NEW WAVE OF REFORMS

In fact, Azerbaijan started the process of privatisation of state property rather late compared to other post-Soviet countries, gradually opening up more state-run enterprises to private investors. The process started in 1996 continues to this day, being one of the profitable items of the state budget. For example, during the seven months of 2023, the proceeds from privatisation of state property reached ₼69m, which is 2.1 times more than in the same period last year.

At the same time, the government has decided from the onset to leave strategically important spheres closed to private investors. While this approach raised a lot of questions initially, over time, especially during the 44-day liberation war in Garabagh, it proved to be the right one.

Currently, it is decided to expand the opportunities for citizens to join the management of state enterprises. On August 31, 2023, President Ilham Aliyev issued the respective order on measures to attract private investments in state enterprises of the Republic of Azerbaijan.

New phase of reforms

According to the order, it is planned to attract investments in International Bank of Azerbaijan OJSC, Baku Telephone Communications and Aztelekom, Azerbaijan Caspian Shipping Company CJSC, AzerGold, Azerikimya (ethylene-polyethylene plant), as well as several urea and methanol plants.

According to the Ministry of Economy, the idea is to reduce the financial share and burden of the state in the management of large enterprises, as well as to expand public-private partnerships. This is supposed to deepen the introduction of corporate governance mechanisms and to revitalise capital markets in the country.

According to the document, it is planned to conduct studies and prepare proposals with the involvement of reputable international consulting companies. They will cover restructuring, rehabilitation, evaluation of state enterprises, identification of potential investors, liberalisation and anti-monopolisation of the relevant market. It is also planned to change the organisational and legal form of state enterprises and the possibility of transferring non-core activities to the private sector, as well as methods of partial sale of parts and shares of state participation intended for privatisation. Thus, it is also planned to improve the legal and regulatory framework.

The government believes that the consolidation of private investment and expansion of co-operation between private businesses and state-owned companies will accelerate the diversification of the national economy, reducing dependence on the non-oil and gas sector and increasing competitiveness.

"Azerbaijan is consistently implementing structural reforms to increase efficiency, liberalisation and diversification of the economy. The ongoing reforms also cover state-owned enterprises. The introduction of corporate governance principles in state enterprises, increasing their economic efficiency and improving their financial sustainability are among the main factors contributing to Azerbaijan's economic development," Ministry of Economy believes.

Among the advantages of the new management method is the transfer of state-owned companies to Azerbaijan Investment Holding Company created specifically for this purpose. The company will control the activities of state-owned companies through supervisory boards. The main purpose of dividing responsibility and ensuring accountability through supervisory boards is to increase economic benefits. These include transition from losses to profits, introduction of responsible expenditure policy, creation of new sources of income, minimisation of budget subsidies, and commercial transformation of state-owned enterprises making transfers to the budget.

"Factors such as political and financial-economic stability, favourable business environment, comprehensive development of free market relations, support of sustainable private property in Azerbaijan accelerate economic development and increase the interest of foreign investors in our country. At the same time, we can observe a steady growth of opportunities for citizens to benefit from economic development," Ministry of Economy stated.

Transparency and corporate governance

The retention of important economic areas by the state is a common practice even in the most developed economies. As for Azerbaijan, back in 2017, the World Bank published a technical note titled Republic of Azerbaijan: Corporate Governance and Forms of Ownership in State-Owned Enterprises, which noted the special role of these entities in the national economy, particularly in terms of improving the welfare of the population, uninterrupted provision of necessary goods and services, and employment. It pointed out that the share of state-owned enterprises and companies in GDP exceeded 45%, covering the largest areas of strategic importance, including the extraction of natural resources (oil and gas), infrastructure, transport, communications, water and energy supply.

At the same time, for many years Azerbaijan has modernised the management and administration in these structures and reorganised many state-owned enterprises into joint-stock companies. However, it is not easy to ensure in a couple of years that such companies and their practice of corporate governance fully comply with the accepted best practices.

