Chapter 3 assesses Azerbaijan Investment Holding and its enterprise portfolio for their alignment with the OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines). The assessment against the SOE Guidelines in Chapter 3 is limited to AIH and its enterprise portfolio and does not cover the broader SOE portfolio touched upon by Chapter 1 of this review.
OECD Review of the Corporate Governance of Azerbaijan Investment Holding and its State‑Owned Enterprises
Abstract
In Chapter 3, the ownership, corporate governance and regulatory arrangements of AIH and its portfolio will be evaluated. The assessment will follow the structure of the SOE Guidelines (2015 edition) and will therefore be laid out in the following sequential sections 3.1 to 3.7 (Paris, 2015[1]):
Rationales for state ownership
The state’s role as an owner
SOEs in the marketplace
Equitable treatment of shareholders
Stakeholder relations and responsible business
Disclosure and transparency
Responsibilities of the boards of SOEs
This Chapter provides the basis for the comprehensive conclusions and recommendations that are detailed in Chapter 4 of the report.
The state exercises the ownership of SOEs in the interest of the general public. It should carefully evaluate and disclose the objectives that justify state ownership and subject these to a recurrent review.
3.1.1. Articulating the rationales for state ownership
A. The ultimate purpose of state ownership of enterprises should be to maximise value for society, through an efficient allocation of resources.
Presently, SOE ownership rationales in Azerbaijan are dispersed across several documents, including the Charter of AIH, the charters of individual SOEs (including PCs), a number of Presidential decrees and orders, or embedded in sectorial regulation.
At a whole of government level, the long-term national strategy documents1, and other state programmes may specify what the role of SOEs are as the primary implementers of these programmes. SOE charter documents and decrees may spell out SOEs operational duties and imply rationales for state ownership. These documents tend to be specific to the SOE or a given policy goal, and do not apply to all SOEs in Azerbaijan.2
While AIH does not act as the de jure ownership entity, the decrees of August and November 2020 indicate some ownership rationales. As clarified in its Charter, AIH’s activities seek to improve the economic efficiency of SOEs and to elevate the competitiveness of Azerbaijan’s markets. This is supported by information detailed in AIH’s Charter, which explains that AIH fulfils an important compliance mechanism and is tasked with the monitoring of SOEs under its portfolio, thus suggesting that one of the rationales for AIH is to improve the operational performance outcomes of its companies. AIH’s role is further identified in its Charter and respective legislative acts. This still does not entail an overarching rationale for state ownership. For the time being, AIH or the government of Azerbaijan has not developed an overarching policy document bringing together the main rationales for state ownership, how the state will exercise ownership, and the state’s expectations for individual PCs and the role of its ownership therein.
Privatisation may also be affected by a lack of an explicit rationale. Over the past two decades, many medium and small-sized SOEs underwent privatisation, but a majority of large companies continue to be state-owned (see 1.2.5). Legislation permits AIH to conduct economic, social, and legal assessments of SOEs, providing advice to the Ministry of Economy’s State Service on Property Issues on whether to retain state ownership or proceed with privatisation. Some SOEs remain in sole or partial state ownership for commercial or social reasons, or a combination of both. Public statements and evidence from the first two rounds of the State Property Privatisation Programme (see 1.2.5) indicate that the government's decision to privatise or retain ownership of SOEs was influenced by factors such as inefficient management, generated losses, insufficient funds for recapitalisation, or constraints within the state budget. Certain SOEs, such as natural monopolies, utilities, and infrastructure companies, continue to be state-owned, while others underwent privatisation or were placed under private management.
Though the rules behind privatisation are detailed in the legislation, it does not list specific criteria for maintaining state ownership (rationale of ownership) and criteria that would initiate the privatisation of state property. It has been recognised by the legislation that in the process of making a decision on privatisation, “the importance of the entity in terms of the ability to defend country and national security, economic interests of the country, its sectoral and local importance shall be taken into consideration”.
Overall, the existing legislation in Azerbaijan outlines the operational guidelines for SOEs, focusing on how they should function rather than providing a comprehensive justification for state ownership. The current legislative framework:
defines the legal status of SOEs
delineates the responsibilities of AIH, governmental agencies and SOEs
establishes reporting lines
identifies reasons preventing the privatisation of SOEs, particularly safeguarding strategic enterprises of national importance.
While individual SOE charters specify the broad objectives of individual PCs, there is a lack of a clear and comprehensive overall rationale. Hence, while implicit rationales of state ownership can be gleaned in some cases from various legal documents, their dispersion across different instruments of policy renders their application to AIH’s enterprise portfolio untransparent and not subject to appropriate levels of accountability.
3.1.2. Ownership policy
B. The government should develop an ownership policy. The policy should inter alia define the overall rationales for state ownership, the state’s role in the governance of SOEs, how the state will implement its ownership policy, and the respective roles and responsibilities of those government offices involved in its implementation.
The governance of AIH’s enterprise portfolio is guided by the following regulations:
the Constitution of Azerbaijan
international treaties signed by Azerbaijan
laws, decrees and orders of the President
decisions and decrees of the Cabinet of Ministers, and other applicable legislation
the Charter of AIH
Presidential decree No. 1174/ 2020 which confers the list of PCs under AIH management while also regulating AIH's budgeting sources.
At the same time, the relevant authorities have not developed an actual overarching ownership policy guiding AIH’s role (or other state shareholding entities) as an enterprise owner. The lack of a high-level and holistic document which describes state ownership arrangements on the state level can thus render it difficult to establish an all-encompassing rationale for state ownership. Efforts to formulate a rationale for the existence of state-owned sector should ideally remain applicable to the entire pool of SOEs in Azerbaijan, and equally to AIH PC, and would serve to identify future privatisation candidates and clarify ownership roles.
3.1.3. Ownership policy accountability, disclosure and review
C. The ownership policy should be subject to appropriate procedures of political accountability and disclosed to the general public. The government should review at regular intervals its ownership policy.
As previously noted, AIH and by extension the government of Azerbaijan, does not have an ownership policy. It also remains unclear whether those documents that relate to the rationale of state ownership are effectively subject to political accountability. Furthermore, although some documents may be disclosed to the general public, such as Presidential decrees or the national strategic documents National Priorities Strategy 2022-26 and Azerbaijan 2030, individual PC charters, are not. Additionally, any implicit ownership rationales that may exist within government are also – by nature – not disclosed to the public.
3.1.4. Defining SOE Objectives
D. The state should define the rationales for owning individual SOEs and subject these to recurrent review. Any public policy objectives that individual SOEs, or groups of SOEs, are required to achieve should be clearly mandated by the relevant authorities and disclosed.
AIH plays a substantial role in the management and oversight of a selected portfolio of SOEs. While line ministries of PCs operating under the AIH portfolio may define public policy objectives and goals for SOEs, these objectives appear to be subject to modification and consultation with AIH. Among AIH’s powers as a SOE management entity is the adaptation of the charter document of individual SOEs, which include definitions of the PCs’ overall purpose, activities and operations.
AIH does not set particular rationales for owning individual SOEs neither their public policy objectives. The latter are not clearly identifiable, mandated nor disclosed. The assessment team could not identify the communication channels for how these objectives may be communicated to SOEs, which as noted may be dispersed across various pieces of legislation, regulation or decrees; and in some cases may also result in multiple or competing objectives.
The Azerbaijani government (President, Prime Minister or line ministries) has the authority to define Azerbaijan’s national or sectorial programmes and targets, such as Azerbaijan 2030: National Priorities for Socio-Economic Development or the Financial Sector Development Strategy 2024-2026.
Furthermore, the mandate and general objectives of SOEs are identified within presidential decrees. For instance, with respect to AzerGold, the decree of the President on the establishment of AzerGold CJSC states that the company carries out the study, research, exploration, processing and management of non-ferrous and ferrous metal ore deposits, the application of new technologies in the referred field, the modernisation of the material and technical base and its efficient use, as well as other works related to the development of the referred field. The same mandate is repeated in the Charter of AzerGold. Or according to Presidential decree No. 2074/ 2023, the State Water Resources Agency of Azerbaijan was established to improve the management in sectors encompassing water resources, water management and reclamation, and to improve the organisation of land reclamation and irrigation work. Azersu OJSC and Azerbaijan Melioration and Water Management OJSC were placed under the Agency.
As there is no aggregate report, the result of AIH’s contribution to setting and monitoring KPIs is not properly disclosed. There are no policy documents or guidelines which set out different roles in the objective-setting process, nor do they clarify the powers of state institutions or authorities with respect to influencing long-term goals or strategies for SOEs.
The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.
3.2.1. Simplification of operational practices and legal form
A. Governments should simplify and standardise the legal forms under which SOEs operate. Their operational practices should follow commonly accepted corporate norms.
In general, Azerbaijani SOEs have the same legal forms as private legal entities, with their operational practices following commonly accepted corporate norms. Six PCs under AIH (AzerGold, ADY, Port of Baku, AZAL, ASCO, and Baku Metro) operate as closed JSCs, three (ABB, Azer Turk Bank, and Tamiz Shahar) as open JSC’s and one (Baku Bus) as LLC. All these legal forms are reflected in Azerbaijan’s Civil Code which is equally applicable to both state-owned and private legal entities.
From a legal standpoint, the legal forms of SOEs are essential in order to identify the maximum level of liability of shareholders: the shareholders of both LLC and JSCs have a limited liability and are not personally liable for the company’s debt. Unlike LLCs, JSCs are authorised to issue shares.
Certain requirements of the legislation are different in terms of the legal form: for instance, in LLCs each shareholder may request an audit, whereas in JSCs, only shareholders with 10% or more of shares enjoy such rights (Government of Azerbaijan, 1999[2]). In general, it is possible to convert one legal form to another by decision of the shareholders.
For SOCAR, neither its name nor Charter reflects the legal form listed within the Civil Code. SOCAR was established in 1992 in its current form as a state entity. Pursuant to its Charter, SOCAR is not liable for the obligations of the state and the state is not liable for the obligations of SOCAR, with some exceptions (AIH, 2020[3]). As of the date of this report no decision has been taken on the selection of legal form listed in the Civil Code for SOCAR.
Azerbaijan's bankruptcy procedures apply uniformly to public (including all SOEs) and private legal entities. There remain some distinctions, if the process is launched by an SOE itself or when the court announces bankruptcy. The bankruptcy of banks is provided in accordance the Law “on Banks” and no specific procedures are determined in relation to state-owned banks.
3.2.2. Political intervention and operational autonomy
B. The government should allow SOEs full operational autonomy to achieve their defined objectives and refrain from intervening in SOE management. The government as a shareholder should avoid redefining SOE objectives in a non-transparent manner.
In Azerbaijan, the legal and regulatory framework for SOEs notes provisions related to governance and potential interference in SOE management. The AIH Charter for instance explains the powers vested in the governing bodies of SOEs, aiming to limit direct involvement in day-to-day matters by the ownership entity. Relevant decrees, company charters and corporate governance standards have the intention to minimise the potential intervention of the government of Azerbaijan into SOE operations, by clearly indicating the roles of the general meeting of shareholders, supervisory boards and management bodies. However, politicisation of PCs remains a risk, considering AIH has material corporate powers (e.g. the authority to approve vital corporate documents or board appointees of PCs) and almost exclusively has political appointees and ministerial representatives sitting on its supervisory board and management board. This could potentially expose the portfolio to an unwanted level of political interference.
AIH has a unique role in relation to its PCs3: its supervisory board represents the state as a shareholder in the general meeting of shareholders together with the President (except for some specific SOEs for which the role as shareholder is not delegated and sits with the President), and its management board members and staff have a seat on supervisory boards at the PC level. It further acts as a coordinator between the general meeting of shareholders and supervisory board.
One of the rationales for the establishment of AIH was to separate SOEs from the policy and regulatory roles that line ministries play. It is through its advisory role in developing transformation plans for individual SOEs that AIH plays a more direct role in the management of the SOEs, which is also ensured through AIH’s representation on the supervisory board of each of its PCs and in its role fulfilling the functions of the general meeting of shareholders where it represents the state (noting that his role is formally divided between AIH and the President). AIH has thus aimed to separate the ownership functions from policy making and regulatory oversight, which is left to the respective line ministries and regulatory authorities.
SOE objectives, or so-called long-term development goals, are approved by the PC supervisory boards. AIH remains involved in the development of the goals, alongside the PC. For this, the PC usually work with international consulting firms, after which AIH is involved as a reviewer and messenger of shareholder expectations. According to AIH, few changes are made at this stage. The goals are then inserted within the strategy document of the relevant PC.
Broader SOE objectives are also included in the PCs' charters, which, except for some PCs, are not publicly disclosed. At the same time, many supervisory board members of PCs (see Annex B) are political appointees and/ or state representatives. Some members of PC supervisory boards may, as a result of their government function, have interests that are not aligned with the objectives of the PC or be privy to information through their roles in government that could affect their voting behaviour on the PC supervisory board. A board that allows its members to have these types of conflicting functions simultaneously does not preclude opportunities for undue political influence in SOE decision making objectives.
That said, the state, through AIH, does publicly disclose and specify in the AIH Charter the areas and types of decisions in which AIH is competent to intervene or give instructions to PCs (AIH, 2020[3]). However, the corporate governance standards that AIH has implemented individually for six PCs,4 which also include provisions on the limits of intervention by AIH, are not publicly disclosed. Yet, the establishment of AIH and having a clear description of its mandate as a “management coordinating body” for PCs in its Charter has created more clarity and is a step in the right direction.
C. The state should let SOE boards exercise their responsibilities and should respect their independence.
Although the decrees and charters of PCs do not refer to independent board membership, the corporate governance standards of PCs contain the provision on the possibility to have independent board members along with the representatives from state authorities and AIH.5 None of the PCs currently have independent members on their supervisory boards.6
The President appoints the management and supervisory board members of almost all PCs. AIH only appoints the management board members for Tamiz Shahar, Baku Bus, ABB and ATB. In practice, AIH has the right to recommend management board members in PCs that have implemented the AIH corporate governance standards. AIH does not have such right for supervisory board members.7
The revised corporate governance standards of individual PCs require that prospective supervisory board members are nominated “taking into account their powers, duties, skills, achievements, business reputation and professional experience, based on clear and transparent procedures.”8 The “Corporate Governance Standards in Banks” requires of banks, including ATB and ABB, that “the Supervisory Board [of banks] should be composed of members with different skills, qualifications and experience, and the principle of gender diversity in the composition of the Board should also be considered” (Government of Azerbaijan, 2023[4]).
In practice however, all PC supervisory boards have political appointees, high-ranking ministerial representatives or AIH representatives sitting on their boards. The fact that these boards are mostly composed of government related officials raises further concerns in relation to potential conflicts of interest and fully independent boards.
Employees of the ownership entity (or AIH) or professionals from other parts of the administration should only be elected to SOE boards if they meet the required competence level for all board members and if they do not act as a conduit for political influence that extends beyond the ownership role. This requests a level of competence which may be hard to find in a post-transition country. Although the assessment team notes the professionalism of hires at AIH, including their positioning in supervisory boards, it was informed by AIH and the Central Bank that it is challenging in practice to find qualified personnel not affiliated with the political system. There is thus the plan to look further abroad, but this is a longer-term process.
The SOE Guidelines note that individual board members shall not act as a representative of different constituencies and shall carry out their duties in an even-handed manner, thus “an ownership entity needs unique competencies and should have professionals with legal, financial, economic and management skills that are experienced in carrying out fiduciary responsibilities”. In order to fulfil this, the Civil Code requires any person represented in the management bodies of a legal entity, to act “honestly, professionally and logically while performing his/her duties for the interests of the legal entity he/she represents, and is obliged to be faithful to the interests of all its participants and to put the interests of the legal entity above its own interests, to be cautious, as well as to be fair and impartial when making decisions” (Government of Azerbaijan, 1999[2]). Board members are also held liable, as they may be requested to pay compensation for violations of the afore-mentioned duties. In addition, the newly-approved charters of AIH PCs indicate that supervisory board members should not make actions or speeches which can influence the perception of their persona. AIH representatives noted that board members receive training on fiduciary duties ahead of the establishment of boards.
On fiduciary duties, relevant provisions are reflected in the corporate governance standards of PCs, approved for six PCs by AIH: The members of the supervisory board of the company operate in accordance with the requirements of the legislation of Azerbaijan, and in line with the principles of professionalism, transparency, and the interests of the company and its founder. The obligations and responsibilities of the members of the supervisory board of AIH companies are also determined according to the corporate governance standards of PCs.
With regards to ATB and ABB, the state as a shareholder has access to the dealings of the supervisory boards of the banks. Article 4.6.4 of the “Corporate Governance Standards in Banks” provides that qualifying holdings or shareholders who own at least 5% of voting shares may submit agenda points to regular supervisory board meetings. As confirmed by AIH, all shareholders may then attend these meetings. Submitting agenda points and allowing attendance at these meetings by shareholders, including the state as shareholder, may impair the independence of the supervisory board as a governing body of ATB and ABB.
