PRIVATIZATION'S SECOND WIND

Privatization has, of course, chan-ged significantly since its early days in Azerbaijan. To be fair, the changes are mainly for the better. The economic reforms, reliance on the development of business and the country's role in the region as a whole and its potential mean that the shift from state ownership can only be positive. Success in privatizing state property should lead to a strong, competitive, diversified market economy. This will be the result of action taken in Azerbaijan to rationalize the use of state property. 

Practice makes perfect

It is practically 12 years since the Azerbaijani government began to privatize state enterprises. Even though denationalization began late in Azerbaijan in comparison with other transition countries (small-scale privatization began in 1995), many negatives were inherent in the process in the early days and as a result the first stage was delayed. 

The general public and local and foreign experts well remember the start of the transfer of state property to private ownership in Azerbaijan, which was accompanied by gaps in legislation, undeveloped stimuli and problems at the enterprises themselves and in the economy as a whole. Time has shown that Azerbaijan is unfamiliar with the practice of making a real evaluation of state property and, as a result, the unfounded increase in the prices of state enterprises has frightened off investors.

The only exception to this was the privatization of the Qaradag cement factory in 1998-99, which was carried out according to an individual plan and with an authoritative, western financial consultant (French investment bank Credit Commercial de France). The consultant - without the involvement of the government - together with an auditor from one of the world's "top five" evaluated the factory's assets according to international standards, prepared the facility pre-sale for tender (an investment competition) and organized the tender itself. As a result the privatization project is still considered one of the most successful in the former Soviet Union and the factory itself has increased production of cement from 200,000 tonnes before privatization to almost two million tonnes today. Sources close to the project claim that it was done according to western standards in large part thanks to the political support of Ilham Aliyev, who was at that time a deputy from Qaradag District and had an interest in the efficient (from the financial and social points of view) privatization of the facility. As well as meeting the purely financial terms of the contract, in purchasing shares in the factory the investor undertook responsibility for the social protection of the work force and their families and the residents of the district itself.

Second, in the early days the state had not managed to sort out the question of the debts of privatized enterprises which reduced interest in them. Third, parts of the securities market and its technical infrastructure were not fully functioning which made the movement of capital between sectors of the economy more difficult and significantly reduced the opportunities for foreign investors to take part in the privatization process. Fourth, the methods of privatization used in the first programme were not wholly appropriate. It even went so far as difficulties concerning the national characteristics of the Azerbaijani people.

The clear error in the privatization process was accompanied by the corruption and incompetence of some leaders, incomplete reforms in the administrative apparatus, the tax burden on the non-oil sector and a strict credit policy that did not allow privatized enterprises to gain financial resources at favourable rates. 

All these factors taken together led to a loss of interest in the denationalization process both from local small investors and from foreign investors, who were attracted by the whiff of oil. According to official statistics, the steep increase in the number of privatized small enterprises in 1996-98 later came to a stop. 

On the other hand, the lack of state control over facilities in the post-privatization period helped the sale of some of the assets of the now private companies. The poor transparency of the privatization process at the time and lack of work to rehabilitate enterprises before privatization also played a negative role.

Second attempt

The government is at present involved in the second stage of privatization, which envisages the denationalization of medium-sized and major enterprises. It has already corrected its policy in this area, enhancing the mechanism for the transfer of enterprises to private ownership, improving the legislative basis and increasing to seven the number of methods of privatization. The investment climate in the country as a whole has improved (the reduction in types of activity requiring a licence, the removal of artificial barriers to business, etc.) and macroeconomic indicators have started to show a more consistent upward trend.

In addition, under the Azerbaijani president's decree of 23 August 2006 on additional steps to improve the process of the privatization of state property and the management of state concerns, the system according to which state property is sold off has changed. The package of shares put to tender has been reduced from 85 to 51 per cent, while as before 15 per cent is offered to the work force through a closed subscription. The shares remaining after the package of shares has been sent for sale via tender or individual projects (not including the part offered to the work force) will be divided into equal parts and put to cash or voucher auctions. Previously when a state enterprise was privatized via tender (85 per cent), the package remaining after closed subscription was also transferred to the investor who won the tender. As a result the investor acquired almost all the shares through the investment tender.

In the first stage the use of privatization vouchers to make partial payment at investment auctions had little effect on the voucher market, while for a long time the second privatization programme was unable to restore the voucher market. This was related to the lull in investment that began in the early stages of major privatization. The voucher market began to revive in 2002. As a result the prices on the market rose to nine to 11 dollars and remain the same today.   

The chairman of the State Property Committee, Karam Hasanov, said at the government sitting on the results to 1 July 2007 that 15 million state privatization vouchers and two million privatization options had been used up as of today in the privatization process. 

Since 1997 7.8 million privatization shares (four vouchers make one share) have been issued in Azerbaijan. After several extensions to their period of validity, they should end circulation from 1 January 2008. 

Meanwhile, activity has increased recently in the cashing in of vouchers. Investment competitions are held quite often where demands are made for vouchers and options to be presented and used up. At least two voucher auctions are held every month. Another way that they are being used up is favourable subscription to shares in privatized enterprises for work forces, which has already allowed 1.3 million state privatization vouchers to be used up.

Tangible results

As for the state of play in the implementation of the privatization programme today, a plan of action has already been drawn up to implement in a timely and rational fashion the measures envisaged in the State Programme on the Improvement and Rational Use and Maintenance of State Property. A standing coordination commission has been set up as part of the State Property Committee in order to coordinate and ensure the efficiency and practicality of the work; coordinators have been appointed to create a rational mechanism of communication between the enterprises and the state bodies connected with them and of supervision and accounting in fulfilling the set measures. Around 30 draft normative and juridical documents have been drawn up to fulfil the state programme. Measures to organize cooperation with international and other foreign enterprises are continuing.

The regulations on investment privatization and management transfer were confirmed by a decree of Azerbaijani President Ilham Aliyev on 6 June 2007 "On the mechanism to maintain and manage state property". The regulations envisage monitoring enterprises privatized individually and by tender. The monitoring will be done in order to determine the prospects for attracting investment, the time frame, fullness and actual volume of investment, changes in the volumes of production and market share of the enterprises, measures to increase the competitiveness of the enterprises, the application of advanced technology, the operating regime and financial state, changes in the amount of shares and the make-up of the shareholders and the utilization of land. 

In addition, the State Programme on the Management of State Property, the regulations on pre-privatization improvements and restructuring and the regulations on managing the state package of shares in joint-stock companies have been confirmed and additions and changes made to the statute on evaluating privatized enterprises.

The state programme will be implemented with funds from the state budget, enterprises and organizations, grants and other financial assistance. The Cabinet of Ministers must regulate the debts of privatized enterprises and the legal prosecution of organizations that have allowed an illegal reduction in the state share in the capital of enterprises.