Azerbaijan, irrespective of their organizational-legislative form or the form of
ownership, must take measures to keep in secret the organization and actual methods of conduction of
operative research activities within the legislation of the Republic of Azerbaijan, in process of
establishment and operation of communication networks.
    Not taking the measures to keep in secret the organization and actual methods of conduction of
operative research activities causes responsibility provided by the legislation of the Republic of
Azerbaijan.

     Electric communication systems (except for networks of institutions and departments without
access to the general network) must be completed with special equipment so that they could transmit
the information.

         The third paragraph of this article applies also to operating subjects of communication
activities.


Article 32. Privileges and concessions in sphere of communication

     The corresponding privileges and concessions may be provided in the determination of taxes and
tariffs for the use of communication systems, to subjects of communication activities in the Republic
of Azerbaijan.
     The list of specific subjects, as well as privileges and concessions is determined by normative
legislative acts of the Republic of Azerbaijan.


Article 33. Guarantees for postal shipments

    Communication operators bear the responsibility for guarding and timely delivery to indicated
address of postal shipments.
    The list of goods that is prohibited from sending by mail is determined by the corresponding
executive authority institutions.
    Postal communication enterprises have the right to remove, annihilate or allow to annihilate
parcels that are prohibited from sending, as well as freights and goods that present a threat to lives and
health of postal employees or the third persons, unless it is possible to eliminate the threat in a
different way.
    Sender of a parcel by post may announce its price when sending.
    When parcels with announced price are lost or damaged, communication operator compensates
the damage to sender in the order that is defined by the legislation.
    Advertisement on parcels sent by mail may be made by consent of the corresponding executive
authority institution in the order defined in the legislation.
                                             CHAPTER VI


                 PECULIARITIES OF OFFERING OF COMMUNICATION SERVICES


Article 34. Service language, record keeping and addressing of information

    Operative management and controlling communication, services, record keeping, registration,
accounting, commercial and technical documents, as well as postal and telegraph correspondence are
in Azerbaijani language at all communication enterprises and networks of the Republic of Azerbaijan.
    International information sent through electric and postal communication is in languages
stipulated by the corresponding international agreements of the Republic of Azerbaijan.


Article 35. Time of registration and accounting in the sphere of communication

    The Baku time is used as the single time of registration and accounting in technological processes
of submission and reception of information of communication enterprises operating in the sphere of
communication in the Republic of Azerbaijan, irrespective of the place of specific location.
    The time of registration and accounting in international communication of the Republic of
Azerbaijan is determined by the corresponding international agreements of the Republic of
Azerbaijan.


Article 36. Production and distribution of postal stamps and other postal payment signs

     Production and publication of postal payments signs (postal stamps, stamped envelopes and open
letters) is conducted by the corresponding executive authority institutions and is State monopoly.
     Themes, arrangement, price and circulation of postal payment signs is determined by the
corresponding executive authority institutions.
     Collections of postal stamps and catalogues of other philately products and price lists are
published in the Republic of Azerbaijan.
     The regulations of production, publication and circulation of postal stamps, other postal payment
signs and other philately products are determined by the corresponding normative legislative acts of
the Republic of Azerbaijan.
                                              CHAPTER VII

                   LAW VIOLATIONS AND RESPONSIBILITY IN THE SPHERE OF
                        COMMUNICATION ACTIVITIES AND SERVICES


Article 37. The responsibility for law violations in the sphere of communication
activities and services

     Communication employees and enterprises bear the responsibility provided by the legislation for
violation of consumer rights in process of execution of communication services, for failure to meet
the existing standards, norms and regulations as well as contract conditions, and for offering
unsatisfactory communication services.
     Communication operators bear financial responsibility for committing such violations as loss and
damaging of postal parcels with announced price, delivering postal parcels worth lower price than
previously announced, causing change of content of the text of telegram, non-delivery of telegrams or
failing to meet the time schedule for delivery to the right address (except for telegrams for delivery to
districts without electric communication).
     Employees of State communication enterprises bear financial responsibility before their
communication enterprises within the financial responsibility that communication enterprises bear
before the consumers for loss or delay of postal and telegraph deliveries through their fault, loss or
damage of some of goods sent with mail, unless otherwise indicated in the legislation.
     Communication operators have the right to suspend offering electric communication network
services after the corresponding notification until shortcomings are eliminated, to communication
consumers who violated the regulations of use of ultimate devices at electric communication
networks, used uncertified equipment within the network, as well as did not cover postal services fees
in due time.
     Lost benefits and casualties caused by damaging of equipment or idle-time must be compensated
by communication consumer.


Article 38. Compensation for damages related to execution of communication activities

    Damages caused to any subject in relation to execution of communication activities are
compensated in the order provided by the legislation.
    Compensation for the caused damage is determined by either bilateral agreement or by the court
decision in the order provided by the legislation of the Republic of Azerbaijan.


Article 39. Resolution of disputes that occur in relation with execution of
communication activities

    Disputes that occur between communication consumers and communication enterprises, as well
as between these enterprises are resolved in the order provided by the legislation.
                                              CHAPTER VIII


                                    INTERNATIONAL AGREEMENT


Article 40. Principles of international communication in the sphere of communication

     International Cupertino is implemented on base of international agreements and treaties of the
Republic of Azerbaijan.
     Foreign physical and judicial persons involved in communication activities on the territory of the
Republic of Azerbaijan are provided with legislative regime provided to physical and judicial persons
of the Republic of Azerbaijan in the order determined in the legislation of the Republic of Azerbaijan.


Article 41. Resolution of disputes occurring in process of use of international
communication networks

     Disputes that occur between the corresponding communication enterprises located on the territory
of the Republic of Azerbaijan and territories of foreign countries are resolved in the order determined
in the corresponding international agreements and treaties of the Republic of Azerbaijan.

Article 42. Legislation attached to international communication in the sphere of
communication

     Physical and judicial persons of the Republic of Azerbaijan, who participate in execution of the
international agreements in the sphere of communication, conclude agreements with foreign
organizations and citizens on base of the legislation of the Republic of Azerbaijan unless application
of the legislation of foreign companies is provided by concluded agreements.


    President of the Republic of Azerbaijan
    Heydar Aliyev

    Baku City, 20 June 1997
    N: 328-1Q
                                                                                                      Appendix 2.4


                                     Trade Policy in Azerbaijan
Since gaining independence in 1991, the Republic of Azerbaijan has been steadily developing its customs
legislation. The basic legislative acts that currently govern the customs regulations in the Republic of Azerbaijan
are the Customs Code, the Law on Customs Tariff, the Tax Code and a number of Decrees issued by the Cabinet
of Ministers. Although there are still improvements to be made, there is an open dialog between the State
Customs Committee and the various interest groups operating in the Azerbaijan, which is beginning to bring
forward positive change.

CUSTOMS PAYMENTS
Import Duties

Import duty rates are assessed at either the fixed percentage rates of 0.5%, 3%, 10% and 15% on the customs
value of goods, or at a fixed rate per unit of imported goods (e.g., US$ 0.20 per one litre of mineral water). If the
value of imported goods declared significantly differs from the market prices for similar goods, customs
authorities have the right to adjust the customs value according to the market prices.

There are certain items, identified below, which may be imported into the Azerbaijan Republic exempt from
import duties:

   • Assets imported by a foreign investor as a contribution to the charter capital of an Azerbaijan Legal Entity

   • Property of Foreign Employees of locally registered companies, which are imported for personal use

   • Goods imported for use as grants and loans under Inter-Governmental Agreements

   • Goods imported by physical persons for gratuitous distribution (humanitarian aid) and

   • Goods imported under special regimes (discussed in further detail below)

It should be noted that only the first two exemptions mentioned above were provided for by the Law on
Protection of Foreign Investments, whereas, all five exemptions have been provided within a Decree of the
Cabinet of Ministers. A subsequent Decree has been issued from the Cabinet of Ministers, which has removed
both of the first two exemptions, and although the laws of the Azerbaijan Republic prevail over decrees, in
practice it is currently very difficult to utilize the first two exemptions.
Export Duties

Generally speaking, goods exported from Azerbaijan are exempt from customs duties. However, effective April
12, 2001, export duties have been introduced on certain products derived from metal. The export duty rates vary
from US$ 0 to15.00 per 1000 kg.

Import Value Added Tax (IVAT)

Imports into Azerbaijan from all countries are subject to IVAT at the rate of 18% of the declared customs value
of the goods (including customs duties and excises). Such Import VAT is creditable against the output VAT for
taxpayers that are registered for VAT purposes.

The following goods are exempt from IVAT:
  • Assets imported by a foreign investor as a contribution to the charter capital of an Azerbaijan Legal Entity

   • Goods imported for use as grants and loans under Inter Governmental Agreements

   • Property of the Foreign Employees of locally registered companies, which are imported for personal use
(provided a confirmation from the employer is available)

   • Goods imported by physical persons for gratuitous distribution (humanitarian aid)

   • Certain agricultural and chemical goods, equipment, electrical power, weapons, and securities

   • National and foreign currencies

   • Assets to be used for a Capital Lease

Excise
The import of drinkable spirits, tobacco and petroleum products is subject to excise taxes in Azerbaijan. Import
excise duties are set at fixed amounts applicable to a unit of product (e.g., US$ 1.50 per 1 litre of wine). The
export of such items is exempt from excise taxes.

Processing Fees
There are special processing fees which are payable to the State Customs Committee in the amount of 0.15% of
the declared customs value of the imported/exported goods. It should be noted however that under the special
regimes (discussed below), the processing fees generally range from 0.06% to 0.15% depending on the value of
the imported goods.

Free Trade Agreements
The Republic of Azerbaijan is in the process of expanding its free trade cooperation throughout the region and
as a result, has ratified agreements on free trade with Moldova, Georgia, Kazakhstan, Uzbekistan, Ukraine and
Russia. Under these agreements no import duties would apply to imports originating from these countries. It is
important to note that the exemption does not apply to IVAT and Excise taxes.

Customs Regimes
Summarized below are the various customs regimes provided for within the current Customs Code of the
Republic of Azerbaijan.

Customs Warehouse
Under this regime, imported goods are stored under the customs control without payment of any customs duties
or applicable taxes during the period of storage. Goods may remain under the regulations of the customs
warehouse for a period of three years without clearance. Upon the expiration of the storage term, goods should
be officially transferred from the customs warehouse to a different customs regime.

To properly establish a Customs warehouse, a special license of the Cabinet of Ministers is required. It should
be noted that, generally speaking, such a license is only issued to Azerbaijan legal entities and physical persons.

Product Processing in the Customs Territory of Azerbaijan (i.e. within the State boundaries of the Republic of
Azerbaijan) Under this regime goods are imported into Azerbaijan for the purposes of processing and further re-
exporting. Import duties are payable at the time of import of such goods and then refunded when the goods are
re-exported.

 Prior to operating under this regime a company must obtain a license from the State Customs Committee. The
license is issued for a period of 1 year and may be extended an additional year upon application. In addition, the
State Customs Committee is permitted to establish a minimum compulsory output of processed products.

 Processing Under the Customs Control
 This regime is similar to the above-mentioned processing regime and is subject to the same basic requirements.
The primary difference is that under the Customs Control regime no duties are to be collected upon importation
of goods. It is important to note that there is no definition of Customs Control within the current legislation of
the Republic of Azerbaijan and no detailed regulations for the implementation of this regime.

 Temporary Import
Certain types of goods can be imported into Azerbaijan without the application of customs duties for a period of
up to 1 year. Generally speaking, this includes goods, which are imported by foreign companies for the purpose
of maintaining their activities. It is important to note that goods imported for eventual sale are not permitted to
be imported under this import regime. There are also goods which may be imported using the temporary import
regime discussed above, but for which the complete exemption from customs duties and taxes during the first
year is not available. These goods, along with the second year extension period for the traditional temporary
imported goods discussed above, are subject to a monthly payment requirement. The monthly payable amount is
calculated as 3% of the total customs duties and taxes which would be payable on the import if it were cleared
for free circulation and is payable to State Customs. This monthly fee is payable until such time as the total
amount of such payments equals the total customs duties and taxes. The extension mentioned above is generally
given for 1 additional year, however, may be granted for a longer period at the discretion of the State Customs
Committee.

Upon the expiration of the above terms, the goods shall be re-exported from the Azerbaijan without any change
in their nature (except for natural tear and wear) or declared under a different customs regime if not re-exported.
It should be noted that if the goods are declared into free circulation before the temporary import term expires,
all outstanding import duties must be paid.

Where a complete exemption is provided, the Customs Authorities have the right to supervise the use of the
imported goods (i.e. to insure they qualify for complete exemption). This may extend to a complete inspection
of the imported goods.
Free Customs Zone and Free (Bonded) Warehouse
This represents a regime where goods may be imported into Azerbaijan and stored within a special zone (which
must be established by the legislation) in the territory of Azerbaijan without paying any customs duties, until
such time as the goods are removed from this zone. Upon such removal of goods into free circulation, all import
duties would become payable. It should be noted that there have been no current regulations adopted regarding
the creation of the free customs zone and therefore this regime is not currently applicable. Steps are currently
being taken with the State Customs Committee to negotiate the creation of free zones and progress is being
made.

Under the current environment, owners of a free warehouse may only be Azerbaijani legal entities and physical
persons.
Furthermore, in order to establish a free warehouse, a license from the Cabinet of Ministers will be required. As
is the case with the governing regulations, no licensing rules have been issued to date.

SPECIAL REGIMES
Oil & Gas Regimes
Since 1994, the Azerbaijani Government has signed over 20 Agreements on the Joint Exploration, Development
and Production Sharing of ("PSAs") with Foreign Oil Companies for prospective oil structures in the territory of
the Azerbaijan.
                                                                                                 Appendix: 2.5

                                   Foreign Investment in Azerbaijan

Since independence in 1991, Azerbaijan's economic policy has focused on attracting foreign capital into
Azerbaijan. To this end, Azerbaijan has been implementing a legal regime to encourage foreign investment in
various industrial sectors. Azerbaijan has already succeeded in attracting major international oil companies to
explore and develop its natural resources1. With the development of the oil industry, Azerbaijan has been able
to attract additional foreign capital into the development of transportation2, communications3 and information
technology services.

 To ensure adequate financing technology transfer and management, foreign participation will be required for
investment in most large- and medium-scale projects. Ultimately, these projects must operate within the
domestic foreign investment regime. All foreign investors in Azerbaijan are entitled to rely on the most
favourable legal regime available under Azerbaijani law and, in many cases, actually receive preferential
treatment.

