The NRGI report could create another “Doing Business crisis”

Recently, I have read the 2021 Resource Governance Index for Azerbaijan prepared by the Institute of Natural Resources Management (NRGI).

It states, “Azerbaijan’s oil and gas sector scored 56 points out of 100 in the 2021 Resource Governance Index (RGI), up by nine points since the 2017 RGI. The country’s ability to realize value from the sector and its overall “enabling environment” deteriorated since the last assessment, but revenue management improved by 35 points and now places in the “good” performance band.” How real are this growth and this indicator?

First of all, I would like to say that for the assessment, results are grouped into five performance bands: “good”, “satisfactory”, “weak”, “poor”, and “failing”. For each assessment, Natural Resource Governance Institute (NRGI) has calculated the composite score using the scores of three index components:

1)    Value realization (49 points - 39 points);

2)    Revenue management (43 points - 78 points);

3)    Enabling environment (49 points - 50 points).  

According to the document, the situation on the first indicator (value realization) deteriorated in 2021, and the score decreased by 10 points compared to 2017, from 49 to 39. The 10-point reduction reduced Azerbaijan's position from the “weak” performance band to the “poor” performance band. The arguments presented here for the deterioration of the “value realization” indicator are strong.

However, according to the document, the situation has improved on the second indicator (revenue management). The score rose or was risen from 43 to 78. The increase in points is 35. According to this indicator, Azerbaijan's position has changed from the "poor" performance band to the "good" performance band.

The score given to Azerbaijan on the third indicator (enabling environment) was increased from 49 to 50. Although there was an increase of 1 point, according to this indicator, Azerbaijan's position is still in the "weak" performance band. Due to such a change in these three indicators, the RGI for Azerbaijan increased by 9 points from 47 to 56.

As can be seen, a change in the second indicator is the main indication of a relative improvement in the RGI for Azerbaijan. To be honest, it is highly doubtful how this indicator was evaluated with 78 points and how 35-point progress was achieved. The evaluators noted that the improvement in this indicator was due to the adoption of fiscal rules and improvement in the legal framework of SOFAZ. The improvement was also explained by the fact that the Azerbaijani government disclosed its budget and government expenditure for both the years 2019-2020, that the Ministry of Finance published documents indicating both revenues derived from the oil and gas sector, as well as the forecast projections of oil revenues, that SOFAZ improved its reporting rules, requiring the publication of an annual report, as well as yearly external financial auditing of SOFAZ’s financial statement, etc.

The point is that these references, mentioned in the report as a positive step, existed before 2019, and even before 2017. Information on oil and gas revenues and the share of these revenues in the state budget was made public before 2017. The State Oil Fund has been preparing annual reports almost since the day it started operating and has been publishing reports on the results of financial audits on its website. For example, you can look at the following sources of information:

https://oilfund.az/report-and-statistics/get-download-file/8_2014.pdf;

https://oilfund.az/report-and-statistics/report-archive.

It is clear that the authors of the document, so to speak, presented those that existed until 2017 as a "novelty" for 2017-2021. In other words, the "experts" of the Natural Resource Governance Institute were able to "improve" the "revenue management" index in the new era by presenting the old data in a new arrangement. Therefore, the result of the assessment on the increase of "35 points" can not be considered reasonable. If the outcome of the assessment on this indicator can be questioned, the final indicator on the RGI can not be taken seriously.

In my opinion, the assessment of the third indicator - the "enabling environment" score of 50 points is not adequate for the real situation too. The improvement of this indicator should have had a positive effect in some way, for example, on the dynamics of investment, albeit slightly. However, official statistics show that there has been no improvement in the dynamics of investment in Azerbaijan in 2017-2021. Not only did it not happen, but even during this period, foreign investment fell by 49% and domestic investment by 72%. How has the “enabling environment” index improved, albeit slightly, but has not had a boosting effect on investment? In my opinion, it is a very serious contraindication. Furthermore, a serious issue in Section 3 is related to the overall quality of governance in the country. Has corruption decreased? Is there an effective fight against it? Is there an independent judiciary? Is the press free? What are the states of the NGO sector and civil society? Are there open government and accountability? The situation in the country in all these areas is dire, as evidenced by international reports. The report turned a blind eye to them in silence.

Our general conclusion is that the assessment is reasonable on the first indicator and unfounded on the second and the third indicators. Therefore, the report on the 9-point increase in the RGI for Azerbaijan does not seem objective, and such an approach can create another “Doing Business crisis”.

Jamil Hasanli, Doctor of Historical Sciences