3.2.3. Centralisation of the ownership function
D. The exercise of ownership rights should be clearly identified within the state administration. The exercise of ownership rights should be centralised in a single ownership entity, or, if this is not possible, carried out by a co-ordinating body. This “ownership entity” should have the capacity and competencies to effectively carry out its duties.
In Azerbaijan, state ownership is dispersed, distributed across different line ministries and other state-owned institutions. These entities carry out their ownership responsibilities in accordance with decrees issued by the President. For the 12 PCs, the ownership rights are formally exercised by the President, sometimes in conjunction with the State Service on Property Issues under the Ministry of Economy. Furthermore, the Ministry of Finance possesses state shares in ABB. Table 3.1 provides further information on the different entities involved.
While AIH does not exercise formal ownership rights of its PCs, it has been delegated managing and coordinating functions on behalf of the government. It also offers advisory services in the governance and oversight of the PCs. AIH articulates SOE objectives, with a particular emphasis on transparency and economic efficiency. Through resource consolidation, strategic initiatives, and supervision, optimisation, and coordination, AIH’s stated mission is to reinforce the financial stability and competitiveness of its PCs. Notably, there are no current plans to consolidate the PCs under AIH into a fully-fledged holding structure and AIH expects to continue to operate primarily as a management body.
As described in the annotations of the SOE Guidelines, a coordinating entity should be in charge of establishing an overall ownership policy for its SOEs, developing specific guidelines and unifying practices among the various ministries. It appears that AIH does not have authority to establish such an ownership policy for the PCs and this remains a prerogative of the President.
AIH, however, does implement specific guidelines for PCs. Examples include the recent establishment of supervisory boards for all PCs, the implementation of corporate governance standards9 and the setting and monitoring of comparable KPIs for its PCs and consolidating data through its internal General Information System, thereby making substantial efforts to unify practices across the PCs. While AIH has an important recommendation role in the nomination processes for board members of PCs, AIH does not yet have a structured or institutionally formalised role, and further transparency around the procedure underpinning its recommendations would be merited.
PCs have noted support from AIH in offering advisory services, in facilitating communication with stakeholders (e.g. creditors) and in professionalising corporate governance which facilitate the PC operations.
To accomplish its mission and role, AIH was granted the following responsibilities:
1. Participation in policy development: AIH actively participates in the development and implementation of statutory regulations, development concepts, and target programs.
2. Management of state-owned shares: AIH has the responsibility to manage state-owned shares in state entities, except in cases specifically determined by the President.
3. Investment facilitation: AIH is empowered to create favourable conditions for investment in SOEs.
4. Planning and monitoring: AIH is authorised to issue opinions for the approval of long-term development and business plans of SOEs. It monitors the targets set in these plans, ensuring their effective implementation, and providing guidance for improvement.
5. Investment attraction: AIH is tasked with developing proposals and stimulating investment, including foreign investment in SOEs.
6. Economic efficiency enhancement: AIH is responsible for enhancing the economic efficiency of SOEs, including maximising their financial performance.
7. Procurement and obligations: AIH arranges the procurement of goods, works, and services in accordance with the Law “on Public Procurement”. It fulfils the provisions stated in its Charter and resolutions issued by the President.
8. Governance and transparency: AIH plays a role in recommending best international practices for the management and corporate governance of SOEs. It evaluates the efficiency of their activities, sets requirements for reports, and monitors their compliance. AIH also promotes transparency by disclosing information on its own activities and maintaining an electronic information system containing data on SOEs.
9. Service Quality and modernisation: AIH is authorised to propose measures to ensure high-quality services in the activity areas of SOEs.
10. Additional rights: AIH possesses several other rights, such as establishing working groups and commissions, involving independent experts and specialists, holding conferences and events, issuing bulletins and publications, and performing actions determined by the legislation and the Charter.
Source: (AIH, 2020[3])
AIH is supervised by the President and its governing bodies, and reports on its annual activities to these entities. The assessment team was informed that in the future a portion of the 20% net profit received by AIH10 from PCs will be utilised to finance its ongoing operations and activities. The rest is intended for further investment opportunities, allowing AIH to reinvest and potentially expand its portfolio, to attract foreign investments to the country and engage in new ventures that align with its strategic objectives.
AIH had just under 100 employees as of August 2023, and aims to further attract professionals with backgrounds in finance, law, business administration, economics, and other disciplines, targeting a staffing rate of 140. Roughly half of its staff have had foreign careers and worked mainly in the private sector (Figure 3.2).
Source: AIH submissions to OECD questionnaire.
Source : AIH submissions to OECD questionnaire.
3.2.4. Accountability of the ownership entity
E. The ownership entity should be held accountable to the relevant representative bodies and have clearly defined relationships with relevant public bodies, including the state supreme audit institutions.
Under article 4.3 of AIH’s Charter, the supervisory board is AIH’s supreme governing body. The supervisory board defines its goals and values and determines the main strategic directions, which are further cascaded down through AIH. AIH’s supervisory board is chaired by the Prime Minister of Azerbaijan and consists of five members appointed by the President, which includes two line ministers and two assistants to the President. In accordance with article 4.7.3, duties of the supervisory board of AIH include the approval of the annual financial report of AIH.
According to its Charter, AIH is only accountable to the Presidential Administration. It is thus not accountable to other representative bodies, including the Parliament, or the Cabinet of Ministers.
AIH, as a management entity, is supervised by the President, and engages an external auditor for the audit of its activities. The Chamber of Accounts undertook an audit of AIH in 2024, and one has been finalised by one of the Big 4 companies, with the results to be published by the end of 2024. AIH submits annual reports to the President. It is required to prepare financial reports in accordance with the Law “on Accounting”, and statistical reports in accordance with the Law “on Official Statistics.” AIH’s annual reports are subject to the approval of its supervisory board. At the time of assessment, no report had been made public in relation to AIH’s activity.
3.2.5. The state’s exercise of ownership rights
F. The state should act as an informed and active owner and should exercise its ownership rights according to the legal structure of each enterprise. Its prime responsibilities include:
F.1. Being represented at the general shareholders meetings and effectively exercising voting rights;
Since the state is a single shareholder in almost all AIH PCs (except ABB and ATB), it is in a position to convene the general meeting of shareholders and cast a decisive vote therein. Depending on the issues on the agenda, either the President (related to issues such as the establishment and liquidation of the SOE or the appointment and release of members of the supervisory board) or AIH (related to issues such as the approval of the annual financial reports or approval of the Charter) represents the state in the general meeting of shareholders of PCs.
Due to the existence of minority shareholders at ATB and ABB, the Charters of these banks require supervisory boards to send notices of and invitations to the general meeting to all shareholders. Extraordinary meetings may be called by shareholders with 5% of voting shares, the supervisory board, audit committee or management board of ABB.11 Further information on minority shareholders and their rights can be found in section 3.4.1.
F.2. [The state’s prime responsibilities include:] Establishing well-structured, merit-based and transparent board nomination processes in fully- or majority-owned SOEs, actively participating in the nomination of all SOEs’ boards and contributing to board diversity.
The board nomination process is the same across all PCs. It is instigated by AIH, which, according to its Charter, is generally responsible for the full formation of the governing bodies of PCs (AIH, 2020[3]). The first step in the process is for AIH to formulate proposals, which are to be discussed among the supervisory board of AIH. After the supervisory board reached a conclusion, AIH addresses a recommendation to the President through the chair of the supervisory board of AIH. Based on the relevant recommendation, the President appoints the members of the supervisory boards of the PCs. The assessment team noted that while such occurrences are rare, the President can veto candidates.
AIH does not have an independent nomination committee in place through which candidates for PCs are evaluated. AIH has indicated that there are nomination criteria, though implicit, that guide the recommendations issued by the supervisory board. AIH seeks to propose candidates which have appropriate background, knowledge, and professional experience to support their candidacy.
One AIH executed reform, as formalised through individual corporate governance standards of individual PCs, encourages boards to set up board committees.12 One of the required board committees (established by all PCs) is the appointment and remuneration committee. The standards provide that the concrete functions and authorities of this committee are further detailed in statutes or regulations designed by the supervisory board. These statutes provide more details on the composition and function of the relevant committee but do not include a prescribed procedure for the board nomination process.
The “Corporate Governance Standards in Banks” provide that with regards to board diversity, “[…] the principle of gender diversity in the composition of the Board should also be considered” (Government of Azerbaijan, 2023[4]). However, the assessment team found that at the time of the review, ATB had women on its supervisory board, whereas ABB did not.
Recently revised corporate governance standards for PCs provide that within the nomination of supervisory board members, the President should consider “diversity in terms of experience and individual characteristics is supported in the composition of the Supervisory Board [...], and efforts are made to ensure gender equality.” At the same time, the standards do not detail any board nomination procedures.
In practice, the board nomination procedures and their outcomes are not communicated in a transparent manner. It is therefore not clear to what extent the requirements for the composition of the supervisory board are followed-up on.
F.3. [The state’s prime responsibilities include:] Setting and monitoring the implementation of broad mandates and objectives for SOEs, including financial targets, capital structure objectives and risk tolerance levels.
As detailed in its Charter, AIH fulfils an oversight and monitoring function for the SOEs under its portfolio. It is authorised to issue opinions for the approval of long-term development and business plans of SOEs, and monitors the targets set in these plans, ensuring their effective implementation, and providing guidance for improvement. AIH thus fulfils a key steering role helping SOEs to stay on track in achieving their company objectives. With respect to ABB and ATB, the CBA sets only the regulatory indicators (such as capital requirements and ratio’s) and AIH and the supervisory boards of the banks define the financial commercial targets.
For financial targets, AIH uses a KPI system for its PCs to set targets and monitor performance. These KPIs cover well-defined financial and non-financial markets and risk tolerance levels, for example the debt-to-EBITDA ratio, the lost time injury frequency rate, and other efficiency ratios.
The mandates and objectives of PCs are also defined in their strategy documents. The supervisory boards are authorised to discuss and approve specific objectives alongside financial targets, the capital structure and risk tolerance level in PCs. Additional public policy objectives can be set through government strategies, which can be communicated through AIH. According to AIH, the KPIs of each PC include all relevant public policy objectives, such as the number of passengers and travel safety for Baku Bus and Metro and the amount of recycled waste for Tamiz Shahar. AIH is not involved with setting public policy objectives for the PCs or the broad mandate of PCs. Longer-term objectives of the company are defined in Presidential decrees on the establishment of the PCs.
Line ministries participate in the formation of a unified state policy in sectors relevant to AIH PC’s and ensure the implementation of this policy. This policy is expressed both in acts (laws, decrees, orders, etc.) for a specific industry and in collegial decisions of the line ministry. Through these regulations, AIH and its portfolio companies are made aware of the policies and regulations in a particular sector and abide by them.
PC charters clearly state the role of the management board to make suggestions on the formation of the development strategy. Thereby, the supervisory board receives suggestions from the management boards to discuss and approve the strategy and targets. Additionally, based on the Charter of AIH, the latter provides the opinion for the long-term development and business plans of PCs. AIH, line ministries or the supervisory board are the main communication channels to deliver the government priorities, targets or programmes to PCs.
AIH’s Charter lists the following monitoring roles:
give opinions on the approval of long-term development and business plans of state enterprises, monitor the goals set in business plans
determine the requirements for SOE reports and monitor the submitted reports
assess the efficiency of SOEs based on analysis of their efficiency indicators
optimise the costs of SOEs, by requesting and analysing information and reports, and giving appropriate instructions to their management bodies of state enterprises
create a single information system, containing information on the activities of SOEs
analyse economic and financial performances of SOES and take measures to increase their efficiency
monitor the efficient use of budget funds, loans, grants and other financial funds allocated to AIH, as well as to SOEs.
Source: (AIH, 2020[3])
F.4. [The state’s prime responsibilities include:] Setting up reporting systems that allow the ownership entity to regularly monitor, audit and assess SOE performance, and oversee and monitor their compliance with applicable corporate governance standards.
The primary external reporting system in place for the AIH enterprise portfolio is the submission of the annual audited financial statements (prepared under IFRS) to AIH and other key governing/regulatory bodies, where applicable (e.g. CBA, in the case of the financial institutions). All SOEs, including the PCs, are required to prepare financial reports in accordance with the Law “on Accounting”, statistical reports in accordance with the Law “on Official Statistics”, and tax reports in accordance with the Tax Code.13 The Ministry of Finance is authorised to receive the annual consolidated financial statements, if the SOE benefits from state financial support in the shape of state guarantees, or it receives/ participates in projects that receive state loans, subsidies or grants. Such financial statements are mandatory regardless of the legal or organisational form of SOE.
Stemming from its Charter, AIH determines the requirements for financial statements submitted by PCs and simultaneously monitors them. Importantly, AIH has the power to approve the annual reports and financial statements of PCs in agreement with the President as the general meeting of shareholders.
AIH notes in the assessment questionnaires, that certain PCs have expressed preparing reports in line with IFRS and have failed to submit reports in a timely manner. In Table 1.7, it is noted that three PCs have not produced audited financial statements, and at least two have produced very limited reports (e.g. Port of Baku and ADY). Acknowledging the issues with the quality of the reports and their disclosure discipline, AIH set the KPI "Evaluation of management of the company on compliance with the requirements of corporate governance and accountability", which allows it to assess the SOE’s preparation and dissemination of financial statements.
Pursuant to the charters and corporate governance standards, PCs are obliged to establish internal audit and internal control systems for detecting and preventing violations of the law. As of today, no compliance officer is appointed in PCs, except the banks where a member of the management board is the chief compliance officer.
All companies have internal audit teams established, under newly established board audit committees. AIH employees monitor the recruitment of auditors, the quality of the internal audit report and compliance of committees against their annual plan and charters. To improve internal controls, AIH is working with the ADB to prepare a unified internal control policy. Four PCs (SOCAR, Metro, PoB and Tamiz Shahar) have been selected as pilot companies and have defined risk and control matrices, list of controls and their status.
F.5. [The state’s prime responsibilities include:] Developing a disclosure policy for SOEs that identifies what information should be publicly disclosed, the appropriate channels for disclosure, and mechanisms for ensuring quality of information.
PC reporting requirements are included across laws, PC charters, AIH’s Charter, and corporate governance standards: originally, reporting and disclosure-related requirements were reflected in the different laws14 and in the charters of PCs. If PCs are the issuers of securities, they are required to submit their financial reports along with the opinion of external auditor and management report to the CBA.
AIH approves the corporate governance standards for PCs which include a separate chapter on financial reporting, transparency and information disclosure. Pursuant to the standards, information required to be disclosed by the PC should, as a rule, be disclosed on its official website. The website should be well organised, easy to search and contain the necessary information for interested parties to understand the activities of the PC.
The recently implemented corporate governance standards for PCs have some provisions that can be considered a disclosure policy. The standards require PCs to publicly disclose financial and certain non-financial information about their operations, including an annual sustainable development report, which should be based on international best practices on environmental, social and governance (ESG) approaches.15 In order to ensure the openness and transparency of its activities for interested parties, the PCs are required to publish their sustainable development report each year. These should contain information on the goals and targets set for sustainable development, the measures taken to achieve them, and the results achieved. The report should be approved by the supervisory board of the PC. With respect to the banks, the “Corporate Governance Standards in Banks” require more detailed disclosure of information.16 However, as noted earlier, PC compliance with these requirements remains inconsistent.
From the supervision perspective, AIH utilises a range of monitoring tools such as KPI dashboards, quarterly and annual management reports, budget versus actual reports, and the General Information System (GIS) to assess the disclosure-related performance of PCs.
Importantly, AIH has indicated that it does not specifically publish updates on the particular topics associated with PCs. AIH reportedly publishes press releases with respect to its participation in the supervisory board meetings of respective PCs. Additionally, the GIS is updated on a regular basis with monthly, quarterly, and annual data, which is accessible in real time to the boards. The assessment team was informed that AIH is in the process of preparing an annual aggregate report which will cover most of the information about PCs in its portfolio.17
F.6. [The state’s prime responsibilities include:] When appropriate and permitted by the legal system and the state’s level of ownership, maintaining continuous dialogue with external auditors and specific state control organs;
The Civil Code of Azerbaijan and the Law “on Audit Services” do not identify the engagement with the external auditor as the prerogative of either the general meeting of shareholders or the supervisory boards and enable the companies to define such issues in their charters, regardless of their legal form. The Law “on Banks”, however, identifies the general meeting of shareholders as the body that appoints external auditors.
