The transition from oligarchic governance to managerial governance in Azerbaijan

During the initial period of the transition from oligarchic governance to managerial governance in Azerbaijan, the subject of this transformation included the central executive bodies implementing the state policy, line ministries. Over the past three decades, the Soviet-era model of single-handed management and administration in large state-owned companies engaged in the provision of public (gas, water, electricity, etc.), transport (air, rail, water, road, metro), and communications (internet, telecommunications, etc.) services resulted in inefficient spending of budgets, loans, and funds collected from customers. Although state-owned companies (SOCs) operating in this area were registered as large taxpayers, in the end, it turned out that they received more than they paid to the budget[1] and used foreign loans guaranteed by the state inefficiently. The leaders of SOCs, who spend their special, budget, and debt funds in a non-transparent manner and without accountability, also joined the ranks of the oligarchs. The leaders of the State Oil Company of the Republic of Azerbaijan (SOCAR), Azerbaijan Airlines (AZAL), Azersu, Azerenergy, Azerishig, Azerbaijan Railways, Amelioration and Water Management took the leading position among them.

The Opinion[2] of the Chamber of Accounts on the Draft Law of the Republic of Azerbaijan On Execution of the State Budget of the Republic of Azerbaijan for 2019 and the Annual Report on Execution of the State Budget states that a comparison of the funds executed from the state budget for six large state taxpayers and their payments to the state budget (receipts by tax authorities) showed that the amount of taxes and other payments paid to the state budget by five other large taxpayers, except for Azerbaijan Airlines CJSC, was less than the funds executed by these enterprises from the state budget. Such that Azerbaijan Railways CJSC paid 10.8 million manats to the budget and received a subsidy of 652 million manats from the budget, Azersu OJSC paid 24.6 million manats and received 483.7 million manats, SOCAR Azerigas CJSC paid 34.2 million manats and received 462.3 million manats, Azerenergy OJSC paid 90.8 million manats and received 403 million manats, Caspian Shipping CJSC paid 24.5 million manats and received 44.5 million manats, Azerbaijan Airlines CJSC paid 35.9 million manats and received 10 million manats. The subsidies received by these large companies from the budget are more than 2 billion manats. While state-owned companies received 4 billion manats in subsidies from the budget, they paid only 1.847 billion manats to the budget. 1.411 billion manats of this payment were paid by SOCAR. 436 million manats fell to the share of other companies. This amount was paid to each of the above companies. In 2019, the share of state-owned enterprises in the structure of revenues provided to the state budget through the State Tax Service amounted to 24.1%, decreased by 36,780.1 thousand manats or 2.0% compared to 2018.

Foreign debts arising from the activities of state-owned enterprises are also increasing. Such that at the beginning of 2020, the foreign debt of the Azerbaijani state amounted to $ 9.091 billion, of which $ 390 million fell to Amelioration and Water Management OJSC, $ 970.3 million to Azersu, $ 885.8 million to Azerbaijan Railways. According to the agreements signed, additional debt of $ 627.1 million will be attracted for Amelioration and Water Management OJSC, $ 1.269 billion for Azersu, and $ 1.368 billion for Azerbaijan Railways.

The abovementioned facts show that state-owned companies are a heavy burden on the state budget. It is not known from what sources the companies' expenses increased and for what purpose the allocated subsidies were used. Because companies do not have accountability and transparency in their activities, access to necessary information is limited. Heavy financial security resulting from the management of companies stems from poor management. Therefore, by the Presidential Decree dated August 7, 2020[3], in order to manage state-owned companies and enterprises, as well as economic societies with state share, on the basis of unified principles, improve their activities, as well as increase the transparency and economic efficiency of their investment programs, increase competitiveness, improve financial health and sustainability, the Azerbaijan Investment Holding was established and its Supervisory Board was formed. State companies and enterprises, as well as economic societies with state share, to be rehabilitated were transferred to the management of the Azerbaijan Investment Holding by the Presidential Decree dated November 5, 2020[4], a total of 22 companies, 5 of which are subordinated to the Ministry of Transport, Communications, and High Technologies of the Republic of Azerbaijan, have been transferred to the management of the Azerbaijan Investment Holding.

Thus, starting from 2020, a number of steps are being taken to implement a modern corporate governance model in large state-owned companies. For this purpose, the legal framework and institutions are being formed, which creates the basis for replacing oligarchs, who are the leaders of the SOCs, with managers. Such that by the Decree[5] of President Ilham Aliyev dated January 23, 2021, on measures to improve the management of the State Oil Company of the Republic of Azerbaijan, the Supervisory Board of SOCAR was established to exercise general management and control over the activities of the State Oil Company. On March 30, 2021, the Presidential Decree approved the composition of the Supervisory Board of Azerbaijan Airlines Closed Joint-Stock Company[6], BakuBus Limited Liability Company[7], Azerbaijan Railways Closed Joint-Stock Company[8], and Baku Metro Closed Joint-Stock Company[9].

