Promoting Enterprise Digitalisation in Azerbaijan

Promoting the adoption of digital solutions by SMEs

Public institutions and private actors providing enterprise support have an important role to play in supporting the digital transformation of SMEs in all industries, helping them overcome the size-related barriers that hamper their access to information, finance, training and quality advisory to progress in their digital transformation agenda. In particular, the following types of support can boost adoption of digital solutions:

• Awareness raising and information support – Small enterprise owners are often not aware of benefits (and risks) associated with digitalisation. Awareness raising campaigns and organisation of events promoting digitalisation can nudge entrepreneurs to explore and implement digital solutions. In addition, entrepreneurs are often unaware of existing support programmes that can help them to discover their digitalisation potential, build digital skills or invest into digital solutions.

• Skills and capacity building – Policymakers have several tools at their disposal to help build digital skills in SMEs, ranging from the digital diagnostic tools to help SMEs identify their digitalisation deficiencies, training and workshops, and more tailored approaches such as consulting and advice services.

• Financial support – Lack of internal funds and restricted access to external finance are often among the main obstacles preventing SMEs from investing into digitalisation. In this context, governments can provide SMEs with grants, loans with preferential interest rate or vouchers that could incentivise entrepreneurs to reach out for external advice or consulting.

Multiple initiatives aim to boost SME digitalisation in Azerbaijan, but comprehensive support programmes are yet to be implemented

Since the adoption of 12 Strategic Roadmaps for the National Economy in 2015, Azerbaijan has made significant improvements in enhancing the SME business support infrastructure and launched a number of financial and non-financial support programmes to boost SME development. The majority of these programmes are implemented by agencies under the supervision of the Ministry of Economy, Ministry of Digital Development and Transport, and the State Agency for Public Service and Social Protection.

Existing support programmes focus mostly on informational support for SMEs, provision of training and consultancy services, and financial support through grants and loans with preferential interest rates. While there is no targeted programme supporting adoption of digital solutions by SMEs from non-ICT sectors, digitalisation is embedded into the existing business support programmes. However, limited co-operation among various providers of digitalisation support services and the absence of a comprehensive digitalisation support programme covering various aspects of financial and non-financial support slow down the uptake of digital solutions by SMEs.

Non-financial support for SME digitalisation remains limited

SMBDA is the main institution providing non-financial support for SMEs

SMBDA operates as a public legal entity under the supervision of the Ministry of Economy. In 2020, the Agency employed 164 staff and operated with a budget of AZN 20 mil (Euro (EUR) 10 mil) financed from the state budget (OECD, 2021[47]). The SMBDA is providing SME support services via its operators that include SME houses, SME Development Centres and SME friends (see Figure 24 for the organisational structure of the SMBDA). While SME digitalisation is among the strategic priorities of the Agency, it does not provide financial and non-financial support programme targeted specifically to digitalisation.

Figure 24. Organisational structure of Small and Medium Business Development Agency

Source: Authors based on https://smb.gov.az/.

SME development centres have the potential to boost SME digitalisation

SME Development Centres provide complex non-financial support services for entrepreneurs with the aim of improving management practices, boosting SME skills and providing targeted advisory and consulting services. SME Development Centres provide training and consultancy services in the areas of management, marketing, legal issues, etc. (see Table 5).

Table 5. Areas of training and consulting services provided by the SME Development Centres

Training services	Consulting services
Starting a business	Support in accessing sales channels
Soft skills	Marketing tips
Project and financial management	Business planning and modelling
Corporate law	Accounting services
Sales	Legal advice and services
Marketing
Digital skills

Source: SME Development Centres (2021), https://kobim.az/az/xidmetler.

The SME Development Centres do not provide targeted training programmes or consulting services focused specifically on building digital awareness and enhancing the ability of SMEs to adopt digital solutions. However, the Centres cover issues related to digital skills and digitalisation more broadly as part of the available training and consultancy services based on ad-hoc needs (e.g. online sales, digital marketing).

As of December 2021 there are 21 SME Development Centres operating in the regions (16 of them launched in 2021), and they represent the main channel through which SMBDA provides its services to SMEs. During the first 9 months of 2021, SME Development Centers provided 1 077 training services to 15 000 SMEs, consulting services to 1 212 SMEs, and supported the development of 178 business plans. All services are provided free of charge and SMEs are not required to co-finance them (OECD, 2021[47]).

