Section 1.1 presents the economic and political context in Azerbaijan and an overview of Azerbaijan’s SOE sector. It then provides information on the legal and regulatory environment bearing on SOE governance. Section 1.2 describes ownership arrangements more broadly and the role of Azerbaijan Investment Holding, and examines how the state exercises ownership rights. An overview of transparency and disclosure and corporate governance requirements applicable to SOEs is provided.
OECD Review of the Corporate Governance of Azerbaijan Investment Holding and its State‑Owned Enterprises
Abstract
The Republic of Azerbaijan (hereafter ‘Azerbaijan’) is a country in the South Caucasus, located at the crossroad of Eastern Europe and Western Asia, offering East-West as well as North-South transit links; 800 kilometres (km) of coastline is on the Caspian Sea. It is the largest and most populous country in the South Caucasus region with a population of 10.16 million (mln) as of 2021 – and also the youngest, with 34.8% of the population under the age of 24 (World Bank, 2020[1]; State Statistical Committee, 2023[2]). Azerbaijan gained independence from the Soviet Union in 1991, which also marked the transition from a centrally planned economy to a more market-oriented system (Varani, 2018[3]).
The country is administratively subdivided into 14 economic regions (of which one is autonomous, the Nakhchivan), into 69 districts, of which eight belong to the region of Nakhchivan. Baku – the capital - has been divided into 12 districts and 53 municipalities. The population is almost equally located between urban areas (53%) and rural areas (47%) (State Statistical Committee, 2023[2]).
1.1.1. Economic performance
Azerbaijan has transformed its economy since its independence in 1991 from a planned to a market-driven economy. As part of its transition, many of the SOEs and collective farms were restructured and privatised. Early attempts at privatisation, like coupon privatisation, had mixed success. While some sectors saw limited privatisation, such as mining, transportation, telecoms and utilities, the Azerbaijani government retained significant control over the oil and gas industry due in part to the strategic importance of the sector and its revenue potential. A sharp increase in oil production and exports, starting in the late 1990s, coinciding with the global commodity super-cycle, pushed growth to double-digit levels from 2005-2008. Together with high levels of investment, particularly public investment, per capita national income rose from USD 630 (United States dollar) in 2000 to USD 5 630 in 2022, moving Azerbaijan from a lower middle income to an upper middle-income country. High oil and gas revenues helped finance social programmes and poverty declined dramatically from 49% of the population in 2001 to 5.5% in 2022 (State Statistical Committee of Azerbaijan, 2022[4]).
Azerbaijan’s economy remains dependent on oil and gas, which accounts for 54% of GDP in 2022 while generating 90% of Azerbaijan’s export revenues, and financing around 60% of the government budget (State Statistical Committee, 2023[2]). While these resources have dramatically increased the country’s living standards since the late 1990s and remain plentiful, over the past ten years, Azerbaijan’s economy was hit by multiple shocks, such as the oil price plunge of 2014 and the COVID-19 pandemic, leading to periods of economic recession.
In the aftermath of the global financial crisis, which led to a sharp fall in oil prices in 2014, external surpluses were wiped out, foreign capital inflows turned to outflows, procyclical fiscal policy was tightened, and the Central Bank of Azerbaijan (CBA) spent two-thirds of its reserves to maintain the de-facto fixed exchange rate against the US dollar. Nevertheless, in 2015, the national currency was devaluated twice and lost half of its value. A credit crunch in the financial sector and a banking crisis followed (World Bank, 2022[5]).
A recession in 2016 further exposed existing vulnerabilities in the banking sector. The sector was not prepared to withstand the shocks of deposit runs and rapid dollarisation after the devaluation and the subsequent rise in nonperforming loans. Several banks faced low capital positions, which were insufficient to absorb loan losses. These shocks precipitated the start of several bank closures, 13 banks had their licenses revoked in 2015-2016. The largest bank, the state-owned International Bank of Azerbaijan (ABB), went through a massive restructuring at high fiscal cost, which included the restructuring of the bank’s external debt of USD 3.3 billion (bln), and received a capital injection of USD 352.9 mln. This also resulted in the transfer of USD 8.2 bln to Agrarkredit (a state-owned non-bank credit organisation that became the de facto asset manager for ABB’s toxic assets) (World Bank, 2022[5]). In 2018 and 2019, the economy began to recover as it was supported by favourable terms of trade and stable oil production, albeit at a sluggish pace.
The pandemic caused Azerbaijan’s GDP to contract again by 4.3% in 2020. In total, 5.7% of firms closed permanently by summer 2021 (from those registered before the pandemic). Foreign trade turnover decreased by 21.2% in the first half of 2020, with imports down by 42.8% and exports down by 6.1% (OECD, 2022[6]). The economy rebounded strongly in 2021 and 2022, as a result mainly of a steep increase in oil and gas prices and bolstered by a recovery in services and manufacturing.
Azerbaijan's strategic location in the South Caucasus region, coupled with its abundant and easily accessible energy resources and well-placed transport infrastructure will continue to be important for the country’s economic development. The energy assets and transnational pipelines traversing the country hold strategic relevance in global energy markets and have gained additional relevance in the current energy landscape, marked by global energy security concerns and geopolitical considerations and priorities stemming from events such as the ongoing energy crisis precipitated by Russia's full-scale invasion of Ukraine.
Source: World Bank (2023), Azerbaijan: key indicators, https://www.worldbank.org/en/data/datatopics/aspire/country/azerbaijan.
1.1.2. Government
Azerbaijan is a Presidential Republic, as defined by its Constitution dated 12 November 1995. The Constitution establishes the division of power: the legislative power belongs to Milli Majlis (the national parliament), the President leads the executive power, and the courts hold judicial power. The President is the head of state and the executive power and is elected for a seven-year term – with the most recent elections being held on 7 February 2024. The President is supported by the First Vice President and the Prime Minister. The Cabinet of Ministers, led by the Prime Minister, is the highest executive body serving the President. The latest (6th) Milli Majlis (unicameral Parliament) was formed following the election held on 9 February 2020, in which the ruling party has a majority of seats.
1.1.3. Legal system
Azerbaijan is a civil law country, and its Constitution has the highest legal force in the country. Its legal system includes the Constitution, acts adopted via referendums, laws, decrees, decisions of the Cabinet of Ministers, and acts of the central executive authorities. The international treaties to which Azerbaijan is Party, are recognised as a constituent part of the internal legal system and given a higher hierarchical status in the case of a conflict with national legal acts, except the Constitution and acts adopted via referenda.
The court system consists of the Constitutional Court, the Supreme Court, appellate courts, general courts and specialised courts. Upon request of the President, Parliament, Cabinet of Ministers, Supreme Court, and Prosecutor’s office, legal acts are subject to review by the Constitutional Court of Azerbaijan on the compliance with the Constitution and with higher level legal acts.1
1.1.4. Business and investment climate
Azerbaijan made significant progress in improving its business climate for firms following the economic crisis in 2015, by reforming the operational and regulatory environment and strengthening the institutional support for firm development with the establishment of the Small and Medium Business Development Agency (OECD, 2022[6]). As part of its 2016-2020 SME Roadmap, the government streamlined administrative procedures, expanded e-government services and introduced tax exemptions for start-ups and individual entrepreneurs. In the 2024 edition of the OECD SME Policy Index for Eastern Partner Countries, Azerbaijan improved on nine out of the 12 policy dimensions assessed, primarily in the areas of small and medium-sized enterprises (SME) internationalisation, SME skills and business support services. Challenges remain on entrepreneurial learning and women’s entrepreneurship, SME operational environment and innovation policy (OECD, 2024[7]).
Azerbaijan ranks 154th out of 180 countries in the 2023 Transparency International Corruption Perceptions Index (Transparency International, 2023[8]). Azerbaijan’s oil and gas sector achieved 56 points out of 100 in the 2021 Resource Governance Index.2 The country’s ability to realise value from the sector and its overall enabling environment deteriorated, but revenue management has improved since the last review which boosted the country’s overall assessment by nine points.
Legal disputes involving foreign investors and Azerbaijani entities can be resolved either in a local court, or international arbitration bodies, as applicable. Despite the relatively strong legal framework3 to resolve legal disputes, foreign investors and businesses report issues with the reliability and independence of judicial processes in Azerbaijan. Problems can particularly arise “when a foreign investor or trader’s success threatens well-connected or favoured local interests” (U.S. Department of State, 2021[9]). According to a recently published OECD report, the country performs poorly in regard to judicial independence (OECD, 2024[10]). It also notes that the legal framework for managing and preventing conflicts of interest is lacking in key areas. While the Law “on Combating Corruption” allows individuals to report corruption, there is no comprehensive whistle-blower protection framework (OECD, 2024[10]).