The charters of PCs have a different approach regarding the engagement of external auditors: the general meeting of shareholders is authorised to approve and change the external auditor per the Charter of ABB and ATB (as is required pursuant to the Law “on Banks”), and the supervisory board of the PC is authorised to approve and change the external auditor per the Charter of SOCAR, AzerGold and other PCs and AIH. As a rule, the chair of the management board of PCs signs the agreement with the external auditors with the authorisation from the higher body.
Pursuant to the corporate governance standards for PCs, and practically, coordination between the supervisory board and external auditors is through the board audit committee, which has at least one representative from the supervisory board and one representative from AIH (either AIH staff or external representative, nominated by AIH). For ABB and ATB, the audit committee is also responsible for the coordination between the supervisory board and the external auditor, and one third of the audit committee consists of the members from the supervisory board, as required by the “Corporate Governance Standards in Banks”. With respect to the rights of minorities on this aspect, JSCs are required to have external audit at the demand of the shareholder(s) with 10% and more shares (ATB is a case), in line with the entire AIH enterprise portfolio, which are required to have an external audit according to AIH's corporate governance standards. Apart from external auditors, PCs are also subject to audit from the Chamber of Accounts of Azerbaijan, which has the authority to inform the President and the Parliament on the results of the audits.
In 2023, AIH and the Chamber of Accounts signed a memorandum agreeing to cooperate in conducting analyses and preparing proposals for further improving the effectiveness of external state financial control measures.
F.7. [The state’s prime responsibilities include:] Establishing a clear remuneration policy for SOE boards that fosters the long- and medium-term interest of the enterprise and can attract and motivate qualified professionals.
The SOE Guidelines’ annotations note that “it is important that SOEs ensure high levels of transparency regarding the remuneration of board members and key executives. Failure to provide adequate information to the public could result in negative perceptions and fuel risks of a backlash against the ownership entity and individual SOEs”. In the case of AIH and its PC, there is no remuneration policy in place – also due to the high politicisation of the boards.
With respect to the remuneration policy for management boards, as stated in the corporate governance standards for the PC, the supervisory board identifies the size of the remuneration, pays special attention to the remuneration of the management board’s members, and establishes appointment and remuneration committees with at least one member from the supervisory board (a member of the management board can be a member of the committee without a voting right). Furthermore, AIH approves a separate standard on the assessment of the management board members. The main criteria for the assessment are KPIs set by AIH. The supervisory board approves the remuneration terms for the chair of the management board by the recommendation of AIH and for the members of the management board by the recommendation of the management board’s chair, respectively.
According to the Civil Code (articles 99.2 and 100.3), JSC are to annually publish information on their management bodies and their officials, which also includes remuneration on “each member of their management body” (Government of Azerbaijan, 1999[2]). Moreover, IFRS disclosures require key management remuneration disclosures. For example, SOCAR's financial reports contain aggregated information on the amount of remuneration (performance-based salaries and bonuses) for senior executives.18 It is not disclosed which portion of these remuneration schemes are salaries and which part are bonuses. At the same time, the distribution of rewards by positions is not specified.
The assessment team was informed that supervisory board members (all state representatives) do not currently receive remuneration or board fees in their exercise of duty as board members, thus rendering disclosure on this aspect moot. Recognising the importance and necessity for a clear remuneration system, AIH is in the process of developing a comprehensive remuneration policy and mechanism, which it presented to its supervisory board in March 2024. AIH’s intention is to reach the equal treatment of all management board members in all PCs.
Consistent with the rationale for state ownership, the legal and regulatory framework for SOEs should ensure a level playing field when SOEs undertake economic activities.
3.3.1. Separation of functions
A. There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state-owned enterprises, particularly with regard to market regulation.
While AIH has been granted some advisory and monitoring functions, its official task does not entail exercising the state’s ownership function in the 12 PCs. As detailed in the section on the legal and regulatory environment (1.3) and ownership arrangements and responsibilities (1.4), the state’s ownership function for the PCs is delegated to AIH by the President and in some cases alongside the Ministry of Finance and/or the State Service on Property Issues under the Ministry of Economy. It was also noted that the exclusive authorities of the general meeting of shareholders of PCs are divided between AIH’s supervisory board and the President. AIH’s supervisory board exercises the shareholders rights in the general meeting of, for instance, ASCO, AzerGold, Port of Baku, Baku Bus and Baku Metro.
The assessment team noted that AIH and the Azerbaijani government aim for a clear separation between the state’s ownership and regulatory function with regards to the PCs. This is, among others, evidenced in individual corporate governance standards of PCs that have specific provisions that these functions should be separated.19
However, as noted previously, AIH only has line ministers and political appointees sitting on its supervisory board, which exercises ownership rights in the general meeting of shareholders of PCs. This means that in practice, there is not a clear separation between the state’s ownership function and other state functions that may influence the conditions for SOEs. This lack of clarity between the functions is further compounded by the fact that the general meeting of the PCs have appointed line ministers (or representatives of these ministries) and regulators on PC supervisory boards, which are simultaneously responsible for market regulation and policy making. For instance, the Minister of Digital Development and Transport sits on the board of AZAL, ADY and Baku Metro, while the Minister is chiefly responsible for policymaking and regulation of the sectors these companies operate in. In addition, the head and deputy head of the State Service on Antimonopoly and Consumer Market Control sit on the boards of ADY and Baku Metro respectively, while the State Service is the competition authority chiefly tasked with regulating these industries and companies.
Although this absence of a clear separation of ownership and regulatory functions is a departure from the SOE Guidelines, vesting authorities in AIH for setting and monitoring KPIs for individual PCs as well as the coordination of some ownership functions has constituted a first, transitional step towards a future centralisation and potential separation of ownership and regulatory functions. Another positive step is the mandate granted to the Ministry of Economy to propose additional legislation to separate the ownership function from regulatory functions of government in consultation with AIH. AIH has indicated that a Presidential decree was signed in August 2023 for the ministries of Economy and Digital Development and Transport to assess and determine, among others:
The main activity of SOEs that should be kept under state control and the possibility of transferring other activities that do not correspond to the main activity to the private sector; and
Possibilities of liberalisation and de-monopoly, taking into account the requirements of the competitive environment of the relevant market.20
The table below shows the overseeing and regulatory bodies of the current and former PCs in the AIH portfolio. Several SOEs note the same overseeing and regulatory government body, rendering it difficult to separate the two functions.
Note (1): AIH acts as a regulatory body only in a capacity where it supervises individual PC management and monitors its performance. AIH does not have any authority to regulate the market or other market players.
Note (2): The competition agency State Service on Antimonopoly and Consumer Market Control has been excluded for the purposes of this table, as this agency has no specific PC in scope but supervises competitiveness in all relevant markets the PCs operate in, as well as PC public procurement practices.
Source: Based on research by the assessment team and information provided by AIH.
3.3.2. Stakeholder rights
B. Stakeholders and other interested parties, including creditors and competitors, should have access to efficient redress through unbiased legal or arbitration processes when they consider that their rights have been violated.
According to AIH, SOE stakeholders, including creditors and competitors, have access to the same means of redress as the stakeholders of private companies. Commercial disputes between SOEs are to be settled through the court system or an arbitral tribunal in case of contractually agreed arbitration between parties. The assessment team was not able to verify whether the means of redress are efficient and unbiased towards all parties (e.g. also including stakeholders and minority shareholders) in practice.
The governing arbitration statute in Azerbaijan is the Law “on Arbitration”, No. 1077 – VIQ, dated 26 December 2023. Azerbaijan is also party to the New York Convention, the Washington Convention and the European Convention. Additionally, the Civil Procedure Code of the Republic of Azerbaijan, effective since 2001, contains provisions on the enforcement and recognition of foreign arbitral awards.
The assessment team was informed that if a dispute initiated by a stakeholder or non-state shareholder is of commercial nature, they are required to pass through a mediation process before they can access the Azerbaijani court system. To file a suit in court, stakeholders need to attend at least the initial mediation session. Statistics for May and June 2023 show that 1 960 cases of a total of 10 488 ended with an agreement between the parties (the statistics include all type of disputes, not limited to commercial).21 Following recent changes in the Law "on Mediation", commercial organisations are no longer required to attend an initial mediation session and can directly go to the courts or undertake arbitration. However, in cases not involving commercial organisations, e.g. disputes involving employees, mediation remains required as a first step. As was noted in section 1.1.4, Azerbaijan has a relatively strong legal framework to resolve legal disputes.
According to a World Bank study, the level of court fees and costs is low in Azerbaijan. Although adequate incentives may not exist to choose mediation services over litigation, the cost of alternative dispute resolution is not likely to be significant. Mediation remains relatively neglected and is not taken into consideration in legislation (Kaufman et al., 2018[5]).
As to the practicalities, the U.S. State Department reported in 2023 that businesses report problems with the reliability and independence of judicial processes in Azerbaijan (U.S. Department of State, 2021[6]). According to the U.S. State Department, investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favoured local interests.22 According to a Human Rights report by the U.S. embassy in Baku, many citizens do not trust the court system and were therefore reluctant to pursue compensation claims (U.S. Embassy Baku, 2021[7]). The Law Society of England and Wales also noted in a stakeholder submission that “judges and courts have hindered citizens access to justice” and that “[...] civil society activists are consistently denied counsel of their choice and forced to accept government appointed lawyers […]” (The Law Society of England and Wales, 2023[8]). This may hinder actual stakeholder right to redress in relation to PCs or the Azerbaijani state.
3.3.3. Identifying the costs of public policy objectives
C. Where SOEs combine economic activities and public policy objectives, high standards of transparency and disclosure regarding their cost and revenue structures must be maintained, allowing for an attribution to main activity areas.
Azerbaijani law does not require a systematic separation between economic activities and non-commercial activities, which allows SOEs to use compensation from non-commercial activities to cross subsidise commercial activities in which they may face private competition (World Bank, 2022[9]). There also appears to be little structural or accounting separation between commercial and non-commercial activities (World Bank, 2022[9]).
Most PCs are primarily profit-driven, with some also required to fulfil state national public policy objectives. Several PCs in AIH’s portfolio therefore combine economic activities and public policy objectives, such as SOCAR, ADY, Baku Metro, Tamiz Shahar and AZAL.
Note: The list of activities and objectives are non-exhaustive and are subject to changes in corporate strategy and government policy.
Source: Information provided by AIH to the assessment team.
These objectives are not clearly described in corporate documents (e.g. as PSOs), such as charters or corporate governance standards, nor are there clear references of an underlying specific public interest a PC may serve. Instead, these PCs are required to perform public policy objectives with a broad mandate, e.g. aligning with the “energy and resource” policy (SOCAR) or the “logistics policy” (Port of Baku) of the Azerbaijani government. In individual PC corporate governance standard documents, reference is solely made to these broader objectives.23 The lack of a clear description of public policy objectives, public interests and/or PSOs for individual PCs implies that an adequate business separation between those activities is also missing.
For some PCs, economic activities and the performance of public policy objectives are separated into different business units. In other cases, separation takes place by means of accounting in the financial statements. AIH has pointed out that, for instance, the commercial cargo division of ADY is a separate business unit from the public policy-oriented passenger division. However, there seems to be no structural comprehensive division of economic activities and other non-commercial objectives throughout the AIH portfolio. This hinders an effective separation of activities and does not allow for a clear and transparent means to separate costs from other activities that may be subject to state support due to their public service nature. AIH has indicated that it has not performed a comprehensive review on how the costs of public policy objectives could be identified and disclosed across its portfolio. The Ministry of Finance is aware of potential fiscal risks associated with SOEs which are beneficiaries of public support. While the issue has not been mapped out in a comprehensive manner, the assessment team was informed that the Ministry of Finance is currently working on such plans.
There is no information on the cross-subsidisation between profit to loss-making activities emanating out of non-commercial objectives assigned to SOEs (World Bank, 2022[9]). Thus, subsidisation for loss-making PSOs performed by a PC through other profitable business lines within the same PC are also not adequately accounted for.
Lastly, a lack of adequate separation of costs could be demonstrated by the low financial performance by some SOEs.24 Such performance could point to the existence of “informal” expectations from the state that are not purely commercial, for example maintaining employment levels or otherwise contributing to development objectives (e.g. local communities). This is presumably the case for the waste management PC Tamiz Shahar. Its broad public policy objectives include waste collection and recycling (see Table 3.2 above) but do not state e.g. that these services need to be offered at a particular low or below cost price rate. However, Tamiz Shahar has been making substantial losses in recent years due to a tariff that is set at artificially low levels, which has not been revised in ten years. The costs of achieving these informal objectives are not well-defined or disclosed in Azerbaijan.
D. Costs related to public policy objectives should be funded by the state and disclosed.
As noted above, a business, structural and accounting separation between economic activities and non-economic activities within SOEs are not mandatory or commonly practiced in Azerbaijan. As many PCs combine economic activities and non-commercial objectives in practice (see Table 3.2 above), the costs related to public policy objectives are currently not properly identified, disclosed, and adequately compensated by the state of Azerbaijan.
In some cases, the state compensates losses deriving from the performance of PSOs of PCs through the allocation of state budgetary funds, which is the case for, for example, Baku Metro and AZAL. However, the government does not have a separate accounting system for PSOs. According to the ADB, the state systematically provides budget support to SOEs, yet there is neither a framework to control how such state aid and public support are granted nor one to assess their impact on competition (Asian Development Bank, 2020[10]).
In other cases, PCs bankroll their own PSOs through cross-subsidisation from the revenue generated by profit-making activities to the loss-making activities. Examples include ADY, which uses the profitable freight services to cross subsidise its passenger transport and SOCAR, which sells oil at below-market regulated prices to certain customer segments that is cross subsidised from its non-regulated profit-making activities (Asian Development Bank, 2020[10]).
The SOE Guidelines recommend that compensation provided to SOEs be identified, accounted for, and calibrated to the actual costs of fulfilling well-defined public policy objectives. Compensation should not be used to offset any financial or operational inefficiencies (including internal cross-subsidisation at the PC level).
Clearly defining and calculating public policy objectives costs followed by setting up contractual mechanisms, such as management or service contracts between the state and relevant PCs and incorporating these in the state budget and SOEs’ financial statements, could mitigate these issues. As a first possible step in this process, the assessment team has taken note that the Ministry of Finance is working on an analysis to calculate the real price of the social benefits of the PSOs (e.g. heating, natural gas tariffs, transportation). Furthermore, the Ministry of Finance is reportedly in the process of entering into public service agreements (PSAs) with e.g. ADY.
3.3.4. General application of laws and regulations
E. As a guiding principle, SOEs undertaking economic activities should not be exempt from the application of general laws, tax codes and regulations. Laws and regulations should not unduly favour SOEs over their market competitors. SOEs’ legal form should allow creditors to press their claims and to initiate insolvency procedures.
Currently, almost all PCs within AIH’s portfolio operate under the legal forms OJSC, CJSC and LLC (see also Table 3.1 above). AIH’s largest PC SOCAR is considered a “state company”.
As was noted in 1.3, the Civil Code of Azerbaijan is formally equally applicable for SOEs and private companies. The assessment team has furthermore been informed in questionnaires that SOEs or their board members do not have any special legal privileges, such as sovereign immunity to lawsuits. Further to this, PCs do not receive a preferential treatment over privately owned companies with regards to corporate taxation. PCs may receive tax exemptions in relation to the performance of public policy objectives, e.g. Tamiz Shahar, but these are assumed to be part of government programmes where private companies could also benefit from.
ATB and ABB, the two banks in the AIH portfolio, are subject to additional laws and regulations such as the Law “on Banks” (Government of Azerbaijan, 2004[11]) and the “Corporate Governance Standards in Banks” (Government of Azerbaijan, 2023[4]), which are supervised by the CBA.
These relevant applicable laws and regulations do not provide explicit preferential treatment to SOEs. It should however be noted that state-owned banks currently have less stringent corporate governance requirements than privately owned banks. Whereas the latter are required to have one-third of their supervisory boards to be comprised of independent board members, this is not yet required from the former category (Government of Azerbaijan, 2023[4]).25
In accordance with Azerbaijani legislation, the only entities that cannot be declared bankrupt are public legal entities and the CBA. All other legal entities, including the PCs, are subject to bankruptcy and insolvency legislation. AIH has indicated that SOCAR, although having an unconventional legal form, is also subject under the national bankruptcy laws like other PCs that are e.g. JSCs.
With regard to banks, it should be noted that specific insolvency provisions in the Law “on Banks” do not provide an adequate outline on unbiased and detailed, substantiated grounds for rejection by the court in case a creditor would file to initiate insolvency procedures (Government of Azerbaijan, 2004[11]). This imposes a risk for arbitrary or unsubstantiated rejection by the courts, which would hurt stakeholders or non-state shareholders’ interests. Lastly, it is noted that a Deposit Insurance Fund is available in the market to provide insured depositors with the necessary amount and acts as an administrator.26
In practice, there has been an example of a PC (ADY) being subject of several investigations initiated by the State Service for Antimonopoly and Consumer Market Control Agency for violation of competition law or potential competition infringements. This indicates that PCs are not systematically protected from competition law by virtue of their state ownership.
