2. Azerbaijan’s sustainable infrastructure investments
This chapter describes sustainable infrastructure planning in Azerbaijan and presents current trends in investment in large-scale infrastructure projects. It compares Azerbaijan’s infrastructure plans in the energy, transport, industry and water sectors against its international commitments under the Paris Agreement on climate change and the Sustainable Development Goals (SDGs). The chapter also explores Azerbaijan’s strategic documents for long-term economic development, sectoral development and the environment, including those related to climate change mitigation and adaptation. It identifies misalignments between stated goals and observed investment flows and provides recommendations to improve strategic planning for sustainable infrastructure.
Economy and trade
Economy and demographics
Azerbaijan is an upper-middle income country in the Caucasus. Its population, the largest in the south Caucasus, has grown steadily at annual rates of about 0.8%. Unlike in neighbouring Armenia and Georgia, Azerbaijan’s population did not decline following the breakup of the Soviet Union, nor has the country ever experienced non-positive annual population growth rates.
The economy of Azerbaijan, on the other hand, followed a similar trajectory to other former Soviet Union countries. It shrank to less than half of its pre-independence levels, from USD 8.9 billion (in current USD) in 1990 to USD 3.1 billion in 1995, and then slowly recovered throughout the late 1990s and early 2000s. Rapid economic growth characterised the period from 2005 to 2014, followed by a major contraction ending in 2016 from which the economy has not fully recovered. In 2019 the country’s GDP stood at USD 48 billion, more than five times larger than before independence.
Azerbaijan’s economy, unlike other countries in the present study, depends more heavily on industry and construction (which accounted for 48.7% of GDP in 2019) than on services (37.4%) and agriculture (5.7%). The share of agriculture in Azerbaijan’s economy is the lowest among EU Eastern Partnership (EaP)1 countries (World Bank, 2021[1]).
Azerbaijan’s territory consists of two unconnected areas separated by Armenia. Larger portion of Azerbaijan’s territory is the only part of the southern Caucasus with access to the Caspian Sea, while the Nakhchivan Autonomous Republic, the country’s exclave, is landlocked between Armenia, Iran and Turkey. Despite the ongoing closure of border crossings between Armenia and Azerbaijan, a 48-kilometre corridor guarantees safe transport links between the exclave and the rest of Azerbaijan. The corridor, which was established by a 2020 ceasefire agreement following renewed armed conflicts between Armenia and Azerbaijan (see below), could improve connectivity between Azerbaijan’s territories and facilitate trade between Azerbaijan and Turkey.
Azerbaijan has no diplomatic relations with Armenia due to the ongoing conflict over the Nagorno-Karabakh region of western Azerbaijan. The region and surrounding areas bordering Armenia declared independence in 1991 as the Republic of Artsakh (or the Nagorno-Karabakh Republic) during the First Nagorno-Karabakh War (1988-1994). To date, no UN member state has recognised the breakaway region’s independence. In 1994 Armenia, Azerbaijan and representatives from the breakaway region signed a ceasefire agreement resulting in an uneasy period of relative peace characterised by intermittent border clashes. The 2020 Nagorno-Karabakh war re-escalated the conflict, and the new ceasefire agreement led to significant transfers of territorial control from the breakaway region to Azerbaijan.
As of February 2021, Azerbaijan has the lowest number of COVID-19 cases per capita among EaP countries. Azerbaijan has diagnosed 22.8 cases per thousand inhabitants compared to 56.6 in Armenia, 27 in Belarus, 65.4 in Georgia, 40.5 in Moldova and 29.3 in Ukraine. Azerbaijan’s death rate (311 deaths per million inhabitants) is the second lowest in the region after Belarus (187), significantly lower than in Armenia (1 049), Georgia (817), Moldova (937) and Ukraine (562) (Roser et al., 2021[3]).2 Azerbaijan’s response to the outbreak included reinforced border restrictions, school closures and country-wide and localised lockdowns.
In 2020, as a result of the COVID-19 pandemic and decreased demand for Azerbaijan’s primary export, crude oil, Azerbaijan’s GDP fell by 4%. The economy is projected to experience modest growth of about 2% starting in 2021. Azerbaijan has announced a raft of economic stimulus measures to support the recovery, including a revised strategy for private sector development targeting micro, small and medium enterprises (OECD, 2021[4]).