Back in 2011 the Azerbaijani government adopted the Corporate Governance Standards, which can be applied on a voluntary basis by all types of enterprises. However, because of the voluntary nature of these standards only a few companies have adopted them—mainly banks and financial companies, and very rarely production companies. Both international and local experts have repeatedly pointed out the negative consequences of the situation for the national economy.

On the other hand, giving strategically important areas of the economy to private investors is not a good idea for a country that has been in a state of military confrontation with a neighbouring state for many years. The 44-day war proved it completely: the state did not depend on private companies to use their potential to ensure victory.

But the process of institutional reforms, measures for restructuring and rehabilitation of state-owned enterprises, attraction of private investment by reducing the share of state participation in them continued and intensified after the war and the pandemic. This point is also reflected in Azerbaijan-2030: National Priorities of Socio-Economic Development approved by the February 2, 2021 presidential order. The document defines commercial principles, introduction of corporate governance standards with due regard to the best international practices, increase of profitability as the founding principles for the successful operation of state companies. It also considers as priorities the further development of issues such as increasing the level of transparency in the public sector, expanding and promoting the introduction of modern corporate behaviour culture in economic management.

"One of the pillars of resistance to external influences is the state's foreign exchange reserves. The other one is disciplined borrowing. In order to maintain foreign exchange reserves at a stable level, it is necessary to gradually reduce the share of transfers from the State Oil Fund in the state budget. Total debt should serve macroeconomic stability, including the stability of the state budget," Gunay Guliyeva, head of department at the Centre for Analysis and Communication of Economic Reforms, said. She believes that internal debt management should contribute to the development of financial markets in the country, maintain a stable level of external public debt, strengthen control over the borrowings of state companies and manage the state debt.

But first, it is necessary to identify the companies open for investment, their financial needs and the optimal ratio of public and private sector share in them. "In the long term, investments by private companies using new and innovative technologies in state-owned companies can create more added value in the economy. This will make it possible for Azerbaijan to join the global value-added chain in a short time," Guliyeva said.

Privatisation of the International Bank of Azerbaijan

The issue of denationalisation of one of the largest banks in the country, International Bank of Azerbaijan OJSC, has long been on the agenda. Does the August 31 order mean that it will finally happen?

Back in 2015-16, the bank drew bad reputation due to its involvement in a number of financial frauds, which caused serious damage both to the stability and image of the bank and the national economy. There have been a number of measures to revitalise the operations of this joint stock company. Thanks to the involvement of the company's management and a reputable international consulting company, a new strategic development plan has been developed and significantly improved IBA's financial position.

In 2021, for the first time in recent years, the bank even earned dividends (7%) to be transferred to the state budget. In 2022, IBA also paid dividends to the state budget (₼120.5m). Meanwhile, last year the state's authorised capital in IBA increased from 91.40% in 2021 to 92.56%, while the share of the State Service for Real Estate Affairs increased from 3.76% to 3.81%. Overall, the state's share in IBA's authorised capital increased from 95.39 to 96.6%.

As of July 1, 2023, the number of IBA's shareholders reached 1,797. The bank's half-yearly report shows that this is 1.1% more than at the beginning of the year. In 1H2023, the number of individual IBA shareholders increased from 1,759 to 1,780, while the number of shareholders from among legal entities decreased from 18 to 17.

IBA also announced financial results for the first half of 2023. It shows that the bank ended six months of 2023 with a profit (₼164.4m).

According to experts, it is time to attract new private investments in IBA. This will help the bank to form a new strategy of competitive actions and reach the next stage of public-private co-operation in the financial sector, thereby reducing the burden on the state. Either way, the optimisation of the state share and further attraction of non-state investments will help to support long-term economic growth in the country. The new wave of reforms will definitely ensure the inflow of fresh investments. This will undoubtedly have a positive impact on the volume of revenues to the state treasury and increase the welfare of citizens.