1.1.5. Capital and financial markets and the banking sector
The Baku Stock Exchange (BSE) is the main stock exchange in Azerbaijan. The BSE is organised in the form of a closed joint-stock company (JSC), established in 1997, carrying out its first trading operation in 2000. The BSE has 20 shareholders, and its state regulatory authority is the Central Bank of Azerbaijan (CBA). It started trading corporate bonds in 2004. Derivative financial instruments started to be traded in March 2014, and SOCAR bonds were traded on the BSE from October 2016 onwards. The BSE trades short-term treasury bonds and bonds with a maturity of five to seven years (issued by the Ministry of Finance), common stocks (mostly from former SOEs that have been privatised), and foreign currency futures and trades corporate securities. It also has the sole responsibility over trading on primary and secondary markets of government securities (Baku Stock Exchange, 2022[11]).4 It has two listing segments, including a premium segment for large issuers (USD 1.47 mln and up)5 with higher corporate governance standards, under which government securities, among others, are traded; as well as a standard segment with more lenient terms for smaller issuers. A handful of SOEs have issued debt or equity for trading on the BSE, and 24 companies were listed as of February 2024. The total trade volume of securities on the BSE in 2022 amounted to USD 8.8 bln.
The BSE aims to change the role of the stock exchange and increase the quality of listings to attract international investment. For this, they are working with the CBA, which is acting as a first window. The CBA confirms the prospectus, financial statements, strategy related documents and issuance of specific securities before they are shared with the BSE. The BSE is working on creating a mobile investment application to facilitate micro investing. For now, most investors are domestic institutional investors.
The oversight of financial markets has been subject to several institutional changes. Azerbaijan transferred the responsibility for supervision of financial organisations and macro-prudential policy in 2016 from the CBA to the newly created Financial Institutions and Markets Supervision Authority (FIMSA), but in 2020 those functions were transferred back to the CBA (IMF, 2022[12]). FIMSA has since ceased to be the financial regulatory authority for Azerbaijan. In addition to financial organisations such as banks and non-banking organisations, the regulation of the insurance and stock market sectors was also returned to the CBA.
The financial sector in Azerbaijan is dominated by banks, which hold about 95% of financial sector total assets. As noted earlier, many banks had their licenses revoked in 2016. The largest state-owned bank, ABB faced reforms and restructuring in 2017 and preliminary discussions on a privatisation plan began. Banking laws were amended in 2017 to appoint the deposit insurance fund as the bank liquidator, while FIMSA established a new bank resolution framework for insolvent banks. An additional four banks were closed in 2020 after the CBA took over financial market supervision from FIMSA (U.S. Department of Commerce, 2021[13]; IMF, 2022[12]).
In 2022, changes were made to the Tax Code to create a favourable tax environment to spur the capital markets, exempting dividends, discounts and interest income paid on publicly offered and traded shares and bonds on the regulated market from tax for five years. The reforms aim to stimulate the supply of securities and listing on the stock exchange. Another stated aim is to ensure the discount and interest income tax return on bonds can stimulate investors' active participation in the capital market (Baku Stock Exchange, 2022[11]).
After the Soviet Union collapsed in 1991, Azerbaijan authorities aimed to establish a market-based economy and, as part of this endeavour, implemented a policy to privatise state-owned assets. There was substantial progress with the privatisation of small SOEs during the first decade of Azerbaijan’s independence, followed by the corporatisation of larger entities after the 2000s. In 2024, the state dominates in the energy, telecommunication, infrastructure and utilities sectors. AIH was established in 2020 to improve corporate governance in these sectors (see Box 1.1 below). Linked to this, efforts have been made to improve the corporate governance of SOEs, restructuring the enterprises, assessing their financial health, identifying potential investors in light of privatisation plans and determining core activities that should remain under state control. In August 2023, the President issued an order which identified a list of potential privatisation candidates involving several key SOEs under the AIH portfolio.
On 7 August 2020, the President of Azerbaijan signed a decree to establish AIH as an overarching management structure encompassing Azerbaijan’s most economically significant and strategic wholly and partially owned SOEs. It is established as a public legal entity under the Civil Code. In 2024, the portfolio of AIH comprises 12 SOEs, with potential plans to include additional SOEs (see also chapter 2). Despite being called a “holding”, shares of the 12 SOEs have not been formally transferred to the AIH. The shares in the 12 SOEs are therefore not owned by AIH, the ownership primarily rests with the State Service on Property Issues under the Ministry of Economy.6 AIH remains a coordinating body for the AIH portfolio with management rights entrusted to it by the President.
AIH adheres to the Constitution of Azerbaijan, international agreements endorsed by Azerbaijan, national laws, presidential decrees and orders, decisions and orders of the Cabinet of Ministers, and other relevant legal acts. AIH was financed by the government budget during its first three years of operation: AZN 13 mln (Azerbaijan manat) (USD 7.6 mln) in 2021, AZN 9 mln (USD 5.3 mln) in 2022, and AZN 9 mln in 2023 (USD 5.3 mln). The establishing decree for AIH notes that as of the fourth year of its operation, AIH is entitled to 20% of the annual net profit of its PCs, which is expected to cover AIH’s budgetary needs.7 Importantly, as AIH is not considered a shareholder of the PCs, the payment will not be considered a dividend. AIH has indicated that it is developing a dividend or an equivalent capital distribution policy and procedure as part of its mandate. A draft policy was not yet available for review at the time of drafting.
The AIH charter clarifies both the designated reforms and the activities it may engage in. Next to fostering economic efficiency, that charter states that AIH shall participate in the development and enactment of state policy, as well as maintaining cooperation with authorised state bodies, in attracting investments, creating public-private partnerships, monitoring key performance indicators (KPI) and ensuring SOEs’ privatisation preparation. AIH further seeks to enhance state enterprises’ global competitiveness and ensure that state investments are used efficiently. Pursuant to separate Presidential Decrees specific to the PCs, AIH can further:
approve the SOE's charter and structure, determining the amount of charter capital
approve the SOE's annual reports, financial statements, profit and loss distribution
appoint and dismiss members of the board of the SOE, including its Chair, in cases determined by the President of Azerbaijan
approve the SOE's dividend policy
make a decision on the issuance of the SOE's securities.
Source: AIH submissions to OECD questionnaire, AIH (2020[14]), Charter of Azerbaijan Investment Holding (AIH), https://aih.gov.az/about/charter?lang=en.
1.2.1. Number and type of state-owned enterprises
Legislation in Azerbaijan identify the definition of an SOE, according to the Law “on Budget Systems”, to include “an entity in which 51% of shares (stakes) or more directly or indirectly belong to the state”.8
SOE legal forms can be divided into public and private forms. Public legal forms of SOEs may, in some cases, include “public institutions” or “public legal entities”. These entities are fully owned and controlled by the government and typically serve public purposes such as education, healthcare and research. However, it is not ruled out that these entities can also perform economic activities that would qualify as commercial and generate profit. Public legal entities are governed by the Law “On Public Legal Entities” adopted in 2015.9 The Law defines a public legal entity as an organisation, which is not a state or municipal body, engaged in the activities have national and/or social significance, created on behalf of the state or municipality.10 Article 3 of the Law provides that public legal entities can be engaged in business activities.
The most common private legal forms for SOEs in Azerbaijan are:
Joint Stock Company (JSE): considered a commercial legal entity, in which the government typically holds a controlling interest. Categorised as open (OJSC) if the owner of shares can alienate the shares to others without the consent of existing shareholders and as closed (CJSC) if shares are placed among existing shareholders and a predetermined range of persons.
Limited Liability Company (LLC): entity characterised by limited liability for their owners. Considered a commercial entity, established by one or more shareholders (participants) and divided into shares. Involved in various sectors, including manufacturing and services.
Since 2000, most SOEs were corporatised into JSCs. However, some SOEs remain without a particular legal form (in their company charter or official name) listed in the Civil Code of Azerbaijan. These include several production associations (remnants of the Soviet system) and one state enterprise – SOCAR, wholly owned by the state.11
In addition to legal forms, SOEs can be labelled public interest entities (PIE). These are companies (may be either public or private) that play a significant role in the country’s economic activities as measured by revenues, employment and total balance sheet,12 and are subject by law to more stringent corporate governance requirements.
According to the State Tax Service under the Ministry of Economy, 2 165 state controlled commercial entities (with state shareholding of 10% or above) and another 454 legal entities of public law were registered with the tax authorities at the end of 2022.13 This comprises the total number of registered entities with individual tax identification numbers. It is noted that parent entities can be listed along with subsidiaries, which may affect the total count.
SOEs are required to comply with the Civil Code and other applicable laws along with the decrees of the President and of the Cabinet of Ministers, or specific acts of the responsible state agencies (e.g. the CBA in relation to issuers of shares). Azerbaijan does not have a separate companies act or law.
