MARKET ATTRACTIVENESS

Perhaps Azerbaijan goes for another stage of property denationalisation in the future. This is expected to cover strategic sectors of the economy, including energy, telecommunications, utilities, as well as a number of large industrial and infrastructure facilities. During the forum on the results of last year, officials of the State Service for Property Affairs and the Ministry of Economy discussed the ways to improve the efficiency of management of large state properties and the prospects for their privatisation.

Learning from past lessons

In addition to boosting the local production, the first stage of large-scale privatisation of state property in Azerbaijan, which was launched back in 1995, right after the country gained its independence, also contributed to the development of an entrepreneurial class and an increasing share of the private sector in the national economy. This stage mainly included small properties. The second phase, which started in the 2000s, included medium-sized enterprises and a number of infrastructure facilities. The main objective of the government at that time was to denationalise the Soviet-built facilities as quickly as possible and to attract investment and new technology to make them function as quickly as possible in the new market environment. Often the goal of the government was not to get the highest possible price for these industrial and service facilities, hence their privatisation at relatively low book values.

A similar situation has been observed in most post-Soviet states. Unfortunately, the process of property denationalisation has not always been highly effective. Many owners delayed the upgrade of industrial enterprises, misused them, or created commercial and service facilities on the area, built multi-storey residential buildings, etc.

In the following years, these and other negative aspects were taken into account. The legal framework and administrative mechanisms were changed, and transparency of the State Property Committee's work was ensured through the introduction of electronic resources. As a result, it was possible to substantially improve the operations of privatisation auctions, control how committed the new owners were to their obligations to invest in property purchased through investment tenders and to enhance the modernisation program as a whole. In particular, investment tenders are the best tool to guarantee that an enterprise restores its operations, for no successful bidder can become a de facto owner of the enterprise without first fulfilling the investment obligations. Moreover, if a potential investor fails to fulfil its obligations, the state can declare the results of the investment tender void. This has increased the interest of new owners in fulfilling their obligations.

A total of 1,476 of the 1,566 joint stock companies (JSCs) were privatised by the end of last year. In other words, 94% of the existing joint-stock companies were privatised. Today, about 23 of 90 non-privatised JSCs are run directly by the state, while the rest are run by other economic entities. Despite this high rate of denationalisation, not all Soviet-era assets have gone through the market transformation, modernised or used for intended purpose. "We can see that about 55% of the state-owned enterprises privatised in Azerbaijan have never restored operations. There are many reasons for that, the main ones being obsolete equipment and technology, as well as lost business ties. Hence, most state enterprises do not meet the requirements of the time and lost their markets," head of the State Service for Property Affairs, Metin Eynullayev, said. Today, only about a third of the privatised JSCs are doing what they should do or have changed orientation after modernisation. The rest rent out their premises, land and production facilities.

Bring the outlook closer

Nevertheless, the privatisation process, together with the replenishment of state budget revenues, actively encourages the development of entrepreneurship, reduces inefficient state assets and creates new jobs. In particular, last year it was possible to overcome the inertia of the pandemic period, including in the area of business investments.

In 2022, it was possible to generate over ₼115.4m budget revenue from the privatisation of state property. This exceeds the previous year's figures by 1.2%. By comparison, in 2019, which was a good year in all respects, the proceeds to Azerbaijan's state budget from the same process reached slightly over ₼88m.

However, the global crisis of recent years urges for enhancing the competitiveness of the Azerbaijani economy. Additional measures are necessary to increase the market attractiveness and efficiency of industrial and other state-owned facilities. To develop this area, it might be necessary to involve private investors in the future.

"Azerbaijan has created conditions for foreign and local investors due to changes in the management of state-owned companies over the past two years. As for the performance of companies transferred to the Azerbaijan Investment Holding (AIH), we can note a high dynamics of development. Last year, the total assets of state-owned companies reached ₼120b, compared to ₼50b in 2020," Azerbaijani Minister of Economy, Mikail Jabbarov, said. He added that EBITDA (operating profit) of companies and banks under the management of the holding company increased from ₼4b in 2020 to ₼14b in 2022. These are strategically important state companies managed by the AIH with a significant share in the national economy. The analysis of performance of state companies in the last two and a half years shows that the greatest effect from the process of rehabilitation and increase of capitalization has been achieved in the State Oil Company (SOCAR). The giant closed joint-stock companies (CJSCs) such as Azerbaijan Caspian Shipping Company (ASCO), Azerbaijan Railways (ADY) and Azerbaijan Airlines (AZAL) are also improving their performance.

"All steps taken in this area are necessary for us to bring closer the privatisation process in some strategic sectors of the economy. The questions has been discussed for so long, but has not yet started," Mikail Jabbarov said.

Efficiency is key

However, the privatisation reforms in the financial sector, which have been repeatedly discussed in the past, are now seen in a slightly different light given a number of circumstances. This relates to changes in approaches to the plans to denationalise the country's backbone lending institution, the International Bank of Azerbaijan (ABB). "The Azerbaijani government does not plan to privatise the country's largest bank ABB, which is on balance of the AIH," Metin Eynullayev said. According to him, the main purpose of the investment holding is to ensure the stability and profitability of its member organisations. If any state-owned enterprise is profitable, there is no need to privatise it, he said. This statement is quite justified, given that ABB's net profit in 2022 exceeded ₼254.4m (+21.8%).

As for other sectors of the economy, a few years ago the government identified priority areas where denationalisation of property is most likely to take place. For instance, it is planned to privatise the largest public utilities and distribution networks supplying electricity, heat, water and gas, as well as providing household waste disposal, road maintenance, and etc. services. Telecommunication sector will be eventually involved in the process of rehabilitation and subsequent privatisation, including a number of production associations such as Aztelekom and Baktelekom. Their value is estimated at billions of manats, so the privatisation process will be carried out step by step and based on their real market value.

The government has yet to decide on the scope and methods of the third phase of the large privatisation process. Nevertheless, this work is ongoing. A few years ago, specialists from the leading accounting firms KPMG, PwC, EY and Deloitte were brought together to develop a new privatisation programme.

Currently, active processes of rehabilitating and improving the efficiency of state property management, including their preparation for privatisation, are underway through the Azerbaijan Industrial Corporation (AIC) established in December 2017 by a presidential decree. The creation of AIH and AIC, as well as the implementation of reforms by these companies, involve reducing unnecessary costs for state-owned companies and ensuring higher export opportunities for the non-oil sector. These challenges are also to be addressed through the optimisation of state asset management mechanisms.

For example, AIC's efforts are aimed at increasing market value, modernisation, certification, introduction of corporate management methods and advanced management in 29 state-owned enterprises on its balance sheet. To date, 6 of them have been privatised and 7 are up for denationalisation through auctions.

A similar process is underway for the privatisation of facilities on the balance of Agrarkredit CJSC. In the last days of 2022, President of Azerbaijan signed a decree on privatisation through investment auctions of eight large enterprises specialised in the production of metal structures, construction materials, textiles, etc.

In general, the government’s goal is not to prepare for the privatisation of state-owned assets. The objective of efforts to clean up administration processes in the largest state-owned companies, to introduce corporate governance mechanisms, various innovations, and digitalisation is to increase capitalisation, production, and profitability of these companies. In the long term, these measures will also help to improve the credit ratings of state companies and improve opportunities for attracting portfolio investors. For example, to create joint ventures and develop other forms of cooperation in which the state could retain a position of the controlling shareholder.