3.3.5. Market consistent financing conditions
F. SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance. In particular:
F.1. SOEs’ relations with all financial institutions, as well as non-financial SOEs, should be based on purely commercial grounds.
Debt financing of PCs
The assessment team found that following foreign financial institutions (such as international banks and development finance institutions), local financial institutions (including state-owned banks) and the Azerbaijani Ministry of Finance are the primary lenders to PCs.
The Ministry of Finance provides direct financing but also explicitly guarantees SOE debt. Below is an overview of the different types of debt that PCs have on their balance sheets, displayed as a percentage of total aggregated debt of PCs. The analysis excludes equity contributions and direct government budget support for PCs (e.g. operational expenditures for PCs such as Baku Bus).
Source: Information provided by AIH to the assessment team.
Note: Amounts are in thousands of AZN.
Source: Information provided by AIH to the assessment team.
Based on information provided by AIH, foreign banks hold a little under 50% of SOE debt financing and are therefore the main creditors of interest-bearing debt for PCs on an aggregate level. Following foreign banks, the Ministry of Finance holds the largest portion of debt (15.96%), followed by the government of Azerbaijan and its State Oil Fund (SOFAZ) (14.67%). These figures show that the PCs rely substantially on state-owned financial institutions, albeit this is not the main source of debt on an aggregate level. The assessment team verified that at a more granular level, primarily SOCAR and AZAL have foreign bank debt on their balance sheets.27
All other PCs rely more heavily on government financing. Although PCs such as Baku Metro, Baku Bus and Tamiz Shahar presumably account for relatively large shares of government financing (either through debt or equity), it is noted that these companies have no or limited involvement in economic activities. The assessment team was informed that in practice, ATB does not have SOE loans in its debt portfolio, whereas ABB does.
According to a World Bank study, most of the debt of economically significant SOEs in Azerbaijan (not limited to the AIH portfolio) is directly guaranteed by the Azerbaijan state (World Bank, 2022[9]). This includes debt for many of the PCs of AIH, e.g. SOCAR28 and AZAL29. According to the World Bank, the Azerbaijani government guarantees certain SOE loans to obtain better credit terms for the respective SOEs as well as grants SOEs preferential access to finance through state-owned banks (World Bank, 2022[9]). These practices are not in line with the SOE Guidelines. This situation has led to artificially low funding costs disrupting the competitive landscape and a distortion of the marketplace. For instance, Baku Bus relies heavily on government funding and the relatively low funding costs associated with it, while it operates with a 30% market share in a commercial market with multiple players.
There is no clear distinction between the respective responsibilities of the state and SOEs in relation to creditors of AIH and its PCs. There are no mechanisms in place to manage conflicts of interest and ensure that PCs develop relations with state-owned banks, other financial institutions as well as other SOEs based on purely commercial grounds. PCs do have some mechanisms in place to manage related party transactions or any material transaction as per their charters and/or corporate governance standards (for banks, there is a separate regulation that has requirements in relation to managing and disclosing related party transactions (Central Bank of Azerbaijan, 2001[12]). However, the assessment team was unable to verify whether these mechanisms work effectively.
State equity and similar contributions to PCs
The assessment team found that the state of Azerbaijan is also a major equity contributor to some PCs, although it is noted that other PCs do not receive any capital support from the state.
Figure 3.5 shows that primarily ADY, Baku Bus, Metro and AzerGold received equity or equity like contributions from the state of Azerbaijan in 2022. Most support was provided in the form of CAPEX subsidies, additional paid in-capital and OPEX subsidies. As some of these companies also have substantial economic activities in competitive industries, concerns regarding competitive neutrality exists.
As laid down in PC charters, supervisory boards at PCs have direct authority over approval of the borrowing terms of conditions of PCs.30 In the case of material transactions that represent a substantial proportion of the PCs assets, the AIH supervisory board has an additional approval right for the transaction. These corporate governance provisions can help prevent undue political interference. However, because the supervisory boards of PCs and the AIH supervisory board do not have independent board members and are often affiliated with line ministries, the avoidance of undue political interference is far from guaranteed in practice. This does not preclude the possibility of easier debt and equity finance access for PCs through direct or indirect state funding.
Note: The one-off payment by the government to Baku Bus is related to the transfer of title of buses to Baku Bus in 2022.
Source: Information provided by AIH to the assessment team.
The assessment team noted that AIH is in the process of setting up mechanisms and decision and monitoring frameworks for achieving market consistent rates of return on projects of PCs that are financed via capital injections of the state of Azerbaijan. Implementing these mechanisms and frameworks could be a first step towards competitive neutrality on debt and equity finance.
F.2. [SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance. In particular:] SOEs’ economic activities should not benefit from any indirect financial support that confers an advantage over private competitors, such as preferential financing, tax arrears or preferential trade credits from other SOEs. SOEs’ economic activities should not receive inputs (such as energy, water or land) at prices or conditions more favourable than those available to private competitors.
Under Azerbaijani tax legislation, the PCs of AIH are subject to equal or equivalent tax treatment as private competitors. The executive authority, the State Tax Service under the Ministry of Economy, ensures the implementation of the country’s tax policy.
PCs economic activities however benefit disproportionately from “off market” funding arrangements from other SOEs, such as trade credits. These trade credits presumably incur substantial indebtedness between PCs, although financial statements of PCs do not provide any information on the volume of intra-company (including PC) trade credits. The assessment team was informed by AIH that delays in settling these debts may occur on various grounds. According to AIH, arrears between SOEs do not lead to penalties, interest or other financial consequences. No well-substantiated justification for this was provided. Such arrangements are not consistent with normal corporate practices and amount to preferential lending.
The assessment team was informed by AIH of recent positive developments with regards to AZAL. AZAL previously made profits by procuring kerosine domestically from SOCAR at below market price and reselling it at marketplace in the international marketplace. However, AZAL must now procure its kerosine at market prices. Additionally, the assessment team was informed during interviews that the government is contemplating to structure the subsidies or reimbursements for the specific AZAL PSO to offer Nakhchivan flights differently, e.g. by providing funds to the local population rather than subsidising AZAL on a company level.31
F.3. [SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance. In particular:] SOEs’ economic activities should be required to earn rates of return that are, taking into account their operational conditions, consistent with those obtained by competing private enterprises.
AIH sets KPIs for most PCs and monitors progress on these KPIs, including via AIH’s internal GIS, among others. One of AIH’s main performance areas is to improve the “[…] financial health and sustainability of the state-owned enterprises, effective management of their financial assets, as well as the attraction of foreign direct investments” (AIH, 2020[3]). These tasks effectively entail directing its PCs towards profitability.
To this end, AIH uses KPIs and financial benchmarks such as EBITDA and on a CAPEX level the internal rate of return or net present value.32 These metrics are considered adequate for purposes of gauging profitability.
Notwithstanding this, AIH does not currently require a rate of return from their PCs or individual projects or CAPEX. The absence of a required rate of return may give PCs a competitive edge over privately owned companies, which could distort the marketplace. The SOE Guidelines therefore prescribe that SOEs’ economic activities should be expected to earn rates of return comparable, in the long run, to those of competing companies. Likewise, if equity financing is provided by the state budget, this should be subject to a required minimum expected required rate of return that is consistent with private sector companies in like circumstances.
The assessment team welcomes AIH’s efforts and intention to set-up mechanisms and decision and monitoring frameworks for achieving market consistent rates of return on projects of PCs that are financed via capital injections of the state of Azerbaijan. This does not, however, include required rates of return for all PC economic activities yet.
3.3.6. Public procurement procedures
G. When SOEs engage in public procurement, whether as bidder or procurer, the procedures involved should be competitive, non-discriminatory and safeguarded by appropriate standards of transparency.
The Law “on Public Procurement” and PC internal procurement policies
The Law No. 988-VIQ/ 2023 “on Public Procurement” was enacted in Azerbaijan in December 2001, and further amended in 2016, 2018 and 2024. It regulates the procurement of goods, works, and services (Government of Azerbaijan, 2024[13]).
The purchase of goods, works or services made with the funds of the state budget of the Republic of Azerbaijan are within the scope of this law. This may include targeted budget funds, budgetary funds, subsidies, loans received under state guarantees, state grants, assistance or extra-budgetary state funds. Conversely, if (1) procurements are funded by internal company funds of the SOEs and (2) the SOEs’ supervisory board is approved by the President (or in agreement with the President), these procurements are not subject to the Law “on Public Procurement” and are carried out in accordance with internal procurement policies (Government of Azerbaijan, 2024[13]).
The assessment team was informed by AIH that following a requirement by Presidential decree33, AIH has been working together with the boards of the PCs on setting up internal (private) procurement policies that reflect the guiding principles of the Law “on Public Procurement”. The policies will require approval by the supervisory boards of the PCs.
The assessment team noted AIH presentation materials addressed to PCs in which the intention to revise internal procurement policies is detailed. The principles and universal details for these policies that are described have reportedly been largely designed by AIH in cooperation with external consultants. According to the materials, the OECD Recommendation on Public Procurement was taken as a starting point. The goal of the revision is stated to be to (1) include transparency of the overall procurement process, (2) ensure a fair selection process, (3) ensure the efficient and effective implementation of tenders and (4) ensure the application of best practices. Given its status as an ongoing project, the assessment team was unable to review a revised, approved procurement policy of a PC or assess its effects in practice.
Public procurement procedures in practice
In the context of Azerbaijan and the AIH portfolio, PCs may apply their own private policies instead of the Law “on Public Procurement” if they engage in procurement with monetary sources that do not stem from the government budget, e.g. a PC’s revenue or profits. This means that to the extent that the procurement of PCs relates to the fulfilment of a government purpose, PCs are not always required, by definition, to follow the Law “on Public Procurement” (either as bidder or procurer). This effectively allows PCs to procure goods, services and works for the performance of public policy objectives and – if funding origins are not well accounted for at PCs and the government - even PSOs without following the state law, its principles and procedures.
Consequently, the legal framework in Azerbaijan currently allows flexibility for the application of public procurement rules. AIH has indicated that PCs such as SOCAR, AZAL, AzerGold, ADY, ATB and ABB are expected to follow their internal rules, whereas PCs such as Tamiz Shahar or Baku Metro may have to follow public procurement procedures, depending on the specific project. AIH has indicated that many PCs have mandatory internal procurement policies in place and that PCs have internal controls and mechanisms in place that monitor procurement processes and outcomes. As procurement is not publicly disclosed or otherwise transparently communicated for PCs, the assessment team was not able to verify the effectiveness of these controls.
It can be expected that in practice, few PCs will be frequently following state law procedures. This is because (1) only a limited number of PCs account for their receipt of (direct or indirect) government funds and, (2) it is likely that PCs in most cases will argue that internal funds are used for bidding purposes. Interviews with several board members of PC on this subject attested to this potential reality.
As many PCs do not have revised internal policies yet and there is a general lack transparency on PC procurement issues, it cannot be guaranteed at this point that bidding processes that have a public interest and (indirect) public funds at stake are competitive, transparent and fair. Moreover, the extent to which anti-competitive or illicit behaviour can be enforced by relevant authorities is not evident.
The underlying systems in Azerbaijan are not well-equipped to counter this. Research has shown that engagement of civil society organisations in public procurement is limited, and that fraud and corruption reporting appears to be weak (OECD, 2022[14]). Also, non-governmental stakeholders have expressed concerns that the public procurement system is not fair and transparent in Azerbaijan (OECD, 2022[14]). Transparency International ranked Azerbaijan 154th out of 180 countries in its Corruption Perceptions Index for 2023, down from 129th place in 2020.34 The assessment team noted from statements made by interviewees that the public procurement system in Azerbaijan is a substantial driver for the lack of transparency, misallocation of funds and unfair competition in the marketplace.
Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognise the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information.
3.4.1. Ensuring equitable treatment of shareholders
A. The state should strive toward full implementation of the OECD Principles of Corporate Governance when it is not the sole owner of SOEs, and of all relevant sections when it is the sole owner of SOEs. Concerning shareholder protection this includes:
The state of Azerbaijan is the single shareholder of nine of the current 12 PCs. The AIH portfolio thus has only two PCs which are not 100% state-owned: ABB and ATB. Both banks are open joint-stock companies.
The state of Azerbaijan owns 96.37% of shares in ABB. The residual shares are free floating and listed on the BSE. The state owns 75% of shares in ATB. The residual shares are owned by several other (foreign) banks and insurance companies. Please refer to sections 2.4.1 and 2.4.2. respectively for more information about these companies and shareholders.
As there is only one LLC in the AIH portfolio (Baku Bus) and the two relevant PCs with non-state shareholders are banks, the analysis in this section is limited to these banks and their legal form, the OJSCs.
A.1. The state and SOEs should ensure that all shareholders are treated equitably.
The corporate governance frameworks of ABB and ATB are governed by the Civil Code of Azerbaijan, the Law “on Banks” (Government of Azerbaijan, 2004[11]), the “Corporate Governance Standards in Banks” (Government of Azerbaijan, 2023[4]) and their respective charters.35
The Civil Code and the Law “on Banks”
The Civil Code of Azerbaijan requires for all discussed legal forms (CJSC, OJSC, LLC) the establishment of a general meeting of shareholders. The Civil Code further requires, among other things, adequate corporate governance mechanisms, including decision-making processes.
The assessment team was informed through the questionnaires that the PCs do not have priority shares or “golden shares”. Notwithstanding this, the Civil Code permits JSCs generally the right to issue “privileged shares” as a separate share class in addition to normal shares (Government of Azerbaijan, 1999[2]). Article 106.1 of the Civil Code sets out basic rights of shareholders and does not differentiate between majority or minority shareholders, nor between state and non-state shareholders.
Laws and regulations in Azerbaijan do not have explicit rules or policies that specifically safeguard the interests of minority shareholders. However, the Civil Code stipulates that the shareholders of JSCs, irrespective of their nature or context have the right to:
participate in the management of the company as specified by the Civil Code, other legislation and the charter of the company as well as to elect and be elected to its management and executive authorities
receive information about the activity of the company, once every year become familiar with its annual report and balance sheet (in the order determined by the legislation)
request the calling of a general meeting of the company shareholders
request making changes and adding topics to the agenda of the general meeting of shareholders
participate at the general meeting of shareholders with voting rights and request a copy of the minutes of the general meeting
request the auditing of the activity of the company by the auditing committee or the auditor
receive dividends from the net profit of the company
receive a proportion of the assets of the company in case of liquidation and after the satisfaction of creditors
demand members of the management board and supervisory board to be held liable for negligence and intentional damage to the company
participate in the sale or acquisition of the shares (e.g. after the issuance of stock)
apply to the courts for the compensation of damages caused to the company or shareholders as a result of a concluded transaction
become acquainted with the appendices of material contracts concluded (contracts with related persons and significant contracts)
possess other rights provided for by the Civil Code and the charter of the company.
Note: The order in which information about activities of the companies is provided should be in accordance with the Law “on information, informatisation and information protection” and the Law “about getting information”.
Under the Civil Code, the general meeting is considered the highest management body authority in a JSC. Article 107.1 of the Civil Code provides the exclusive competencies of the general meeting. Under the Civil, Code, if a general meeting is to be convened, all shareholders need to be notified at least 45 days in advance via simultaneous dissemination of information in the media and written notifications to shareholders. During the general meeting, shareholders can cast votes in person or through an authorised representative.
Article 107.1 provides that the following issues fall within the exclusive competence of the general meeting:
changes to the charter of a company or the amount of the charter capital
election and dismissal of members of the board of directors (supervisory boards) and additionally, in case the entity has more than 50 shareholders or is a public legal entity, a revision or inspection commission
establishment of the company’s executive bodies and dismissing them provided that this matter is not within the competence of the board of directors (supervisory board)
approval of annual reports, balance sheets, profit and loss accounts and distribution of profit and compensation of losses
decisions to reorganise or liquidate the company
decisions on transactions with related parties and entering into significantly important contracts.
The Law “on Banks” provides additional competencies of the general meeting. Although the Law “on Banks” does not include explicit provisions that address or protect minority shareholders, it does explicitly set out in article 24.4 the basic notion that shareholders in principle have voting rights pro-rata to their shares in the bank’s capital (Government of Azerbaijan, 2004[11]). Article 24.1 of the Law “on Banks” provides a list of additional exclusive competencies of the general meeting, such as the right to appoint and dismiss the bank’s management board and supervisory board members, adopt and approve the bank’s budget and to establish general financial, control, administrative and human resource policies.
The formal legal system of Azerbaijan can be considered aligned with international standards to the extent that it does not differentiate between types of shareholders.