 Foreign investment in Azerbaijan is regulated by a number of legislative acts, including the Law On Protection
of Foreign investments dated January 15, 1992 ("Foreign Investment Law"), the Law On Investment Activity
dated January 13, 1995 (the "Investment Activity Law"), the Law On Privatization of State Property and the
Second Programme for Privatization of State Property in the Republic of Azerbaijan, adopted on August 10,
2000 (the "Second Privatization Programme"), as well as laws that regulate separate sectors of the Azerbaijani
economy.

Under Azerbaijani law, foreign investors may engage in any investment activity not prohibited by law. Pursuant
to the Foreign Investment Law, foreign investment may be through:
          • Joint ventures with Azerbaijani entities or citizens
          • Foreign-owned subsidiaries
          • Purchase of enterprises, buildings, structures, shares of enterprises and other securities and any other
property, which may be owned by foreign investors
          • Acquisition of rights to use land and other natural resources and other property
          • Agreements with Azerbaijani entities and citizens providing for other methods
of realizing foreign investments

Under the Foreign Investment Law, foreign investments are guaranteed:

   • A "not-less-favoured" regime under which foreign investors have at least the same rights as
     local investors and may be granted certain preferential rights;

   * The right to repatriate profits, revenues and other amounts
    received in connection with investments, provided that all
    applicable Azerbaijani taxes have been paid:

    • A ten-year moratorium on the application of any subsequent law adversely affecting an investment. The
moratorium has the force of law, automatically enforceable and binding upon all Azerbaijani State agencies.
Laws, which govern the general investment climate, defence, national security, public order, morality, public
health and environmental protection and legislation affecting credits and finances, however, fall outside the
scope of the moratorium. Under the later-enacted Investment Activity Law, however, subsequent legislation
(including laws on defence, national security, public order and tax) adversely affecting investment terms do not
apply to an investor for the term of an investment contract
    • that property may only be nationalized by a resolution of the National Assembly under
       exceptional circumstances to prevent harm to the people and damage to the State
       interests. Requisition of property is possible only under circumstances of natural disaster,
       epidemics, and other extraordinary situations by a decision of the Cabinet of
       Ministers. In both cases, foreign investors are entitled to compensation which shall be
       "prompt, effective and adequate"; and
   • free access to international arbitration upon the agreement of the parties where arbitration is
     not otherwise prohibited by law. Rulings of foreign courts are generally unenforceable in
     Azerbaijan.
In certain sectors *oT the Azerbaijani economy, such as energy, incentives are available to foreign investors and
enterprises with foreign investment. These incentives may be granted by law or by agreements with the
government.

Bilateral investment treaties may establish a more favourable investment climate for certain investors and
provide additional guarantees. Under Azerbaijani law, international treaties prevail over local legislation except
for the Constitution and acts adopted by referendum. Azerbaijan has so far concluded 17 bilateral investment
treaties with countries, such as the U.S., the U.K., Germany, France, Austria, Italy, and Turkey, as well as a
number of multilateral foreign investment treaties.

Business Organizations
Azerbaijani law authorizes both foreign and domestic individuals and entities to participate in Azerbaijani legal
entities. An Azerbaijani legal entity may be established in the following legal
forms provided in the Civil Code and the Law On Enterprises-

   • general partnership;
   • limited partnership;
   • joint stock company;
   • limited liability company;
   • additional liability company.

A general partnership is a legal entity comprised of at least two individuals and/or legal entities. An Azerbaijani
citizen may participate in a general partnership only if registered as an entrepreneur. Additionally, Azerbaijani
citizens and legal entities may participate in only one general partnership. As in most jurisdictions, general
partners are jointly and severally liable for the partnership's liabilities. To the extent that the partnership does not
have sufficient assets to cover its obligations, the partners are then personally liable for its obligations.

A limited partnership has one or more general partners and one or more limited partners. The general partners
are personally liable for the partnership's obligations. A limited partner's liability is limited to the extent of its
contribution. An individual may be a general partner in only one limited partnership.
Similarly, a partner of the general partnership may not participate as a general partner in a limited partnership.

To secure a limited liability structure, i.e., without recourse to the founders, an Azerbaijani legal entity must be
created as a either a joint stock company (JSC) or a limited liability company (LLC). These entities that provide
their shareholders/members with liability limited to the extent of their shares. An LLC established by a physical
person, however, may not participate as the only founder in another LLC. A JSC may be created by a single
shareholder provided that shareholder has purchased all outstanding shares of the company.

A JSC may be either ''open" or "closed". Closed JSCs with more than 50 shareholders must be reorganized into
open JSCs. Shares of a closed JSC and participatory interests of an LLC are distributed only among the founders
and transferred to third parties only upon failure of shareholders/members to exercise their right of first refusal
and upon failure of the company to purchase its shares for fair market value. Shares of an open JSC are publicly
traded and may be alienated by shareholders to third parties without restriction. Shares in a JSC are securities,
which must be registered with the State Securities Committee before issuance. Shares may be either common or
preferred shares. Preferred shares may not exceed 25% of the charter capital.

The charter capital of a JSC is divided into a fixed number of shares of a stated par value. For a closed JSC, the
minimum amount of the charter capital is 10 million AZ manats (approximately US$ 2,200 calculated at 4,600
AZ manats to US$ 1). The minimum capitalization for an open JSC is 20 million AZ manats.

An additional liability company (ALC) is an entity established by one or more individuals or legal entities
contributing their shares to the charter capital. The legal structure of an ALC is similar to an LLC, except that
the participants of an ALC may assume liability for the company in excess of their contributions as regulated by
the charter.

The charter capital of any Azerbaijani legal entity, irrespective of its business form, must be fully paid on or
before the date of its State registration. If the value of the net assets of an Azerbaijani
legal entity is less than the amount of the charter capital at the end of the Azerbaijani legal entity's second fiscal
year, the charter capital must be decreased with the decrease registered with
the Ministry of Justice.

All Azerbaijan legal entities are subject to State registration with several State authorities including the Ministry
of Justice, the tax authorities and the social insurance, employment and other special purpose mandatory funds.

A foreign legal entity may establish a representative office or branch in Azerbaijan. Representative offices and
branches are not considered legal entities under Azerbaijani law but, rather, are considered an extension of a
foreign legal entity. Both a representative office and a branch may carry out all or some of the functions of the
entity and may engage in revenue-generating activities. They both operate on the basis of regulations (similar to
a charter) approved by their parent legal entities.

LEGISLATION
The tangible upheaval was achieved not only in stabilisation macroeconomic development, but also in attraction
of huge foreign investment inflows into the economy. Favourable conditions are created and permanently have
been improving for foreign investments. A legal framework provides good incentives for foreign investors.
The completion, however, of building a legal and institutional market infrastructure is being gradually but
consistently pursued. From 1992 up to the present the Milli Majlis (Parliament) of the Republic of Azerbaijan
has adopted 120 top-priority laws, which regulate the reforms in economy and include Law on Protection of
Foreign Investments, Property Law, Law on Land Reform, Law on Privatization of State Property, Law on
Joint-Stock Companies, Law on Entrepreneurial Activity, Law on Bankruptcy, Law on Securities and Stock
Exchange, Tax Code, Customs Code and etc. Aimed at regulating effectively the economic processes in the
country have been adopted a great number of decrees and resolutions of the President and decisions of the
Cabinet of Ministers.

A new Tax Code entered into force in January 1, 2001. According to this Code the tax rates on all taxes have
been decreased, maximum rate of the tax on income of physical persons has been decreased from 40% to 35%,
rate of the tax on profits of legal entities from 30% to 27%, rate of the value added tax from 20% to 18%,
calculation methods have been improved, measures of safeguard taxpayers' rights have been taken.

Since April 16, 2001, the differentiated tariff system is applied for import operations. Raw materials, goods and
equipment intended for production are free from import tariffs, and goods intended for investment purposes are
free from customs taxes and tariffs.

For ensuring of a favourable climate to the foreign investors irrespectively of the national belongings the law on
"Protection of Foreign Investments" and the law concerning "Investment Activities" were adopted in 1992.
Having successfully implemented two State Investment Programmes for a period of 1997-1999 and 1998-
2000,'Azerbaijan is being elaborated of the next State Investment Programme for a term of 2002-2004.

State Programme on Development of Tourism infrastructure is also under elaboration. The relevant Presidential
Decree on Promotion of Tourism in Azerbaijan has to be designed.
                                                                 Appendix: 3.1


Statistics For Export and Import in the Republic of Azerbaijan
Electronic Data Processing
Export by AZERBAIJAN
Product EDP (8471, 8473)


Countries              1996   1997   1998      1999      2000

USA,PR,USVI            0      0      0         0         1
UNTD KINGDOM           0      0      0         0         0
RUSSIAN FED            0      0      0         0         0
WORLD                  0      0      1         1         1



Import by AZERBAIJAN
Product EDP (8471, 8473)


Countries              1996   1997   1998      1999      2000

USA,PR,USVI            0      0      1         3         5
UNTD KINGDOM           0      0      3         1         3
NETHERLANDS            0      0      4         1         1
UNTD ARAB EM           0      0      2         1         1
TURKEY                 0      0      2         0         0
GERMANY                0      0      1         0         1
CHINA                  0      0      0         0         1
SWITZ.LIECHT           0      0      0         0         1
NORWAY                 0      0      0         0         1
IRELAND                0      0      0         0         1
FRANCE                 0      0      0         0         0
RUSSIAN FED            0      0      0         0         0
JAPAN                  0      0      0         0         0
KOREA REP.             0      0      0         0         0
ISRAEL                 0      0      0         0         0
WORLD                  0      0      15        9         17




Office Equipment
Export by AZERBAIJAN
Product OFFICE EQUIPMENT (8469, 8470, 8519, 9009)
Countries          1996    1997           1998           1999       2000

USA,PR,USVI        0       0              0              0          0
WORLD              0       0              0              0          0


Import by AZERBAIJAN
Product OFFICE EQUIPMENT (8469, 8470, 8519, 9009)


Countries              1996    1997           1998           1999       2000

FINLAND                0       0              0              0          0
TURKEY                 0       0              0              0          0
USA,PR,USVI            0       0              0              0          0
IRELAND                0       0              0              0          0
UNTD KINGDOM           0       0              0              0          0
WORLD                  0       0              1              1          0




Other Components


Export by AZERBAIJAN
Product OTHER COMPONENTS (8504, 8532, 8533, 8534, 8535, 8536, 8518, 8522, 8523, 8528, 8529)


Countries              1996    1997   1998        1999       2000

RUSSIAN FED            0       0      1           0          0
TURKEY                 0       0      0           0          0
USA,PR,USVI            0       0      0           0          0
NETHERLANDS            0       0      0           0          0
UNTD KINGDOM           0       0      0           0          0
WORLD                  0       0      1           0          0
Import by AZERBAIJAN
Product OTHER COMPONENTS (8504, 8532, 8533, 8534, 8535, 8536, 8518,8522, 8523, 8528, 8529)


Countries              1996   1997    1998     1999        2000

TURKEY                 0      0       14       2           2
GERMANY                0      0       0        6           1
UNTD KINGDOM           0      0       3        2           1
RUSSIAN FED            0      0       4        0           1
CHINA                  0      0       0        1           3
BELARUS                0      0       2        1           0
UNTD ARAB EM           0      0       2        0           1
KOREA REP.             0      0       1        0           1
UKRAINE                0      0       1        0           1
INDIA                  0      0       0        0           2
USA,PR,USVI            0      0       0        1           1
NETHERLANDS            0      0       0        0           1
FRANCE                 0      0       0        0           1
ISRAEL                 0      0       0        0           1
IRELAND                0      0       0        0           0
WORLD                  0      0       31       17          19




Other Miscellaneous Products
Export by AZERBAIJAN
Product OTHER MISCELLANEOUS PRODUCTS (8543, 9014, 9015, 9023, 9024, 9025, 9026, 9027,
9030, 9031, 9032, 9018, 9021, 9022, 8514, 8530, 8531, 9013)

Countries              1996   1997      1998        1999          2000

UNTD KINGDOM           0      0         2           0             0
KAZAKSTAN              0      0         0           0             1
UNTD ARAB EM           0      0         0           1             0
FRANCE                 0      0         1           0             0
RUSSIAN FED            0      0         0           1             0
GEORGIA                0      0         0           0             0
NETHERLANDS            0      0         0           0             0
TURKEY                 0      0         0           0             0
USA,PR,USVI            0      0         0           0             0
GERMANY                0      0         0           0             0
SWITZ.LIECHT           0      0         0           0             0
WORLD                  0      0         3           3             2



Import by AZERBAIJAN
Product OTHER MISCELLANEOUS PRODUCTS (8543, 9014, 9015, 9023, 9024, 9025, 9026, 9027,
9030, 9031, 9032, 9018, 9021, 9022, 8514, 8530, 8531, 9013)

Countries             1996    1997     1998         1999          2000
GERMANY               0        0         4         2         12
UNTD KINGDOM          0        0         6         3         3
USA,PR,USVI           0        0         1         3         4
TURKEY                0        0         1         1         5
NORWAY                0        0         0         4         1
JAPAN                 0        0         0         3         1
SWITZ.LIECHT          0        0         1         1         1
RUSSIAN FED           0        0         2         0         1
FRANCE                0        0         1         0         1
CANADA                0        0         2         0         0
NETHERLANDS           0        0         1         0         1
KAZAKSTAN             0        0         1         0         1
ISRAEL                0        0         0         0         1
ITALY                 0        0         0         0         1
SPAIN                 0        0         0         0         0
WORLD                 0        0         23        21        35




Telecommunication
Export by AZERBAIJAN
Product TELECOMMUNICATION (8525, 8526, 8527, 8529, 9014, 9015, 8517, 8518, 8520)


Countries            1996 1997       1998      1999      2000

UNTD KINGDOM         0     0         2         0         0
KAZAKSTAN            0     0         0         0         1
UNTD ARAB EM         0     0         0         1         0
USA,PR,USVI          0     0         0         0         1
FRANCE               0     0         1         0         0
TURKEY               0     0         1         0         0
NETHERLANDS          0     0         0         0         0
GEORGIA              0     0         0         0         0
GERMANY              0     0         0         0         0
WORLD                0     0         4         2         3
Import by AZERBAIJAN
Product TELECOMMUNICATION (8525, 8526, 8527, 8529, 9014, 9015, 8517, 8518, 8520)