1.2.2. SOEs’ share of the economy
The size of the overall SOE sector is difficult to estimate given the dearth of complete or publicly available information on the SOE portfolio. Their domestic revenue as per World Bank calculations is estimated at around 40% of GDP in 2022, considerably above the global averages estimated to be around 15%.14
The World Bank has estimated the approximate value added of SOEs to GDP at USD 4.3 bln (or 5.9%) in 2022, compared to USD 3.3 bln (or 8.4%) in 2020.15 Subsidies to SOEs increased by 60% from USD 246 mln in 2020 to USD 410 mln in 2022.16 The share of the subsidies to SOEs out of the total state budget subsidies for the same period increased from 39% to 50%.17 Although authorities do not have exact SOE employment numbers for the entire state-owned portfolio, an estimation can be conducted by observing employment statistics. Employment statistics in sectors dominated by the largest SOEs show that these entities remain important employers and provide 360 000 jobs, one-fifth of total formal employment in the country.18 Based on this methodology, total employment of SOEs declined moderately from 21.6% in 2020 to 20.7% in 2022.19
Source: World Bank analysis adapted from information provided by the Chamber of Accounts.
The AIH portfolio, although representing a sub-set of the overall SOE portfolio, is predominantly made up of the economically most important SOEs, and notably includes the national oil and gas company SOCAR. Figure 1.2 shows the share of total dependent employment in AIH portfolio companies. SOCAR, followed by ADY and ASCO, have the highest employee figures across the AIH portfolio companies (Figure 1.2).
AIH was established as a public legal entity, wholly owned by the government of Azerbaijan, that serves as a managing body with oversight responsibility for a portfolio of 12 SOEs. Several of these PCs have a large number of subsidiaries, for example ASCO (13 entities), ADY (14 entities) and SOCAR (107 entities).20 Apart from ABB and ATB, where the state remains the majority owner, the remainder of the AIH portfolio is wholly-owned by the government of Azerbaijan. Azersigorta, a small insurance company under the management of AIH, was wound down and the liquidation process has begun in accordance with Presidential decree No. 2459 in January 2024. For this reason, Azersigorta is not excluded from analysis in this report where relevant.
Note: OECD figures are based on OECD Annual Labour Force Statistics (2015) for non-agricultural employment.
Source: AIH submissions to OECD questionnaire. OECD (2017[16]). The size and sectoral distribution of State-Owned Enterprises, https://doi.org/10.1787/9789264280663-en.
1.2.3. Sectoral distribution of SOEs
SOEs play a large role in the economy of Azerbaijan, providing goods and services to consumers in key sectors (Figure 1.3) such as transportation, energy and natural resources, and utilities (World Bank, 2022[5]). Many SOEs operate in liberalised sectors of the economy, in (potential) competition with the private sector such as finance, manufacturing, retail, tourism/hospitality, and real estate.
Note: Sector classification may differ from AIH classifications.
Source: AIH submissions to OECD questionnaire.
1.2.4. Operational performance of SOEs
Performance of SOE sector in general
Studies of SOE performance in Azerbaijan have concluded that they tend to under-perform the private sector, but the picture is far from uniform. An Asian Development Bank (ADB) review of the country’s 14 largest SOEs found that between 2013-2017, underperformance in SOEs was equivalent to an average efficiency loss of 4.2% of GDP per year (Hashimova and Kadyrov, 2017[15]). A World Bank study in 2017 highlighted further challenges of SOEs’ governance and accountability in Azerbaijan. It noted the lack of a clear ownership policy, weaknesses in the execution of the ownership function, poor corporate governance and negative net results from SOE operations (World Bank, 2022[5]).
The fiscal impact of financial losses incurred by Azerbaijan’s SOEs has not been mapped out in a comprehensive manner, although the Ministry of Finance is currently working on such plans. Managing fiscal risks associated with SOEs is considered important by the authorities to safeguard financial stability and prevent unexpected impacts on public finances, particularly considering the 2015 banking crisis which led to the rescue of the state-owned banking sector.
While there is no information on the cross-subsidisation between profit to loss making activities emanating out of public policy objectives assigned to SOEs (World Bank, 2022[5]), SOEs may still be benefitting from state support in the form of preferential access to factors of production, particularly state budget subsidies. As a significant share of the public investment programme of Azerbaijan is executed by SOEs, they receive large capital injections from the state owner.21
Performance of the AIH SOE portfolio
Performance of the AIH SOE portfolio has been mixed but has improved overall in the last few years. As a group, net profits were on a downward trend between 2017 and 2020 with profits going from USD 1.3 bln in 2017 to a loss of USD 1.4 bln in 2020, and then net profits rebounded again in 2021, reaching a high of USD 5.8 bln in 2022, driven largely by SOCAR. Several other SOEs also improved their economic performance over the last couple of years, underpinned by strong economic recovery and growth in 2021 (5.6% GDP growth) and 2022 (4.6% GDP growth). The worst performer in the portfolio in terms of return on asset (RoA) average over 2021 and 2022 was Tamiz Shahar (-19.62%), which is focused on the delivery of public services in the waste management sector. ABB saw the highest average net profit margin (29%), followed by AzerGold (22%) and the Port of Baku (13%). This rebound is arguably linked to a combination of factors relating to the overall improved economic growth following a period of contraction, volatilities in the oil and gas market and potentially stronger emphasis on financial performance through the instauration of corporate governance and transformation strategies in the PCs.
Source: AIH submissions to OECD questionnaire.
1.2.5. Reforms in Azerbaijan’s SOE sector
Since 2010, the government of Azerbaijan has made reforms aimed at deeper integration into the global economic landscape. These reforms have also prioritised enhancing corporate governance within SOEs. In 2020, AIH was launched with the primary objective of optimising the management structure of its PCs, increasing the transparency and economic efficiency of their investment programmes, ensuring their competitiveness, improving their financial health and stability – whilst gathering the most significant companies of Azerbaijan under its umbrella. This endeavour involves conducting comprehensive functional reviews of all PCs and subsequently introducing company boards to oversee their performance. Their oversight, including active monitoring, is led by AIH which has undertaken several initiatives since its establishment, with plans for further areas going forward (Box 1.2).
Other long-term national strategy programmes such as the National Priorities Strategy 2022-2026 and Azerbaijan 2030 note the importance of reforming Azerbaijan’s state-owned sector. More recently, in August 2023, the President signed an order with the aim to attract private investment into several SOEs. The Ministry of Economy, in cooperation with the Ministry of Digital Development and Transport and AIH have been delegated to undertake this endeavour.
Since its inception, AIH has embarked on the following initiatives:
conducted diagnostics of the PCs in order to identify major issues in company operations
created supervisory boards and respective committees
established coordination offices to support supervisory boards with their work
developed strategies in accordance with the companies
put together corporate governance standards
set KPIs for each PC including respective evaluation and monitoring mechanisms
prepared unified budgeting policies
developed real time accessible general information systems with operational and financial data from the PC.
Moving forward, AIH has numerous reforms planned (2024-2026), including:
applying best practices and project management standards in order to manage large capital expenditure (CAPEX) projects
enhancing internal control and risk management mechanisms
developing strict investment and treasury policies
developing mechanisms to enhance the management of cash flows
preparing unified and fair remuneration mechanisms (for chief executive officers (CEO) and CEO-1) linked to established KPIs
implementing unified enterprise resource planning solutions to create a central database for information from the PC
establishing a “Centre of Excellence” to improve reporting capabilities of SOEs
finalising the ongoing investment attraction programme.
Source: AIH (2020[14]), Charter of Azerbaijan Investment Holding (AIH), https://aih.gov.az/about/charter?lang=en.
The recommendations are aimed at: restructuring the enterprises; assessing the SOEs based on their investment needs; identifying potential investors and opportunities for liberalisation and de-monopolisation in the relevant markets; and identifying core activities that need to be kept under state control and transferring non-core activities to private sector.
The authorities – in particular the Ministry of Economy – are considering the development of a new law “On Management of State Property and Privatisation”. While the scope of the law was still under development at the time of writing, the OECD was informed that the law could include: defining SOEs and other state assets (real estate, movable objects, intangible assets, securities and property) where the state will plan to remain a shareholder; establishing rules and criteria for the establishment of SOEs (namely a rationale for state ownership) and privatisation; clarifying the powers of the authorities involved in the exercise of the state ownership function; and, institutionalising the requirement to establish supervisory boards in SOEs.
Privatisation
Privatisation in Azerbaijan is steered by the Second State Programme on the Privatisation of State Property and is actioned according to the instructions laid out in the Law “On Privatisation of State-owned Property”, Presidential decree No. 432/ 2000, and the rules on “implementation of investment tenders” approved by Presidential decree No. 533/ 2001. In line with legal provisions, public tenders of SOEs to be sold to private investors are published on the State Service on Property Issues’ website following a decision by the President. The State Service on Property Issues and Efficient Use of Control departments under the Ministry of Economy now oversee the privatisation process, inheriting this task from the initially established State Property Committee.
