Falling Oil Revenues Compel Azerbaijan to Reform its Public Sector: Petrostrategies  

The article was published in the World Energy Weekly (September 7 issue), a publication of Petrostrategies, a French think-tank specializing in energy issues. 

Hit hard by falling oil revenues, Azerbaijan is trying to make its public sector more efficient through fundamental reform, possibly involving the privatization of some state-owned corporations. Thus, at the behest of President Ilham Aliyev, a holding company was founded on August 7 to bring together and manage “all state-owned companies”, including energy firms. On the previous day, during a public video-meeting with his government, Aliyev had criticized public-sector companies in very harsh terms, accusing them not only of mismanagement but also of dragging his country’s economy downward. These companies use the state budget to finance their projects and to bail themselves out if they make a loss, he asserted. “The losses in state-owned companies are quite large”, he said, specifically singling out companies in such fields as oil, gas, water, railways, aviation, maritime transportation, and so on. Stressing that such losses can range as high as 40% to 50%, the President pointed out that state-owned corporations are used to having their losses reimbursed by the government. “This will no longer be tolerated”, he insisted.

Hit hard by falling oil revenues, Azerbaijan is trying to make its public sector more efficient through fundamental reform, possibly involving the privatization of some state-owned corporations. Thus, at the behest of President Ilham Aliyev, a holding company was founded on August 7 to bring together and manage “all state-owned companies”, including energy firms. On the previous day, during a public video-meeting with his government, Aliyev had criticized public-sector companies in very harsh terms, accusing them not only of mismanagement but also of dragging his country’s economy downward. These companies use the state budget to finance their projects and to bail themselves out if they make a loss, he asserted. “The losses in state-owned companies are quite large”, he said, specifically singling out companies in such fields as oil, gas, water, railways, aviation, maritime transportation, and so on. Stressing that such losses can range as high as 40% to 50%, the President pointed out that state-owned corporations are used to having their losses reimbursed by the government. “This will no longer be tolerated”, he insisted.

In particular, SOCAR, the national hydrocarbon company, was harshly criticized by Aliyev. The government budget has been used to finance not only the extension of the gas network in rural areas, but also SOCAR’s drilling and even its “share in consortia with foreign partners and […] other infrastructure projects. Where does this money come from?” exclaimed Aliyev on August 6, probably referring to Socar’s share in the Azeri–Chirag–Deepwater Gunashli (ACG) consortium. On the following day, the President signed a decree to set up Azerbaijan Investment Holding (AIH), a company intended to bring all state-owned corporations under a single umbrella, with a charter capital of 100 million manats (some $59 million). The new body has a five-member supervisory board and is chaired by the Prime Minister. It also includes the country’’s Economy and Finance Ministers and two of Aliyev’s advisers. The decree specifies that decisions shall be made by majority vote and that there can be no abstentions when the board votes. Ilham Aliyev has given his government two months to propose a list of state-owned companies that will be subordinated to the AIH, thus ensuring their “transparency” and healthy management while “optimizing costs and risks”. According to one of Aliyev’s advisers, the aim is to speed up the liberalization of the economy by privatizing certain state-owned companies when they become profitable.

To ward off criticism, sources in the Azeri press have assured that the AIH will not meet the same fate as the Financial Market Supervision Authority (FIMSA), which was set up by Azerbaijan in February 2016 to clean up the country’s financial sector. This body proved unable to prevent major bankruptcies in the banking and insurance sectors. The most famous case is that of Azerbaijan’s largest bank, the International Bank of Azerbaijan (IBA), whose bailout between 2013 and 2017 cost the government the equivalent of a year’s GDP, according to the EBRD. FIMSA was liquidated in November 2019.