While SMBDA significantly boosted the provision of training and consulting services for SMEs, interviews with SME policy makers and experts conducted by the OECD indicated that awareness of SMEs’ training needs continues to be limited. This could be partly related to the lack of a systematic approach to the identification of SME needs and growth barriers, including those related to SME digitalisation. Even though SMBDA conducts an annual survey of SMEs to identify overall needs and development priorities, this cannot replace a company-specific needs diagnostic.

While SME Development Centres are under the supervision of the SMBDA, the Agency has only limited control over the scope and quality of services provided since these Centres are run by sub-contractors selected by the SMBDA. The sub-contractors are responsible for the delivery of all services provided in Centres and they determine the scope and type of provided support. This allows for greater flexibility and ability to tailor the services to the specific needs of SMEs in a given region. However, it might also lead to an inconsistent approach to trainings and consultancy services provided across regions and may lower their quality (despite follow-up satisfactory surveys that are performed by each SME Development Centre and which indicated high satisfactory rate among beneficiaries).

SMBDA has also developed a video training platform to increase the training and education opportunities. The platform offers a total of 180 training videos, presentation of training topics, relevant self-assessment tests and information support on issues including starting a business, soft skills, corporate law, project management, finance, sales, marketing, tourism and organization of the export process.

SME houses provide G2B and B2B services including those supporting digitalisation

Small and medium business houses (SME houses) are structural units of the SMBDA operating as a one-stop-shop providing G2B and B2B services. They offer services of several state institutions such as the State Custom Committee, Ministry of Economy (including State Tax Office), Ministry of Digital Development and Transport. With regards to services related to SME digitalisation, the SME houses provide information on the services of the SMBDA and its training programmes, the Entrepreneurship Development Fund, information on the activities of the Innovation and Digital Development Agency, but also issuance of e-signature. Currently there are two operational SME houses, in Khachmaz and Yevlakh (SMBDA, 2021[48]). While the SME houses provide important information and services support for SMEs, their potential to boost SME digitalisation is limited by their focus on general services but also due to their regional limitations (currently only 2 offices).

In addition to the two SME houses, the SMBDA launched an e-SME house portal, which aims to provide some services provided by SME houses online. Entrepreneurs that want to use the services of the e-SME house have to request a personal electronic account and are able to authorise all interactions using their e-signature. Entrepreneurs can use the portal to pay customs duties, payments for government services, but also use various financial “B2B”, banking, insurance and consulting services (SMBDA, 2021[48]).

The Innovation and Digital Development Agency aims to boost digitalisation, but with the primary focus on the ITC sector

The establishment of the Innovation and Digital Development Agency in 2018 under the supervision of the Ministry of Digital Development and Transport represents an important milestone in shaping the business support environment in Azerbaijan. The Agency was created by merging the ICT Fund and the High-Tech Park Azerbaijan. Its main objective is to assist individuals and legal entities in obtaining modern technologies and technological solutions, promote innovation-oriented research and innovative projects (including start-ups), provide them with financial support and promote innovation (Innovation and Digitalisation Agency Azerbaijan, 2021[46]).

The Innovation and Digital Development Agency oversees two high-tech parks located in Mingachevir and Pirallahi island, Barama Innovation and Entrepreneurship Centre and Symbiosis Technical Business Incubator, and is expected to establish an Innovation House which should provide complex services for innovative companies. However, while the above-mentioned initiatives promote ICT development and development of the high-tech sector and therefore contribute to digital transformation and diversification of the economy, SMEs operating in non-ICT sectors will not benefit from their services as they are not in the primary target group.

ABAD supports digitalisation of micro enterprises in Azerbaijan’s regions

ABAD – Easy Support for Family Business is a public legal entity established in 2016 under the State Agency for Citizen Services and Social Innovations. Its main objective is to support the development of family businesses to increase employment, support business formalisation and facilitate socio-economic development in the regions. ABAD centres in Baku, Quba, Balakan, Masalli, Imisli and Sheki support family businesses mainly in the sectors of handicrafts and food processing and packaging. Currently, services are being provided to over 350 clients, of whom approximately 50% are women.