Trade
Azerbaijan is an observer, not a member, of the World Trade Organisation. Unlike neighbouring Armenia, it is not a member of the Eurasian Economic Union. Azerbaijan is a target country of the European Union’s European Neighbourhood Policy under the EaP initiative. This aim to deepen EU-Azerbaijan relations through actions focusing on economic development, governance, connectivity and people-to-people contact. Its trade relations with the EU have been governed by a Partnership and Cooperation Agreement since 1999, and negotiations began in 2017 to establish a more comprehensive trade agreement (European Commission, 2019[5]), Unlike Armenia, Georgia and Turkey, Azerbaijan has no formal relationship with the European Union’s Energy Community.
The oil and gas industry produces all but a small fraction of Azerbaijan’s exports (see Figure 2.1(c), where they are classified as ‘mineral products’). The country’s most important export by far is crude petroleum (80% of exports), followed by petroleum gas (7.6%) and refined petroleum (2.6%). Other than limited exports of metal, the share of other exports is very small. While Azerbaijan exports mostly raw hydrocarbon resources, it imports primarily finished manufactured goods and consumer goods. Its main imports are machinery (33%) and vehicles (9%, mostly cars which account for 3.7% of imports) as well as precious metals (12%), metals (11%), chemical products (7%) and foodstuffs (6%) (see Figure 2.1(d)).
Azerbaijan’s main export market is the European Union (53% of exports), especially Italy (30%), the Czech Republic (5%), Germany (4%) and Portugal (3%) (see Figure 2.1(a)). Major non-EU export destinations include Turkey (9%) – with which Azerbaijan has close historical, cultural and linguistic ties, and Israel (7%). Azerbaijan’s most important export destinations within the former Soviet Union are Russia (3%), its neighbour Georgia (2.5%) and Ukraine (1.8%). The European Union as a bloc is Azerbaijan’s most important source of imports (17.4%), with Germany (5.1%), Italy (2.9%) and the Netherlands (1.7%) as the sources of most of Azerbaijan’s EU imports. Azerbaijan’s neighbours, the Russian Federation (16%) and Turkey (13%), are the most important countries for Azerbaijan’s imports, followed by the United Kingdom (11%) and the People’s Republic of China (5.7%) (see Figure 2.1(b)). Other than the Russian Federation, Georgia (4%), Belarus (2%) and Kazakhstan (1.5%) are the former Soviet countries that export the most to Azerbaijan. Azerbaijan’s Strategic Road Map on the Development of Logistics Outcomes set goals for increasing trade volumes by 2020 with specific regions and countries compared to 2015 (see section 2.3 on Azerbaijan’s key strategic documents). Azerbaijan aimed to increase trade via the Black Sea with Central Asia by 40% and with Iran by 25%. It also aims to increase transit volumes for various routes: between Central Asia and Europe by 25%, between China and Europe by 3% and between the Russian Federation and Iran by 40% (President of Azerbaijan, 2016[6]).
Source: Observatory of Economic Complexity (2020[7]), Azerbaijan: Exports, Imports and Trade Partners, Observatory of Economic Complexity, https://oec.world/en/profile/country/aze
Investment climate
In recent years, Azerbaijan has taken significant reforms to improve its investment climate by strengthening the institutional, regulatory and operational environment for companies to operate in the country. Such reforms and programmes are part of government’s efforts to develop industry and improve the image of the country worldwide (OECD, 2019[8]).
A recent OECD survey in Azerbaijan also demonstrates positive business perceptions of the reforms in Azerbaijan, with over 50% of the businesses considering all reforms “good” or “very good” (OECD, 2019[8]). The reforms that have been well-received by businesses include the suspension of business inspections (with 86% of businesses responding good or very good), as well as the online licensing (82%), and visa services (77%). Other initiatives such as the simplification of the tax system and the simplification of the customs system have also been perceived as positive by businesses in Azerbaijan.