Azerbaijan's privatisation process since the fall of the Soviet Union has evolved from an initial period of ad hoc privatisation to more systematic and strategic approaches. A stage-by-stage overview of the privatisation process is detailed below.
Initial Transition Period (Early 1990s)
After the fall of the Soviet Union, the first state body responsible for the privatisation of state property was established, together with the privatisation law which defines the organisational, economic and legal basis of privatisation of state-owned property in Azerbaijan.
In a move aimed at extending the benefits of privatisation to the broader population, shares of SOEs were freely distributed to all citizens born before 1 January 1996.
Mass privatisation (1995 - early 2000s)
During this period, the Azerbaijani government embarked on a more systematic and comprehensive approach to privatisation, encompassing the swift transfer of ownership from state control to private hands. This multifaceted initiative included the privatisation of small-scale enterprises and the transformation of medium and large enterprises.
A pivotal step in this process was the implementation of the State Programme on Privatisation of State Property in Azerbaijan between 1995 and 1998 which resulted in two-thirds of state-owned property being privatised. This encompassed 22 193 small-scale establishments, accounting for 74% of the 30 000 small SOEs and facilities targeted by the programme. To facilitate this transition, various privatisation methods were employed, including auctions, tenders, and direct sales, targeting both domestic and foreign investors.
Strategic Sectors (2000s - 2010s)
During this period, there was a noticeable slowdown in the pace of privatisation, marked by intermittent interruptions. However, the establishment of a new legal framework for privatisation was formed under the framework of the Law “on State Property Privatisation”, in alignment with the provisions outlined in the Second State Programme.
While the primary objective of this phase was to shift the focus towards medium-sized and large companies, there remained unfinished privatisation from the previous phase. Under the programme's provisions, 15% of small businesses were slated for transfer to employees without cost, while the remaining 85% were set to be auctioned off through check auctions. In parallel, medium-sized and large companies underwent a transformation into JSCs before their eventual privatisation.
2015 onwards
In May 2016, a Presidential decree was issued to speed up the privatisation of state property. Subsequently, in July 2016, the State Service on Property Issues launched a dedicated portal, privatization.az, offering details about properties, including their addresses, locations, and initial costs. The goal behind this initiative was to streamline and simplify the privatisation process, making it more accessible and transparent to the public.
Between 1996 and 2018, 49 679 small enterprises and 1 607 medium and large enterprises were privatised. According to official data, 60721 shareholders were established in Azerbaijan, and USD 75 mln in total was transferred to the state budget. The State Service on Property Issues has conducted a study in 2023 and survey into privatised companies and found that 665 of the fully privatised companies were still active, while 800 were no longer in business. 96 companies are operating in a different sector from when they were state-owned. The state holds a controlling share in 23 of the 81 partially privatised companies and a minority share in 58 companies. The plan is to fully privatise or sell the remaining 81 companies with state participation, through auctions or investment competitions. 58 are slated for auctions while 23 are seeking strategic investors. The State Service on Property Issues Service holds auctions every 2-3 months, selling or divesting from around 6-7 companies a year.
The main directions of the budget and tax policy of Azerbaijan in 2021-2024 state that stimulating the privatisation of state property are top of the government’s agenda. The projected revenues from privatisation in 2023-2024 (USD 36.5 mln in 2023, and USD 37.6 mln in 2024) show that there is an increasing trend.
In August 2023, the President of Azerbaijan defined the list of SOEs that are potential candidates for attracting private investments.22 The list includes three SOEs from the AIH portfolio (i.e. AzerGold, ASCO and ABB), several of SOCAR's subsidiaries, and Baktelekom and Aztelekom under the Ministry of Digital Development and Transport. The decree further tasks the Ministry of National Economy jointly with the Ministry of Digital Development and Transport and AIH to prepare within nine months proposals related to restructuring, financial stability, rationale for state ownership and areas which can be divested, evaluation of SOEs and potential investors. Table 1.2 provides an overview on AIH company privatisation plans.
Source: AIH submissions to OECD questionnaire.
1.3.1. Legal forms of SOEs under AIH
Azerbaijan’s Civil Code No. 779-IG/ 1999 lists and describes the legal forms and determines the legal nature for each type of enterprise, with no differentiation made between SOE or other types of companies (Government of Azerbaijan, 1999[16]). The registration of public legal entities is made in line with the Law “on State Registration of Legal Entities and State Registry”, No. 560-IIQ/ 2003 (Government of Azerbaijan, 2003[17]). Depending on the legal form, SOEs and AIH are required to comply with the relevant sections of the Civil Code and/or the Law “on Legal Entitles under Public Law”, No. 97-VQ/ 2009, respectively, along with the decrees of the President, the Prime Minister or the applicable acts and regulations (e.g. the CBA in relation to issuers of shares).
With respect to SOEs’ legal forms, six AIH SOEs are closed JSCs (AzerGold, ADY, Baku International Sea Trade Port (Port of Baku), Azerbaijan Airlines (AZAL), ASCO and Baku Metro), three open JSCs (ABB, Azer Turk Bank and Tamiz Shahar), and one is an LLC (Baku Bus). SOCAR is identified as a “state company” (SOCAR, 2015[18]). While a new charter is to be established for SOCAR, it remains under discussion whether its corporate form will be adapted to reflect any of the legal forms identified in the Civil Code. AIH, operating as a managing legal entity, is subject to the law “on Public Legal Entities”, No. 97-VQ/ 2015 (Government of Azerbaijan, 2015[19]).
Note: Azersigorta State Insurance Company is subject to liquidation but is reflected as OJSC in this graph for ease of comparison.
Source: AIH submissions to OECD questionnaire.
1.3.2. Legal and regulatory framework bearing on corporate governance of SOEs
In most cases SOEs operate in a similar legal framework as private companies, but some legislative acts may contain provisions that grant specific conditions or exceptions for SOEs. The legal and regulatory framework applicable to SOEs is further split in: (1) laws, (2) decrees of the President, (3) decrees of the Prime Minister of Azerbaijan, and (4) responsible ministry decrees, administrative regulations and guidelines.
Azerbaijan’s legal framework for the regulation of companies, their business activities and interaction with the government, is underpinned by the Civil Code, non-binding Corporate Governance Standards and Rules, including a specific one for state-owned financial institutions, the Law “on Banks”, and more. The Civil Code is the major legislative act setting the corporate governance-related requirements for all types all legal entities, including JSCs, LLCs, and others, and is applicable equally to SOEs and private companies. Currently, corporate governance standards for SOEs are a high priority for the government and several relevant regulations from the President and Prime Minister have been approved in recent years.
Compliance with laws and regulations is monitored by various state bodies, including the:
sectorial regulators for sector-specific regulation (e.g. the CBA for banks, Ministry of Digital Development and Transport for AZAL)
the Commission on Combatting Corruption is a coordination and policy discussion body for anti-corruption and integrity related aspects23
the Anti-Corruption General Directorate under the Prosecutor General which is a specialised prosecuting body in investigation and operational-search activities related to corruption offences (OECD, 2024[10]) as a law enforcement body.
the Chamber of Accounts as the Supreme Audit Institution, which conducts audits to ensure the proper use of state funds and resources (includes oversight of SOEs to prevent misappropriation or misuse of public assets).
A non-exhaustive overview of the legal and regulatory framework bearing on the corporate governance of SOEs is provided in the Table 1.3 below.
Source: AIH submissions to OECD questionnaire.
A new Competition Code will come in to force from 1 July 2024, thus effectively replacing the Law “on Anti-Monopoly Activity”, Law “on Unfair Competition” and Law “on Natural Monopolies”. The Code is applicable to private companies and SOEs (within the terms, including natural monopolies) and lays down the general principles of:
ensuring, protecting and developing free and healthy competition in Azerbaijan
state control to ensure the compliance with the legislation on competition
regulation in the field of competition
organisational and legal bases of state regulation of natural monopolies
rights and duties of market players
violations of competition legislation.
The Code further determines the responsibility for the violation of competition legislation and notes that state control is carried out either through investigations or inspections by the State Service for Anti-Monopoly Policy and Consumer Market Control under the Ministry of Economy.25 According to the Code, the decisions of the competition authority are binding for all market subjects. A competition commission is established by the State Service in order to review violations of the Code. The Code further stipulates financial sanctions, cases of exemption from sanctions and concessions and factors that lighten and aggravate financial sanctions.
Source: Prosecutor General’s Office of the Republic of Azerbaijan (2023), Azerbaijan’s Competition Code, https://genprosecutor.gov.az/az/post/7273
Sector-specific laws
SOEs are also required to follow sector-specific laws, as summarised in Table 1.4. It is important to note that Azerbaijani laws are sector-based rather than entity-based. AIH companies should thus comply with the requirements of these laws if they operate in the relevant area. This non-exhaustive sample of sector-specific laws generally relates to the sectors in which AIH’s PCs operate: (1) energy and natural resources, (2) logistics, (3) public services and (4) finance.