On May 8, 2021, the Decree of the President of the Republic of Azerbaijan No. 844 dated January 24, 2003, on improving the structure of the State Oil Company of the Republic of Azerbaijan was amended.[10] The management structures provided for in the Charter of the State Oil Company of the Republic of Azerbaijan approved by this decree were abolished and new ones were established. With this decree, the approval of the Company's structure in coordination with the President of the Republic of Azerbaijan was entrusted to the Azerbaijan Investment Holding (AIH). At the same time, the decree stipulates that the decisions on the establishment, reorganization, and liquidation of the bodies included in the structure of the company, as well as subsidiaries and affiliates, are made by the Supervisory Board of the Company. The decree states that the company applies advanced corporate governance standards in its activities and management. The company's corporate governance standards are approved by the AIH.

As for the management structure, this decree defines the supreme governing body of the company as its General Meeting. The governing bodies of the company are the Supervisory Board and the collegial executive body is the Management Board. The general management and control of the company's activities are carried out by the Supervisory Board of the Company. The Supervisory Board consists of 7 (seven) members who are appointed and dismissed by the President of the Republic of Azerbaijan. Members of the Management Board of the Company may not be appointed members of the Supervisory Board. The term of office of the members of the Supervisory Board is 3 (three) years.

The current management of the company's activities is carried out by the Management Board of the Company. The Management Board consists of 14 (fourteen) members - President of the Company, First Vice President of the Company, Vice President for Geology and Geophysics, Vice President for Field Development, Vice President for Economic Issues, Vice President for Refining, Vice President for Investments and Marketing, Vice President for Social Issues, Vice President for Ecology, Vice President for HR, IT, and Regulations, Vice President for Strategic Development, Vice President for Oil and Gas Transportation and Gas Facilities, and Vice President -  who are appointed and dismissed by the President of the Republic of Azerbaijan.

In the previous structure, SOCAR was governed by its president and vice presidents. According to this structure, SOCAR has 12 vice-presidents, 12 deputy vice-presidents, 12 administrative assistants, and 34 advisers. Apparently, the new system serves to redistribute management powers in SOCAR and put an end to single-handed management. After that, the newly formed Management Board of SOCAR will be engaged in current affairs, and the Supervisory Board will monitor their activities. However, all this is now reflected in the decrees. SOCAR, AZAL, and other SOCs are still run by oligarchs under the old rules. However, I think that starting from the second half of this year, the process of replacing the oligarchs with managers will begin in these SOCs. Effective implementation of this process and leading to qualitative changes in the SOCs will be possible only after the privatization and the emergence of a real class of shareholders. This still requires a lot of work. We are still at the beginning of a long journey aimed at the transition from oligarchic governance to managerial governance in the SOCs.

[1] Large taxpayers received more than they paid to the budget, https://maide.az/rivergid_h452579.html

[2] Opinion of the Chamber of Accounts on the Draft Law of the Republic of Azerbaijan On Execution of the State Budget of the Republic of Azerbaijan for 2019 and the Annual Report on Execution of the State Budget, https://sai.gov.az/files/2019-REY_%C4%B0CRA.pdf

[3] Decree of the President of the Republic of Azerbaijan on the establishment of the Azerbaijan Investment Holding, August 7, 2020, https://www.taxes.gov.az/az/post/1129

[4] List of state companies and enterprises, as well as economic societies with state share, to be transferred to the management of the Azerbaijan Investment Holding, November 5, 2020, https://president.az/articles/45523

[5] SOCAR's Supervisory Board was established, January 23, 2021, https://apa.az/az/daxili_siyaset/SOCAR-in-Musahid-Surasi-yaradilib-625876

[6] Order of the President of the Republic of Azerbaijan on approval of the composition of the Supervisory Board of Azerbaijan Airlines Closed Joint-Stock Company, March 30, 2021, https://president.az/articles/50966

[7] Order of the President of the Republic of Azerbaijan on approval of the composition of the Supervisory Board of BakuBus Limited Liability Company, March 30, 2021, https://president.az/articles/50965

[8] Order of the President of the Republic of Azerbaijan on approval of the composition of the Supervisory Board of Azerbaijan Railways Closed Joint-Stock Company, March 30, 2021, https://president.az/articles/50963

[9] Order of the President of the Republic of Azerbaijan on approval of the composition of the Supervisory Board of Baku Metro Closed Joint-Stock Company, March 30, 2021, https://president.az/articles/50964

[10] Decree of the President of the Republic of Azerbaijan on Amendments to the Decree of the President of the Republic of Azerbaijan dated January 24, 2003, No. 844 on improving the structure of the State Oil Company of the Republic of Azerbaijan, https://president.az/articles/51420