Yet, despite such reforms in improving the investment climate, Azerbaijan still needs to improve its ability to foster skills development, promote competition among firms and reduce uncertainty. Despite the improved regulatory framework, the current business environment still deters entry of new firms and the expansion of existing businesses (EBRD, 2019[9]). According to some companies surveyed by the OECD, there is volatility in the sectors targeted by the government for growth, which creates uncertainty for businesses and hampers the effectiveness of the initiatives (OECD, 2019[8]). Companies would welcome greater consistency and long-term commitment across the reform programme.
Azerbaijan ranks 34th in the World Bank’s 2020 Ease of Doing Business report, second among its EaP peers after Georgia (6th). Protections for minority investors are the weakest point of Azerbaijan’s regulatory system, with the country ranking 105th out of 190 countries. Azerbaijan’s progress on other indicators has been consistent. For instance, it reduced the time required to open a business (105 days in 2004 compared to 3.5 days in 2020) and the complexity of the tax system (37 payments requiring over 750 hours on average per year in 2006 compared to 9 payments requiring approximately 160 hours per year in 2020) (World Bank, 2020[10]).
Corruption remains a significant problem for Azerbaijan’s investment climate. Transparency International ranked Azerbaijan 129th out of 180 countries in the 2020 edition of its annual Corruption Perceptions Index, down from 126th in 2019 and below other EaP countries (Armenia, 77th; Belarus, 66th; Georgia, 44th; Moldova, 120th; Ukraine, 126th) (Transparency International, 2020[11]).
International data on announced greenfield FDI projects offer insights on cross-border investment by economic activity in Azerbaijan. Between 2003 and 2017, the economy attracted over USD 32.7 billion of greenfield FDI projects, 50% of which was directed towards the coal, oil and natural gas sectors (or USD 16.3 billion) (see Figure 2.2). Infrastructure-related investments, particularly in the transport sector attracted close to USD 5 billion (or 15% of total greenfield FDI), which is relatively high compared to other countries in the region. This is in line with the government’s current priorities to develop new trade routes and transport corridors, including five logistics centres, the Alat free trade zone and the modernisation of the East-West Railway, which are expected to further attract FDI into the country (German-Azerbaijan Chamber of Commerce, 2018[12]). Other sectors that attracted greenfield FDI are financial services (USD 2.8 billion), real estate and metals (both with around USD 1 billion). In general, the government has acknowledged the need to diversify its FDI away from coal, oil and natural gas and increase the share of non-oil FDI from 2.6% of GDP in 2017 to 4% by 2025 as stated in the Strategic Road Map on the National Economy (Center for Analysis of Economic Reforms and Communication, 2017[13]).
Source: OECD based on fDi Markets (2019[14]), fDi Markets: the in-depth crossborder investment monitor (database), fDi Markets, https://www.fdimarkets.com/
The United Kingdom is the most important source of foreign direct investment (FDI) in Azerbaijan, providing 27% of foreign investment in fixed capital between 2016 and 2019 (see Figure 2.3). The United Kingdom’s interest in Azerbaijan centres on the country’s oil and gas industry, in which BP actively participates. Azerbaijan’s neighbour Turkey and international organisations (i.e. multilateral development banks) contribute a further 13% of FDI each. Azerbaijan’s other important investors are geographically diverse: Malaysia (9%), Switzerland (6%), Iran (6%), Russia (6%), Japan (6%) and the United States of America (5%). Other than Russia, the former Soviet Union countries are not large investors.
Source: State Statistical Committee of the Republic of Azerbaijan (2020[15]), “Fixed investments directed to fixed capital by foreign countries”, https://www.stat.gov.az/source/construction/
Azerbaijan’s public debt is considered to be at sustainable levels. However, given the country’s reliance on oil revenue, shocks to demand and price fluctuations like those experienced in 2020 are set to worsen the country’s fiscal and external positions (IMF, 2019[16]).
Climate change
Given the country’s relatively small size, its total emissions amount to only 0.1% of total global greenhouse gas (GHG) emissions. Azerbaijan’s GHG emissions and GDP both halved in the 1990s, following the breakup of the Soviet Union. Its GHG emissions fell from 78 MtCO2e in 1990 to 38 MtCO2e in 1997, while its GDP declined (see Figure 2.4). Over the past two decades, Azerbaijan’s emissions have slowly increased but, as of 2012, they have not yet surpassed their 1990 levels. Azerbaijan’s economy, on the other hand, has expanded rapidly since the late 1990s; by 2017, it was 2.5 larger than before independence. Consequently, the GHG intensity of Azerbaijan’s economy decreased by more than half, from 3.5 kgCO2e per USD (in constant 2010 dollars) in 1990 to 1 kgCO2e per USD of GDP by 2012. While this figure is the lowest GHG intensity of the countries analysed in the present study, it is significantly higher than the OECD average (0.35 kgCO2e per USD in 2012) (World Bank, 2021[1]).