Source: Laws and regulation based on inputs from relevant authorities and OECD research.
Applicable rules and regulations regarding the corporate governance of PCs
The corporate governance landscape for SOEs and PCs in Azerbaijan is made up of various legislation (e.g. the Civil Code of Azerbaijan) and corporate governance codes and standards, and remains quite fragmented.26 The applicability of regulations relating to corporate governance may therefore differ per PC. Below is a non-exhaustive description of the national codes, sector-specific laws, Presidential decrees, company charters and corporate governance standards applicable to the AIH portfolio.
First, the Civil Code of Azerbaijan is applicable to all private legal forms (including JSCs, LLCs). The Civil Code establishes high-level requirements on, among others, the establishment and mandate of boards, the General Meeting of shareholders and disclosure of information.
Second, the specific Law “on Banks” is applicable to the banking sector and all banks therein (private and state-owned, foreign and domestic). As already stated in section 1.3.1, the Law includes provisions on the corporate governance of banks, that are directly applicable to PCs ABB and ATB.
Third, various Presidential decrees or orders reflect different corporate governance matters, which are mandatory for the addressed SOEs. For example, the decree on the establishment of Port of Baku identifies the powers of the President and AIH within the general meeting of shareholders and sets the power and formation of the supervisory boards.27 With respect to ABB, similar issues have been decided in the decree that is related to the transfer of ABB to the portfolio of AIH.28
Note: 1. Azersigorta is excluded from this Figure, as AIH has indicated that this PC was liquidated in January 2024. 2. PCs do not apply the voluntary “Corporate Governance Standards of Azerbaijan” 2011 of the Ministry of Economy. 3. Cabinet of Ministers resolution 257 on “Corporate Governance Rules and Standards in Legal Entities with the Control Percentage of the State” 2019 does not apply to AIH’s enterprise portfolio. 4: SOCAR, AZAL and ADY individual corporate governance standards implementation is awaiting approval of the revised charters.
Source: Figure based on OECD research.
Fourth, company charters contain corporate governance provisions that are specific to each company. Company charters are generally approved by the company’s General Meeting of shareholders (i.e., by AIH’s supervisory board along with the President). In practice, AIH’s management prepares a draft charter and submits it to the AIH supervisory board. Once this board approves and receives a consent letter from the Presidential Administration, the approved charter is sent to AIH’s management for implementation. A charter is the core corporate document of a PC. Revision of a charter is preceded by a Presidential decree. Most PC charters are not published. However, recently two PCs (AzerGold and Baku Metro) have published the charters on their respective websites.
Lastly, Azerbaijan and AIH have several national and individual corporate governance standards. Azerbaijan has two national corporate governance standards, the voluntary “Corporate Governance Standards of Azerbaijan” of 2011 for all JSCs and the mandatory “Corporate Governance Standards in Banks” of 2023 specifically for banks. There is no separate corporate governance code specifically for listed companies.
The “Corporate Governance Standards of Azerbaijan” of 2011 do not have legal (binding) status and were developed by the Ministry of Economy with the aim of aligning with OECD corporate governance principles (Minister of Economy of Azerbaijan, 2011[26]). AIH has confirmed that no PC currently adheres to these standards because AIH has already developed its own standards (see below).
The banks ABB and ATB adhere to the “Corporate Governance Standards in Banks”, updated in 2023, and have no additional AIH imposed corporate governance standards (see below).
AIH has – as part of its mandate29 – set and implemented mandatory individual corporate governance standards for six PCs in 2023, including ASCO, Baku Metro, Tamiz Shahar, AzerGold, Baku Bus and Port of Baku. These standards are implemented following a specific Presidential decree and include detailed provisions on corporate bodies, fiduciary duties and the role of specialised committees. The corporate governance standards are subordinate to the company charters and contain more detailed provisions than the charters.
The assessment team was informed by AIH that all individual corporate governance standards are or will be (i.e. for those PCs that are still awaiting approval of their standards) almost identical except for some minor sector specific diversions. As not all corporate governance standards have been approved and implemented, the assessment team has not been able to verify this. Moreover, the corporate governance standards remain unpublished.30 AIH has indicated that it intends to set and implement similar individual standards for SOCAR, AZAL and ADY as soon as their respective charters have been approved. AIH has stated that it currently awaits the charter approval process, after which it can roll out the corporate governance standards for these companies.
Resolution No. 257/ 2019 “On the Adoption of Legal Acts Aimed at Enhancement of Performance of Legal Entities with a Controlling Equity Stake of the Government” by the Cabinet of Ministers imposes some (binding) corporate governance requirements on SOEs in Azerbaijan. The resolution sets out elements of an ownership policy as it encompasses the financial criteria for the assessment of SOE performance; corporate governance standards; and principles and rules for the payment of bonuses of the members of the management boards of SOEs.
Some of the corporate governance requirements of the Resolution have far-reaching implications, such as the requirement for JSCs to appoint a majority of independent board members on supervisory boards. The resolution has, however, carved-out all companies under management by AIH, i.e., all PCs.31 The resolution should therefore be considered as applicable for all SOEs in Azerbaijan, except for the PCs under AIH’s oversight.
1.4.1. Ownership framework and relevant state authorities
State ownership in Azerbaijan is dispersed across various line ministries and other state-owned institutions, which exercise their ownership functions according to decrees and orders of the President. For the 12 PCs, state ownership is exercised by the President (and in some cases alongside the State Service on Property Issues under the Ministry of Economy). Additionally, the Ministry of Finance holds parts of the state share of ABB, which is the largest state-owned bank in Azerbaijan.
While out of the scope of the analysis, it is useful to highlight that other line ministries are equally engaged in the oversight of SOEs outside the portfolio of AIH. Often referred to as subordinate institutions and corporations, such enterprises and organisations can take the form of LLCs, OJSCs or public legal entities, and are placed outside the structure of the overseeing line ministry. Public legal entities are regulated under a dedicated law and are designated to provide services to the public but are not considered public authorities. They are entitled to financing from the state budget. Generally, public entities are part of education and health sectors, but may serve other purposes too, operating in sectors such as energy, real estate, financial services and infrastructure.
The activities of subordinate institutions and corporations may be commercial or non-commercial in nature. A non-exhaustive estimation of the number of subordinate institutions of line ministries is provided in Table 1.5. SOEs can also be established under an individual statutory framework created by order of the President and thus are not formally subsumed to a given line ministry. While the total number of such statutory enterprises is unknown, two are essential to Azerbaijan’s public service provision – Azersu,32 the national water management and irrigation company involved in the collection, processing and distribution of drinking water, and Azerishig, the national electricity distributor.
Note: The above breakdown is not an exhaustive list of subordinate enterprises and institutions and SOEs in Azerbaijan, with more details included in the Annex. This list includes Azersigorta.
Source: Table based on OECD research.
The respective line minister is responsible for the approval of regulatory legal acts and charter documents of subordinate organisations and enterprises, except for those which have been approved by the President. Line ministries further approve the structure, staffing plan and costs accrued by subordinate institutions. A list of all subordinate institutions and corporations that have been identified by the OECD through desk research is provided in Annex A.
Azerbaijan Investment Holding
While AIH is not considered the owner of its PCs, it can be viewed as a “managing body” performing management and oversight functions in relation to the PCs. AIH’s stated purpose is “to implement international best practices under a set of unified principles, particularly with respect to transparency, which are in place to drive economic efficiency of PCs”. By consolidating resources and implementing strategic measures and through careful supervision, optimisation and coordination, AIH’s stated mission is to reinforce the financial stability and competitiveness of its PC, thereby stimulating growth, attracting investments and bolstering Azerbaijan's position internationally. The exclusive authorities of the general meeting of shareholders of its SOEs are divided between AIH’s supervisory board and the President of Azerbaijan.
As noted earlier, AIH’s PCs operate in the transport sector, public services, financial, energy and natural resource sectors. All except for one of AIH’s PCs are unlisted companies; ABB is the only (partial) listed PC but is still majority-owned by the government.33
Note: In the case of partially privatised SOEs, the state’s voting shares are exercised by the indicated state shareholding entities. Whereas for the bulk of the portfolio, the general meeting of shareholders is formally divided between AIH and the President of the Republic.
Source: AIH submissions to OECD questionnaire.
According to information shared by AIH, the current book value of equity of PC’s of AIH stands at almost USD 24 bln. The top five SOEs overseen by AIH account for 99% of the total portfolio book value of equity, while AZAL results in a slight decrease in the overall portfolio’s book value of equity. SOCAR, the national oil and gas company, is by far the most economically significant in the portfolio of AIH reaching 82% in total.