Countries                 1996       1997       1998       1999          2000

TURKEY                    0          0          45         15            27
UNTD KINGDOM              0          0          8          11            15
USA,PR,USVI               0          0          5          3             18
SWEDEN                    0          0          9          5             3
ISRAEL                    0          0          7          5             4
BELGIUM-LUX               0          0          16         0             0
BR.VIRGIN IS              0          0          12         0             0
GERMANY                   0          0          4          3             3
KOREA REP.                0          0          2          2             1
NORWAY                    0          0          0          4             1
CHINA                     0          0          0          1             3
UNTD ARAB EM              0          0          2          0             1
RUSSIAN FED               0          0          1          1             1
DENMARK                   0          0          2          0             0
FRANCE                    0          0          2          0             0
WORLD                     0          0          122        55            82




Semiconductor
Import by AZERBAIJAN
Product SEMICONDUCTOR (8540, 8541, 8542)


Countries             1996       1997       1998       1999       2000

GERMANY               0          0          0          1          2
RUSSIAN FED           0          0          1          0          0
USA,PR,USVI           0          0          0          0          0
NETHERLANDS           0          0          0          0          0
FRANCE                0          0          0          0          0
UNTD KINGDOM          0          0          0          0          0
UNTD ARAB EM          0          0          0          0          0
WORLD                 0          0          2          2          3
                                                                                                                             Appendix: 4.1

                                                    LIST OF CONTACTS


N/N    Time           Organization        Person/s met          Topics discussed         Follow-ups                               Remarks
Saturday, 22 June 2002
1     13:00 - 23:00   ITC                 Mr. A. Abdullaev      arrivals in Baku



Sunday, 23 June 2002
      Time            Organization        Person/s met          Topics discussed         Follow-ups                               Remarks
N/
N
 1
2     11:00 - 16:00   SSAC                Mr. Amir Abdullayev   Project briefing



 Monday, 24 June 2002
N/N    Time           Organization        Person/s met           Topics discussed         Follow-ups                              Remarks
1        10:30        Copyright Agency    Mr. K.Imanov -        - IPR national system    - To receive copyright law
         11: 45                           - Chairman            - TRIPS                  - Analysis of Azeri IPR system with
                                                                - Enforcement              USA, EU, Russia
                                                                - Piracy                 - Recommendation of conferences
                                                                - Privacy                - National IPR policy report
                                                                - Dugital signiture      - Draft law on digital signature

2      12:00          Ministry of         Mr. F. Pashayev       - WTO accession          - Statistics will be provided
       13:40          Foreign affaires,   Ms. N.Gurbanova       - Export Development
                                                                - State of the country
                                                                economy
                      Dept of             Mr. E. Mammedov       - Priority for ICT       - Debriefing sessionto be held on
                      Economic            Mr. R. Novruzov       - Industry protection      June 27
                      Cooperation                               - Trade policy & IT
                      and
                      Development
3     14:00           Mili Mijilis        Mr. S. Nasanov        - National legislation
                                                                - List of law inacted
                                                                on ICT
      15:40                                                      on ICT                   - Draft e-signiture law
                                          Mr.                   - e-business
                                          Mr.                   - e-government
                                                                - ICT country vision

4     16:00           AZERCELL            Mr. M. Yigit          - m-business              - Company presentations
      18:00           Azeronline          Ms. F.Safarova        - Internet                - List of ISP operators
                                                                - challenges faced        - ICT policy
                                                                -e-business readiness
                                                                - public-private
                                                                  partnerships

5     19:00 - 22:00   SSAC/UNDP           Mr. R. Aliyev         Project brief
                                          Mr. S.Gadjiyev
                                          Mr. A. Abdullayev

Tuesday, 25 June 2002
N/N   Time            Organization        Person/s met           Topics discussed         Follow-ups                             Remarks
1      9:30           SSAC                Mr. Amir Abdullayev   ICT Projects in

2.     11:00          State Statistical   Mr. Allaverdiev       - National Statistics     - Import/Export Statistics on ICT to
       12:30          Committee           - Deputy, Director      System                   be provided before Friday, June 28
                                          IT Centre             - Impooirt/Export         - List of ICT companies operational
                                          Mr. Ibrahim,            of ICT products           on Azeri market
                                          Head of Department    - ICT potential

3.     14:00          Ministry of         Mr. Aflatun           - Telecom Policy          - National ICT policy policy paper/
       16:10          Communication       Mammadov              - Tariff/Privatization/     statistics/ FDI/ Tariffs will be
                                          Chief, Telecom          Interconnection/          provided to ITC by June 28
                                          Division              - WTO accession
                                          Mr. M. Bilalov        - Market potential
                                          Mr. R. Rahimov        - Certification
                                          Mr.N. Mustafaev       - Purchasing policy
                                 Mr.I. Mammedov        - Public-private
                                                         partnerships

4     16:30      State           Mr. A.Aliyev          - Customs Statistics   - Letter need to be sent by SSAC
      18:00      Customs                               - Tarif structure       with request for detailed statistics
                 Committee       Mr. Vahabov           - Tariff Policy        - Tariff policy paper will be
                                                       - WTO accession          provided to ITC
                                                       - Preferential
                                                         treatment

Wednesday, 26 June 2002
N/N   Time       Organization    Persons met            Topics discussed      Follow-ups                              Remarks
1     11:00      Catel JV        Leonard Barenboim     Market Assessment      Make presentation in Roundtable
                                 Tahir Mamedov         Industry
                                                       Development
                                                       Business environment
                                                       WILL telephony
2      13:00     UNDP            Sultan Gadjiyev       Roundtable             Roundtable Participation
                                 Programme Officer     Strategy Brief
                                                       Techno Parks
                                                       Caucasian Cyber
                                                       Market
3      14:00     NICTS(SSAC)     Maleyka Abbaszadeh    Project Brief          Meeting with the Ambassador of India
                                 Chairman of SSAC,     Funding of research    Follow up for Roundtable in
                                 Project Coordinator   Possible strategy      November
                                                       Technology Parks for
                                                       exports and their
                                                       settlement
Thursday, 27 June 2002
N/N   Time        Organization   Person/s met           Topics discussed      Follow-ups                              Remarks
1     10:30      Institute of    Nusratov Ogtay        State of Industry      Meet them again for detailed
                 Cybernetics     Azizova Zahra         Scientific             discussion on strategy
                                 Atamov Faig           Development
                                 Elchin Aliyev         R&D
                                 Rasim Alguliyev       Cooperation with
                                 Kamil Ayda-zade       Industry

2      12:00     Azerin          Galib Gurbanov        Internet               Participation in the Roundtable, he
                                                              Tariffs                will make a presentation
                                                              Business
                                                              Environment
                                                              Policy Issues
                                                              Legislation
                                                              Interconnection
3      15:00      Ministry of           SH. Sadigov           Economic Policies      Statistics and relevant information
                  Economic              Kamran Aliyev         FDI
                  Development           E. Asadov             Trade Development
                                        Avtandil Musayev      Trade Policy
                                        Zaur Cafarov          Statistics
                                                              WTO Issues
4      16:30      Presidential Office   Elmir Velizadeh       Strategy               Profiles, details
                                        Vasif Khalafov        Rountdable
                                                              Conference
                                                              Compnay Profiles
                                                              Trans Caucasian
                                                              Cyber Market

5     18:15       Press Conference      Internet news         Information on
                                        Trend                 Country profile
                                        Turan                 Azerbaijan Country
                                        STA info              Potential
                                        Echo newspaper        Roundtable
                                                              Conference
Friday, June 28 2002
N/N    Time        Organization          Person/s met          Topics discussed      Follow-ups                             Remarks
1     8:30        American Chamber      Jonel Glosh           Industry Views         E-mail of the documents
                  of Comerce                                  Legislative Issues
                                                              Industry Profile
2     10:30       Chamber of            Zahid Muradov         Memberships to         List of Members
                  Comerce and           Secretary General     chamber
                  Industry                                    Industry Concerns
                                                              Policy
                                                              Market Potential
3     12:00       Iteca Caspian         Bahruz Hidayetzadeh   Exhibition Details     Statistics, Market Appraisal report,
                                                              Market in Azerbaijan   Conference publishing
                                                              Marketing Channels
                                                              Major Projects
                                                             Statistic Data
4     14:00       Flexible Solutions   Araz Mamedov          Software Industry       Company Profile
                                                             Skills
                                                             Export orientation
5     16:00       Azerbaijan           Igor Yakovlenko       Company Profile         Market Report, Company
                  Electronics          Rassim Ibrahimov      Market Potential        Presentation, Letter for Participation
                                       Oleg Silantiev        Export Technologic      in the Technology Park
                                                             Park
                                                             Bonded warehouse
                                                             Software production
                                                             Assembling
Saturday, June 29 2002
N/N    Time       Organization         Person/s met          Topics discussed        Follow-ups                               Remarks
1     9:00        NICTS office         Rauf Aliyev           Material for country    Submission of possible on 5th July
                                       Amir Abdullayev       profile
                                       Ulviya Mamedova       Translation
                                       Sabina Zulfugarzade   Statistic Preparation
                                                             Work Programme
Sunday, 30 June 2002
N/N    Time       Organization         Person/s met          Topics discussed        Follow-ups                               Remarks
1     15:00       Airport              Ram Verma             Departure
                                                                                                              Appendix: 5.1

                                  Company Profile -National Champions

Company Name:                    Araz Computer
                                 Nizami street, 94
Address:


Phone:                           (+99412) 982525, 983489, 983486, 930 358
Fax:                             (+99412) 982 737
E-mail:                          arazcom@online.az


Web-site:                        www.arazsoft.com

                                 Director                                          - Aida Odjagova
President/Director               Deputy & Chief of Software developping department – Taleh Adigezalov
and other key personnel:         Sales Manager                                      - Naila Mirzayeva
                                 Service Manager                                    - Ilgar Aslanov

Core competence:                 Sales of IT Technology, PC's and office equipment, software developping, service

                               PC: Fujitsu Siemens, Compaq, HP
Range of products or services: Office Equipment: Brother, Samsung, Canon, Oki, Ricoh, APC, Xerox
                               Assembling of PC's on demand
                                Service center: warranty and past warranty service of all equipmentFirst Commercial
                                Accounting Programmes in Azerbaijan "Azmuhasib" and "Azmuhasib – Ticaret"
                                (receiving orders for developping software)

Turnover (1999/2000):            US$ 450 380 / US$ 628 000

Number of employees:             10 (in staff)
                                 5 (working with contract)
                                 Local IT market, Caucasus IT Market
Target markets:

Export revenues (2000):          US$ 49 000

                                  Sales : COMPAQ official dealer
International certificates                  Fujitsu Siemens Computers Official Distributor in Azerbaijan
obtained:                                  APC – Master Distributor
                                           Brother International Gulf (FZE) Official Distributor
                                           Ricoh Official Dealer
                                  Service : Compaq authorised Service Center
                                             Fujitsu Siemens Computers Service Center
                                             Brother International GULF (FZE) Service Center
                                  Personnel: Sufitsu Siemens Certified Specialist
                                               HP Certified Specialist
                                               MCP Certified Specialist
                                               CCNA (CISCO) Certified Specialist
                                             XEROX Certified Specialist
Success indicators:              Creating of Software products:
                                  Azerbaijan Computer Accounting programme, local version – Azmuhasib
                                  Network version – Azmuhasib – Ticaret
                                  Receiving orders for the software developping
Company Name:                    AZEL Company
                                 5th floor, 65 Fizuli Street, Baku, 370014 , Azerbaijan Republic
Address:

                                 +99412 974040(4lines)
Phone:                           +99412 974042
Fax:                             newmail@azel.net
E-mail:


Web-site:                        www.azel.net


President/Director               Mr. Igor Yakovenko
and other key personnel:         President


Core competence:                 System integrator, projects, key accounts sales and service providing.


Range of products or services:   Computer equipment, Office euipment, Telecommunication technologies IT service &
                                 support.


Turnover (1999/2000):            5.782,3 thousands US$/ 3.682,7 thousands US$


Number of employees:             87


Target markets:                  Computer equipment, Office equipment, IT service


Export revenues (2000):          Not available


International certificates       Hewlett-Packard Authorized Corporate Reseller and Authorized Service Center,
obtained:                        Compaq Authorized System Reseller and Service Provider, Microsoft Certified
                                 Partner, 3COM Authorised Solution Partner, Silicon Graphics Authorized Reseller,
                                 IBM Business Partner, Samsung, Legrand, BASF, Pioneer, Symantec Software
                                 Partner

Success indicators:              Financial stability, reliability and expertise based on the work of highly qualified
                                 certified specialists.
                                 AWARDS: UGUR 2000, 2001" – awarded by business magazine "Consulting &
                                 Business" in nomination "Reputation"
Company Name:                    Azeronline Ltd JV
                                 Tbilisi Ave., 61 A, Baku, 370122, Azerbaijan
Address:


Phone:                           (994 12) 96 70 07
Fax:                             (994 12) 30 05 75
E-mail:                          info@azeronline.com


Web-site:                        www.azeronline.com


President/Director               Cem S. Nalbantoglu (acting General Manager)
and other key personnel:         Farida Safarova (Sales & Marketing Manager)

                                 Internet Access Services (wireless and fixed)
Core competence:                 Internet Content Management
                                 Internet Hosting Services (including e-commerce services)

Range of products or services:   Internet connection through dial-up, leased line via PSTN, leased via mobile switches,
                                 web hosting, mail hosting, co-location, domain name registration, web design and
                                 maintenance, WAP


Turnover (1999/2000):


Number of employees:             18


Target markets:                  Corporate customers, middle and upper class families and individuals, students


Export revenues (2000):          US$


International certificates       (bullet points)
obtained:


Success indicators:                   One of the leaders in ISP market after just 1.5 years of operation
                                      The best known brand in ISP market
                                         Largest geographic coverage
                                         www.azeronline.com – the only professional 3 language portal in Azerbaijan
                                         Offers one of 2 operational WAP sites in Azerbaijan
                                         First to introduce real reseller network for Internet access products in
                                         Azerbaijan
                                         And many other firsts in ISP market of Azerbaijan
Company Name:                    Computer Technologies Company

Address:                         9 Inshaatchilar ave, Baku – 370065


Phone:                           (99412) 386553/385266
Fax:                             (99412) 330828
E-mail:                          ctc@ctnet.az