Azerbaijan’s per capita emissions have also dropped from 10.9 tCO2e in 1990 to 6.1 tCO2e. While this figure is less than a third of other hydrocarbon-dependent economies like Kazakhstan and the Russian Federation and less than half the OECD average of 12.9 tCO2 per capita, it is considerably higher than its neighbour Georgia’s per capita emissions of 3.8 tCO2e (World Bank, 2021[1]).
Source: World Bank (2021[1]), World Development Indicators (database), World Bank, https://data.worldbank.org/
Energy (including fuel combustion for transport) accounts for the majority of Azerbaijan’s greenhouse gas emissions, at 75.3% in 2012. While this is a sizeable share, it is smaller than in 1990 when energy accounted for 87.2% of total emissions. Azerbaijan’s energy-related emissions were 38.5% lower than in 1990, while all other sources have gradually increased emissions since independence. Agriculture accounted for 13.6% of emissions in 2012, while industrial processes made up 5.8% and waste 4.8% (Ministry of Ecology and Natural Resources Republic of Azerbaijan, 2015[17]).
Current trends of decreasing precipitation and rising temperatures linked to climate change are already affecting Azerbaijan’s agriculture industry, which employs 38% of the population Pastures and vital crops, such as wheat, cotton and grapes, are particularly vulnerable to these changes due to overgrazing. The country already faces a shortage of water to meet domestic needs, caused in part due to a disproportionate draw on water from large-scale agricultural enterprises, and projected decreases in water resources (rivers, lakes, reservoirs and glaciers) are set to deepen the deficit. The number of days with maximum temperatures exceeding 35 degrees Celsius in Azerbaijan has increased rapidly, from 3 in the period 1961-1990 to 16 in the 2000s. The capital Baku in 2010 registered 44 days of temperatures over 35 degrees Celsius resulting in increased sunstroke incidence and hospitalisation rates. Climate impacts on economic activity and human wellbeing are projected to worsen without adequate adaptation measures (Ministry of Ecology and Natural Resources Republic of Azerbaijan, 2015[17]).
Azerbaijan’s infrastructure, especially its transportation infrastructure, is relatively high quality in comparison to other EaP countries and upper-middle income countries as a whole. Azerbaijan’s road network as well as air and rail transport services are of higher quality than in neighbouring countries, but its power and water infrastructure systems underperform on certain metrics (see Figure 2.5). However, Azerbaijan’s capital stock per capita is one of the lowest in the former Soviet Union, and much scope remains for increased infrastructure investment, particularly in modernising rail and improving irrigation as well as water supply and sanitation. Infrastructure service delivery varies considerably by region, with rural areas neglected in favour of the capital city region (World Bank, 2015[18]). Despite its relatively good infrastructure, Azerbaijan ranks poorly in the World Bank’s Logistics Performance Index (123rd out of 167 countries) due primarily to its ‘soft’ trade infrastructure, such as the competence and quality of its logistics services (World Bank, 2018[19]).
Source: World Economic Forum (2019[20]), The Global Competitiveness Report 2019, World Economic Forum, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf
The OECD’s database tracks 26 major infrastructure projects planned and under construction in Azerbaijan, with a cumulative value of USD 27.4 billion. By value, industry and mining projects account for over half of the investments (61%, USD 16.6 billion); energy and transport projects make up the second and third largest shares respectively (29%, USD 8.0 billion; 9%, USD 2.6 billion) (Figure 2.6). By comparison, water projects (1%, USD 234 million) represent much smaller shares of total investment in Azerbaijan’s infrastructure.
Source: OECD analysis based on accessed databases as of June 2020.