Ministry of Finance
Azerbaijan’s Ministry of Finance is the central executive power carrying out state financial policy while overseeing state finance and the state budget, as well as monitoring fiscal risks. It is in charge of implementing financial transactions and planning activities concerning the attainment of public service obligations (PSOs) through the State Treasury Agency.
The structure of the Ministry is made up of:
the State Treasury Agency
the Public Debt and Financial Liabilities Management Agency
the State Financial Control Service.
It holds a functional role in ensuring compliance with the law through the State Financial Control Service, which is mandated to carry out inspections of enterprises and organisations receiving state financial support following court decisions and appeals. Following Cabinet resolution No. 534, a government commission was established that has the authority to review and approve the income and expenditure estimates of large SOEs, which also includes some PCs. The Ministry serves as secretariat to this commission.
Furthermore, the Minister is member of the AIH supervisory board, and AIH’s budget has up until now been financed and approved by the state budget and thus the Ministry of Finance. This will continue to be the case. The Ministry furthermore has a strong role in deciding appropriations of the state budget to the AIH enterprise portfolio.
In comparison to the Ministry of Economy, the Ministry of Finance holds a less pronounced role in the ownership of SOEs. Currently, the Ministry of Finance discloses four entities as subordinate institutions on its website. The decision to subordinate these institutions to the ministry are carried out in accordance with Presidential decrees and orders, or decisions made by the Cabinet of Ministers. Most of the subordinate institutions currently overseen by the Ministry were allocated to it in 2010 following a decision of the Cabinet of Ministers. The decision transferred the Financial Research and Education Centre, Data Processing Centre and Finance and Accounting Journal Editorial Board to the oversight of the Ministry. As noted earlier, the Ministry is also among the state-designated shareholders of ABB.
Ministry of Economy
Azerbaijan’s current Ministry of Economy was formed under a new structure in 2016, which also led to an expansion of its activities in 2019 through a Presidential decree, after which the following agencies and departments were integrated into the Ministry:
the State Tax Service (or Ministry of Taxes)
the State Service for Anti-Monopoly Policy and Consumer Market Control
the State Service for Property Issues
The Ministry of Economy thus combines several policymaking and regulatory roles. The Ministry of Economy carries the ultimate responsibility for legislation on state property and privatisations, which may heavily impact the AIH portfolio. Its State Service for Property Issues maintains the register of and criteria for establishing an open JSC,34 and was formed in 1992 focused on privatisation. While there has been no recent large-scale privatisation activity since 2015, the State Service would be responsible for both large- and small-scale privatisation. It provides advisory services to partially or fully privatised companies and also works with the AIH portfolio to write off obsolete assets, or transfer assets between the balance sheets of one SOE to another.
The State Service for Anti-Monopoly Policy and Consumer Market Control is the national competition authority that monitors competitive markets and market players, including most PCs, for compliance with competition regulations. The Ministry of Economy is responsible for drafting and updating the competition legislation.
Line ministries
Various line ministries are involved in exercising ownership of SOEs, including the PCs. The Ministry of Digital Development and Transport administers seven subordinate institutions that classify under the legal form of an LLC. Both the Ministry of Agriculture and the Renewable Energy Agency under the Ministry of Energy further oversee one LLC that is subordinated to each respective ministry. Typically, for SOEs held outside of the remit of AIH, the respective line ministry tends to have a more “hands on” approach to its SOEs, with the responsibility to ensure the financing of staff costs, as well as maintain the SOE’s ongoing cost estimates within the budget allocations.35
Line ministries produce sector-specific policies and regulations that affect the market environment that SOEs operate in, as well as privatisation plans and efforts. The provisions of a ministry in acting as a central executive state body are affirmed by Presidential decree for each ministry, which entail the implementation of state policy and regulation in the relevant area of the ministry. Noting this, not all SOEs are affected by policies and regulations implemented by a given line ministry that it is subordinated under, thus inferring a distinction between regulatory oversight and ownership powers in certain instances. For example, while AZAL as an aviation company is part of the logistics sector, it falls under AIH as a management body with sector specific regulation and policies overseen by the Ministry of Digital Development and Transport, which produces regulation in the areas of logistics/transport (except for the cases determined by the President), including civil aviation.
Furthermore, it is the line ministry’s duty to analyse the activities and practice financial control of subordinate organisations, to submit proposals on how to improve the efficiency of their activities, to develop plans of socio-economic development and provide estimates on revenues and expenditure. There were no high-level rules or laws accessible to the assessment team to detail the exact budgeting process for subordinate external organisations and enterprises subsumed under a given ministry. Typically, it is the respective line minister’s responsibility to ensure the financing of staff costs, as well as maintain the SOE’s ongoing cost estimates within the budget allocation.
Ownership arrangements and institutional roles
AIH’s wholly state-owned PCs are organised according to three main decision-making bodies – the General Meeting of shareholders, the supervisory board, and an executive or management board. The AIH supervisory board has been given the delegated authority through relevant Presidential decrees to represent the state in the shareholder role (as stipulated in the Civil Code, subject to exceptions) for all PCs in their General Meeting of shareholders (see Figure 1.7). Formally, these are divided between the President and the supervisory board of AIH. For PCs under AIH’s portfolio that are not wholly owned by the state, as is the case for ABB and ATB, state representation in the General Meeting is conducted by a representative appointed by the supervisory board of AIH, who votes in accordance with clear instructions from AIH’s supervisory board as agreed with the President. Figure 1.7 clarifies AIH’s respective role in the overall context of SOE ownership, which is mainly to manage, practice oversight, and improve the corporate governance of SOEs.
Note: While the President acts as shareholder in the General Meeting of shareholders, this has been delegated to the exclusive competence of AIH in coordination with the President for the PCs (albeit with some exceptions).
Source: Charter of Azerbaijan Investment Holding (AIH), https://aih.gov.az/about/charter?lang=en.
AIH itself does not have any board committees. However, there are reporting lines between the supervisory board of AIH and the risk and audit committees that serve under the supervisory boards of the PCs. This enables AIH to effectively monitor SOEs and assess their compliance with internal corporate governance indicators. The governance structure of AIH follows a two-tier board structure consisting of a supervisory and management board. AIH itself is accountable to the President and performs its duties according to the Constitution of Azerbaijan, as well as decisions and orders of the Cabinet of Ministers and various other legislation. Its supervisory board consists of five members, each of which are appointed and dismissed by the President.
Source: AIH charter document and information provided by AIH.
The chair of the supervisory board of AIH calls for meetings of the supervisory board at least once a year. The quorum for holding a meeting of the supervisory board is over half of the members of the board. Each member of the supervisory board has one vote, and members are not allowed to abstain during the voting. In the event of an equal number of votes, the vote of the person chairing the meeting casts the final decision. The management board of AIH meets once monthly and is called by the chair, based on the individual initiative of any board member who is appointed and dismissed by the President.
1.4.2. Transparency and disclosure
Reporting and disclosure
Accounting and disclosure standards
According to the Law “on Accounting” (Government of Azerbaijan, 2004[21]), SOEs that fall under the definition of PIE are required to comply with IFRS. Such enterprises are legal entities that provide financial services, are listed on the stock exchange, or are considered “large” enterprises due to exceeding revenue and employment thresholds as determined by the relevant state authority.
Commercially active SOEs that are not considered PIEs must apply the national accounting standards for commercial organisations or may qualify for a simplified method of reporting. They are expected to submit their financial statements and consolidated financial statements to the relevant state authority on the terms defined either in the charter documents or as required by the relevant state authority. Some entities which publish consolidated financial statements on their website are required to complement them with an auditor’s opinion.
SOEs that are considered natural monopolies, commercial in nature, and/or benefiting from state financial support (e.g. state guarantees, state borrowings and/or state subsidies, subventions or grants) must submit their annual consolidated financial statements to the relevant executive state authority when not made public.
Only five of the 12 PCs of AIH are considered a PIE according to the Law “on Accounting” and are required by law to report according to IFRS, these are: SOCAR, AZAL, ASCO, ADY and Baku Metro. The two state-owned banks ABB and ATB are also required to apply IFRS (as per the Law “on Banks” and the Law “on Insurance”) and have additional prudential reporting requirements in line with regulatory obligations set by the CBA. There are further conditions detailed in the Law “on Accounting” which exempt some PIEs from conforming to IFRS. These conditions are the following:
the enterprise is a subsidiary and all owners, including those not otherwise entitled to vote, unanimously agree that the entity need not present consolidated financial statements
the enterprise's securities are not publicly traded
the enterprise is not in the process of issuing securities in public securities markets.