Web-site:                        www.ctc.net.az


President/Director               Dr. Mamed Jamalbayov (president)
and other key personnel:         Vugar Bayramov (administrator)


Core competence:                 Software development


Range of products or services:   Hardware/Software/Internet Services, computer &computer equipment


Turnover (1999/2000):            ---


Number of employees:             10 (in staff)
                                 5 (working with contract)

Target markets:                  Software


Export revenues (2000):          0


International certificates        ---
obtained:


Success indicators:              "Ideal Style" (Registration No. 05/R3 Certificate No. 43, 08.02.1999);
                                 "Market Manager" (Registration No. 05/R15 Certificate No.68, 20.04.2000),
                                 "Market Manager2" (Registration No. 05/R9 Certificate No. 264, 08.01.2002)
Company Name:                    DIVI Distributor Company

Address:                         4th Floor, 65 Fizuli Street, Baku, 370014, Azerbaijan Republic


Phone:                           +99412 973121
Fax:                             +99412 977371
E-mail:                          mail@dividc.com


Web-site:                        http://www.dividc.com


President/Director               Mr. Emin Kuliyev
and other key personnel:         General irector


Core competence:                 Ditribution


Range of products or services:   Computer Euipment, Office Equipment


Turnover (1999/2000):            1.874,1 thousands US$/ 1.535,9 thousands US$


Number of employees:             24


Target markets:                  Computer Equipment, Office Equipment


Export revenues (2000):          Not Available


International certificates       Distributor of Compaq, HP, IBM, Microsoft, Sun Microsystem, Canon, APC
obtained:                        Dealer of 3Com, Sony, Merlin Gerin
                                 Symantec Software Partner

Success indicators:              Financial Stability and Reliability based on the work of highly qualified staff.
Company Name:                    N-LINK

Address:                         Inshaatchilar pr.,149, Baku, Azerbaijan, 370136


Phone:                           (994 12) 389370
Fax:                             (994 12) 389371
E-mail:                          n-link@azdata.net


Web-site:                        www.nlink-az.com


President/Director               Dmitry Tigiev
and other key personnel:


Core competence:                 Office equipment – sales and sevice


Range of products or services:   Computers, copiers and other office equipment. Network. internet


Turnover (1999/2000):            US$ 300 000 / 400 000


Number of employees:             10


Target markets:                  Azerbaijan


Export revenues (2000):          US$ -


International certificates       (bullet points) HP, APC, Intel, Canon,Lexmark
obtained:


Success indicators:              (Bullet points)
Company Name:                    R.I.S.K. Company


Address:                         24 Samed Vurgun Street,
                                 Baku, Azerbaijan, 370000

Phone:                           +994 12 973737;
Fax:                             +994 12 981993;
E-mail:                          info@risk.az;


Web-site:                        www.risk.az


President/Director               Anar Aligioulov, Managing Director;
and other key personnel:         Jabir Joumshoudov, General Manager;
                                 Teymur Akhundov, Projects Director;
                                 Nofal Rzayev, Marketing Director.

Core competence:                      IT Consulting and ICT System Integration;
                                      IBM, HP, Dell, Cisco Systems, RAD Solution Provider and IT lead companies
                                       Service Center;
                                      Corporate Solutions for TeleCom market;
                                      Software Application Development for corporate Customers;
                                      GIS Center: Scientific-Commercial Research, Development and Implementation
                                       of Geographic Informational Systems


Range of products or services:        System Integration;
                                      Solution Providing basing on Hardware and Software of industry leading
                                       companies: IBM, HP, Dell, Cisco Systems, RAD, Oracle, ESRI, ERDAS, Leica;
                                      Authorized Service Center of IBM, Dell, Tektronix, Cisco Systems, Hewlett
                                       Packard, PowerCom, Leica, ESRI, ERDAS, Oracle;
                                      Application Software Development for corporate Customers;
                                      GIS Application Development


Turnover (1999/2000):            US$ 7.9m/8.2m (approx.)


Number of employees:             112


Target markets:                       Government Sector;
                                      Finance;
                                      Oil and Gas;
                                      Telecom;
                                      Diplomatic;
                                      Private Businesses and others
                                      Enterprises

Export revenues (2000):          US$ 1.6m


International certificates           IBM Business Partner (1998);
obtained:                        - IBM PC Reseller;
                                 - IBM Solution Provider;
                                 - IBM Reseller;
                                 - IBM Azerbaijan Authorized Solution Provider for AS/400, RS/6000, networking
                                 systems, printing systems, storage products, displays;
                         Dell Distributor (1997);
                         Cisco Systems Authorized Distributor (1998);
                         Cisco Systems VPN/Security specialized partner
                         Cisco Systems Wireless specialized partner
                         HP Certified Business Partner (1998);
                         RAD Data Communication Distributor (2000);
                         Microsoft Certified Partner (1999);
                         ESRI Distributor(1998);
                         ESRI application partner
                         Oracle Programme Partner(2000)
                         Autodesk Authorized Dealer

Success indicators:   Financial:

                         percent of budget devoted to R.I.S.K. Company material and human resources
                          development;
                         accumulative percent of R.I.S.K. Company budget


                      Customer Satisfaction:

                         24X7X365 user support (also applies to business process improvement);

                         turn-key solutions;

                         stockholding policy;

                         servicing;

                         consulting;


                      Learning and Growth:

                         trainings participation;

                      trainers/consultants invitation;

                      on-line Internet resources;

                      R.I.S.K. Company and employee certificates achievement


                      Business Process Improvement:

                      ISO 9001:2000 based Quality Management system implementation;

                      staff number increment


                      Work in Progress:

                      Collect baseline data;

                      Set targets;

                      Determine timeframes
Company name:                “SINAM-INVEST” LRS
Address:                     370141, 9, Firuddin Agayev str., Baku, Azerbaijan
Phone:                       (+994 12) 392214, 394967, 396948
Fax:                         (+994 12) 392633
E-mail:                      info@sinam.net

Web-site:                    http://www.sinam.net
President / Director         President - Dr. Elchin R. Aliyev
and other key personnel:     Director – Abulfat S. Rakhmanov
                             Chief of Software & Database Centre – Islam M. Ahmadov
                             Chief of Maintenance Centre – Elman T. Gasanov
                             Chief of Sales Department – Vugar B. Imranov
                             Chief of Internet Department – Sabina V. Aliyeva
Core competence:             - System integration;
                             - Data communication network creation;
                             - Internet-services;
                             - Development of large telecommunication projects & integrated
                               systems;
                             - Creation and support of information databases, software
                               development;
                             - Development of Projects based on electronic cards;
                             - Maintenance of computer & office equipment;
                             - Distribution of computer & network equipment, software;
                             - Consulting in the field of information technologies;
                             - Training;
                             - Implementation of Access Control System.
Range of products or         1. PC: Targa, Fujitsu Siemens, HP, Compaq
services:                    2. Office Equipment : Xerox, APC, Canon, Epson, HP
                             3. Assembling of PC’s on demand
                             4. Service center: warranty and past warranty service of all
                                equipment.

Turnover (1999/2000)         US$ 1 500 000 / 1 700 000
Number of employees:         54 persons
Target markets:              Local IT market, Europe
Export revenues (2000)       US$ 100 000
International certificates   - SINAM-INVEST is an official distributor of UNISYS,
                             KARLNET, CYBERSTAR, NETASSIST PROGRAMME,
obtained:
                             FUJITSU and ACTEBIS, an official network partner of NOVELL
                             INC. and official dealer of HEWLETT PACKARD, ICL,
                             SIEMENS NIXDORF (bancomats), LORAL ORION (VSAT
                             satellite earth stations), SMS and AIRONET (radio LAN
                      equipment).
                      - SINAM-INVEST is a partner of CISCO SYSTEMS, in the field of
                      connection to ALTERNATE BACKBONE USA, CANADIAN Bank
                      Note Company LTD (Azerbaijan Representation) as the sub-
                      contractor on Azerbaijan Passport System Project, UNDP within
                      the Project “Development of computer technologies and
                      Educational Centre” and Baku Scientific Education Centre on
                      creation Training Centre for studying advanced information
                      technologies and latest Software & DBMS products in Baku,
                      Sumgait and Nakhichevan (since 1999) branches.
                      - Since July 1998 SINAM-INVEST is a member of American
                      Chamber of Commerce in Azerbaijan.
                      - Since October 7, 1998 "Sinam-Invest" is GROUND OPERATOR
                      of LORAL CYBERSTAR company - the world leader in the field of
                      telecommunications, satellite service and DATA services, including
                      Internet services.
                      - Since April, 2001 " Sinam-Invest " company is SWIFT Partner
                      Solution (Partner Identifier Code PTSAAZAA).
Success indicators:   TACIS Programmes:
                      Statistics Committee of Azerbaijan Republic
                      Delivery of computer and network equipment and installation of
                      Local Area Network under the Contracts No. 97.0463 Project
                      AZ98EU02-2, AZ98EU02-3
                      Western University
                      Economical University
                      TACIS Project of European Union “Strengthening Management
                      Training Capabilities in Azerbaijan” on delivery of computers
                      and training to the advanced software.
                      European Patent Office
                      Delivery of equipment for regional subdivision of European Patent
                      Office in Azerbaijan
                      Telecommunication Training Centre
                      Creation of Telecommunication Training Centre in the City of
                      Baku, creation of the detailed incorporated plan for transition from
                      analog communication to digital

                      UNDP Projects:
                      Baku Scientific-Educational centre
                      Sumgait computer center
                      Delivery of equipment and installation of the network have been
                      made for scientific-training centres in Baku and Sumgait. Within this
                      Project three remote LANs have been connected by means of high-
                      speed radio-bridge. Routers CISCO, radio-bridges Lucent
                      Technologies, and other equipment have been used. In
                      consequence of this Project implementation TCP/IP Network with
                      connection to Internet has been created.
                      World Food Programme
Delivery of computer & office equipment
Committee for struggle with narcotics and narcobusiness
Equipping with computers of Workgroup of Secretary of the State
Commission of Azerbaijan Republic on fulfillment of the Project of
the multisector assistance in the field of struggle with
narcotics and illegal circulation of narcotic means in the
republic
Customs Committee
SINAM-INVEST has developed and with success implements
Project of modernization of the Customs Committee
information network. Within this Project the following
opportunities will be available: creation of a general digital private
telephone network integrated with a computer network and
connection to city ATEs; receipt of reliable electronic data from
regional subdivisions in "real time" including graphic and video
data; creation of the general information database of the Customs
Committee; access to international computer networks.

World Bank Projects:
Аzerbaijan Regional Water Company
Creation and installation of LAN
Farm Privatization Project
Two tenders for delivery of computer & office equipment under
financial assistance of the World Bank
Statistics Committee of Azerbaijan Republic
Delivery of computer and network equipment

Other Projects:
Royal Bank, ArcoBank
SINAM-INVEST has carried out delivery of computer & office
equipment, and developed and with success implemented Projects
on LANs creation for two commercial banks of Baku - Royal Bank,
ArcoBank.
State Property Committee
Together with English company ICL delivery of computer
equipment has been carried out for State Property Committee of
Azerbaijan Republic. On the instructions of ICL the shipped
equipment has been installed and taken for maintenance.

National Bank Projects:
Tender for delivery of computer and office equipment and
development of application programme on copying of archive
documents to electronic carriers – “Electronic Archives”.
Hungary:
The system “Electronic logistiocs”.
                                                                                                  Appendix: 8.1


                         ITC’s NATIONAL EXPORT POTENTIAL INDEX :
                   INFORMATION AND TELECOMMUNICATION TECHNOLOGIES


              Advancement    Business      IPR   Market       e-Business      National       Other        Country
                   In        Environment         Openness     Readiness        ICT           National     Export
              Technology                                                   Competitiveness   Advantages   Potential
                                                                                                          Rank


Eastern and Central Europe

                    4             5         4        4            4              6                5          4.5
Azerbaijan
                    4             4         2        8            3              4                6           5
Bulgaria
Czech               6             6         5        8            5              7                7           7
Latvia
Lithuania          6.5           5.0       4.5       8            6              8                7           6.4
Poland              6             6         6        8            5              6                7            6
Turkey              5             5         5        9            4              5                5            5
Russia              7             5         5        5            5              5                5            8
                    6             7         7        5            5              7                7            8
Slovenia
Hungary             7             7         7        5            5              7                7           7
                    5             5         4        7            3              4                5           6
Ukraine
Moldova             3             4         3        8            3              3                6           4
Romania             5             5         4        8            4              5                7           6

                                                     Europe

                   8              8        10        6            7              8                8           9
EU
                   9              9        10        6            7              9                8           10
Germany
  France           8              8        9         5            6              8                7            9
   Italy           8              7        9         7            6              7                7            8
  Greece           6              6        7         7            5              5                7            7
  Finland          7              8        9         6            8              9                8            9
 Denmark           6              8        10        6            7              6                9            8
  Sweden           8              8        10        5            7              9                8            9
    UK             9              9        9         7            8              9                9           10
   Spain           7              8        8         6            5              7                7            7
Switzerland        8              8        10        5            6              8                8            8
                                            North America
                   10             9          9         7          10             10              10         10
USA
  Canada            9             9          9         7           9              8              10          9




                                       Asia and the Pacific
                   10             7          9         4           6             10              7          10
Japan
  South             8             7          8         5           5              9              7           9
  Korea
 Malaysia           7             8          6         6           6              8              8           8
 Thailand           7             7          6         6           5              8              7           7
Philippines         7             8          5         7           4              8              8           7
  India             7             7          6         7           4              8              7           8
  China             7             7          4         6           3              8              6           8
                    8             7          7         6           5              9              7           8
Taiwan




                                  Latin America and others
                    6             7          6         7           4              7              6           7
Brazil
  Mexico            7             8          7         7           5              8              7           8
  Egypt             5             6          5         8           3              4              8           5



Background

ITC’s Trade Capacity Index is designed to assess comparative advantages of the most active
players on the global market of information and telecommunication technologies. It is based on the
professional views of experts, opinion leaders and industry associations across the regions.

The principal objective of this tool is to provide IT policy-makers as well as business community and eventual investors
in IT with objective, qualitative assessment of the major parameters affecting IT sector development.

Evaluation Methodology
Delphi methodology has been used for obtaining the assessment. In each country, the project
interviewed as average 10 professionals from industry, government, academia and mass
media.

Grades of 10 points were used to describe country competitiveness on the selected parameters listed
below. The scale is divided as following:
from 1 to 4 – lower country capacities
from 5 to 6 - average country capacities
from 7 to 10 – high country capacities.

