Accelerating the Growth of High-Speed Internet Services in Azerbaijan

Accelerating the Growth of High-Speed Internet Services in Azerbaijan

Nestled at the crossroads between Europe and Central Asia, Azerbaijan is a resource-rich country that has achieved impressive economic growth over the past decade, thanks in great part to its highly successful petroleum industry.

Poverty has been reduced significantly, unemployment has steadily decreased and the middle-class has grown among the country’s 9.4 million citizens.

Azerbaijan’s government recognizes, however, that the country faces some long-term challenges, including an over-dependence on oil exports, a concentration of employment in only a few sectors, and a rapidly growing population of young people entering the labor market in the coming years.

Consequently, the government has shifted its focus recently to a range of policies that include diversification of the economy and increased investment in information and communication technologies (ICT). Identified as an important future contributor to non-oil GDP, the ICT sector could help facilitate the country’s transition into a successful knowledge economy by 2020.

Azerbaijan’s ICT sector has been expanding rapidly – at an average rate of 25-30% per year since 2005 – stimulated largely by telecommunications liberalization, modernization and extension of the national telecom infrastructure, and implementation of e-government, among other sector-specific policies.

Overall development of the country’s ICT sector has been fueled mostly by the telecom industry, especially its mobile segment.

The number of Internet users in Azerbaijan soared from only 17% of the population in 2008 to 73% in 2013. By 2014, wireless penetration per capita had grown to over 100%, while around one third of the population had gained access to mobile broadband, and 30% of households had subscribed to fixed (wired) broadband Internet.

Increased Internet penetration and improved affordability are the results of a gradual extension of mobile and fixed broadband networks, coupled with significant reduction in broadband access wholesale and retail prices for the country’s Internet service providers (ISPs) and customers.

In comparison with neighboring countries in Central Asia, Azerbaijan boasts the lowest prices for fixed and mobile broadband access in proportion to average disposable monthly income.

However, the quality of broadband service in Azerbaijan is strikingly low: the number of higher speed connections (over 4Mbps) is persistently lower than 10% of all connections in the country, with only a very slow increase over the last two years.

Such low-speed broadband connectivity can negatively impact aspects of socio-economic development in Azerbaijan, including but not limited to job creation, human skills development, and foreign direct investment – all of which are associated with higher speed broadband rollout.

Lithuania and Norway, for example, have demonstrated that countries can perform highly in terms of fixed and wireless broadband penetration by facilitating infrastructure-based and technology-neutral competition, while enjoying a high quality of service at low and affordable prices.

Infrastructure-based competition is usually fostered through regulatory approaches that encourage the market players in a country to invest in national backbone infrastructure through the use of bitstream, and to invest in regional infrastructure.

The absence of a level-playing field between state-owned incumbents and alternative operators in Azerbaijan means that Internet Service Providers (ISPs) are not sufficiently incentivized to develop their own access fixed networks through regulatory means and therefore increase the quality of their service provision.

In addition, regulatory bottlenecks at the wholesale level and low fixed broadband infrastructure coverage outside of the capital city, Baku, further impede private sector deployment of access networks.

Azerbaijan’s Ministry of Communications and High Technologies is responsible for establishing and enforcing policy on electronic communications, acting both as a policymaking and regulatory body.

The Ministry also formulates proposals related to the provision of public investment in the ICT sector, while the sector itself is dominated by two state-owned enterprises. A major challenge that arises, therefore, is being able to sustain healthy competition and private investment inflows over the long-term.

Given that the telecom sector is the backbone of Azerbaijan’s ICT sector, it is highly recommended that policymakers enact sector governance reform and adopt measures to stimulate infrastructure-based competition, specifically in the fixed broadband market.

Such actions will not only improve the country’s broadband potential and ensure long-term sustainable growth in the ICT sector, but also help toward achieving economic diversification and development more broadly for Azerbaijan in the future.