Corporate governance standards and PC charters
In addition to the formal legal system, corporate governance standards include provisions on shareholder rights.
First, the “Azerbaijan Corporate Governance Standards” of 2011 provide a separate chapter on shareholder rights (Minister of Economy of Azerbaijan, 2011[15]) that stipulates the following rights for shareholders to be reflected by individual companies in their charters:
to adopt decisions on the company’s operation
to receive information about the company’s activity
to participate in distribution of the company’s profit
to control the transactions of the company within its economic activity
to receive residual value at liquidation of the company.
Although these standards also do not specifically address the rights or interests of minority shareholders, no differentiation is made between types of shareholders and therefore the equal treatment of all shareholders is implied. There are no additional corporate governance requirements for listed companies with regards to the protection of the rights of minority shareholders.
Second, the “Corporate Governance Standards in Banks”, which is directly applicable to PCs ABB and ATB, also do not contain provisions directly relating to the rights of minority shareholders. The standards however require that one-third of all banks’ supervisory boards must be comprised of independent members, except for state-owned banks. This exception for state-owned banks, including ABB and ATB, poses a material departure from the SOE Guidelines, as it effectively favours the state as a shareholder, allowing more influence over the company and access to information than a minority shareholder would have.
The “Corporate Governance Standards in Banks” contain some shareholder rights, including (but not limited to) an approval right for the bank’s organisational structure, the bank’s annual budget, revision of the bank’s revision accounting policy and decisions on variable remuneration for bank managers.
These shareholder rights may be beneficial for (potential) minority shareholders, as they vest a certain degree of authority into the general meeting. These standards, however, seem to provide flexibility for the general meeting to authorise delegation of certain shareholder rights to the supervisory board. For instance, article 3.2 of the standards provide that:
“Bank’s organizational structure is approved by the general meeting of shareholders or, if authorised, by the supervisory board […]” (Government of Azerbaijan, 2023[4]),
In the absence of ancillary arrangements such as a shareholders’ agreement and minority shareholder representatives on the supervisory board, the flexibility of delegating shareholder powers to the supervisory board could disproportionally dilute the influence of minority shareholders in the general meeting. This poses a risk for the equitable treatment of all shareholders. This risk is considered more material if there are no independent board members sitting on the supervisory board. AIH and relevant policymakers should take this into account when updating PC charters and corporate governance standards.
Source: “Corporate Governance Standards in Banks” (Government of Azerbaijan, 2023[4])
Lastly, the PC charters and corporate governance standards do not specifically address the rights or protection of minority shareholders. This may be explained by the fact that all PCs, except for ABB, are 100% state-owned and possible future privatisation has not been mapped out.
ABB has some minority shareholders. Its Charter addresses general equality amongst shareholders and shareholders rights and duties, but does not particularly address minority shareholders. For instance, the Charter provides in article 8.2 that “the Bank provides an equal opportunity to all its shareholders to participate in the general meeting of shareholders.” Or in article 8.12 that “except for the cases stipulated by the legislation, shareholders have the right to vote in proportion to their shares in the authorised capital of the Bank” (International Bank of Azerbaijan, 2023[16]).
During interviews, ATB board members indicated that there were disputes between the state and minority shareholders up until 2016. In the wake of the financial crisis that struck the financial sector in Azerbaijan, the state acquired the majority of ATB shares in 2014. In 2016, ATB experienced debt problems and lost almost AZN 100 mln.
Following the acquisition of shares by the state, non-state (foreign) shareholders initiated proceedings, which also resulted in the minority shareholders voting against resolutions at ATB general meetings of shareholders. According to ATB, the disputes were resolved and there have not been any subsequent minority shareholder disputes involving ATB.
Source: (Hashimova and Kadyrov, 2017[17]).
A.2. [Concerning shareholder protection this includes:] SOEs should observe a high degree of transparency, including as a general rule equal and simultaneous disclosure of information, towards all shareholders.
The Civil Code of Azerbaijan does not include provisions on transparency or disclosure of information by SOEs or private companies to shareholders. The voluntary “Corporate Governance Standards of Azerbaijan” of 2011 contain a few limited provisions on financial reporting and the disclosure of information.
The “Corporate Governance Standards in Banks” require each bank to disclose the following information for data users in order to make economic decisions, assess the bank's financial condition and effectively compare different banks:
information about the bank's financial indicators
general information about the bank and its activities
information on the structure and adequacy of bank capital
information on bank risk management.
The Standards further require banks to place disclosed information in a separate section of the bank's website, structured in a clearly visible, accessible format and that their financial statements must be kept on the bank's website for at least three years from the date of posting. The Standards also require banks to deliver data directly to data users upon their inquiries without any charges. The standards are aligned with international standards and best practices in this regard.
Source: “Corporate Governance Standards in Banks” (Government of Azerbaijan, 2023[4])
However, on the topic of information disclosure, the “Corporate Governance Standards in Banks” facilitates preferential treatment for the state as a shareholder as opposed to non-state shareholders through various provisions. Against the backdrop of a lack of independent board members on PC supervisory boards, numerous supervisory board approval rights instigate earlier access to material corporate information for state shareholders - who are represented on the boards - than non-state minority shareholders. The supervisory board’s approval right for the strategic vision and mission statement of the bank which is then shared with the general meeting for information purposes (article 3.4) is exemplary of this.
As discussed in section 3.2.2, article 4.6.4 of the “Corporate Governance Standards in Banks” provides that qualifying holdings or shareholders who own at least 5% of voting shares may submit agenda points to regular supervisory board meetings (Government of Azerbaijan, 2023[4]). All shareholders may reportedly also attend these meetings. Although all shareholders, including minority shareholders, are thus allowed to attend, this provision may favour shareholders that represent a larger portion of shares, i.e., the state as a shareholder, as they already have representatives on the supervisory board and can more easily influence the supervisory board than minority shareholders.
Furthermore, shareholders located close to the PC offices where the supervisory board meetings are held also have a slight advantage, which would typically include the state as a shareholder. In these cases, shareholders attending in person may have early access to vital corporate information. This could be increasingly problematic in cases where the general meeting of shareholders is fragmented or international, for instance for ATB (which has foreign shareholders) or if a PC is or will be publicly listed. This provision is therefore considered unfavourable to the equitable treatment of all shareholders, including minority shareholders. Lastly, there is no separate corporate governance code or additional corporate governance requirements specifically for listed companies.
A.3. [Concerning shareholder protection this includes:] SOEs should develop an active policy of communication and consultation with all shareholders.
Various laws and regulations require PCs to identify their shareholders. First, the Civil Code of Azerbaijan requires JSCs to ensure registration of shareholders not later than within 30 days after the state registration of the company (Government of Azerbaijan, 1999[2]).
Besides exercising their general disclosure requirements, ABB and ATB currently do not have a policy of active communication and consultation with all shareholders. It is recommended to develop additional guidelines specifically related to the equitable treatment of shareholders. The PCs’ policy of communication and consultation with all shareholders should be an integral part of these guidelines. Establishing a dividend policy that sets out what minority shareholders may expect in case of profits and appointing an investor relations officer in the management of ABB and ATB responsible for shareholder communications is recommended.
A.4. [Concerning shareholder protection this includes:] The participation of minority shareholders in shareholder meetings should be facilitated so they can take part in fundamental corporate decisions such as board election.
The participation in the general meeting of shareholders of JSCs, either in person, through a representative or through written correspondence (unless otherwise stipulated in the company’s charter) is enshrined in the Civil Code. The law also provides shareholders the right to elect and be elected to management and executive authorities of the company (Government of Azerbaijan, 1999[2]).
The Civil Code, the Law “on Banks” and the “Corporate Governance Standards in Banks” further provide shareholder rights that encompass several fundamental corporate decisions, such as the right to appoint and dismiss the bank’s management board and supervisory board members, approval of the bank’s charter, approval of the annual financial statements and right to decide on the sale, reorganisation, or liquidation of the bank.
The Law “on Banks” provides that general meetings of shareholders shall be deemed valid in the event that a minimum of 60% of voting shares are present. Decisions on the introduction of amendments and changes to the charter, appointments and dismissal of the members of the supervisory board and the management board, the sale, reorganisation of the bank, purchase of other bank and termination of activities of the bank shall be taken by the majority of 75% of shareholder votes represented at the meeting (Government of Azerbaijan, 2004[11]). This legislation is aligned with international practices and may stimulate the participation of minority shareholders in relation to those specific decisions.
3.4.2. Adherence to the corporate governance code
B. National corporate governance codes should be adhered to by all listed and, where practical, unlisted SOEs.
Azerbaijan has two national corporate governance standards, the voluntary “Corporate Governance Standards of Azerbaijan” of 2011 (Minister of Economy of Azerbaijan, 2011[15]) for all JSCs and the mandatory “Corporate Governance Standards in Banks” of 2023 (Government of Azerbaijan, 2023[4]) specifically for banks. There is no corporate governance code specifically for listed companies.36 Details on the legal and regulatory framework bearing on the corporate governance of AIH’s enterprise portfolio are described in 1.3.2.
As also noted, ABB is the only listed SOE within the AIH portfolio. In addition, only ATB has non-state shareholders. All other PCs are 100% state-owned. ABB and ATB do not apply the national “Corporate Governance Standards of Azerbaijan” of 2011 and only apply the “Corporate Governance Standards in Banks”. All other PCs either adhere to individual corporate governance standards37 or, in the absence thereof, only to their individual charters, relevant presidential decrees and the Civil Code of Azerbaijan.
To conclude, no PC adheres to the national “Corporate Governance Standards of Azerbaijan” of 2011. Adherence thereto is not required and non-adherence is not substantiated on a ‘comply or explain’ basis.
3.4.3. Disclosure of public policy objectives
C. Where SOEs are required to pursue public policy objectives, adequate information about these should be available to non-state shareholders at all times.
ABB and ATB are the only PCs that have non-state shareholders. However, as was elaborated in Table 3.2, these PCs do not have any PSOs, nor do they pursue any public policy objectives.
3.4.4. Joint ventures and public-private partnerships
D. When SOEs engage in co-operative projects such as joint ventures and public-private partnerships, the contracting party should ensure that contractual rights are upheld and that disputes are addressed in a timely and objective manner.
On 27 December 2022, the Law “on Public-Private Partnerships” was adopted. Although there have reportedly been instances of public-private partnership projects in Azerbaijan, in the renewable energy industry, this is the first law prescribing public-private partnership regulations in Azerbaijan (Caspian Legal Center, 2023[18]). The law declares that public-private partnerships must be implemented on the basis of the principles of the rule of law, protection of free competition, improvement of transparency and efficiency, equality of rights of claimants, and maintenance of the balance of interest and risk between the parties (Cantekin, 2023[19]).
The Law “on Public-Private Partnerships”
The annotations of the SOE Guidelines state that formal agreements between the state and private partners, or between an SOE and private partners, should clearly specify the respective responsibilities of project partners in the case of unforeseen events, while at the same time there should be sufficient flexibility for contract renegotiation in case of need.
The Law “on Public-Private Partnerships” provides a framework for contracts between the state and private partners. This framework provides a process following the conclusion of tenders and a clear overview of key elements to be included in the agreements between parties. The Law provides some guidance as to what parties should agree upon with regard to their respective responsibilities in the case of unforeseen events. For instance, the Law provides that parties shall periodically review and adapt payment terms to changing circumstances. Parties further have contractual freedom to make arrangements on unforeseen events.
Article 27 provides for a guarantee for private contractors in the event of a change of legislation in Azerbaijan after the public-private partnership has concluded.38 Articles 26 (protection of private partner’s investment and assets) and 28 (respecting creditor’s rights) are other examples of adequate measures that provide the contracting party with assurance that contractual rights will be upheld.
The provisions mentioned above are assessed to be adequate for purposes of this Guideline. However, the assessment team has not verified any practical cases against the backdrop of this legislation.
Dispute resolution
Article 38 of the Law “on Public-Private Partnership” relates to the settlement of disputes between parties and provides that parties can appeal administratively and to the court against the decisions and actions (or inaction) of the competent body related to the organisation and holding of the tenders. Article 38 further provides that disputes between the parties of the public-private partnership agreement and other agreements on the public-private partnership project are resolved in accordance with the procedure provided for in those agreements. If the dispute resolution procedure is not stipulated in those contracts, the disputes are resolved in accordance with the laws of Azerbaijan (Republic of Azerbaijan, 2022[20]).
Regarding alternative dispute resolution, the "on Arbitration" entered into force on 25 January 2024. This Law was reportedly developed to improve the business environment in Azerbaijan. According to AIH, the Law is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law “on International Commercial Arbitration” of 1985 and the UNCITRAL Arbitration Rules of 2010 of the United Nations Commission on International Trade Law. The assessment team was unable to verify the effects of this new Law.
Role of AIH
Attracting private investments to PCs and having PCs engage in public-private partnerships is one of the key objectives of AIH (AIH, 2020[3]). To this end, AIH has a coordinating authority to elaborate on proposals for the attraction of private investments to its PCs, including foreign investments (AIH, 2020[3]). The assessment team understands from AIH that PCs engage in co-operative projects depending on the market conditions and available investment opportunities.
The AIH Charter provides that AIH may conclude agreements and transactions, acquire and execute property and private non-property rights and obligations and act as a claimant or defendant in court proceedings. There have been occurrences where AIH co-signs agreements between PCs and public or private partners, such as a loan agreement between ASCO and the European Bank for Reconstruction and Development (EBRD) in February 2024 with a total value of USD 60 mln.39
The state ownership policy should fully recognise SOEs’ responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders. It should make clear any expectations the state has in respect of responsible business conduct by SOEs.
3.5.1. Recognising and respecting stakeholders’ rights
A. Governments, the state ownership entities and SOEs themselves should recognise and respect stakeholders’ rights established by law or through mutual agreements.
In Azerbaijan, the different legal forms of SOEs in principle do not differentiate in their rights or obligations towards employees or the broader treatment of employees (e.g. regarding working hours, leave, termination, and other employment-related matters). The rights and obligations of employees are the same across all company types, as outlined in the country’s Labour Code (Government of Azerbaijan, 1999[21]). Additionally, individual PCs have collective agreements in place which concern employees (such as ADY, ASCO, SOCAR, AzerGold).
Azerbaijan established a commission for human rights (ombudsman) in 2002 with responsibilities ranging across human rights and business. Azerbaijan has further implemented internationally recognised human rights instruments, including those stated in the International Bill of Human Rights and ILO conventions. Azerbaijan was also among the 47 member-states that became the first members of the Human Rights Council in 2006. Despite these commitments, human rights challenges can exist in certain SOEs (U.S. Department of State, 2022[22]), particularly in sectors like mining or extraction. For instance, it was found that workers’ freedom of association has been restricted. There have been cases reported to the OECD National Contact Point under the OECD Guidelines on Multinational Enterprises involving Azerbaijan, related to the “undue influence on the regulatory framework, and the failure to operate in a manner contributing to the wider goals of sustainable development, and to adequately consult with the communities affected”40.
In Azerbaijan, there are no specific policies or practices in place for providing stakeholders with timely and adequate information about SOEs, including PCs. Additionally, PCs do not have a special policy for employees’ board representation as well as mandatory consultations with all stakeholder groups. This is, however, not common practice for private sector companies in Azerbaijan either.
Regarding consumers, their rights are generally safeguarded by the Law "on Consumer Rights". Additionally, the CBA oversees the protection of rights for representatives of financial institutions, while the State Service for Antimonopoly and Consumer Market Control, focuses on safeguarding the rights of other consumers. According to Article 29.1.26 of the Law "on Getting Information", information related to the use of funds from the state budget or extra-budgetary funds to SOEs must be disclosed.
Internally, within the banking sector, ABB has endorsed a "Conflict of Interest Policy", approved by its board, to regulate the rights of stakeholders. This policy addresses potential conflicts between ABB and its customers, employees, third parties, and individuals associated with ABB. However, it lacks provisions mandating consultations with concerned parties and consumers.
A decision by the Cabinet of Ministers of Azerbaijan, dated 19 October 2010, has approved the "Rules for using the Baku Metro", which includes regulations for service consumers.
The government has made notable efforts over the last decade to modernise environmental legislation and regulations, as reflected in an increase in the position in international rankings on environmental performance.41 The government has introduced environmental regulations to ensure stakeholder protection. However, some enterprises have complained about the lack of transparency of environmental regulations and expressed concerns about irregular and inexplicable fines (OECD, 2019[23]).
B. Listed or large SOEs should report on stakeholder relations, including where relevant and feasible with regard to labour, creditors and affected communities.