Selected Parameters:

The project selected the following parameters as the most representative for assessing the
general business environment, comparative advantages and potential for grow in IT sector.

   Advancement in technology :
    indicates the level of technological advancement achieved in terms of innovations, R&D capacities and its
    marketing and commercialization.

   Business environment :
    reflects openness of the local markets, level of political and economic stability and
    predictability, transparent legislation, compliance with the WTO agreements, available
    infrastructure and incentives for national and international players.

   Intellectual Property Rights :
    indicates the level of protection of the IPR, availability of the enforcement and dispute
    resolution mechanisms.

   Market Openness:
    Estimated as a level of a non-tariff barrier for IT products and services from
    other countries.

   E-Business readiness :

    Assesses the availability of the legal framework related to digital signature, certification
    and authentication, private and transaction security in INTERNET-based business
    environment as well as infrastructure for electronic marketplaces.
   National ICT competitiveness :
    It reflects integrated capacities to compete at the global IT markets in terms of quality, price, delivery
    and brand image

   Other barriers :
      It refers to cultural, languages, import licensing and non-participation in the WTO
Agreement on the Information Technology Agreement and extended staging for eliminating tariffs.

   Potential for export growth:

    It refers to non-realized opportunities that can be harnessed in terms of qualified human
    resources, infrastructure, innovation and market-driven environment.
                                                                        Appendix: 8.2



Azerbaijan ICT national capacities
     n/n                      Parameters
                                                ACTUAL LEVEL

            Technical Universities:
            Number of ICT graduates per year
      1     - Network engineers                 1500


            -   Programmers                     10000


            -   System analysts and designers   1000


            -   Data entry operators            15000



            Average monthly salary level of     Years of
            ICT specialists (US$):              experience
                                                More            Less
                                                         3
      2                                         then            then
                                                        years
                                                  5              3
                                                years           years
            -   Network engineers                       200

            -   Programmers                             300-
                                                        250
            -   System analysts and designers           500-
                                                        1000
            -   Data entry operators                    150-
                                                        100

            Availability of high speed,
            broadband Internet access:

      3
                                                E1

            -   ISDN lines (up to 128 Kb/sec)

            -   ADSL                            No

            -   CATV lines (up to 10 Mb/sec)    Only for TV

            -   Leased lines                    Yes



      4     Prices for Internet users           US$ 50/per month
            (Average US$ per month)
5
     Productivity of software professionals:       N/A
     -   Lines of codes per hour
     -   Cost/quality ratio



6    Number of Internet Service Providers (ISPs)   12

     Software development infrastructure:
7    - Numbers of Software Technology Parks        No
     - Testing and certification facilities        ISO certification –
                                                   yes, CMM – no
     -   Training and skill upgrading facilities
                                                   CISCO academy,
                                                   Microsoft Academy
                                                   other training
                                                   institute



8                                                  High    Fair   Low
     Level of Business Ethics:


     - Obligation to honor contract                               X

     - Respect for software/technology                            X
     license agreement


     - Respect for the property rights of                         X
     copyright



9.                                                 Average
     Classification of ICT companies               number
     operating in Azerbaijan:
     -   Multinational companies                   None

         (for R&D)
     -   Multinational companies                   Siemens, Ericsson,
                                                   Nokia, Oracle,
         (sales representatives)                   Microsoft,
                                                   Panasonic,
                                                   Samsung, LG, BT
     -   National companies with                   AZEL, RISK

         more than 50 employees
     -   National companies with                   60-70
         less than 10 employees
         10.        Main Telephone lines per 100                      10.5
                    inhabitants


         11.        Internet hosts per 10,000 inhabitants             0
                                                                      30000
                    Internet Users
         12.        Personal computers total inhabitants              150000



         13.        Piracy rate                                       84%



         14.        Percent of PCs connected to                       20%
                    INTERNET


         15.        Cell phone subscribers per 100                    9
                    inhabitants


   Sources: ITC consultations with the Azerbaijan ICT sector - 2002




                                        ITC’s Questionnaire
Key concerns of the ICT foreign investors in Azerbaijan - 2002
                    Azerin               Catel                AmCham            Chamber of
                                                                                Commerce
Sustainability      Stable and           Political and        Stable. Law are   Stable. May be
of economic         sustainable          economic             there but they    difficulties if
and business                             stability to stay    are interpreted   political
conditions                                                    differently for   leadership
                                         Set of laws are
                                                              different         changes
                                         not working
                                                              persons
                                         properly
Predictability of Market is              Unpredictable.       Law need          Market
                  predictable and                             Changes. Set of   predictable
Market
                  growing. To                                 amendment         legal
conditions
                  change laws                                 suggested and     framework
change (legal,
                  president held                              needed            need changes.
regulatory)
                  meeting with                                discussion.       To develop the
                  industry and                                                  economy faster.
                  chamber and
                  would make
                  some
                  announcement.
Customs duties, 0-15%. No                Customs duty         Possible to       Law is flexible
                restrictions.            High but             manipulate and
Taxes,              Negotiation at       project import       interpret the
                    high level.          at law duty          regulations to
Protectionism
                    VAT 18%.             possible.            reduce duties.
                                                              No protection
Labour cost         Low                  Low                  Low                     Low


Labour force        Technical man        Radio and            Abundant                Abundant
availability        power                telecom
                    available, lack      engineers
                    of skills.           available.
Inconsistent        Very High            Legislation          Legislation             Changes in
government                               exist                need                    offing.
policy                                   implementation       amendment to
                                         is weak.             be pragmatic.


Local               Non-                 High                 High                    High
government          professional
bureaucracy         approach of
                    bureaucracy

Potential future    Yes with likely      May be               Economic                May be
political           change of                                 stability have
instability         presidency in                             reached a level
                    2004                                      where
                                                              successor can
                                                              takeover
Education           Desired to be        Soviet period        fine                    fine
standards           improved             they were good
                                         but now
                                         declining

Personal            No risk              Crime rate is        Crime rate is           Crime rate is
security                                 low                  low                     low


Corruption          high                 high                 high                    High


Pierce of copy      high                 high                 high                    High
rights


Others              Potential of     Brain drain              Possible growth Possible growth
                    growth high      high to Canada           with people     with people
                    youth have       most.                    coming back     coming back
                    great ambitious.
Source: ITC consultations with foreign ICT companies based in Azerbaijan, June 2002
ITC’s Questionnaire

Reinvestment Plans in Azerbaijan ICT sector by the JVs Azerin, Azercell, Azeronline etc.


Are you ready to reinvest in Azerbaijan ICT sector?
                                           YES                    NO                  NOT YET
                                                                                      DECIDED
Hardware                                                  X
Software                            X
ICT services                        X
Source: ITC consultations with the selected ICT foreign companies based in Azerbaijan, 2002


Note: Most investors felt that in their field of operation they have reached the market capacity.
Possibility in investment of ICT services and software development was a possible for
reinvestment.
                                                                                                                Appendix: 8.3


    ASSESSMENT OF AZERBAIJAN’S R&D CAPABILITY BY INSTITUTE                                                                     OF
    CYBERNETICS THE NATIONAL ACADEMY OF SCIENCES OF AZERBAIJAN

    1. Technical means worked out at the Institute
             -    Hybrid systems of diagnostics of sea-oil-gas extraction platforms and flyovers;
-   The robust system for forecasting the progress of drilling;
-   The robust system of the determination of the seismic stability of the sea deep water stationary platforms is developed;
-   The multi-channel telemetric system for the transfer of the information with the delta modulation is developed;
-   The device for determining the dynamic characteristics of the drilling wells is developed;
-   The device for the management of the work of the periodic wells with little discharge is developed;
-   Intellectual information-measuring system of determining the weight of the petroleum products in the reservoirs is
    developed;
-   The multi channel device for the registration of the seismic signals is developed;
-   The device showing the existence of the vessels with the poor ability to carry traffic in the man's vascular system is
    developed;
-   Hard and software for the representation of the information by means of the electronic multicolor indicator panel and etc are
    developed.

    2. The software developed by the Institute


       Package of applied programmes for improving the estimate of the statistical characteristics of the stipulation of the
        correlation matrices and the adequacy of the identification is developed.
    •   Package of applied programmes for solving the problem of the identification of the parameters of the
        technological processes by means of the methods and algorithms of regularization is developed,
    •   Package of applied programmes for calculating the oil-condensate reserves is developed. Package of applied programmes
        for calculating the stress deformed state of the rod construction is developed;
    •   Package of applied programmes for modeling the processes of exploitation of the oil, gas and gas-condensate fields is
        developed.
    •   Package of applied programmes for modeling the processes, designing underground gas storage created in water
        carrying layers is developed;
    •   Package of applied programmes for automatic process control system of the gate valve of the spout armature is developed.
    •   package of applied programmes for the optimal placement of the sea oil-gas refinery platforms is developed.
    •   package of applied programmes for the determining of the vibration movement of the underwater sea oil-gas pipes
        caused by the inner hydrodynamic powers and by outer wave factors is developed, package of applied programmes for the
        management of the difficult looped gas pipe system including the programme of solving the calculation and optimization
        problem of decision making in the systems of management of the regimes of transfer of the hydrocarbon raw is
        developed;
    •   package of applied programmes for modeling the processes of the multi phase filtration and forecasting the
        movement of the water oil contact during displacing the oil by water is developed.
    •   The expert systems for diagnostics of the professional illnesses in the oil industry are developed.
3. The scientific achievements of the Institute from 1996 till 2000


•   The variants of the formation of the infrastructure of the united information space of the republic are researched
    and the specifications of the information resources, telecommunication environment, hard and software and
    organization structure are determined. The concept of the infomatization of the republic is prepared.


   It is shown that the classic conditions adopted for the methods of the spectra] analysis of the technological parameters
    do not take place in solving some class of the practical problems, due to that the received results contain the great
    errors.


    So taking into account the real features and properties of the signal the theoretical bases, methods, algorithms and
    calculation technology providing the improvement of the accuracy of the spectral analysis of the signals are suggested.


   The theoretical bases of the robust spectral analysis of the seismic signals are developed. That theoretical
    bases improve the efficiency of the application their information potential. The architecture of the hybrid intellectual
    seismic telemetric system is suggested.


   The system allow to make parallel multi variant analysis of seismic signals that provide the efficiency of the
    decision making.


   The theoretical bases and the corresponding methods and algorithms of the analysis of the interferences as the
    information carrier are researched. The possibility of their application for improving of the reliability of forecasting the
    failures of the sea oil refinery constructions is shown.


   The precision position-width-impulse method and the algorithm of the analysis of the cyclical signals are suggested. It
    is shown that the application of the suggested method allows to build the effective information system of
    management and diagnostics of oil refinery equipment.


   The united method for the numerical solution of the problem of the optimal management of the distributed
    systems is researched. That method is based on the special structure of the limitation obtained as the result of the
    finite differences approximation of the initial problem.


    The constructive necessary optimal conditions are obtained as the result of the researches of the problem of the networks
    structure.


   The resistivity of sea oil refinery constructions (underwater pipe lines, pile bases, stationary platforms and etc.) to
    the real outer influences, seismic waves and vibro influences are researched. The packages of applied
    programmes for the practical realization of the obtained results are made.


   The theoretical bases of the elimination of the sand bitumen tying in drilling wells by mean of the seismic
    influences are developed.


   The macro model of the social economic system of the republic is developed. The possible variants of the
    development of the social economic system of the republic are researched and macro economic
    prognosis for the period 2001-2004 is given.
   The theory of the management of the systems of the mass servicing of the difficult structure with the moving
    devices is developed. The necessary and sufficient conditions of the management are determined.


   The theoretical bases and the information technology of providing the adequacy of the identification of the
    statistical mathematical models of the technological processes are developed.

4. The application of the results of scientific


    RESEARCH WORKS (SRW)


The following works based on the results of SRW from 1996 till 2000 are suggested:
-   The methods, algorithms and the package of applied programmes improving the adequacy of mathematical
    models are developed for optimal management of the technological processes of oil refinery and for increase of the
    efficiency.


The package of applied programme is given to industrial association "Azneftyanajag".
-   The methods, algorithms and software increasing the reliability of forecasting of the technical state of sea oil gas
    refinery constructions are developed.
The results can be used on objects of State Oil Company of Azerbaijan Republic (SOCAR).
-   The methods, algorithms and software providing the robustness and preciseness of the analysis of the seismic
    signals and improving the efficiency of the application of their information potential by
    considering the interference as the carrier of the useful information are developed.
-   The numerical methods and software providing the calculation of regimes of the movement of raw are
    developed for gas transport system of difficult configuration. The single and multi criteria's problems of the
    optimization of the regimes and the problems of determination of the leakage position are solved.


The corresponding package of applied programme is applied in the system of the operative management of industrial
association "Yamburggasdobycha".
-   The methods of ecological expert operation of the projects of Caspian oil and gas fields, based on data base technology are
    developed.
The result can be used for the adequate and efficiency expert operation of the Caspian projects.
-   The robust algorithms, soft- and hardware based on the analysis of the interferences for forecasting the failures
    in drilling oil wells are developed.
The experimental device is made.
-   The methods, algorithms and software for forecasting and estimating the reliability and durability of the gas-transfer
    compressor stations of sea oil fields are developed, and are used now for estimating and forecastingthe state of gas
    turbine compressor units used on "Neft Dashlary" for the gas utilization.
    The positional width impulse algorithms of the analysis of the signals and information system for the management
    and diagnostics of the deepwater pump units by means of the wattmetrograms are developed. The results can be used
    on the objects of SOCAR.
-   The mathematical model of social economic development of the republic allowing to analyze the variants of
    development of the social economic system by means of macromodel is developed and is used by GKNT and
    the ministry of finances.
-   The mathematical model of the distribution of the wave with the limited front in shallow water was developed and was
    used during the release of the drilling unit "Gurtulush".
    The algorithm and software for determining of the optimal quantity of the ballast water for the transport barge STB-1 in
    loading heavy cargo are researched. The results are given to the NIPI "Gipromneftgas" SOCAR.
-   The mathematical model and software for researching of the influence of the different powers on the oscillatory
    processes during the exploitation of the underwater pipelines are developed. The package of programmes is given to
    the NIPI "Gipromneftgas" SOCAR.
-   The algorithms of the optimal placement of the oil refinery platform on oil fields by means of the standard and fuzzy
    information are developed.
         The package of programmes is given to the SOCAR.
-   The mathematical model of the movement of the underwater and topsides of the sea stationary platforms during
    the seismic powers and the recurrent expressions for determining the shifts in the units of the rod constructions are
    developed.
-   The calculation algorithms and software are given to GosNIPI "Gipromorneftgas" SOCAR.
-   The vibrator for release of the drilling columns from tying up is developed. Several vibrators are made and
    successfully used in some wells of the NGDU SOCAR. The efficiency of those vibrators is confirmed.
-   The methods of the seismic influence on the near face zone for increasing the intensity of the filtration of
    the oil are developed. The results      (package of the programmes) are given to the GosNIPI
    "Gipromneftgas" SOCAR.
-   The algorithms for the determination of the carrier ability of the pile bases during the exploitation of the sea
    stationary platforms are developed.
The package of applied programme is given to GosNIPI "Gipromneftgas" SOCAR.