Transport costs are high in Azerbaijan, and domestic connectivity outside of the capital, Baku, presents a major barrier for rural residents’ economic prospects. Azerbaijan’s road and rail networks are in need of modernisation and increased spending on maintenance in order to take advantage of the country’s position by the Caspian Sea and being in proximity to major markets such as Iran, the Russian Federation and Turkey (World Bank, 2015[18]). However, in recent years Azerbaijan’s per capita spending on transport infrastructure has declined (see Figure 2.7). Road infrastructure investments account for almost all government spending on transport infrastructure, of which only about 3% is dedicated to maintenance of existing roads. Only 0.2% of inland infrastructure spending benefits the country’s rail network (ITF, 2019[21]).
Source: ITF (2019[21]), Transport performance indicators, International Transport Forum, https://doi.org/10.1787/trsprt-data-en
Azerbaijan’s inland transport modal split for freight has shifted towards road over time. In 2005, road only accounted for 44% of the country’s freight, measured in tonne-kilometres, but by 2015 it had risen to 71% (15.5 billion tkm), while rail’s share dropped from 56% to 29% (6.2 billion tkm). For passengers, road’s dominance is even starker: in 2015, 98% of passenger transport (23.8 billion passenger-km, up from 15.3 billion pkm in 2009) occurred by road, compared to only 2% (0.5 billion pkm, down from 1.0 billion pkm in 2009) by rail (UNECE, 2018[22]).
In the road sector, the government’s main development strategy, Azerbaijan – 2020: View to the Future, prioritises the development of two corridors: one running east-west from the capital Baku to Georgia and another north-south corridor from the Russian Federation to Iran (Government of Azerbaijan, 2012[23]). The World Bank, however, has recommended focusing on secondary and local roads to improve domestic connectivity and bring down travel and trade costs (World Bank, 2015[18]).
Azerbaijan’s state-owned rail company, Azerbaijan Railways, owns and operates the country’s rail network. Azerbaijan has international links with Georgia, Iran (only from the Nakhchivan exclave), the Russian Federation and Turkey (via the Kars-Tbilisi-Baku railway). No rail links exist with Armenia and, as a consequence, to date rail traffic between the majority of Azerbaijan and its exclave must bypass Armenia via Iran or Georgia and Turkey. However, the condition in the 2020 ceasefire agreement guaranteeing safe transport across Armenia between Nakhchivan and the rest of Azerbaijan could lead to the development of a rail link between Azerbaijan, its exclave and Turkey (Goble, 2020[24]).
Given its strategic position by the Caspian Sea and near large markets such as Turkey, Iran, Europe and Russia, Azerbaijan partakes in several international connectivity initiatives. Azerbaijan is a key component of the EU initiative TRACECA (Transport Corridor Europe-Caucasus-Asia), with its key Caspian Sea port (Baku) and well-established rail and road links to the Black Sea and onwards via Georgia and Turkey (TRACECA, 1998[25]). CAREC Corridor 2 also passes through Azerbaijan, linking Central Asia to the Caucasus via the port of Baku and onwards to Turkey and Europe through Georgia and its Black Sea ports (ADB, 2017[26]). Other initiatives include the Middle Corridor Trans-Caspian International Transport Route (2019[27]) (along with Georgia and Kazakhstan) and the South-West Transport Corridor (along with Georgia and Iran) (Financial Tribune, 2017[28]).
Azerbaijan’s transport infrastructure projects planned and under construction account for around USD 3.8 billion. Road projects dominate investments in the transport sector (68%, USD 1.7 billion), followed by rail projects (31%, USD 801 million) (Figure 2.8). While rail and port infrastructure accounted for larger proportions of Azerbaijan’s transport investments in the OECD’s 2019 study of ongoing infrastructure projects (OECD, 2019[29]), their shares have diminished with the completion of two key projects. In rail, the Astara-Astara railway, which connects eastern Azerbaijan to Iran, was completed in 2018 and complemented with a series of terminals for oil and grain. In 2020, the expansion and modernisation of the new Port of Baku at Alat was completed (Port Technology International, 2020[30]). Investment projects in the roads sector are mainly focused on expanding or rehabilitating highways, which are important in order to further strengthen Azerbaijan’s geographical position as an important link between the Black and Caspian seas and between Russia and Iran.