The recently approved – but not yet implemented – individual corporate governance standards for six PCs mandate the PCs to publicly disclose specific non-financial details regarding their operations. This encompasses the annual publication of a sustainable development report aligned with international best practices with regards to ESG. These reports should cover information about set goals and targets for sustainable development, the measures implemented to attain them, and the corresponding outcomes. Approval of the sustainable development report is required from the supervisory board of the respective SOE. In practice three PCs (SOCAR, AzerGold, ABB) of the 12 in total so far adhere to this requirement.42 This poses a particular concern for those PCs whose corporate governance standards explicitly necessitate adherence to this reporting obligation. Larger SOEs, including SOCAR, may further release annual reports that integrate discussions on social and environmental subjects.
3.5.2. Internal controls, ethics and compliance programmes
C. The boards of SOEs should develop, implement, monitor and communicate internal controls, ethics and compliance programmes or measures, including those which contribute to preventing fraud and corruption. They should be based on country norms, in conformity with international commitments and apply to the SOE and its subsidiaries.
Azerbaijan has enacted anti-corruption legislation applicable to all legal entities, including SOEs. The primary legal framework is the Law “on Combating Corruption”, established in 2004, which defines corrupt practices and prescribes penalties. This law explicitly extends its application to the public sector and SOEs. The law aims to: prevent and detect offences related to corruption; protect social justice, human rights and freedoms; create favourable conditions for the development of the economy, and ensures the lawfulness, transparency and effectiveness of the activities of state authorities, municipal bodies, and legal entities under public law.
The country's Criminal Code also incorporates provisions addressing corruption and bribery offences, holding individuals within SOEs accountable if engaging in corrupt practices. Azerbaijan is a signatory to international agreements like the United Nations Convention against Corruption, which encompasses measures applicable to SOEs.
In the six PCs in which individual corporate governance standards have already been established (Tamiz Shahar, ASCO, AzerGold, Port of Bank, Baku Bus, and Baku Metro), the development of internal codes of ethics, with oversight on compliance managed through the internal audit function is required. These codes must explicitly prohibit illegal activities, including financial misreporting and misconduct, economic crimes such as fraud, breaches of sanctions, money laundering, anti-competitive practices, bribery, corruption, or violations of consumer rights. For now, AIH has indicated that AzerGold, SOCAR, ADY, and Baku Metro have implemented internal codes of ethics for their employees. These reportedly include anti-corruption mechanisms, such as a compliance programme addressing SOE integrity and corruption prevention, as well as a corruption-focused risk assessment.
ABB and ATB are mandated to establish and develop internal codes of ethics in accordance with article 17 of the “Corporate Governance Standards in Banks”, as endorsed by the CBA (Government of Azerbaijan, 2023[4]). These standards draw upon the corporate governance principles for banks outlined by the Basel Committee43, and have a one-year grace period. These standards are therefore required to have been implemented by banks, including ATB and ABB by August 2024. The internal codes must explicitly prohibit illegal activities, including financial misreporting, misconduct, crimes such as fraud, breach of sanctions, money laundering, anti-competitive practices, bribery, corruption, and the infringement of consumer rights.
All PCs have established audit committees and an internal audit function that conducts regular audits, focusing on compliance issues.44 Additionally, AIH has indicated that relevant internal departments at PCs monitor adherence to the legislative framework on corporate governance and internal regulatory documents.
Moving forward, and in alignment with the National Action Plan for 2022-2026 aimed at enhancing anti-corruption efforts, SOEs, including PCs, are obligated to conduct a corruption risk assessment and implement preventive measures. This includes fostering transparency and incorporating civil society oversight in recruitment processes of SOE staff. Furthermore, SOEs are mandated to organise anti-corruption trainings for employees and regularly submit reports to both the National Anti-Corruption Commission (comprising government representatives) and the Cabinet of Ministers, detailing the outcomes of the implemented measures. The adoption of the international standard ISO 37001 "anti-corruption management systems" is also part of the planned initiatives.
Despite the enactment of laws and codes of conduct, Azerbaijan's SOEs, particularly in high-risk sectors like oil and gas, may confront corruption challenges (GAN Integrity, 2020[24]). There have been high-level corruption cases concerning some of the AIH PCs, raising questions on the effectiveness of anti-corruption programmes (OCCRP, 2022[25]). Interviewees indicated that limited political will and the lack of monitoring may hamper comprehensive oversight of the SOE portfolio.
The Law “on Rules of Ethics Conduct of Civil Servants” addresses conflict of interest prevention, stating that civil servants must avoid conflicts of interest and report any contradictions between service duties and private interests. However, the law does not mandate abstention from decision-making until conflicts of interest are resolved, and it provides only a general duty to implement preventative actions. Reporting to direct or superior supervisors is required. Thus, Azerbaijan lacks a comprehensive legal definition of conflict of interest at the primary law level applicable to individuals in the public sector. While the majority of state bodies and PCs have internal ethical rules incorporating conflict of interest regulations, these rules are not publicly accessible. Currently, the regulation of conflict of interest relies mainly on secondary legislation and is not publicly disclosed. Azerbaijan has been developing a draft Law “on the Prevention of Conflict of Interest” for several years, with expectations for it to come into force in the near future.
AIH has intentions to enhance its own internal compliance functions. Currently, the implementation of these more elaborate internal compliance measures is lacking but stands out as a key focus area for AIH's future initiatives. Further, the Anti-Corruption General Directorate under the Prosecutor General advised that a new mandatory law would be introduced with requirements for companies to cater for whistleblower protection, as the current Law “on Combating Corruption” reportedly contains only two provisions on whistleblowers which are generally not adhered to. The framework on whistleblowers prepared by the Anti-Corruption General Directorate under the Prosecutor General is currently only voluntary.
3.5.3. Responsible business conduct
D. SOEs should observe high standards of responsible business conduct. Expectations established by the government in this regard should be publicly disclosed and mechanisms for their implementation be clearly established.
According to AIH, although there are no specific responsible business conduct standards currently in place, the government and AIH are eager to actively address this.
Although responsible business conduct expectations for AIH PCs – except for those on corruption - are not governed by a distinct legal framework, they are uniformly applied to all corporate entities and individuals engaged in business activities, irrespective of their legal or ownership structure. There are also long-term national strategy programmes, including the National Priorities Strategy 2022-2026 and Azerbaijan 2030, which outline that PCs are the primary implementers of these programmes. References to responsible business conduct are disclosed publicly through the publication of these strategy documents.
3.5.4. Financing political activities
E. SOEs should not be used as vehicles for financing political activities. SOEs themselves should not make political campaign contributions.
There have been no recorded instances of AIH PCs engaging in financing political activities or making contributions to political campaigns. While there are no explicit prohibitions on such actions, the SOEs under AIH’s oversight are asked to make a distinct separation from political involvement, prioritising their dedication to business objectives and mandates. The assessment team does not have any further information in order to properly assess evaluate this recommendation.
State-owned enterprises should observe high standards of transparency and be subject to the same high-quality accounting, disclosure, compliance and auditing standards as listed companies.
3.6.1. Applicable disclosure standards and practices
The Civil Code of Azerbaijan
The requirement for OJSCs and CJSCs to publish annual financial statements derives from article 99.2 and 100.3 of the Civil Code of Azerbaijan. Article 107.6 of the Code further provides that upon publication of these documents, a JSC is obligated to invite a professional auditor, who does not have any property interest in the company or its participants, to audit the annual financial report (Government of Azerbaijan, 1999[2]).
LLCs, which is the legal form of Baku Bus, are required by the Civil Code to submit externally audited annual financial reports to their general meeting of participants in the company, albeit are not required to publish these reports afterwards (Government of Azerbaijan, 1999[2]).
The Civil Code itself does not further elaborate on required key elements for the financial reports of JSCs or LLCs, nor which accounting standards should be used or the timing of filing and publication. This is, however, further detailed in subsequent laws and corporate governance standards.
Law “on Banks” and the “Corporate Governance Standards in Banks”
The Law on Banks requires banks in Azerbaijan, including PCs ABB and ATB, to prepare statements in accordance with IFRS, whereby the accounting rules, including the form and content of the annual financial statements, are established by the CBA (Government of Azerbaijan, 2004[11]). The law requires banks to submit and publish annual financial statements audited by the external auditor no later than five months (six months for consolidated accounts) after the end of the fiscal year.
The “Corporate Governance Standards in Banks”, which AIH applies to ABB and ATB, further requires that the audited financial reports and consolidated accounts must be published on the bank’s website and mass media. The Code provides a list of data disclosure requirements for all banks (Government of Azerbaijan, 2023[4]) (see 3.4.1).
Applicable corporate governance standards for non-banks PCs
As noted, AIH has the intention of creating and implementing new corporate governance standards for all its PCs (except for the banks) and has done so already for ASCO, Baku Bus, AzerGold, Baku Metro, Port of Baku and Tamiz Shahar. AIH informed the assessment team that the individual PC corporate governance standards are or will be approximately 95-100% identical and allow only certain immaterial deviations to be judged on a case-by-case basis. However, because not all individual corporate governance standards were provided and some remain internal working documents of AIH, the assessment team was not able to verify this for the whole AIH portfolio.
With regards to the disclosure of corporate information, the recently revised corporate governance standards of AIH require PCs to:
prepare audited financial statements in accordance with IFRS
change the external auditor performing the PC’s audit in principle at least every three years (the supervisory board may extend for a further two-year period)
prepare a report on sustainable development and include the information in the annual report
prepare a report on compliance (requirements of which are also laid down in the charter) and include this information in the annual report
prepare and publish quarterly reports, management reports and other information required by AIH
publish all information on its official company website, which should be well organised, easily accessible and comprehensible for interested third parties
disclose the above information in a timely manner.
The assessment team analysed the alignment of PCs with the relevant Guidelines disclosure provisions in practice. An overview of this analysis is included below.
Source: Based on OECD research.
Notes:
1. PC supervisory board members do not receive any remuneration.
2. Available sustainable development reports are available up until the fiscal year 2021.
3. Available audited financial statements are available up until the fiscal year of 2020.
4. Available financial statement of 2022 was not audited and in draft form.
5. Available financial statement of 2022 was not audited and in draft form.
6. Audited accounts that precede the fiscal year 2022 are not taken into account. The assessment team was provided with the audited financial statements for AzerGold and ADY by AIH, as these were not available on company websites at the time of the review. Although draft financial statements of 2022 (not audited) by PCs are not considered adequate, these are included in the overview for purposes of providing some insights regarding these PCs.
7. Some PCs have ‘non applicable’ regarding the separation of accounts related to public policy and non-public policy. Reference is made to Table 3.2 for more information.
Source: Based on information provided by AIH and research of company websites for the fiscal year 2022 by the assessment team. Disclosure standards and practices of selected SOEs.
A. SOEs should report material financial and non-financial information on the enterprise in line with high quality internationally recognised standards of corporate disclosure and including areas of significant concern for the state as an owner and the general public. This includes in particular SOE activities that are carried out in the public interest. With due regard to enterprise capacity and size, examples of such information include:
A1. A clear statement to the public of enterprise objectives and their fulfilment (for fully-owned SOEs this would include any mandate elaborated by the state ownership entity)
The annotations to the SOE Guidelines prescribe that when the state is a majority shareholder or effectively controls the SOE, enterprise objectives should be made clear to all other investors, the market and the general public. A limited set of basic overall objectives should also be identified together with information about how the enterprise is dealing with trade-offs between objectives that could be conflicting.
Research of PC websites and publicly available financial statements points out that a substantial majority of PCs disclose basic overall objectives. Except for ADY, the assessment team found no evidence that PCs also concretely report and disclose information on the fulfilment of these objectives.
Disclosure of broad objectives by SOEs
Based on the available data, it appears that a few PCs elaborate on their objectives and are therefore well aligned with the Guideline. For instance, ASCO, SOCAR and ABB serve as examples as they have published comprehensive management reports and/or sustainable development reports that include a description of the company’s mission and strategic vision (Azerbaijan Caspian Shipping Company, 2019[26]; SOCAR, 2022[27]; International Bank of Azerbaijan, 2023[16]). Some PCs include limited information about broad enterprise objectives on their website. These include AzerGold,
45 ATB,46 SOCAR,47 ADY,48 ABB,49 and Port of Baku.50 However, several PCs have no accessible information about their enterprise objectives (either in reports or on their websites), including AZAL, Baku Bus, Baku Metro and Tamiz Shahar.
On a portfolio level, AIH has short descriptions of general activities of all PCs available on its website.51 These descriptions, however, do not encompass the objectives of these PCs or mandates and rationales for state ownership. Although AIH is not considered a state ownership entity, the website, aggregate report or other activity report of AIH – an ownership coordination body – would be well suited to more in-depth descriptions of objectives, mandates and ownership rationales for all PCs.
Financial and non-financial key performance indicators (KPIs)
SOEs should report on how they fulfilled their objectives by disclosing key financial and non-financial performance indicators. When the SOE is also used for public policy objectives, it should also report on how these are being achieved. In practice, some PCs publish performance of specific non-financial KPIs on their websites (e.g. ADY)52 but these appear to be exceptions.
Furthermore, the assessment team was informed by AIH that it sets and monitors specific non-financial KPIs that serve the public interest. Examples were given of Baku Bus, where the total number of accidents or collisions involving Baku Bus vehicles are monitored, as well as indicators relating to the service reach to passengers. However, these KPIs are not publicly available and thus could not be assessed in the context of this review.
A2. Enterprise financial and operating results, including where relevant the costs and funding arrangements pertaining to public policy objectives
As per the annotations of the SOE Guidelines, when SOEs are expected to fulfil specific public policy objectives, information on the costs of related activities, and how they are funded, should also be disclosed.
As noted in the previous section, all PCs in the AIH portfolio are subject to financial and non-financial disclosure requirements that reflect high quality internationally recognised standards (IFRS), as well as many other disclosure requirements that can be considered best practices (e.g. sustainable development, compliance and management reports). That being said, the level of compliance by PCs remains uneven.
As was assessed in 3.3.3 however, the costs related to public policy objectives are currently not properly identified or disclosed by the state of Azerbaijan or the PCs. The financial data received from the Azerbaijani government through the questionnaire and information exchange, as well as other governmental and non-governmental statistical sources resulted in material discrepancies that have not been clarified over the course of this review. Reference is made to Annex A for more information.
A3. The governance, ownership and voting structure of the enterprise, including the content of any corporate governance code or policy and implementation processes
As per the annotations of the SOE Guidelines, non-wholly owned SOEs should have transparent ownership and voting structures, so that all shareholders have a clear understanding of their share of cash-flow and voting rights.
Both ABB and ATB, the two PCs that are not 100% state-owned, have published information on their governance, ownership and voting structure. ATB’s website contains clear information on shareholders and shareholder rights. ABB’s sustainable development report includes a detailed overview of its ownership and corporate governance structure, who within the government retains the shares and who exercises the state ownership rights and the general rights of shareholders. The report also references the foundations of the corporate governance framework, including for instance recommendations of the Basel Committee53 on banking (International Bank of Azerbaijan, 2023[28]). Based on all available information of the AIH portfolio, ABB can be considered best-in-class among its peers of other PCs in this regard.
Concerning the other wholly owned PCs, ASCO and SOCAR are specifically noted as having disclosed information about their corporate governance structures in their respective management or sustainable development report. Although these disclosures are not as clear and detailed as ABB’s aforementioned disclosure, and therefore further development of these sections are encouraged, they are a substantial step towards aligning with good practices.
A4. The remuneration of board members and key executives
Almost all PCs also disclose the remuneration of key management personnel in their financial statements,54 except for Baku Metro and ADY. ADY discloses some information on remuneration of key management personnel disclosed, but this is not considered aligned with the SOE Guidelines as it does not specify who is key management personnel. As discussed in section 1.4, PC supervisory board members do not receive any remuneration, and are therefore not included in these remuneration overviews.
The information on key personnel remuneration is generally disclosed in a transparent manner under a separate heading of the financial statements. The assessment team specifically highlights ABB and ASCO as leading the way in transparency among PCs for disclosing the remuneration of the management board and some other key executives.
PCs’ key management personnel remuneration is disclosed only on an aggregate level and is not broken down into short-term employee benefits, post-employment benefits, share-based payment and other long-term benefits as would be recommended in line with “International Accounting Standard 24 Related Party Disclosures (IAS 24)”. A welcome exception to this is AzerGold, which discloses a more detailed breakdown of remuneration elements for its key management personnel.
A5. Board member qualifications, selection process, including board diversity policies, roles on other company boards and whether they are considered as independent by the SOE board
Full transparency surrounding board member qualifications is considered especially important for SOEs. A majority of PCs disclose general information about the composition of their management board and supervisory board on the company website, occasionally with personal background information per board member.
In the absence of specific disclosure requirements, no PC currently discloses any additional material information, such as board member qualifications, their roles on other company boards (if any) and whether they are considered independent by the PC. On a general level, the PCs do not disclose information on board selection processes.