Address:9, F.Agayev str., Baku-370141, Azerbaijan
Phone:
(994 12) 390151
Fax:
(994 12) 392633
Email:
cyber@cyber.ab.az, cyber@dcacs.ab.az
Director:
Telman Abbas oglu Aliyev
Doctor of Technical Sciences, Professor, Academician
Phone: (994 12) 390151 Fax: (994 12) 392633
Email: cyber@cyber.ab.az
Deputy directors:
Oktay Gudrat oglu Nusratov
Ph.D in Technical Sciences, Scientific Research
Phone: (994 12) 392743 Fax: (994 12) 392633
Email: cyber@cyber.ab.azRauf Mustafa oglu Kadymov
Ph.D in Technical Sciences, Scientific Research
Phone: (994 12) 393798 Fax: (994 12) 392633
Email: cyber@cyber.ab.az, cyber@dcacs.ab.az
Scientific secretary:
Zakhra Alekber gizi Azizova
Phone: (994 12) 393943

Main area of activity of organization:
Information systems and technologies.

Main scientific achievements made over the last five years:
The main achievements are given below:
- theoretical foundations and appropriate methods and algorithms for analysis of interference as information carrier. The
prospects of its application to increase reliability of sea oilproducing constructions breakdown prognosis are shown;
- theoretical foundations of robust spectral analysis of seismic signals that increase efficiency of these signals
information capacity employment. Architecture of hybrid intelligent seismic telemetry system is proposed.
- methods, algorithms, computation technologies providing for increase of accuracy of signals' spectral analysis with
regard to its actual features and properties;
- a unified approach to numerical solving of distributed systems' optimal control problems. Constructive necessary
optimal conditions are obtained as a result of net structure problems investigation;
- theoretical foundations to eliminate sand-bitumen stuck in oil wells by vibration impacts;
- macromodel of social-economics system of republic. The variations of scenarios of social-economics system
development are studied and macroeconomics prognosis are given on the basis of this model;
- theory of queuing systems control for complex structure with moving devices. The function of optimal control is
revealed;
- theoretical foundations and information technology to provide for adequacy of identification of technological
processes' statistical mathematical models;
- precise position-width-impulse method and algorithm of cyclic signals analysis are proposed. It is shown, that
application of this method provides a way to design effective information systems for oil-producing equipment control
and diagnostics;
-mathematical models to define strained-deformed state of sea oil-field constructions (submarine pipelines, pile
foundations, stationary platforms, etc).

Brief information on the organization’s history:
In 1952 the opening of laboratory of electronic modeling became starting point in the institute foundation. In 1958 the
laboratory was included in the Institute of Mechanics and mathematics and was renamed to Computer Center. In 1960
the Computer Center was detached as an independent organization. In 1965 the Institute of Cybernetics was founded on
the basis of the Computer Center. Since its foundation the institute was oriented to solving the problems of modeling,
optimization, to development of methods, algorithms and digital computing devices and systems for monitor and
control of oil-gas production and petrochemistry. There are 10 departments, 30 labs functioning at the institute. 212
scientific researchers, including 4 academicians, 3 corresponding members, 24 doctors and 75 candidates of sciences
(Ph.D.) are employed at the institute.

Total number of employees:
347

Information about structural units of the organization:
Department of Problems of Informatization
Department of Identification of Stochastic Processes
Department of Theoretical Issues of Control
Department of Models and Methods of Decision Making
Department of Modeling and Optimization of Mechanical SystemsDepartment of Monitor and Control Information
Systems
Department of Information Systems, Complexes and Networks
Department of Mathematical Modeling of Social-Economics SystemsDepartment of Modeling,
Optimization, Numerical Method and Decision-Making in Deterministic SystemsDepartment of
Theory of Probability and Statistical Methods




                               1.   THE HISTORY OF THE INSTITUTE’S FORMATION

       The Institute of Information Technology (IIT) of the Azerbaijan Academy of Sciences (ANAS) was formed by
Decree No. 18 of May 21, 2002 of the Cabinet of Ministers of the Azerbaijan Republic on the basis of Information-
Telecommunication Scientific Centre of ANAS. By that time the overall history of this entity has counted thirty years.
       First, in the 70s a Department for development and application of Automated Control Systems was created
within the structure of the Institute of Cybernetics of the Azerbaijan Academy of Sciences. In 1982 this unit was
transformed into independent scientific organization, a Department of Automated Control Systems of the Academy of
Sciences. By Decree No. 152 of March 18, 1982 of the Council of Ministers the Department was given a status of the
main coordinating body in the field of development and application of automated control systems in the Azerbaijan
Republic. In 80s and 90s the Department actively participated as an independent organization in design, development
and practical implementation of:
        Automated Control Systems for various governmental organizations;
        Republican Computing Centres Network;
       Republican Data Transmission Network;
       The automated controls systems in the fields of scientific and technological development;
       A number of regional and local area computer networks;
       A big number of inter-sectoral complexes of automated control.
      In 1997 the name and status of the Department were changed and on the basis of it an Information-
Telecommunication Scientific Centre (ITSC) was created.
      ITSC obtained a number of important scientific results and was successful in practical application of most of
them in the fields of creation of expert systems, ensuring of information security, development of aircraft control
systems etc.

                           2.   THE ACHIEVEMENTS MADE OVER THE RECENT YEARS

       The following can be presented as examples of the main scientific achievements made at the Institute over the
recent years:
        The development of methods and algorithms for optimisation and improvement of search of information
resources, improvement of performance of Internet nodes in Azerbaijan and broadening of their functional capacity;
        Suggestion of theoretic-game model for time-related decision making in fight against active natural threats
in corporative computer networks;
        Development of scientific-theoretical basis and architectural principles for synthesis of adaptive systems for
ensuring information security in corporative networks;
        Development of systems based on new information technology for operational processing and intellectual
analysis of information in special purpose aircraft of certain class;
        Development of automated system for detection and tracking of static and dynamic air targets in on-line
mode on the basis of geographically distributed radar stations;
        Development of optimised methods and algorithms for diagnostics of power systems of special class units;
        Development of conceptual aspects of informatization of macro-economical processes in the Azerbaijan
Republic in relation to their practical application;
        Development of algorithms and software for practical implementation of turnover and processing of
electronically signed documents in the Local Area Network of the Academy of Sciences.

                    3. THE MAIN DIRECTIONS OF PROSPECTIVE SCIENTIFIC RESEARCH

        In accordance with Resolution No. 1/1 of 16.01.02 of the Presidium of the Academy of Sciences the following
activities have been planned for the Institute within the period of 2002 and beyond:
         The continuation of scientific-research and practical work in direction of further improvement of key
performance indicators of Internet nodes in Azerbaijan and further development of their infrastructure;
         Creation of various information resources on the basis of WEB technology;
         Further improvement, expansion and ensuring of steady performance of www.ab.az server;
         Formation of subject virtual libraries on the basis of Internet nodes in Azerbaijan with the use of foreign
information resources;
         Creation of intellectual corporate network of the Azerbaijan Academy of Sciences on the basis of
infrastructure of Azerbaijan Internet nodes and development and application of methods algorithms that could ensure
information security of this network;
         Development of intellectual systems for decision making support in real time mode in distributed
environment;
         Development of methods and algorithms for detection and elimination of various threats in computer
networks;
         Development of multi-criteria optimisation models and algorithms for design of special virtual networks;
         Development of scientific-technological suggestions for ensuring of application of electronic signatures in
the Azerbaijan Republic;
         Research of opportunities in Internet environment and development of necessary recommendations on
application of modern network technologies in the fields of virtual work, education, e-commerce, e-business etc. in the
Azerbaijan Republic;
         Design, development and application of technological computer systems;
         Conduct of scientific-theoretical research and practical work in the field of diagnostics and prognostication
of technical parameters of aircraft in normal and emergency situations;
         The analysis of telecommunication market in the Azerbaijan Republic and identification of perspectives for
its development;
         Conduct of scientific research in the field of application of new information technologies in study of macro-
economic processes and research of mathematical economic problems of information-telecommunication technologies;
         Implementation of broader application of the Azeri language in the field of computer and information
technologies, including scientific research in the field of automatic translation of texts.
        In addition to the presented above, the Institute has planned to conduct work in two special complex
programmes:
        THE FIRST SPECIAL PROGRAMME:
        “Creation of corporative information systems and networks for the government bodies of the Azerbaijan
Republic and ensuring of their information security” is expected to be implemented in executive, legislative and judicial
structures of the Azerbaijan Republic.
        The following subject areas are included in this programme:
        1. Development of architecture of virtual networks to ensure exchange of information within corporate
networks of the government bodies of the Azerbaijan Republic and between this networks;
        2. Development of technology for creation of corporate information systems of State significance;
        3. Preparation of the concept of information security in the Azerbaijan Republic and resolution of problems
identified within this concept;
        4. Development of methods and means for resolution of problems of application of electronic signature
technologies in information environment of the Azerbaijan Republic;
        5. Development of intellectual systems for decision making support in corporate environment for application
in government initiated and supported social and political and other all-national events such as elections, referendums
etc.
        THE SECOND SPECIAL COMPLEX PROGRAMME:
        “The development of automated intellectual system of distributed structure (AISDS) for detection, recognition
and tracking of dynamic objects in airspace of the Azerbaijan Republic” is expected to be implemented within the
structure of Air Defence system of the Ministry of Defence, Azerbaijan Airlines Concern and other fields.
        The following subject areas are included in this programme:
        1. The development of scientific-theoretical principles of detection of dynamic targets based on signals
received from geographically distributed radar stations;
        2. The development of systems for automatic recognition of dynamic targets through application of
cryptographic methods;
        3. Design and development of hardware means for linking ground radar stations;
        4. Design and development of instrumental means for ensuring steady performance of AISDS in on-line mode.

                       4. SCIENTIFIC-TECHNOLOGICAL POTENTIAL OF THE INSTITUTE

        With aim of resolution of scientific problems important for the Azerbaijan Republic, a big group of Doctors and
Candidates of Sciences and other leading specialists having broad expertise, knowledge and experience have been
prepared and developed at the Institute. At the same time these group of people transfers their knowledge and
experience to their younger colleagues working at the Institute.
        The Institute has good technological base. All departments of the Institute have been provided with modern
computers linked into network with permanent Internet connection. At the same time, the Institute successfully
conducted work on development and application of latest network technologies in improvement of performance of
Internet nodes in Azerbaijan.
        The Institute has forged productive links with a number of leading scientific institutions and published a number
of scientific articles in cooperation with the scientists from those organizations. The Institute has gained a reputation as
a solid scientific organization in all fields of scientific research in the Azerbaijan Republic.
        The Institute is actively involved in educational activity by means of running post-graduate courses in the field
of information technology and establishing modern academic educational centre, where the applications of computer
and information technologies in the fields of economic, management, humanitarian sciences etc. are being taught.
        This is our intent to become leaders as an organization active within the frameworks of National Strategy of the
Azerbaijan Republic on development of information and communications technologies and make significant
contribution as the leading organization in accomplishing major tasks of this project.

                                                                           Azerbaijan National Academy of Sciences

                                                                                   INSTITUTE OF
                                                                                   INFORMATION
                                                                                   TECHNOLOGY
                                                                                         Azerbaijan Republic
                                                                                  9, F.Agayev str., Baku c., 370141
                                                                            Tel.: (99412)390167 Fax: (99412)396121
                                                                                   secretary@iit.ab.az www.ab.az
Institute of Applied Mathematics
Baku State University
Activities on ICT
Z. Khalilov str.23, Baku 370148, Azerbaijan
Tel 39 15 95
Fax 33 08 74
e-mail f_aliev@yahoo.com

1. Presented work dedicated to the investigation of the factors connecting with the oil-gas exploration and their
interrelations, finding the optimal regimes for the oil-well exploitation the caring out the operative economic estimate
for each well, optimal using of the funds, raising of the profitability of the oil wells.

1) Programme providing;
2) Greeting of the automatic using regime.
Giving data for each oil well the optimal economic regime may be
obtaining for each oil-well. These methods will be put in the web-site
of Azerbaijan National Academy of Sciences in open access form.
2. The control and diagnostics system using computers and corresponding
telecommunication systems has been created for the deep pump units of
the oil-wells. Using the system the control and diagnostics may be made
from distance. This system were already applied in the wells of
Azerbaijan State Oil Company.
The investigations are caring out for the defining and control of the
oil-water border. These models also have been realized on PC.
3. Considering the rapid spreading of the INTERNET and the
telecommunication systems in Azerbaijan and the coming with them their
specific terminology the English - Russian - Azeri modern Terminological
dictionary of informatics has been created. The electronic version (on
CD) and on-line variant of this Dictionary also will be made. The
continuous monitoring and renewing will be carried out.
                                                                                       Appendix: 9.1

                                     IS Cluster Code of Ethics


            Azerbaijan Information System Cluster Code of Ethics

1. Preamble
We, the participants of the Azerbaijan IS cluster, that has been established to promote the
collaboration among the Azerbaijan IT companies and related organizations to increase the
competitiveness and growth of export of the Azerbaijan IS services in international markets, taking
into account the IS cluster objectives and strategy defined in IS Cluster Strategy Articulation Map
and in order to:

             Strengthen the image of Azerbaijan as a provider of high quality and reliable services
               for export;
             Facilitate sharing knowledge and experience among companies;
             Facilitate joint marketing and project implementation activities;
             Support the creation of the industrial software development culture in Azerbaijan;
             Facilitate creation of new industrial activities and new cluster participants, which
               might increase the IS cluster competitiveness in the export markets adhere to the
               principles and norms of conduct described in this Code of Ethics (Code).