Source: OECD analysis based on accessed databases as of June 2020.
Refurbishment and rehabilitation of existing assets make up the majority of major transport investments in Azerbaijan (Table 2.2). Highest impact in terms of regional connectivity is the Railway Sector Development Programme, which aims to rehabilitate the Sumgait-Yalama rail line connecting Azerbaijan to Russia, which is also considered a key link in the North-South Railway Corridor of the CAREC corridors (ADB, n.d.[31]).
Energy
Overall, Azerbaijan’s energy sector benefits from better quality infrastructure than other strategic sectors, but the country’s electricity transmission and distribution systems underperform compared to its neighbours. While neighbouring Georgia’s electricity grids led to losses of 7.3% of electricity output, the Azerbaijani transmission and distribution networks have a loss rate of 9.7% (IEA, 2019[32]). Like other former Soviet Union countries, Azerbaijan has achieved universal electricity access.
The energy sector is of fundamental importance to the Azerbaijani economy. Petroleum products account for over 90% of Azerbaijan’s exports, and the oil and gas industry makes up a large but fluctuating share of the economy. Oil and gas accounted for 33% of Azerbaijan’s GDP in 2016 when oil prices were low (USD 46.4 per barrel of Brent crude) and 50% in 2011 when oil prices were higher (USD 112 per barrel) (Deloitte, 2017[33]). To export its oil and gas to Turkey and onwards to Europe, Azerbaijan has several pipelines that cross its neighbour, Georgia: the Baku-Tbilisi-Ceyhan (BTC) pipeline, Baku-Tbilisi-Erzurum (BTE) pipeline and the Trans-Anatolian Natural Gas Pipeline (TANAP) (Emerging Markets Forum, 2019[34]).
Azerbaijan’s electricity generation relies on its hydrocarbon resources; natural gas-fired power plants generate 93% of the country’s electricity (Figure 2.9). Historically, Azerbaijan relied more heavily on oil-fired power plants than on cleaner burning natural gas-fired plants. The former accounted for 66% of generated electricity in 1995 compared to just 16.9% for natural gas, but by the 2000s natural gas-fired electricity generation had surpassed oil-fired power. Hydroelectric dams are also an important part of Azerbaijan’s electricity mix, although their share has varied considerably in the past decade. Hydro accounted for 6% (1.6 TWh) of the country’s electricity in 2019, which is considerably less than in 2010 (18%, 3.4 TWh). Azerbaijan also began generating electricity from waste incineration in the 2010s; since 2016 waste accounts for 1% of power generation. Other renewables also account for small but increasing fractions of Azerbaijan’s electricity mix: Wind and solar photovoltaics (PV) generated 105 MWh (0.4%) and 44 MWh (0.17%) respectively in 2019 compared to 1 MWh (0.005%) in 2010 for wind and 5 MWh (0.02%) in 2015 for solar PV (IEA, 2018[35]).
Source: IEA (2020[36]), Electricity Information 2019, International Energy Agency.
Azerbaijan, as a result of its hydrocarbon reserves, is a net energy exporter and does not face the same energy security concerns as its neighbour Georgia. It exported 33 Mt of oil in 2017 making it the third largest oil exporter in the former Soviet Union after the Russian Federation and Kazakhstan. It is also an exporter of oil products (1.1 Mtoe in 2017), natural gas (7.4 Mtoe in 2017) and electricity (0.1 Mtoe in 2017) (IEA, 2019[37]).
Although the government of Azerbaijan identifies economic diversification and strengthening of the ‘non-oil sector’ as key priorities in its development strategy Azerbaijan-2020, many of its energy-related goals support the continued dominance of oil and gas in the energy sector and economy more widely. Azerbaijan-2020 singles out Phase 2 of the Shah Deniz gas field and its connection to the Trans-Anatolian natural gas pipeline (TANAP) as priorities (Government of Azerbaijan, 2012[23]). Since the OECD’s last review of Azerbaijan’s infrastructure plans, both projects have reached completion.