A6. Any material foreseeable risk factors and measures taken to manage such risks
The assessment team was informed that supervisory boards of PCs are currently in the process of establishing risk management systems for individual PCs.
A majority of PCs disclose information on risk management (relating to credit, liquidity and market risks) in their financial statements. The disclosures are audited by external auditors and provide insights in material risk factors and mitigation measures for PCs credit, liquidity and market risks of the company, which is in line with the minimum requirements under “IFRS 7 Financial Instruments: Disclosures”. As some PCs are relatively smaller and less complex, human rights, labour, environmental or tax related issues may be less material and therefore non-disclosure on these topics may be warranted. However, this does not apply to more complex and economically important SOEs such as SOCAR, AZAL and ASCO. In practice, these PCs publish risk management information on (some of) these topics.
The annotations further single out SOEs in extractive industries in relation to risk management. Companies in extractive industries (SOCAR and AzerGold) should disclose their reserves according to best practices in this regard, as this may be a key element of their value and risk profile. In this context, SOCAR, the largest PC in the extractive industry, discloses extensive information on its oil and gas reserves in its financial statements. Contrary to this, AzerGold, the second major PC in the extractive industry, has only disclosed very high-level and unaudited information in its financial statements over the fiscal year 2022 on its website.55 The report does not disclose any audited and/or detailed financial or non-financial information, including on risk management. There is some information on reserves and risk management in the AzerGold 2022 audited accounts that the assessment team received from AIH, but this appears to be limited.
Lastly, it is noted that Port of Baku does not publish any information on risk management on its websites or in its financial statements, while Baku Metro has not published audited financial statements entirely for the fiscal year 2022.
A7. Any financial assistance, including guarantees, received from the state and commitments made on behalf of the SOE, including contractual commitments and liabilities arising from public-private partnerships
More than half of the PCs disclose information on financial assistance received from the government of Azerbaijan. This includes SOCAR, AZAL, ADY, Baku Bus,56 Port of Baku, Tamiz Shahar57 and ASCO. The disclosed information primarily pertains to government grants and subsidies. AZAL also mentions government guarantees it received as a result of the COVID-19 crisis.
Other more implicit financial assistance, such as commitments and general guarantees are not included in the financial statements. None of the PCs disclose public-private partnerships.
A8. Any material transactions with the state and other related entities
Less than half of the PCs disclose information about material transactions with the state and other related entities. This includes AZAL, ABB, ATB, Baku Bus, and ASCO. Some PCs, such as Tamiz Shahar and ADY, disclose information on related party transactions albeit very limited, without any required specification and information necessary to assess the fairness and appropriateness of these transactions. AzerGold discloses some specification but does not provide any details that could be helpful for further assessment.
A9. Any relevant issues relating to employees and other stakeholders
One quarter of PCs disclose some information regarding employees and other stakeholders. These include SOCAR, AzerGold and ABB. AzerGold for instance, discloses an annual report by its “corporate social responsibility committee” that contains information on local communities and ecological projects.58
Although AIH has indicated that the corporate governance standards it imposes or intends to impose on its PCs require them to publicly disclose certain non-financial information about their operations, including an annual sustainable development report that includes information related to employees and stakeholders, few of the PCs have put this into practice.
B. SOEs’ annual financial statements should be subject to an independent external audit based on high-quality standards. Specific state control procedures do not substitute for an independent external audit.
As mentioned, the Civil Code of Azerbaijan requires all incorporated companies, including SOEs, to publish annual financial statements.59 AIH has, as noted, imposed additional requirements in the corporate governance standards on six PCs. These additional reporting requirements entail external audited financial statements in accordance with IFRS. Further to this, ABB and ATB are required under the “Corporate Governance Standards in Banks” to disclose audited IFRS financial statements. With regards to the residual three PCs, AIH has indicated that - while awaiting implementation of the corporate governance standards for these companies - it requires them to publish audited IFRS financial statements. The assessment team welcomes AIH’s level of ambition in this regard.
The assessment team has verified that for those available audited financial statements published by PCs, the independent external audits were carried out by an internationally reputable accountancy firm, such as a “Big 4” or “Big 10” firm. However, in practice, the assessment team has assessed that not all PCs are meeting the reporting requirements. For instance, Baku Metro does not publish financial statements at all, Tamiz Shahar and Baku Bus only have non-audited, draft statements available, and Port of Baku and ADY publish limited audited financial statements that lack material information and disclosures, such as on risk management or – in the case of Port of Baku – also financial assistance by the state.
Lastly, it is noted that not all PCs publish audited financial statements in a timely manner. For example, Port of Baku only published its 2021 financial statements on 15 November 2023 and its 2022 financial statements on 25 November 2023.60 AzerGold and ADY’s financial statements were not found to be published on their company websites.
3.6.2. Aggregate annual reporting of SOEs
C. The ownership entity should develop consistent reporting on SOEs and publish annually an aggregate report on SOEs. Good practice calls for the use of web-based communications to facilitate access by the general public.
AIH does not currently publish an aggregate report on its PCs. AIH has, however, developed KPI dashboards and internal reporting systems for its PCs to actively monitor their performance. The GIS, which is updated on a regular basis with monthly, quarterly and annual data, allows AIH to consolidate and aggregate data and other findings. The internal system is not openly accessible to the public.
An aggregate report should primarily focus on financial performance and the value of the SOEs, but should also include information on performance related to key non-financial indicators and the methods used to aggregate data. The assessment team was informed by AIH that the GIS will allow AIH to publish an aggregate report on its PCs and that it intends to do so for the first time in 2024.
AIH has already developed and launched a publicly accessible website, available in Azerbaijani and English.61 This website is envisaged to serve as a platform for the publication of an aggregate report.
The boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.
3.7.1. Board mandate and responsibility for enterprise performance
A. The boards of SOEs should be assigned a clear mandate and ultimate responsibility for the enterprise’s performance. The role of SOE boards should be clearly defined in legislation, preferably according to company law. The board should be fully accountable to the owners, act in the best interest of the enterprise and treat all shareholders equitably.
Board mandates and roles - Civil Code of Azerbaijan
As noted earlier in this report, all PCs have a two-tier board structure, comprised of a management board and a supervisory board. All but one PC have the legal form of a JSC, Baku Bus is incorporated as an LLC.
The primary mandate for all boards of PCs of AIH is enshrined in the Civil Code of Azerbaijan. For JSCs, article 107.4 of the Code prescribes that a JSC’s management board shall “carry out the management of the day-to-day activities of the company and report to the board of directors (supervisory board) or supervisory council and the general meeting of shareholders.” (Government of Azerbaijan, 1999[2]). For larger JSCs, a supervisory board or board of directors is required.
The Civil Code does not provide any further guidance or mandatory competences for the mandate of management or supervisory boards. Pursuant to the Code, the charter of the JSC further defines the competences of the respective governing bodies and their competences in relation to the authority of the general meeting of shareholders.
For LLCs, the Code provides similar legislation. For instance, similarities are that a management board of an LLC “shall deal with current management of the activities of the limited liability company and be accountable to the general meeting of the participants” and a board of directors or supervisory board may also be elected, depending on the charter of the LLC (Government of Azerbaijan, 1999[2]).
Board mandates and roles - Law “on Banks” and “Corporate Governance Standards in Banks”
ABB and ATB, the two banks in the AIH portfolio, are subject to the Law “on Banks”. This Law further describes the competencies of the management board and supervisory boards of banks, including those of ABB and ATB.
The Law provides, e.g. that the management board of the bank shall be responsible for management and implementation of bank activities. Regarding the supervisory board, the Law provides more extensive descriptions of its exclusive competencies. For instance, the supervisory board shall be authorised to, among other things, (1) control the management and activities of the bank, including the report of the Bank Board, (2) issue recommendations for the general meeting of shareholders and the management board, (3) convene the general meeting of shareholders and approve its agenda, (4) dismiss or temporarily replace members of the management board, and (5) manage and represent the bank in the event of conflict of interest between the bank and one or more of the board members.
The Law “on Banks” also sets requirements for the composition of the boards, such as that these boards need to consist of an odd number of members and three persons minimum (Government of Azerbaijan, 2004[11]). ABB and ATB are furthermore subject to the mandatory “Corporate Governance Standards in Banks” last revised in 2023 (Government of Azerbaijan, 2023[4]). The background to these standards is detailed in section 1.3.2. These standards have additional provisions on the role of the boards of banks, with notable exceptions for ABB and ATB relating to the appointment of independent board members.
For example, article 5 of the standards provides detailed fiduciary duties of the supervisory board of a bank, including but not limited to the duty to:
Be aware of the financial situation of the bank, as well as all its important operations and should regularly analyse the reports submitted by the internal committees.
Be aware of important events and existing trends in banking and other financial sectors.
Make decisions and vote based only on personal judgment and inner confidence in order to protect the interests of the bank.
Not give priority to the interests of any shareholder or group of shareholders or act on their instructions, not allow the adoption of decisions that are not in the interest of the bank or are aimed at obtaining short-term income at the expense of long-term risks (Government of Azerbaijan, 2023[4]).
The standards do not provide fiduciary duties for management board members of banks.
State-owned banks in Azerbaijan have long applied corporate governance standards that are close to international standards. The first regulatory act on the transition to corporate governance standards in the country was adopted in 2013.
The CBA approved the "Corporate Governance Standards in Banks" as per Resolution dated 3 June 2013 (Government of Azerbaijan, 2013). In 2019, a new corporate governance standard was adopted by the decision of the Financial Markets Supervisory Chamber.
In August 2023, the CBA, which had merged with the Financial Markets Supervisory Chamber by then, adopted improved corporate governance standards that have a grace period of one year. This new standard is – amongst others – based on the Basel Committee on Banking Supervision's "Principles for Improving Corporate Governance".
Board mandates and roles - PC corporate governance standards
The recently adopted individual corporate governance standards of six PCs also address the mandates and authorities of the supervisory board and management board of the respective PC. Fiduciary duties for management board members are included in these documents. The assessment team verified this for these six PCs.
AIH corporate governance standards provide that “The members of the management board of the Company are obliged to act honestly, professionally and within reason while performing their duties for the interests of the Company, to be loyal to the interests of the Company and the state that is its founder and to prioritize their interests over their own interests, to be cautious, as well as to be fair and impartial when making decisions.”62 A similar obligation is required of supervisory board members. Furthermore, the standards have stipulations on the composition of the boards, including the requirement for a specific number of supervisory board members (see Figure 3.7 below).
Note: Azersigorta is excluded from this overview. However, prior to the start its liquidation, it had three supervisory board members.
Source: Based on OECD research.
Collective and individual liability of board members
Regarding the collective and individual liability of board members, only the Civil Code of Azerbaijan provides some general information on this. Article 49 thereof provides that: “A person acting on behalf of a legal entity shall act in the interest of the legal entity in good faith and prudently. He is obliged, on the request of the shareholders (participants) with at least 5% ownership in the legal entity, to compensate for damages caused to the legal entity except as otherwise provided by agreement.” (Government of Azerbaijan, 1999[2]). Further to specific sector laws, corporate governance standards of PCs do not express a clear statement of collective and individual liability of board members. The collective and individual responsibilities of members of the supervisory board are defined differently per SOE (including PCs). In the banking sector, the “Corporate Governance Standards in Banks” notes the individual liability of supervisory board members. Additionally, as stipulated in the corporate governance standards of PCs, the members of the supervisory board of the PC are responsible according to the legislation of the Republic of Azerbaijan and pay for the damage if they do not take into account the recommendations of AIH. In other PCs, individual liability does not seem to exist.
3.7.2. Setting strategy and supervising management
B. SOE boards should effectively carry out their functions of setting strategy and supervising management, based on broad mandates and objectives set by the government. They should have the power to appoint and remove the CEO. They should set executive remuneration levels that are in the long-term interest of the enterprise.
Setting strategy and supervising management
Azerbaijan’s Civil Code, sector specific laws (such as the Law “on Banks”) and the “Corporate Governance Standards in Banks” do not mandate the supervisory boards of PCs to set or approve company strategy.
However, the Civil Code provides that the supervisory board of JSCs “carries out control on general supervision and activity of the company […].”, i.e., to supervise management. The “Corporate Governance Standards in Banks”, describe “supervising the operation of the bank, its structural divisions and subsidiaries” as a core function of the bank’s supervisory board (Government of Azerbaijan, 2023[4]).
Approving company strategy may be part of a PC supervisory board’s main functions. According to the PC corporate governance standards verified by the assessment team63, supervisory boards have the authority to supervise the management board and approve the long-term development strategy of the company.64 AIH has indicated that SOCAR, ABB, ATB, AZAL, Port of Baku, ADY, AzerGold and ASCO all have strategies approved by their supervisory boards. The assessment team noted only two PCs had adopted a development strategy in accordance with these standards at the time of review. In 2021, the supervisory board of SOCAR adopted a corporate strategy for 2035 and the supervisory board of ABB has adopted a development strategy for 2023-2025.
Appointment of the CEO and management board members
With the exception of the ABB, ATB, Tamiz Shahar and Baku Bus,65 supervisory board and management board members, including the CEO (chair of the management board), are all appointed and dismissed by the President.66 AIH has indicated that it has a recommendation right for the appointment of management board members. This is evidenced, for example, in the AIH corporate governance standards, which provides that the President appoints board members, “[…] taking into account their skills, achievements, business reputation and professional experience, and taking into account the presentation of AIH on the basis of clear and transparent procedures”. It should be noted that AIH does not have a similar recommendation right for the nomination of supervisory board members.
For the banks, AIH is responsible for appointing or dismissing the head of the management board, in agreement with the President. This authority has been delegated to AIH following Presidential decrees No. 1448 and No. 1752. It is worth noting that the "Corporate Governance Standards in Banks" do not specify the entity responsible for the appointment or dismissal of board members. The standards do, however, provide for the creation of a corporate governance committee, operating under the supervisory board, that is authorised to “provide recommendations and opinions on new and potential candidates for membership of the supervisory board, the management board and the committees of the supervisory board” (Government of Azerbaijan, 2023[4]).
Source: Based on research by the assessment team.
Setting executive remuneration levels
The authority to set executive remuneration levels is not detailed in the Civil Code nor in the Law “on Banks”, it is instead left up to the PC charters of non-bank PCs and the “Corporate Governance Standards in Banks” for the banks.
According to the “Corporate Governance Standards in Banks”, the responsibility for overseeing the function of remuneration in banks is entrusted to the corporate governance committee. The responsibilities of the committee regarding the remuneration encompass the following tasks:
formulating the bank's remuneration policy and presenting it for approval to the supervisory board
overseeing the remuneration process, including conducting an annual assessment of the effectiveness of the remuneration system in collaboration with the risk management committee
proposing remuneration amounts to the relevant management body of the bank
evaluating the performance indicators of employees falling under special categories
analysing the impact of internal and external events on the bank's remuneration policy and process.
The standards further stipulate in article 18 that the remuneration policy is to be determined in alignment with the bank’s risk management policy and that the policy should, among others, be aimed at achieving the bank’s strategic goals and should not encourage the bank to obtain income in the short-term due to the assumption of long-term risks (Government of Azerbaijan, 2023[4]).
For the other PCs, the revised corporate governance standards do not provide detailed guidance on the setting of remuneration levels. The standards only provide that the supervisory board “determines the amount of remuneration”.67 This is similar in other verified PC standards. AIH has indicated that it plans to implement unified remuneration mechanisms that are linked to KPI performance in the future.
3.7.3. Board composition and exercise of objective and independent judgment
C. SOE board composition should allow the exercise of objective and independent judgment. All board members, including any public officials, should be nominated based on qualifications and have equivalent legal responsibilities.
In Azerbaijan, there is no specific procedure with universal criteria in law for the nomination and appointment of members to the management board or supervisory board of SOEs or specifically PCs.
However, existing laws, such as the Law “on Banks”, do establish some criteria regarding length of service (i.e., terms of three years) expected from individuals serving as members of the management board and supervisory board. The Law “on Banks” further requires members of the supervisory boards of banks to have had “higher education in economics or law, or work experience, which allows independent of educational background to participate in the process of defining the financial strategy and decision making in financial entities.” For management board members, several years of experience in the banking sector is also required (Government of Azerbaijan, 2004[11]).
The “Corporate Governance Standards in Banks”, applicable to ABB and ATB, requires banks to nominate supervisory board members based on a few broad qualifications: “The supervisory board [of a bank] should be composed of members with different skills, qualifications and experience, and the principle of gender diversity in the composition of the board should also be considered.” (Article 6.2, (Government of Azerbaijan, 2023[4])). The standards do not set criteria for the nomination of management board members for banks. Remarkably, the standards do set specific qualification criteria for the position of corporate secretary of the bank – the corporate secretary must at least have three years of work experience in the field of financial markets and have a higher education in law, economics or management.