2. Scope of the Code
The Code defines values and acceptable standards of conduct of cluster participants related to their
business activities in international markets.
Local market activities are outside the scope of this Code, however, it is anticipated and accepted by
members of the Cluster that intentional and/or severe misconduct against this Code in local market
can lead to negative attitudes inside the Cluster towards the member committing such misconduct.


3. Values
Collaboration - extensive collaboration among companies and related organizations (both in
knowledge sharing, customer contact and project delivery activities).
Quality and reliability - quality of services corresponds to the highest of industry standards.
Competence - thorough industry knowledge, continuous education and training.
Innovation - ability to create new solutions and attract future R&D investment to the Azerbaijan IT
sector.
4. General Issues
        4.1 Responsibility for employee conduct
Participants shall be responsible for the activities and opinions expressed by their employees and
representatives, doing their utmost to ensure that the said employees and representatives act
according to the values and norms of this Code, showing integrity at all times and acting in an
atmosphere of good faith.
        4.2 Compliance with legislation
Participants shall accept and follow all the obligations specified in the legislation of Azerbaijan as
well as that of other countries, relevant to their business activities, all of which proceeds directly
from law and international agreements.
        4.3 Usage of legal products
Participants shall exclusively utilise and sell legal goods and services, including software, in
conjunction with their business activities, fostering fair, ethical and legal trade practices.

5. Knowledge Sharing
   5.1 Sharing of experience
Participants shall share their experiences, best practice foundations and other information in the
areas of project management, quality assurance, human resource management, coordination of
research and development activities, as well as other areas that the cluster participants agree upon.
   5.2 Confidentiality
All information shared among the participants based on this Code of ethics shall be confidential. It
is a breach of confidentiality to make public any information obtained via collaboration within the
cluster. Exceptions can only be made with informed consent in advance from the participants
themselves.
   5.3 Business use of “know-how”
    Intellectual property rights shall be honoured. Business use of specific knowledge - “know-how” -
which has been obtained via cluster information sharing is acceptable only with the express permission of the
owner.
                                                                                                            Appendix - 12.1



     “e-Readiness for the Networked World: A Guide for Developing Countries" of
     Information Technologies Group (ITG) at the Center for International
                            Development at Harvard University

Net-work Access
What are the availability, cost, and quality of ICT networks, services, and equipment?

The minimum necessary condition for Readiness is access to adequate network infrastructure. Without access to global
communications networks, no community can participate in the Networked World. Access is determined by a
combination of the availability and affordability of use of the network itself, as well as of the hardware and software
needed for network interface. The quality and speed of the network are also important in determining how the network
is used. The customer service orientation of access-providers is a major factor in network application adoption and
usability.

Because of the growing importance and unique character of the Internet, which provides a global platform for both data
and (increasingly) voice services, the assessment of network access should be carried out in the context of Internet
access, rather than access to either voice or data. The significance of the Internet will only continue to grow in terms of
global trade and communications.

    1.   Information Infrastructure For most communities in the developing world, a lack of access to voice and data
         services remains a significant impediment to Networked Readiness. Communications infrastructure is
         deployed with widely varying local and regional rates of penetration, depending on factors such as geography
         and/or income levels. Local network access may be provided by any one of a number of media that makes up
         the communications network (including twisted pair copper wires, coaxial cable, wireless local loop, satellite,
         and fiber optics). While in the future, mobile wireless technologies will undoubtedly provide an attractive
         option for data access, as will cable networks and perhaps even the electrical grid, currently most Internet
         access in the developing world is provided through the traditional telecommunications network.
    2.   Internet Availability-Internet access is enhanced by competition among Internet Service Providers (ISPS) that
         operate locally. The range of services offered, number of dial-up lines (which helps determine ISP capacity)
         and transmission capacity all influence an ISP's usefulness. The availability of leased lines is particularly
         important in making the Internet available to the business community. Finally, in many communities in the
         developing world, public access is essential to making the Internet available to greater numbers of individuals
         and firms. Tele-centers, Internet cafes, and community information centers assume great importance in
         making the Internet available to those who do not have personal access to home, school, work, or elsewhere.
    3.   Internet Affordability: The prices which business and individual consumers pay for the Internet access are in
         most cases determined by a combination of fees for basic telephony andI SP services. In communities where
         the sum of ISP and telephony fees is prohibitively highs, a disincentive to network usage exists, and access is
         curtailed. Pricing packages can be structured in ways that are conducive to Internet use-per minute or hourly
         pricing (unlike flat rate pricing) for both Internet and telephone service can limit users' time online an therefore
         inhibit the use of the network for many activities such as electronic commerce (e-commerce). The provision of
         tiered pricing packages can improve the affordability for many subscribers by allowing them to purchase only
         what they need.
    4.   Network Speed and Quality: The available bandwidth, both for individuals' local access and for a
         community's connection to the Internet backbone, determines the number of users and types of online activities
         the network can support. Bandwidth-intensive activities, such as large file transfers or video streaming, may
         be unavailable to communities with constrained access to the network. The quality of the network, including
         servers, also determines its usage. High numbers of mainline faults, poor connections, dropped connections,
         and packet loss can render any network useless or operationally sub-optimal. thus discouraging use of and
         investment in new technologies.
    5.   Hardware and Software A vibrant market with numerous hardware and software options can encourage more
         specialized usage of the network, including ICT solutions that are tailored to local needs. More widespread
         retail and wholesale distribution channels for both hardware and software increases opportunities to use the
         network within the community. The prices of hardware and software are particularly important in the
         developing country context, where generally low-income levels cannot support high-priced consumer items.
    6.   Service and Support-A strong customer service orientation is important in determining the success of
         network deployment. Long waiting periods forinstallation and repair and a lack of support services by
         telephone companies and Internet providers pose major obstacles to Readiness. The quality and number of
         technical support professionals are essential in maintaining the network and providing service.
Networked Learning
Does the educational system integrate ICTs into its processes to improve learning? Are there technical training
programmes in the community that can train and prepare an ICT workforce.

Without an educated, ICT-savvy populace, no community can fully participate in the Networked World. To foster this
resource, ICTs must be incorporated into the learning system. Lamentably, although the use of ICTs in education is one
of the most powerful catalysts to Networked Readiness, it is an opportunity that is often squandered, misunderstood, or
underestimated.

    1. Schools Access to ICTs: Schools must integrate ICT tools into their learning process if they are to be part of the
        Networked World. Programmes that give students access to ICTs in the classroom provide an important step
        to improving Readiness. A school's Readiness in terms of access can be broken down into six broad areas:
        number of computers, physical access to the technology, types of computers, diffusion of the network, access
        to and organization of electronic content, and quality and speed of connectivity in the school. In general, the
        diffusion of ICTs is driven by unit cost per pupil. Computers tend to be adopted first at the university level,
        then by the secondary school system, and finally by the primary schools.
    2. Enhancing Education with ICTs: While putting ICTs into schools is an important first step to Readiness, the
        technologies need to be properly harnessed to improve the learning process. Teachers must be trained to use
        the Internet and computers as tools for the students' benefit; this training is central to Readiness. Curricula
        must be redesigned to encourage the use of ICTs in the pursuit of problem solving, group learning, and
        research.' Students should be taught from the earliest age possible to use ICTs to enhance and improve their
        learning experiences. Full integration of ICTs into the learning process is optimal, and collaborative, project-
        based learning can make up a solid pedagogical strategy for ICT-enhanced education.
    3. Developing and ICT Workforce-It is essential that there exist opportunities within the community to offer
        future ICT workers both first-time and continuing training in essential skills such as software programming,
        hardware engineering and World Wide Web design. These opportunities are fundamental to creating a
        sustainable ICT industry and support the integration of ICTs into the local economy.

Networked Society

To what extent are individuals using information and communications technologies at work and in their personal lives?
Are there significant opportunities available for those with ICT skills?

Readiness depends upon the community's incorporation of ICTs into tt-ic fabric of its activities in order to maximize the
gains of joining in the Networked World. In society-at-large, ICTs can have a profound effect upon people's
professional and personal lives by providing easier access to information, more efficient ways to communicate, and
powerful organizational tools. To understand how a community is using ICTS, it is important to assess not only how
many members of the community have access to the technologies, but also how they are using them.

    1.  People and Organizations Online: One of the hardest indicators to track is the actual number of online users.
        Particularly in the developing world, where multiple users share many electronic mail (e-mall) accounts and
        other online tools, there are few reliable indicators that accurately map how many people are online. The
        exponential growth in online usage also makes tracking current use difficult. This nevertheless is an important
        indicator. As more people access the Internet regularly, a network of users grow, there is a greater demand and
        opportunity for online interaction, as well as better meshing with the Networked World at-large. As more
        organizations gain an online presence, it becomes more likely that the community will use ICTs to augment or
        carry out its activities and needs. One of the most important drivers of online growth is awareness-people must
        first know and understand what the Internet is in order to participate. Particular attention should be paid to the
        demographics of Internet users in the community. Particularly at lower stages in Readiness, groups such as
        women, the physically disabled, and racial and ethnic minorities often do not participate in the online
        environment. A community is more ready when there are not large discrepancies in online presence among
        different groups.
    2. Locally Relevant: Community members find the Internet medium more useful and relevant to their own lives
        when online content reflects their own interests and needs. Locally relevant content is a major driver of
        growth of Internet usage. Interactions such as chat rooms, online interest groups, special interest software,
        bulletin boards, listservs, and Web sites all drive the community to use ICTs more widely in their lives.
        English language dominance on the Internet remains a serious impediment to the world's non-English speaking
        communities. While the preponderance of English is waning, and other world languages are gaining, most of
        the world does not speak a language that is strongly represented either in software or on the World Wide Web.
    3. ICTs in Everyday Life: Communities participate more directly in the Networked World when information
        devices such as radios, faxes, televisions, telephones, pagers and computers are culturally accepted and widely
        incorporated into daily life. It is important to examine both the penetration of ICT devices into community and
        their applications. In communities where either income levels or the network infrastructure cannot support
        high levels of individual access, public shared facilities provide a needed alternative. Such venues may
        include telecenters, cybercafes and community information centers. Strategies for drawing people in to use
        these facilities is essential.
    4. ICTs in the Workplace: The more that businesses and government offices are already using ICTS, the better
        prepared they are to participate in the global networked economy. In order to realize important efficiency
        gains from ICTS, businesses and governments need to not only make technologies available to their
        employees, but also effectively incorporate them into their core processes.

Networked Economy
How are businesses and governments using information and communications technologies to interact with the public
and with each other?

Businesses and governments that arc able to effectively employ IC'Fs find more sophisticated and efficient ways to
managing their external relationships and communications. This growing IC'F usage helps form the critical mass of
electronic transactions which supports a networked economy, both in terms of the network size and the demand for
associated good services, labour, and policy reform.

    1. ICT Employment Opportunities: A thriving job market for ICT professionals provides added incentive for
        growth of ICT adoption, training programmes and overall use of ICTs within the economy. The retention of
        technical workers becomes an important competitiveness issue for the community.
    2. Business-to-Consumer (B2C) E-Commerce-Online retail options enhance consumer choice and access to
        products. They also allow businesses to reduce costs associated with physical infrastructure and to augment
        their marketing outreach and public relations via a dynamic communications channel.
    3. Business-to-Business (B2B) E-Commerce-When businesses move their dealings with other businesses online,
        they can often communicate more easily at lower costs, hold smaller inventories, and process billings and
        payments more quickly, among other advantages. Moreover, networked businesses are likely to explore new
        business models, including dynamic business partnerships and radical market restructuring.
    4. E-Government: Governments can take advantage of ICTs to improve connections with their constituents,
        including using the Internet to post information online and to offer interactive services for the public.
        Governments can also lead by example and become a catalyst for the networked economy by investing in ICTs
        Cor their internal use, leading to more efficient operations and the creation of a local market for ICT
        equipment and services. Relationships with government contractors and procurement mechanisms can be
        streamlined by putting them online. ICTs can make government activities more transparent to citizens and
        other observers.



Network Policy
To what extent does the policy environment promote to hinder the growth of ICT adoption and use?

Public policy can be a help or a hindrance to the networked economy. The favourable climate that
public policy can create for Internet use and e-commerce encourages communities, organizations,
and individuals to invest in and use ICTS. Important aspects of Networked Readiness dealt with
elsewhere in the Guide (such as Internet availability and affordability, hardware and software
availability and affordability, ICTs in school, and electronic commerce) are all influenced by public
policy. For a community to become ready for the Networked World, the appropriate policy-makers
must realize the implications of their decisions upon ICT adoption and use.

    1. Telecommunications Regulation: Effective regulation should promote competition, ensure affordable pricing
       for consumers and maximize ions access in the community.
    2. Liberalization within the telecommunications sector should establish a regulatory framework that encourages
       multiple carriers to operate competitively. As more operators enter and compete in the marketplace, service
       offerings become more accessible and affordable, are deployed more rapidly and reach higher levels of quality.
       At the same time, regulation should encourage universal access to telecommunications services.
    3. ICT Trade Policy: ICTs become more available and affordable when there are low barriers to trade, including
       tariffs on ICT equipment and software, and electronically ordered or delivered goods and services
                                                                                                          Appendix: 12.2


INFORMATION TECHNOLOGY AND E-BUSINESS READINESS
                                           ECONOMIES IN TRANSITION

                                   COUNTRY EXPORT POTENTIAL PROFILE


AZERBAIJAN

                                            E-BUSINESS READINESS


Purpose: To access current state of Azerbaijan preparedness to user into Electronic Commerce and
to diagnose actions needed to facilitate successful establishing of the National Electronic
Marketplace.

Project Outline : Internet and the World Wide Web are altering the landscape of International Commerce. National
Strategy Makers are endeavouring to create an environment conducive to the rapid growth of e-Trade capability and to
promote the development of e-competency at the level of both the individual firm and the various organizations, public
or private that are involved in supporting the national export effort. Efforts are on in integrating the economy with that
of global market place in the wake of posed WTO era.

B2B e-Trade redefines the traditional buyer–seller (importer-exporter) relationship and establishes new business
practices as the norm. It places emphasis on the exporting enterprise having total response capability, i.e. the capability
to compete on the basis of time and customer service, in addition to price and quality. It will, in all likelihood, impact
on the operations and the performance of all export-oriented businesses, irrespective of what they supply. It should,
therefore, be seen as a possible threat to current competitiveness. It is a threat that must be addressed at the strategic
level, within the firm and the country as a whole.