Furthermore, PIEs are exempt from preparing annual statements if their immediate or ultimate parent company already publishes consolidated financial statements. According to AIH, the corporate governance standards it imposes on its PCs requires that the relevant PC post on their official internet resources annual financial statements compiled and audited in accordance with IFRS, as well as management reports and information required by AIH. However, as outlined in Table 1.7 below, the level of compliance by individual SOEs and the availability of publicly available financial and non-financial information varies by SOE.
It should be noted that as AIH is not a shareholding entity it does not consolidate financial statements on its PCs. However, article 7 of AIH’s charter requires AIH as an entity to comply with the Law “on Accounting” and to compile and submit statistical data on its portfolio and thus overall operating results in accordance with the Law “on Official Statistics”. AIH can “invite” an external auditor for an independent audit of its own activities, as it has done in 2024.36 While AIH has produced an annual aggregate report for internal reporting purposes, it has not yet published an aggregate report in the public domain.
Notes: Information on financial assistance or state guarantees can be found on a limited level in the opinions issued by the Chamber of Accounts regarding the implementation of the state budget. AIH reports that supervisory board members currently do not receive compensation.
1. Audited financial statement of 2022 was provided by AIH but was not accessible during the review on AzerGold’s company website.
2. Port of Baku’s audited financial statements are audited but are very limited in nature. These statements are therefore not considered in line with IFRS reporting and public disclosure standards.
Source: Analysis by the assessment team based on publicly available information and 2022 reports or most recent available (as indicated).
Internal and external audit
Internal audit
In Azerbaijan, the Law “on Internal Audit” No. 332-IIIG/ 2007, defines the legal grounds of the establishment of internal audit in all legal entities subject to statutory audits. Internal audits are to determine the adequacy of the entity’s effective risk management and the establishment of an internal control system, for checking the accuracy and reliability of financial statements of the entity and its subsidiaries and for the appropriate controls for loss protection. The Law further details an independence requirement applicable to the internal auditing service, which aims to render internal audits independent from works relevant to the entity’s executive bodies.
According to the already implemented individual corporate governance standards of PCs, the supervisory board is required to have an audit committee and an internal audit function that periodically reports to the audit committee.37 The exact mandate and requirements of the audit committee are regulated in the individual PC charters and statutes. The internal audit function is asked to compile complete and high-quality information requested by AIH, the supervisory board or the internal audit committee in a timely manner. The two state-owned banks (ABB and ATB) have requirements set out by the Law “on Banks”. and the corporate governance standard elaborated for all banking institutions specifically in terms of risk management obligations.
External audit
The Law “On Auditing Services”, No. 882/1994 governs the auditing rules in Azerbaijan in the instances where external audit is mandatory. External audits are only obligatory for business entities that are statutorily required to publish their financial statements or required by decision of an authorised state body. The Civil Code requires JSCs and LLCs (excluding micro and small businesses) to be subject to independent external audit.38 Therefore, other SOEs in AIH's portfolio are also obliged to involve independent external audit to audit annual financial statements, this includes those SOEs that qualify as PIEs under the Law “on Accounting”.39 The two state-owned banks and national insurance company (ABB, ATB and Azersigorta) also have requirements set out by the Law “on Banks”, Law “on Insurance” and the corporate governance standard elaborated for all financial institutions, which require external auditor rotation. AIH reports that its corporate governance requires a rotation of external auditors every three years. This period can be extended for up to two years, thus pushing the maximum period of maintaining the same external auditor five years. For SOEs that do not yet have formal corporate governance standards, AIH is closely monitoring to ensure they follow the same principles. Dialogue between internal and external auditors is neither prohibited nor discouraged.
The companies subject to independent external audit tend to rely on the services of “Big 4” or “Big 10” companies that operate in Azerbaijan. The Chamber of Auditors of Azerbaijan is the main regulator of auditing services in Azerbaijan. For an auditor to be considered as independent they must be licensed by the Chamber of Auditors, which assures the independent auditing service. The Chamber of Auditors is not involved in conducting independent audits, though has the authority to check the quality of auditing work of external independent auditors. It also upkeeps a register of auditors in Azerbaijan and works to improve the overall standards of auditing in Azerbaijan.
As for state audit procedures, the Chamber of Accounts is the Supreme Audit Institution. According to information provided to the assessment team the Chamber of Accounts conducts periodic audits of SOEs, these audits can look at compliance with the law, financial auditor or performance auditing. It has reportedly conducted audits of SOEs under AIH. The audits are aimed to evaluate the efficient use of resources and encourage greater transparency and may result in recommendations or the issuance of decisions. Performance audits are a relatively new type of audit, two have been conducted for SOEs in the water sector.
1.4.3. Boards of directors
Board structure and composition requirements
Board structure of SOEs, except for the financial sector, does not appear to be mandated by law. Article 91-1.2. of the Civil Code requires the establishment of the board of directors, as well as activities of the board to be determined in the charter document of LLCs. The Civil Code outlines broad expectations on the general meeting of participants of an LLC, which are adaptable to a one- or two-tier board system. Similarly, the Civil Code allows JSCs to either be structured according to a one- or two-tier system (article 107.3). In any case, if the JSC is a PIE or has more than 50 shareholders, it is required to establish a supervisory board.
All PCs, regardless of their size and sector of operation, are required to implement a governance structure which consists of three different bodies; the general meeting (which, according to article 4.7.18 of AIH’s charter, is generally delegated to the AIH supervisory board in coordination with the President) a supervisory board and a management board (or executive body). Supervisory boards’ composition typically ranges from three to seven members. Therefore, all AIH's PCs, as well as AIH itself, are governed by a two-tier board structure. A detailed breakdown of the board composition of AIH and its PCs is found in Annex B. Prior to the establishment of AIH and the corporate governance reforms that it has a mandate to implement, SOEs in Azerbaijan generally did not operate with supervisory boards (including multinational companies such as SOCAR for which a supervisory board was established in 2021).
While no high-level reporting items requirements on board structure and composition appear to exist,40 non-binding policy documents, such as Azerbaijan’s Corporate Governance Standards, lay out guidelines on the composition, structure and competence of supervisory boards. Among the key recommendations of Azerbaijan’s Corporate Governance Standards is that supervisory boards should have an odd number of directors, as well as independent board members.
Regarding supervisory board composition, independent members are not required in the supervisory board members of AIH or its portfolio companies. Both AIH boards are entirely composed of state representatives (including politically appointed officials) or AIH representatives, which the assessment team understands is a deliberate choice at the current stage of the reform process reportedly due to a lack of available candidates in the local market. There are also no voluntary quotas or recommendations relating to supervisory or management board diversity. Among the PCs, one out of three members of supervisory boards of Baku Bus LLC, ATB, and one out of five members of Baku Metro has a female board member. Some SOEs have female executives among their management boards (e.g. SOCAR).
References
[14] AIH (2020), Charter of Azerbaijan Investment Holding (AIH), https://aih.gov.az/about/charter?lang=en.
[11] Baku Stock Exchange (2022), A favorable tax environment is being formed in the capital market.
[35] GAN Integrity (2020), Azerbaijan Corruption Report.
[30] Government of Azerbaijan (2024), Law on Public Procurement, https://e-qanun.az/framework/1029.
[20] Government of Azerbaijan (2023), Corporate Governance Standards in Banks.
[25] Government of Azerbaijan (2016), Law on Licenses and Permits.
[31] Government of Azerbaijan (2015), Law on Securities Market, https://e-qanun.az/framework/30333.
[19] Government of Azerbaijan (2015), Public Law.
[28] Government of Azerbaijan (2011), AZƏRBAYCAN KORPORATİV İDARƏETMƏ STANDARTLARI, https://economy.gov.az/storage/files/files/4185/LMLmAgNP2GE7qnJLsJUtDZowY0ILCbSXSQ7y6ZZl.pdf.
[21] Government of Azerbaijan (2004), Law on Accounting.
[29] Government of Azerbaijan (2004), Law on Banks, https://e-qanun.az/framework/5825.
[17] Government of Azerbaijan (2003), Law on Legal Entities under Public Law.
[16] Government of Azerbaijan (1999), Civil Code.
[33] Government of Azerbaijan (1999), Labour Code, https://e-qanun.az/framework/46943.
[24] Government of Azerbaijan (1998), Law on Natural Monopolies.
[32] Government of Azerbaijan (1997), Law on Banktruptcy, https://e-qanun.az/framework/4014.
[23] Government of Azerbaijan (1995), Law on Unfair Competition.
[22] Government of Azerbaijan (1993), Law on Anti-Monopoly Activity.
[15] Hashimova, K. and Z. Kadyrov (2017), The Current Situation and Problems of State Owned Enterprises in Azerbaijan, https://cesd.az/new/wp-content/uploads/2017/12/State-Owned-Enterprises-Azerbaijan.pdf.
[12] IMF (2022), Macroprudential Policies to Enhance Financial Stability in the Caucasus and Central Asia, IMF.