The government has set a number of targets related to renewable energy use and energy efficiency. The National Strategy of Azerbaijan on the Use of Alternative and Renewable Energy Sources (2015-2020) aimed to increase the share of renewables in electricity generation to 20% and in total energy consumption to 9.7% by 2020 (EaPGREEN, 2016[38]). Renewables development by 2020 fell short of these targets. The Strategic Roadmap on Development of Utilities sets the following goals for diversifying the country’s installed capacity for electricity generation: 350 MW of wind, 50 MW of solar and 20 MW of bioenergy by 2020 (President of Azerbaijan, 2016[39]). By 2019, installed capacity was well below targets: 66 MW of wind, 35 MW of solar, 44 MW of solid waste incineration and 1 MW of biogas (State Statistical Committee of the Republic of Azerbaijan, 2020[40]). In 2020, the Ministry of Energy of Azerbaijan announced that its new target is to increase the share of renewables in installed capacity to 30% by 2030 (Ministry of Energy of the Republic of Azerbaijan, 2020[41]).
Azerbaijan’s large-scale energy infrastructure projects planned and under construction total around USD 8.0 billion. Upstream oil and gas projects account for 80% (USD 6.4 billion), and electricity generation projects (16%, USD 1.2 billion) and transmission and distribution projects (USD 325 million) make the remainder (Figure 2.10). A single capital-intensive project, Azeri Central East platform, is responsible for the majority of upstream oil and gas’s large share. The joint project between Azerbaijan’s state oil company SOCAR and BP-Azerbaijan seeks to build a new exploration platform to further explore the offshore Azeri-Chirag-Guneshli oilfields.
As for electricity generation, all of the currently tracked projects are in wind power (). The push towards renewables development stems from two very different motivations. First, increased power generation capacity from renewable sources will help Azerbaijan meet its domestic targets and international commitments. Second, more renewable power will help Azerbaijan meet its rising domestic energy demand, which has been threatening natural gas exports (O’Byrne, 2020[42]).
Source: OECD analysis based on accessed databases as of June 2020.
Source: OECD database as of June 2020.Industry, mining and water
Mining and quarrying, primarily the extraction of crude petroleum and natural gas, account for 70% of Azerbaijan’s industrial output, while manufacturing makes up a further 25% (Figure 2.11). Historically, these proportions were reversed: In 1990, manufacturing accounted for 90% of the country’s output compared to only mining and quarrying’s 5% share. The manufacture of food products, both historically and today, is the country’s most important manufacturing industry (8% of industrial output in 2019; 25% in 1990), closely followed by the production of refined petroleum products (6% of industrial output in 2019). Other important manufacturing industries include the production of construction materials (2%), chemicals (1%) and the metallurgy industry (1%). Azerbaijan’s remaining industrial input is split between electricity, gas, steam and air conditioning supply (4%) and water supply, sewerage, waste management and remediation activities (1%).
Azerbaijan’s large-scale industry infrastructure projects planned and under construction total around USD 16.6 billion. The SOCAR GPC project is by far the largest active investment in the country’s industrial sector, valued at USD 15 billion. It aims to increase the production of polyethylene and propylene, primarily for export to Turkey, the EU and China, allowing Azerbaijan to move up the petroleum value chain and diversify from crude oil exports. Current investments in water supply and sanitation tracked in the OECD database are modest, amounting to USD 234 million.
Note: * NACE = Nomenclature statistique des activités économiques dans la Communauté européenne [Statistical Classification of Economic Activities in the European Community]
Source: State Statistical Committee of the Republic of Azerbaijan (2020[43]), “Industry of Azerbaijan - Sectoral structure of industry, 2019”, https://www.stat.gov.az/source/industry/
Strategic planning and links between long-term goals, infrastructure plans and environmental considerations
Azerbaijan adopted a long-term development strategy in 2012, Azerbaijan 2020: A Look to the Future, which describes the government’s vision for strengthened economic growth, diversification away from fossil fuels and the development of key sectors, including information and communications technologies (ICT) and logistics. The government complemented this document in 2016 with its Strategic Road Map on the National Economy and a series of twelve sectoral road maps for key economic sectors, including industry, agriculture, transport and housing, with quantitative targets for 2020, 2025 and some unspecified for post-2025. A follow-up strategy, National Priorities for Socio-Economic Development - Azerbaijan-2030, is set to be adopted in 2021.