Services provided by ABAD include business planning, marketing, training, branding and design, financial accounting, legal assistance and, most importantly, sales and equipment. With regards to digitalisation, ABAD provides businesses with an e-commerce platform (https://abad.gov.az/?locale). While there is no special programme targeting SME digitalisation, adoption of digital solutions is embedded in existing support, focusing, for example, on online marketing and e-commerce.

Financial support for SME digitalisation holds its promise

Restricted access to external finance continues to be one of the major barriers preventing SME development. According to an OECD enterprise survey carried out in 2018, 58% of surveyed SMEs considered insufficient access to finance the main barrier to their growth (OECD, 2019[38]). The often intangible nature of digital projects exacerbates the access to finance issues already faced by many SMEs. Banks’ credit departments are often unable or unwilling to assess the potential values and risks of a digital project and low financial literacy among SMEs further exacerbates the problem. As the alternative sources of financing and FinTech are still in their infancy, SMEs are often unable to access external financing.

Although government-sponsored financial support for SMEs in Azerbaijan has improved in recent years, existing support mechanism have limited scope and are not used to support purchase and adoption of digital technologies by SMEs.

The Entrepreneurship Development Fund operating under the Ministry of Economy provides, through commercial banks, loans to SMEs with preferential interest rate (5% p.a.). The size of loans is between AZN 50 000 (EUR 25 000) and AZN 1 million (EUR 500 000). In the first 9 months of 2021, the Entrepreneurship Development Fund provided financing for 1152 companies, most of them operating in the agricultural sector. The Fund started to implement a new strategy, which was adopted in January 2021 and identifies the financing priorities until 2023, which include telecommunication projects and digitalisation.

While SMBDA is primarily focusing on non-financial support, the Agency also has a grant mechanism in place to award SMEs with grants of up to AZN 20 000 (EUR 10 000). The grant programme is not yet fully operational and in in the first half of 2021 only 15 companies have received the support. However, the SMBDA plans to revamp the programme and will allocate an additional AZN 200 000 (EUR 100 000) until end of 2021 for SME grants.

The Innovation and Digital Development Agency provides financial support for innovative projects, including for commercialising research, as well as for acceleration programmes such as Idea to Business and Fast Track. In the past, the ICT Fund distributed grants, with a maximum amount of AZN 50 000 (EUR 25 000). The Innovation and Digital Development Agency plans to increase the maximum amount to AZN 500 000 (EUR 250 000), to support ambitious innovation projects that have large scope and scale. The Innovation and Digital Development Agency’s role as a facilitator of innovation activities is not entirely clear or well defined, as some of its mandates overlap with those of other government authorities with responsibilities for science and innovation (UNECE, 2020[49]).

Sector-specific digitalisation strategies and support programmes are still underdeveloped

While the adoption of digital technologies has a great potential to improve performance of SMEs across all sectors, the implications of digitalisation are likely to differ across different sectors, which calls for industry-specific strategies and support programmes. For example, intelligent and digitally connected machinery can enable the development of precision farming, which can boost productivity in the agricultural sector. On the other hand, logistics and online marketing and sale can boost performance of SMEs operating in the retails sector.

Azerbaijan’s institutions do not conduct sector-specific studies to determine digital maturity of different industries. As a result, sector-specific digitalisation support in Azerbaijan is limited to a few initiatives.

Limited co-ordination among digital ecosystem institutions hinders effectiveness of support

In the last 5 years, Azerbaijan has put in place a number of new institutions and programmes to support private-sector development and spur innovation. However, new policy instruments are not yet fully operational. Both old and newly established authorities lack full capacities to formulate, design and implement initiatives. While this is partly a natural process of building internal capacities, limited co-ordination between innovation agents – enterprise support and innovation agencies, high-tech parks, business incubators, etc. – limits the overall efficiency and effectiveness of existing programmes.

Active involvement of the private sector in the design and delivery of the digitalisation support programmes is very limited. This co-operation can be critical to ensure the quality of provided services, buy-in from the potential support beneficiaries, and better sustainability of the provided services. In addition, as all the programmes are provided free of charge, it limits the uptake of private sector providers of business development services and prevents further development of consultancy market.