[26] Minister of Economy of Azerbaijan (2011), Azerbaijan Corporate Governance Standards, https://track.unodc.org/uploads/documents/BRI-legal-resources/Azerbaijan/10_-cg_standards_azerbaijan_2011_en.pdf.
[10] OECD (2024), Baseline Report of the Fifth Round of Monitoring of Anti-Corruption Reforms in Azerbaijan: The Istanbul Anti-Corruption Action Plan, OECD Publishing, Paris, https://doi.org/10.1787/a17aca4c-en.
[7] OECD (2024), SME Policy Index: Eastern Partner Countries 2024, OECD Publishing.
[6] OECD (2022), Promoting Enterprise Digitalisation in Azerbaijan, OECD Publishing, Paris, https://doi.org/10.1787/6a612a2a-en.
[34] Paris (ed.) (2017), The size and sectoral distribution of State-Owned Enterprises, OECD Publishing, https://doi.org/10.1787/9789264280663-en.
[18] SOCAR (2015), Charter.
[2] State Statistical Committee (2023), Əhalinin yaş qrupları üzrə xüsusi çəkisi.
[4] State Statistical Committee of Azerbaijan (2022), Data, https://www.stat.gov.az/?lang=en.
[8] Transparency International (2023), CORRUPTION PERCEPTIONS INDEX.
[13] U.S. Department of Commerce (2021), Banking and Finance.
[9] U.S. Department of State (2021), 2021 Investment Climate Statements Azerbaijan.
[3] Varani, N. (2018), “Azerbaijan frameworks: geopolitical and socio-economic considerations”, Geopolitical, Social Security and Freedom Journal, Vol. 1/2, pp. 44-65, https://doi.org/10.2478/gssfj-2018-0013.
[27] World Bank (2022), Azerbaijan, https://data.worldbank.org/country/AZ.
[5] World Bank (2022), “Azerbaijan”, Country Memorandum, https://documents1.worldbank.org/curated/en/099100009222236784/pdf/P17532606988e2056084e603c9c48ddc618.pdf (accessed on 24 April 2024).
[1] World Bank (2020), Population, total - Azerbaijan, https://data.worldbank.org/indicator/SP.POP.TOTL?locations=AZ (accessed on 20 June 2022).
← 1. Constitution of the Republic of Azerbaijan, art. 130.
← 2. As earlier OECD studies have noted, the extractive sectors can be particularly prone to integrity risks. Azerbaijan joined the Extractive Industries Transparency Initiative (EITI) in 2004 but was suspended in March 2017 over concerns about the ability for civil society to critically analyse the EITI process. In response, the government withdrew from the initiative, but claimed to remain committed to the EITI principles through the Commission on Transparency in Extractive Industries established in 2017. However, a U.S. Department of State 2021 analysis found that the Commission had published two reports, had not met since 2019 and did not conform with EITI standards. Unofficial sources note that the Commission has since been abolished (U.S. Department of State, 2021[9]; GAN Integrity, 2020[35]) .
← 3. Azerbaijan is a member of the International Centre for Settlement of Investment Disputes and is a signatory of the New York Convention 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
← 4. T-bills of the Ministry of Finance of Azerbaijan and banknotes of the CBA.
← 5. The premium segment of the BSE currently comprises 230 listings. 229 of those are listed bonds, only one is an equity listing, i.e. ABB stocks.
← 6. Reference is made to section 3.4.2 and Table 3.1.
← 7. The authors were informed that the new funding structure was introduced in AIH's 4th year (thus most recent year) of operation. Before that, the Government budget provided funds to finance AIH operations and would cover any net loss.
← 8. Budget System Law, Republic of Azerbaijan: paragraph 1.1.30.
← 9. The Law of Azerbaijan “on Public Legal Entities” No. 97-VQ/ 2015.
← 10. The Law of the Republic of Azerbaijan “on Public Legal Entities”, art. 2.2.
← 11. SOCAR, Azerbaijan Airlines, ASCO, Baku Metro, and ADY were previously classified as state concerns, facing more stringent government oversight and regulation.
← 12. The 2004 Accounting Law defines PIEs in Azerbaijan as “credit organisations, insurance companies, investment funds, non-state (private) social funds, legal entities with securities traded on the stock exchange and commercial organizations that, on the date the financial statements are prepared, exceed two of the thresholds (for annual revenue, average number of employees during the financial year and total balance sheet)”.
← 13. This information was provided to the World Bank by the State Tax Service under Ministry of Economy but is not publicly available.
← 14. Importantly, this does not indicate that SOEs account for 40% of GDP. Sales and revenues of companies are typically 2-3 times higher than their contributions to GDP (as per World Bank calculations).
← 15. SOE’s contribution was calculated based on state statistics “Value added in state and non-state sectors of the economy” by subtracting other services (public administration, defence, social security, education, healthcare and social work activities) from the total of state figures. This methodology is an approximation of the share of SOEs.
← 16. According to the state budget execution figures.
← 17. According to the state budget execution figures.
← 18. These estimated numbers include those employed by public or private SOEs and also employees from the broader public sector, e.g. hospitals and schools.
← 19. SOE employment was calculated based on state statistics “Breakdown of employees by type of economic activity” by subtracting activities like public administration, defence, social security, education, healthcare and social work activities from the total of state figures. This methodology is an approximation.
← 20. 107 is the number of holding companies. E.g. SOCAR Turkiye Enerji A.S. is one of the 107 companies and it has more than 20 entities under control. Those entities are not included within 107 companies.
← 21. Reference is made to section 3.4.5 below.
← 22. Decree of the President of Azerbaijan dated 31 August 2023.
← 23. Established in 2004, performs the functions of a body specialised in the prevention of corruption. The Commission consists of 15 members, five of whom are appointed by the President, five by the Parliament and five by the Constitutional Court.
← 24. According to an unofficial translation of the definition of PIEs, they are credit organisations, insurance companies, investment funds, non-state (private) social funds, legal entities with securities listed on the stock exchange and commercial organisations that on the date the financial statements are prepared exceed two of the thresholds for annual revenue, average number of employees during the financial year or total balance sheet in an amount determined by the relevant executive authority.
← 25. Reference is made to section 1.4.1 below.
← 26. There is an AIH presentation slidedeck of unified corporate governance standards from 2020 intended for all PCs that was approved by the AIH supervisory board. This forms a basis for individual corporate governance standards implemented at the PC level. However, as it is a basis for AIH to further implement individual standards for PCs and also includes diagnostics at a PC level, this document cannot be considered universally applicable.
← 27. Presidential decree No. 1121 dated 18 March 2015.
← 28. Presidential decree No. 1448 dated 22 September 2021.
← 29. Reference is made to articles 2.1.9, 3.1.12-1 and 4.1 of the AIH charter (AIH, 2020[14]).
← 30. Rather, it is an internal presentation to the AIH supervisory board that includes diagnostics and policy suggestions, which can be seen as a starting point for the subsequent individual corporate governance standards. However, this cannot be considered a policy document that has any legal standing in relation to PCs.
← 31. Reference is made to article 3-1 of the resolution. AIH has further that according to decree No. 1120, AIH must approve corporate governance standards for its SOEs, and that this is the reason why AIH SOEs are exempted from this Resolution.
← 32. In interviews, the team heard that there were plans to integrate Azersu OJSC as part of AIH portfolio, however, this change was eventually not undertaken and Azersu remains a statutory enterprise under a newly established Agency.
← 33. AIH has indicated that formally, ATB is listed on the BSE as of 2021. However, there have been no registered trades of ATB shares and the BSE does not impose additional requirements on ATB for being formally listed. To avoid confusion, ATB is not labelled as a listed company for this report.
← 34. Criteria include having more than 150 employees (for construction more than 100 employees, and more than 50 employees in the trade and services sector).
← 35. According to information available on some ministries’ websites, the respective minister is appointed by the President and is required to fulfil a range of budgeting and planning tasks. These may vary by ministry, though typically involve: making proposals for the formation of the state budget and extra-budgetary funds for the respective year on issues within the competence of the ministry; ensuring that the funds allocated from the state budget are spent for its intended purpose; distributing financial resources, taking into account the limit of allocated funds, ensuring the provision of bonuses to salaries and financial assistance.
← 36. AIH has invited Ernst & Young for the audit of the financial statements of 2020-2023. March 2024 is the expected date of submission by the auditor.
← 37. Reference is made to section 3.7.8.
← 38. Civil Code articles 91.4 and 107.6.
← 39. These SOEs are SOCAR, AZAL, ASCO, Baku Metro, and ADY.
← 40. The Civil Code of Azerbaijan broadly details the reporting obligations for CJSCs and OJSCs and LLCs. None of the legal forms a SOE may take are required to report non-financial information on board composition. Disclosure requirements detailed in the Civil Code relate to financial disclosure items and apply mostly to JSCs.