ATTEMPT NUMBER THREE

The government has speeded up reforms in all spheres of the national economy to improve the export potential of the non-oil sector. Drastic reforms in the customs and tax systems have been initiated after the launch of the new stage of privatization of state property. On July 19, 2016, President Ilham Aliyev issued a decree “On some measures for the acceleration of privatization and improvement of efficiency of state property.” Thus, the third stage of this process was officially initiated after several years of weakening interest due to implementation of large-scale oil and gas projects.

Errors of the first stages

The first law on privatization of state property was adopted in 1995 and the peak of privatization process was observed in 1997-1998. At that time, the promised decentralization of “blue-chip companies” included in the first State Program (1995-1998) did not happen: the giants of national economy such as SOCAR, Caspian Shipping Company, AzTeleKom, etc. had not been listed neither on check nor cash auctions. Therefore, foreign investors have lost interest in the privatization process, with the focus shifted mainly to local businesses. Evaluating the situation from this point of view, thanks to the first stage of privatization, a new class of entrepreneurs, literally tens of thousands of SME owners, has successfully emerged in the country. However, not all of them could cope with new challenges: most of the repurchased entities have subsequently fell into disrepair. There was a discernible trend indicating that the voucher privatization could not become a reliable tool for revival of production capacities transferred to private enterprises. So, the new owners had initially sold off the property, and later the acquired territories for the construction of residential complexes.

The blunders had to be rectified during the second stage of privatization. The new law “On privatization” was adopted in August 2000. In this case, the main tool was investment competitions: potential investors would take over the financial responsibility for the restoration of production while the control over the production would be placed upon the staff of the supervisory authority.

However, in search of foreign investors, the Azerbaijani officials of that period have failed to find proper entrepreneurs, who sometimes owned investment capital with net worth tens or hundreds times lower than that the investment proposals they had presented for review. The most striking example of such a negligence was a billion-dollar proposal by Dutch company Fondel Metal Participation B.V., which won the tender on the management of Azeraluminium OJSC in September 2000. The Russian company RUSAL, with an investment proposal of $124 million, was also taking part in the tender. The Ministry of State Property ranked RUSAL the fourth favourable company.

Anyone reasoning in international trade and business was aware that the “tale about billion dollars” was clearly a prank. Indeed, Fondel, which was engaged in metal trading operations with a total declared turnover of $175 million, could not invest $1 billion into an Azerbaijani project by the end of 1999.

Eventually, the Dutch had managed to steer Azeraluminium for a little more than five years, as the contract with Fondel Metal was terminated in 2006. Azerbaijan could not get the promised construction of a new aluminum plant worth $250-300 million and with an annual capacity of 100 thousand tons.

Ultimately, a number of enterprises privatized or managed by foreign investors under the investment competition rules had terminated contracts with their owners including the British Targol Investment Ltd (privatized Azerboru JSC, the former Sumgayit Pipe Mill), the Turkish Barmek Holding owning power distribution networks in Baku, Sumgayit and northern regions, and other companies.

A difficult challenge

The third stage of privatization must be governed by the following main principles: transparent deregulation process, corporate governance practices, introduction of know-how in production processes and a broader attraction of foreign investors.

On August 31, the management of the State Committee for Property Affairs held a public presentation on privatized enterprises to attract foreign investors and companies. The participants included a number of international financial institutions and consulting firms such as KPMG, Ernst & Young, Delloitte, PriceWaterhouseCoopers, McKinsey & Co. and Baker & McKenzie.

The presentation provided information about ten large state-owned enterprises including joint-stock companies (JSC) Daşkəsən Filizsaflaşdırma, Bakı Elektroavtomat, Mingəçevir Texniki Rezin, and Mingəçevir Regenerat.

In addition to these large-scale enterprises, 190 state enterprises and entities operating both in Baku and the regions (including a 30% controlling stake of 75 join-stock companies covering various sectors of the national economy such as mining, chemistry, metallurgy, machine-building industry, agriculture, construction, transport, etc.) have also been exhibited as part of the third stage of privatization auctions. The rest of the property consists of 89 small state-owned enterprises, as well as some vehicles (cars and helicopters).

In order to ensure transparency of the privatization process, the applications for participation in auctions will be accepted electronically. In addition, foreign investors have had an opportunity in participate in auctions in on-line mode. The press and public representatives will be able to observe the bidding process online.

It should be recognized that the world economy has not yet fully revived after the international financial crisis of 2008-2009 to make sure that foreign investors are willing to invest in developing countries.

It is obvious that over the past decade, Azerbaijan has become a reliable partner of foreign investors with regard to the implementation of large-scale oil and gas projects. Accordingly, to attract more foreign investors, the government must use the lessons learnt and provide necessary incentives during the third phase of privatization.

However, foreign investment policy applied on large-scale projects is not enough for the successful development of non-oil sector of the economy. It is necessary that local businesses begin to invest heavily in the revival of enterprises in the regions.

In particular, it is important to establish enterprises ready to cover full cycle of production, e.g. starting from the production of cotton and silkworm cocoons to finished products. That means local investors, who need preferential government support in the matters of privatization and the establishment of businesses, can guarantee the success of government plans.