At the same time, e-Trade opens new commercial opportunities to the export-oriented enterprise. In particular, it
empowers the small and medium-sized enterprise (SME), allowing it to participate in international markets where
previously market entry and promotion costs were prohibitive, streamline (i.e. eliminate intermediaries) its own supply
and export-distribution chains and to reduce business transaction costs. In short, e-Trade allows the enterprise to
reposition itself in the international market place.

Ensuring that the business community, in its totality, acquires the capability to engage in B2B trade should therefore be
seen as a critical element of a national export strategy.
E-Trade capability does not, however, mean that the exporter must be able to conduct each stage of
the international transaction electronically. That requirement may come in time, but for the moment
the market does not demand it. Indeed, export development in the digital economy is not an ‘all or
nothing’ proposition.
The challenge is, nevertheless, to work towards acquiring e-Trade capability at every stage of the transaction-a
challenge that will require a positive and concerted response not just from the entrepreneur, but also from the public-
sector strategy-maker and managers of trade support institutions (including banks)

This questionnaire is designed to assess the level of Azerbaijan’s preparedness to embrace the challenges and the threats
posed by e-Trade in their basic competitiveness, assessment of basic e-Trade competency within the company,
Technology deployed, National Infrastructure, Payment Gateways and Laws relating to Signature Authentication.

Questionnaire     for      assessing         preparedness        of      Azerbaijan’s        and        gauging      the
e-Competency of enterprises

Section I : Enterprise Level :
Gaining e-Competency at enterprise level improves communication between customer and suppliers, pre
transaction knowledge, manage customer relationship and to monitor logistics and their commercial
activities. Please indicate at what level your enterprise have gained expertise on scale of 1-10
                                                                                                         Scale
1. Basic e-Trade capability within the firms                                                                  2
2. Conduct preliminary market research and identify possible commercial                                       4
   partners.
3. Promote capacities and establish and e-presence through a website.                                         6
   Engineering enterprise
4. Initiate and maintain regular contact with perspective clients and supplier                                9
   through email including e-tender.
5. Acquire credit references                                                                                   0
6. Negotiate terms and contract specifics (e-mail)                                                             4
7. Exchange and sign contracts on the basis of digital signatures                                            No
8. Order materials needed to produce the goods contracted and monitor production and               No practice
delivery status. i) Automobile, ii) Video, iii) Enterprise
9. Expedite clearance of the imported materials through customs.                                              7
10. Coordinate production and delivery with subcontractors.                                                   2
11. Provide the buyer with information on order production and delivery.                                      4
12. Coordinate shipment with freight forwarders.                                                              4
13. Acquire certificates of origin and other export documentation.                                            2
14. Organize payment to suppliers through the local banking system.                                           2
    (Only one bank issue credit cards)
15. Receive payment from the buyer through the international banking                                          2
    system
Section 2 – National level e-Competency                        Yes              No       Remarks
1.   Name of the organization responsible for                                             SSAC
     conducting the design and management of e-
     competency :
(Draft laws have been prepared and presented to the
Parliament.                                                     Yes
 Central Bank for Authentication payment
 Ministry of Finance
 Chamber of Commerce & industry
 Secure Transaction Law exist and transaction
     be verified)
2. Does the Trade Support Institutions help in        Public/private but             Chamber of
     e-Competency of their members :                  will be statutory              Commerce &
                                                                                     Industry,
                                                      by SSAC                        Associations,
                                                                                     World Bank – e-
                                                                                     Readiness project
3. Access to Internet and www services                       Yes
 Dial up US $50 per month charges                      Average US$ 50
 Dedicated Leased line per month
     64/33/1mb
 Wide band (CATV) accounts for                         Not for Internet
     (10% on cable TV)
 Community Centres (Instant Cafeteria) 50 in               7.50 in Baku             Ganja, Singha &
     Baku + 100 other cities                                                         Liniara
4. Technology deployed for e-Trade for
    B2B/B2C :
 ARBIA
 Commerce one                                                             Not yet
 i2 Technology                                                            Not yet
 Others
5. Legal procedure for authentication of                                             Law is going to
   electronic records and signatures, Please                                         be drafted but not
   mention.                                                                          in use
Law exist but not in use.
6. Establishment of Gateways and Structures
   for :
 e-Payments                                                               No
 Secure on-line transactions                         Yes
 Limited to credit Cards                             Yes                            One bank
 Controller of Certifying Authority                                       No
7. Strategy to develop human resource to apply e-     No e-learning
Trade technologies to remain competitive. What        programme
programmes have been initiated for upgrading skills
of participants in e-Trade :
 Refreshing Training Programme                       Yes
 High Degree Level                                                        No
 School Level                                        Yes
 Professional Level                                  Yes
8. What e-Competency facilitation measures have       Yes,
been initiated for completing export procedures
to improve response time and to create overall        documentation
efficiency in trade            operations. Please
describe?
Section 3-Azerbaijani B2B environment :                          Yes                 Response
                                                                       No
1.   What marketplace model is currently adopting                                Small Web sites,
     Lithuania? EU model is being deployed                                       Web shops

2.   What is the share of direct goods (directly used in final                   Very less
     products) in total purchases of Lithuanian companies?

3.   Azerbaijan supply chain (how many intermediaries                            2 or 3: bank buyer
     between each seller and business buyer?)                                    for smaller Owner
                                                                                 of Web site
4.   Supply chain efficiency : finished-goods inventory,                         Adequate
     raw-materials inventory, stock-outs, and accounts
     receivable? Measured in days.

5. On-line payment : does it exist and how well it functions              No
?
6. Mechanisms for managing suppliers’ credit risk or                      No
    legal sanctions against defaulting debtors : are they
    developed?

7.   Information on companies : who supplies data on the                         Not available
     finances of midsize company i.e. Credit Rating?

8.   What are the procedures for payments ? (Letter-of-                          Letter of credit
     credit?)                                                                    and bank transfers

9. B2B market size? What is sufficient scale?                                    Beginning/very
                                                                                 small
10. Identify product clusters for B2B markets
11. Management Software                                                          CD/Books
12. Train buyers to use the B2B system and                                       Training started
    adjust to new on-line procurement                                            universities
13. Compatibility of technology with different                                   Allowed
information technology systems.
14. Legal procedure for authentication of                              Not yet   Under debate
electronic records and signatures. Please
mention

15. ERP technology                                               No
                                                                                       Appendix: 12.3

The Economic Intelligence Unit/Pyramid Research e-Readiness rankings Methodology: How
                                  we derive the scores

Our first round of e-readiness rankings, published to mark the May 2000 launch of the EIU e-
business forum, were a rough proxy for “e-business”, combining two variables: the EIU’s business
environment rankings, which themselves encompass 70 separate indicators, and Pyramid’s
connectivity scores.

Our new model is far more robust, thanks to the growing body of knowledge on the drivers of e-
business worldwide. It tallies scores across six categories—including the business environment
rankings—and 19 additional indicators. Each variable in our model is scored on a scale from one to
ten. Where possible, the variables – connectivity in particular-rest on quantitative, statistical data;
other reflect qualitative assessments are made by our country analysts.

In devising the more sophisticated methodology, we weighed the factors we believe determine
whether a country is prepared to seize the opportunities presented by the Internet. Our guiding
assumption remains that successful e-business is not possible without a positive business climate
overall. But we also take into account more specific elements of Internet and e-business
infrastructure: not just connectivity, but also social and cultural factors, the legal environment for e-
business, the development of e-commerce and the existence of supporting e-services.

The six categories that freed into our rankings (and their weight in our model) are:
Connectivity (30%): E-business simply cannot function without adequate telecommunications and
Internet infrastructure. “Connectivity” measures the access that individuals and businesses have to
basic fixed and mobile telephony services, including voice and both narrowband and broadband
data. Affordability and availability of service (both a function of the level of competition in the
telecom market) also figure as determinants of connectivity.

Business environment (20%): In evaluating the general business climate, the EIU screens 70
indicators covering criteria such as the strength of the economy, political stability, the regulatory
environment, taxation, and openness to trade and investment. The resulting “business environment
rankings” measures to expected attractiveness of the general business environment over the next
five years. Calculated regularly as part of the EIU’s Country Forecasts, these rankings have long
offered investors an invaluable comparative index for 60 major economies.

e-Commerce consumer and business adoption (20%): Payment and logistics systems form the
backbone of this set of criteria. Here we evaluate the extent of credit-cards ownership as well as the
existence of secure, reliable and efficient electronic payment mechanisms, the ability of vendors to
ensure timely and reliable delivery of goods, and the extent of website development by local firms.

Legal and regulatory environment (15%): The legal framework governing e-business is a vital
factor than enhance or inhibit the development of electronic trading. We consider the extent of
legal support for virtual transactions and digital signatures. Ease of licensing and the ability of
firms to operate with a minimal but effective degree of regulation are other criteria.

Supporting e-services (10%): No business or industry can function efficiently without
intermediaries and ancillary services to support it. For e-business markets, these include portals and
other online intermediaries, web-hosting firms, application service providers (ASPs), as well as
website developers and e-business consultants. The rankings assess the extent to which local
companies and organizations have access to these services.
Social and cultural infrastructure (50%): Education and literacy are preconditions to a population’s
ability to navigate the web and drive future domestic Internet development.                 Because
entrepreneurship and risk-taking play such an important role in building new e-commerce models,
we also assess the national proclivity to business innovation and receptiveness to web content.
                                                                                      Appendix: 12.4
Technology Requirements and Components for e-Business
The infrastructure needed to provide e-business services includes; trust, secure transaction and e-
payment components (amongst others that are beyond the scope of the discussion). The faceless
nature of e-business requires that transactions between two parties be secured. Some of the
technology requirements will be further elaborated by separating them into e-security and e-
payment components. The poor banking services, inadequate Information and Communication
Technology (ICT) infrastructures and absence of legislative and regulatory framework for e-
business in developing countries require a slightly different approach for implementing e-business.
The section below explains some of the main e-security features followed by a discussion on the
technology requirements and the role e-security plays in the e-business strategy for developing and
least developed countries.
Technology Services
   1. Mutual Authentication:
       This involves making sure that the identities of the parties to a transaction can be established
       and verified. Authentication requires the use of digital certificates, passwords and electronic
       tokens that can be implemented using both hardware and software.
   2. Data Confidentiality:
       Confidentiality provided through the use of encryption technology enables only the intended
       parties to be able to view the contents of the transaction. It scrambles the contents of the
       transaction using a combination of symmetric (private key) and public key cryptography.
   3. Data Integrity:
       It is fundamental that the contents of a transaction remain unchanged. Data integrity uses a
       combination of hash functions and public key cryptography to provide mechanisms to verify
       the integrity of the data. Any changes are detected and the other party rejects such data.
   4. Non-repudiation:
       Like in traditional business transactions, a mechanism needs to be put in place to ensure that
       transactions cannot be denied after their execution. Non-repudiation is achieved using a
       combination of both digital signatures and hash functions.
    PKI Components
    Public Key Infrastructure (PKI) provides all of these features and is the foundation for providing
    trust and security for e-business (and other services). A PKI consists of more than just technology.
    It includes a security policy, certification authority, registration authority, certificate distribution
    system and PKI-enabled applications. Detailed description PKI and the policy issues related to its
    implementation are not covered in this paper. PKI is used in this discussion as a solution for e-
    business in developing countries. Some of the components of PKI include:
           Digital Certificate: This is an electronic document issued by a trusted party that binds the
      physical identity of an entity (user, organization or computer) to their public key. In security
      systems (especially in a public key cryptographic system), a digital certificate is used to
      authenticate the parties involved in a transaction, to electronically sign documents used to ensure
      the integrity of contents and the non-deniability of transactions conducted electronically. ITU-T
      X.509 Recommendation defines the format for a certificate. Figure below shows a simple
      diagram of an X.509 certificate.




           Attribute Certificates: Attribute certificates are short-lived certificates that can be issued
      locally where the user is known but can have a global scope. They contain information about the
      roles and the privileges of the user. Several attribute certificates issued by different organizations
      can be linked to a single digital certificate. A financial institution can issue an attribute certificate
      to a business enabling that business to perform transactions up to a certain amount. Industry
      attributes can also be issued to link the business credibility and credentials to the business’s
      identity.


           Security Policy: The security policy defines the direction that an organization has decided to
      take in implementing its information security. This includes the use of encryption technology and
      how security matters are handled. If the organization also operates as a certification authority, the
      security procedures and how security policies are enforced will be part of what is called a
      Certificate Practice Statement (CPS). A CPS includes (but is not limited to) procedures on how
      certificates are issued and revoked and how the keys for encryption (public key) are stored.
         Certificate Authority (CA): Typically, a CA is a network organization that issues
    certificates by using a digital signature to bind the physical identity of the entity (user, application
    or host) to the public key.
         Registration Authority (RA): An RA authenticates the identities of entities and requests the
    CA to issue a certificate for that entity. An RA operates hierarchically under a CA and acts as the
    user interface of the CA.
         Validation Authority (VA): A VA could be part of the services offered by a CA or by a
    third party. It validates digital certificates, provides digital receipts and Trusted Third Party
    notarization services as proof that an e-transaction took place.
         Attribute Authority (AA): A digital certificate could be linked to attributes that define the
    privileges of the certificate holder. An AA normally stores and manages attribute certificate
    independently from the CA.
         Certificate Distribution System (CDS): Digital certificates issued by CAs need to be made
    available to other network users. A CDS is normally implemented as an ITU-T X.500 directory
    database or a Lightweight Directory Access Protocol (LDAP). It is a public database system that
    stores certificates and maintains a list of revoked certificates. Depending on the PKI
    implementation, a CDS could also store certificate attributes. The CDS enables network entities
    (users, organizations or hosts) to verify that the public key of a network entity really belongs to
    them before accepting the transaction.
         PKI-enabled Applications: Applications that use the PKI technology are referred to as PKI-
    enabled applications. These include Web, email, electronic data interchange (EDI), Virtual
    Private Networks (VPN) and e-payment systems. PKI applications provide the necessary security
    to run on a public network such as the Internet.
        PKI Tokens: A hardware device in the form of a smart card or a key usually with limited
    memory capacity used to store the entity’s certificate and private key. Some tokens also store the
    cryptographic algorithm used for encryption and other relevant data. When the user inserts the
    token into the reader, they are requested to enter a Personal Identification Number (PIN) or a
    password. Tokens could be read by the smartcard reader on the keyboard or through the Universal
    Serial Bus (USB) port of the computer.




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