Azerbaijan needs a longer-term development strategy, preferably to the mid-century, to plan its transition towards other economic activities. While Azerbaijan 2020 and the Strategic Road Map both discuss environmental challenges, they do not articulate a clear action plan to achieve the greenhouse gas emissions reduction goals expressed in the country’s Nationally Determined Contribution (NDC) or the long-term sustainability of the country’s transport and energy systems. Azerbaijan would benefit from a coherent document with a strong environmental focus and, crucially, a sufficiently long time horizon to evaluate the synergies and trade-offs associated with different infrastructure investments.
Azerbaijan also lacks formal strategies, instead it has set strategic directions for certain key sectors. One of the Strategic Road Map’s primary objectives is to strengthen the non-oil sectors of the economy through increases in foreign direct investment (FDI) flows, support for export-oriented non-oil industries and increased employment in services (particularly tourism) and commodities manufacturing (e.g. industry and food production). The Strategic Road Map also calls for the government to reduce its budgetary dependence on transfers from SOFAZ, Azerbaijan’s energy-related sovereign wealth fund, from about 50% in 2016 to 15% by 2025. However, despite these goals of economic diversification, the oil and gas sector still looms large in the country’s development vision, most notably with the construction of the new Azeri Central East platform for oil exploration.
Among the sectoral road maps that accompanied Azerbaijan’s Strategic Road Map on the National Economy were strategies relating to upstream oil and gas, the Strategic Road Map on Oil and Gas Development, and the end use of energy (both from hydrocarbons and other sources), the Strategic Roadmap on Development of Utilities. However, Azerbaijan does not have a strategy for the energy sector as a whole and currently lacks legislation on energy efficiency standards. The government is drafting a National Energy Efficiency Action Plan (NEEAP) and is expected to adopt a draft Law on the Efficient Use of Energy Resources and Energy Efficiency.
In the transport sector, both Azerbaijan-2020 and the Strategic Road Map on the Development of Logistics Outcomes set goals relating to the development of transport, primarily in terms of international connectivity and trade facilitation. Neither document presents a holistic development plan for the transport sector including improved secondary and rural roads to improve domestic connectivity, which has been identified as a barrier to regional economic development (World Bank, 2015[18]).
Institutional set-up and decision making processes
As noted in the OECD’s previous review of Azerbaijan’s infrastructure-related institutional set-up, Azerbaijan abolished the State Agency for Alternative and Renewable Energy Sources in 2019. In late 2020, the Azerbaijan Renewable Energy Agency was established by presidential decree under the Ministry of Energy. The Ministry has subsequently announced more ambitious renewables development targets (30% of electricity generation capacity by 2030) (Ministry of Energy of the Republic of Azerbaijan, 2020[41]).
Azerbaijan is a party to the Convention on Environmental Impact Assessment (EIA) in a Transboundary Context (the Espoo Convention), and in 2018 Azerbaijan adopted a Law on Environmental Impact Assessment. However, the parties to the Convention have signalled that Azerbaijan’s existing legislation and current lack of secondary legislation relating to EIA do not comply with the articles of the Convention (UNECE, 2019[44]).
Unlike neighbouring Georgia, Azerbaijan is not a signatory of the Protocol on Strategic Environmental Assessment (SEA). However, Azerbaijan in conjunction with the EaP-GREEN programme carried out a pilot SEA of the National Strategy on the Use of Alternative and Renewable Energy Source (2015-2020) (EaPGREEN, 2016[38]). EaP GREEN has also supported training programmes and workshops in Azerbaijan as well as the publication of Azeri-language documents on SEA’s benefits to encourage the tool’s adoption and use (UNECE, n.d.[45]).
References
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[31] ADB (n.d.), Azerbaijan: Railway Sector Development Program, https://www.adb.org/projects/48386-004/main.
[13] Center for Analysis of Economic Reforms and Communication (2017), Azerbaijan Economic Reforms Review, http://www.vusalmusayev.com.
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Notes
← 1. The EU Eastern Partnership (EaP) is a joint initiative for strengthening the relationships between the European Union, its member states and six countries (hereafter the EaP countries): Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine.
← 2. Confirmed case and death figures are underestimates of actual case and death numbers. Methodology and testing rates vary widely, and international comparisons are necessarily flawed.