In several verified individual PC corporate governance standards, nomination criteria for supervisory board and management board members are described, albeit in a general, abstract sense. For instance, the corporate governance standards for PCs stipulate that:
“The supervisory board members are appointed […] taking into account their powers, duties, skills, achievements, business reputation and professional experience, based on clear and transparent procedures, taking into account the presentation of the supervisory board. Diversity in terms of experience and individual characteristics is supported in the composition of the supervisory board of the Company, and efforts are made to ensure gender equality.”
“The management board members are appointed […], taking into account their skills, achievements, business reputation and professional experience, and taking into account the presentation of AIH on the basis of clear and transparent procedures.”
This is similar across all examined PC corporate governance standards. The assessment team has not seen any evidence of clear and transparent nomination procedures, nor has it seen any AIH nomination policy that further details or explains the general criteria on qualifications mentioned in the standards.
The assessment team has not been able to verify whether all board members in practice have the same or equivalent legal responsibilities towards the company, its shareholders or its stakeholders. As noted earlier in the report, the Civil Code provides flexibility on this point and provides that a person acting on behalf of a legal entity is obliged, at the demand of the shareholders of the legal entity, to compensate for damages which he caused to the legal entity except as otherwise provided by agreement (Government of Azerbaijan, 1999[2]).
3.7.4. Independent board members
D. Independent board members, where applicable, should be free of any interests or relationships with the enterprise, its management, other major shareholders and the ownership entity that could jeopardise their exercise of objective judgment.
First and foremost, boards of PCs do not have any independent board members as per the definition of the SOE Guidelines. The corporate governance frameworks that govern the PCs, including the recently implemented individual corporate governance standards, do not require independent members on their respective boards. The “Corporate Governance Standards in Banks” require banks to have a minimum of one-third of the members of its supervisory board to be independent. However, state-owned banks, including ABB and ATB, are legally excluded from this requirement.68 The assessment team was informed that the government of Azerbaijan intends to gradually phase out political appointees on PC supervisory boards (including banks) and phase in independent board members.
3.7.5. Mechanisms to prevent conflicts of interest
E. Mechanisms should be implemented to avoid conflicts of interest preventing board members from objectively carrying out their board duties and to limit political interference in board processes.
Legal framework in Azerbaijan
Laws and regulations in Azerbaijan have several provisions relating to avoiding and mitigating conflicts of interest in the board room. The general starting point is that board members should act in that capacity the best interests of the company and its founder (i.e. the state), which was detailed earlier in 3.6.1.
The Civil Code provides that if the private interest of a member of the management board of a JSC is contradictory with the company’s interests during the conclusion of any agreement, the board member must inform the management board about this (article 107-10.5 (Government of Azerbaijan, 1999[2]). The management board then decides whether to go through with the conclusion of said agreement. This provision does not seem to apply to supervisory board members of JSCs.
The Law “on Banks” refers to this clause in the Civil Code and requires each member of the management board to disclose information on personal interests that may lead to a conflict with the interests of the bank in accordance with the Civil Code (Government of Azerbaijan, 2004[11]). This provision does not seem to apply to supervisory boards.
The mandatory “Corporate Governance Standards in Banks” includes a provision that “The management and organizational structure, as well as the division of powers, should be in accordance with the nature, volume and complexity of the bank's operations, avoiding conflicts of interest.” Again, this provision seems not to relate to supervisory boards of banks, nor does it detail a procedure to avoid or a follow-up process to mitigate conflicts of interest.
The voluntary “Corporate Governance Standards” of 2011 provide that members of the supervisory board are required to avoid actual and potential conflicts between personal interests and those of the company.69
The recently revised PC corporate governance standards for six PCs have more detailed mechanisms in place. For instance, the standards provide that management board members are to refrain from actions that may lead to a conflict of interest between the interests of the company and the founder and their own personal interests, not participate in voting on issues that may lead to a conflict of interest, and to immediately inform the management board in writing if such a conflict exists or arises. Supervisory board members are required to do the same and must inform the supervisory board in writing through the corporate secretary.70
According to the charters of PCs, if conflicts arise between the personal interests of its supervisory board and the interests of the company, the chair of the supervisory board or another board member is obligated to also disclose this in written form to the general meeting.
Conflicts of interest in practice
In Azerbaijan, the mechanisms governing the constitution of supervisory boards in SOEs, including the PCs, currently lack the capacity to effectively manage conflicts of interests between politicians and PCs and to mitigate political interference within the board.
AIH, the coordinating body tasked with the management and monitoring of performance of its PCs, has political appointees sitting on its supervisory board, to which AIH’s management board is accountable. Notably, the head of the supervisory board of AIH simultaneously holds the position of the country's Prime Minister. AIH furthermore has high-ranking ministerial representatives sitting on its management board. Having these types of members on AIH boards does not preclude political interference in the functions of AIH, including (but not limited to) the approval of corporate documents, material investments and recommendations for appointments of board members.
As all supervisory board members of PCs and almost all management board members (see Figure 3.6 above) are appointed by the President based on recommendations from the AIH boards, it is far from guaranteed that political factors do not influence day-to-day decision-making within SOEs.
Managing conflicts of interest and avoiding undue political interference in supervisory boards and management boards of PCs in practice therefore also remains a challenge. Although this has changed recently, political affiliations of board members at the PC level were commonplace in the past.71 The absence of independent board members can still contribute to conflicts of interest in the representation of line ministries and state institutions. In practice, it is possible to appoint the same political appointees on multiple levels that influence an SOE, state regulation or policy making, AIH management oversight and on supervisory boards of PCs themselves.
Several, non-exhaustive examples illustrate this point:
The Assistant to the President, overseeing the Department of Economic Affairs and Innovative Development Policy, serves on the AIH supervisory board and also chairs the supervisory board of ABB.
The Minister of Economy, responsible for implementing the state's economic policy, and the head of the Tariff Council, overseeing price adjustments for state-regulated goods and services, serves on the AIH supervisory board and also chairs the supervisory board of SOCAR.
The Minister of Finance, responsible for, among others, the state budget, serves on the AIH supervisory board and also chairs the supervisory board of ASCO.
The Minister and Deputy Minister of Digital Development and Transport, responsible for policy making in the sectors of transportation, serve on boards in the transportation sector, notably AZAL and ADY.
While the country's legislation incorporates mechanisms aimed at addressing conflicts of interest in the management of state-owned companies, concerns persist.
3.7.6. Role and responsibilities of the Chair
F. The Chair should assume responsibilities for boardroom efficiency, and when necessary in co-ordination with other board members, act as the liaison for communications with the state ownership entity. Good practice calls for the Chair to be separate from the CEO.
As was discussed in detail earlier in the report, AIH acts as a coordinating body in relation to the PCs rather than as a state ownership entity directly exercising shareholder rights. However, as a coordinating body, it often represents the state in the general meeting of shareholders of PCs. The function of chair of the supervisory board is always – including for all PCs – separated from the function of CEO, as is required by law.
The chair of the supervisory boards of PCs is, pursuant to the Civil Code, elected by the general meeting. This is also reflected in the Law “on Banks”.
In the reviewed PC corporate governance standards, the chair of the supervisory boards is vested with important responsibilities aimed at boardroom efficiency and facilitating dialogue with the state as a shareholder. For example, the standards provide that “The chair of the supervisory board of the Company directs its work, ensures the full and efficient implementation of its main tasks and establishes a constructive dialogue between the members of the supervisory board of the Company, the founder and the management board”.72 As was also noted earlier, the standards provide that the supervisory board is tasked with monitoring the efficiency of the company’s management board. The chair, serving at the helm of the supervisory board, assumes the final responsibility for this function. Importantly though, the chair does not hold superior powers compared to other supervisory board members and lacks the authority to nominate candidates for the supervisory board.
As AIH employees and directors also serve on several supervisory boards of PCs, the chair presumably does not act exclusively as the liaison for communications between the PC and AIH. The assessment team was also informed by AIH that AIH employees may be involved in operational projects, which make clear distinctions between communication lines somewhat opaque. This is further substantiated by the fact that supervisory boards of PCs do not have independent members and ties between AIH, PC boards, line ministries and other political appointees are assessed as close.
3.7.7. Employee representation
G. If employee representation on the board is mandated, mechanisms should be developed to guarantee that this representation is exercised effectively and contributes to the enhancement of the board skills, information and independence.
The Civil Code and the Law “on Banks” do not include any provisions, requirements or directives concerning the inclusion of representatives from local self-government entities, trade unions or other bodies authorised by labour collectives in the supervisory board meetings of SOEs. Based on the review of several revised corporate governance standards of PCs, employee representation on the boards of PCs is also not promoted for individual PCs. Reference is made to section 3.5.1 for more information on employee rights.
3.7.8. Board committees and board evaluation
H. SOE boards should consider setting up specialised committees, composed of independent and qualified members, to support the full board in performing its functions, particularly in respect to audit, risk management and remuneration. The establishment of specialised committees should improve boardroom efficiency and should not detract from the responsibility of the full board.
Legal framework for establishing specialised committees
The Civil Code initially mentions the responsibility of the supervisory boards of JSCs and LLCs to establish an audit committee (Government of Azerbaijan, 1999[2]). Recent AIH corporate governance standards that were incorporated into the standards of PCs (except ABB and ATB), expanded the authority of supervisory boards to establish an audit committee, an appointment and remuneration committee, and a strategy and investment committee.73 The PC supervisory board decides on the establishment of committees, determines their number composition, chairs, terms of authority, as well as their duties and work order, including the requirements for their composition.74
Committee requirements for banks
Article 7 of the "Corporate Governance Standards in Banks” (applicable to ABB and ATB) outlines the formation of committees by the supervisory board of banks with the aim of enhancing bank management efficiency and reinforcing risk control. These committees operate independently from the management board and are accountable to the supervisory board of the bank. Typically, every bank is expected to have an audit committee, a risk management committee, and a corporate governance committee. The corporate governance committee is responsible for overseeing corporate governance, remuneration and appointments within the bank (Government of Azerbaijan, 2023[4]).
As per article 8 of the " Corporate Governance Standards in Banks", at least one-third of the audit committee's composition is reserved for members of the supervisory board (excluding the chair), while the remaining seats may be filled by members that are independent and do not hold a seat on the supervisory board. Moreover, the chair of the audit committee cannot concurrently hold the position of chair of the supervisory board or chair of another committee serving under the supervisory board (Government of Azerbaijan, 2023[4]).
The standards further note the option to establish a compliance committee, considering factors such as the systemic importance of the bank, its risk profile, and the complexity and nature of its activities. Presently, the state banks have audit, risk management, and remuneration committees.
Committee requirements for other PCs
Pursuant to the AIH corporate governance standards implemented for six PCs,75 three committees need to be established. The following requirements relate to the composition of these committees:
The “audit committee” shall include at least one member of the supervisory board and a representative of AIH. AIH may choose to nominate an outsider (i.e. someone not sitting on any board within the company) as its representative. Experts with specialised knowledge in the relevant field may also be involved in the work of the audit committee, albeit without having the right to vote.
The “strategy and investment committee” shall include at least one member of the supervisory board and a representative of AIH. AIH may choose to nominate an outsider (i.e. someone not sitting on any board within the company) as its representative. Members of the company’s management board may also be appointed members of this committee, albeit without the right to vote.
The “appointment and remuneration committee” shall include at least one member of the supervisory board. A representative of AIH is not required. Members of the company’s management board may be appointed members of this committee, albeit without the right to vote.
It is stipulated that all members of these committees shall operate based on the principle of protecting the interests of the company and the state, which is its sole founder, using their skills, experience and knowledge to ensure independent, transparent, objective and balanced decision-making and the principles of sustainable development.
As these committees are tasked to independently oversee management or certain functions thereof, the SOE Guidelines provide some guidance to this respect. For instance, the annotations prescribe that the audit committee should be composed of only independent and financially literate board members. Acknowledging this from a two-tier board structure perspective, having management board members – regardless of their right to vote – sitting on these specialised board committees that serve at the purview of the supervisory board cannot be considered good corporate governance practice.
Specialised committees in practice at PCs
All PCs have established specialised committees under the purview of their respective supervisory boards, which is commended. All PCs76 have established audit, strategy and investment and appointment and remuneration committees that serve under the supervisory board. Below is an overview of the analysis of all established committees at PCs and their composition.
Drawing from the analysis in the overview, the established committees have a variety of different types of members. According to AIH, some committee members may be considered independent as they do not have any current ties to the boards. However, the assessment team has not been able to verify whether these members can be considered independent as per the definition of the SOE Guidelines.77 In addition, even if those members could be identified as independent, it seems the committees, particularly the audit committees, have an insufficient number of these members. Only the audit committees of ASCO, Baku Bus, AZAL or Port of Baku have one or more of these non-board affiliated members. Of all appointment and remuneration committees, only AZAL has one such member.
Notes: As committee requirements differ for banks, ATB and ABB have additional types of committee members compared to other PCs. Azersigorta is excluded from this overview as it is currently in a state of liquidation.
Source: Based on OECD research. Annual performance evaluation
I. SOE boards should, under the Chair’s oversight, carry out an annual, well-structured evaluation to appraise their performance and efficiency.
AIH is mandated by its corporate governance standards to approve the performance appraisal systems for all PC supervisory boards (AIH, 2020[3]).
The recently revised standards of PCs that have incorporated AIH corporate governance frameworks, i.e. ASCO, AzerGold, Port of Baku, Baku Metro, Tamiz Shahar and Baku Bus, specify that the evaluation of members of the supervisory board of PCs aligns with the assessment system approved by AIH. For instance, for those PCs that have implemented AIH corporate governance standards, AIH approval is required for the appraisal systems for both the management board and the supervisory board (articles 82 and 91 respectively). These boards then perform self-evaluations on an annual basis.
For the supervisory board, the purpose of the evaluation is to determine the contribution of the board to the increase of the long-term value and sustainable development of AIH companies and to recommend measures to improve its activity. The results of the assessment are also considered during the reappointment of the members of the supervisory board.
For the management board, the main criterion of the assessment is the implementation of the set operational efficiency indicators. The results of the evaluation affect the amount of remuneration, incentives, re-appointment or early termination of the powers of the chair and members of the Company's management board. The remuneration of the management board is then determined by the supervisory board, based on the presentation of AIH.
Furthermore, as per the AIH corporate governance standards implemented at six individual PCs, the activity of the members of the supervisory board is evaluated at least once every three years by external consultants. AIH has indicated in questionnaires that it will involve “Big 4” firms to conduct this assessment. This assessment has not yet been performed as three years have not passed since the revised standards of ASCO or for any of the other revised PC standards that came into force. The assessment team therefore has not been able to verify if and to what extent PC boards and AIH have put the above into practice.
3.7.9. Internal audit
J. SOEs should develop efficient internal audit procedures and establish an internal audit function that is monitored by and reports directly to the board and to the audit committee or the equivalent corporate organ.
The assessment team was informed by AIH that all PCs have established audit committees that serve under the supervisory board of the respective PCs. The establishment of these committees stems from (1) the revised corporate governance standards of PCs (six currently), (2) the Law “on Banks” (for ABB and ATB) and (3) for the PCs that do not have revised corporate governance standards and are non-banks, on AIH’s instigation as a coordinating body and representative of the state in the general meeting of such PC.
AIH informed the assessment team that all PCs have independent internal audit functions and relevant audit procedures in place. The assessment team notes that the procedures as stipulated in approved AIH corporate governance frameworks appear to be adequate for the purpose of those specific PCs.
In view of the above, many steps in the right direction have been taken with regards to internal audit procedures and functions. Given that these steps stem from recent reforms, the assessment team was not able to verify the effectiveness and efficiency of these policy changes. However, the required disclosure on the functioning of the internal control and risk management system (as is required in the individual PC corporate governance standards, see (Box 3.9 below) is missing from all PCs’ financial statement and/or annual report that have incorporated the standards (ASCO, AzerGold, Port of Baku, Baku Metro, Tamiz Shahar and Baku Bus).
According to the individual corporate governance standards of AIH, the functions of the company's risk management and internal control system relate to:
planning the internal control and risk management and integration into the company's management processes
generally coordinating risk management and internal control processes in structural divisions of the company
preparing methodological documents in the field of risk management and ensuring internal control processes
organising relevant training
assessing the company's risks using risk assessment models
analysing the company's risk portfolio and preparation of proposals for the strategy
developing mechanisms of interaction and information exchange between structural units of the company
drafting consolidated reports on risks and internal control
setting policies on the prevention of corruption and fight against corporate fraud within the framework of internal control and risk management.
In addition, the standards provide that reports on risks should be brought to the meetings of the supervisory board of the PC no less than once every quarter and should be discussed in detail. Lastly, the PC supervisory board is required to review and evaluate the organisation, operation and efficiency of the internal control and risk management system at least once a year and, if necessary, take measures to improve it. The supervisory board informs the state in its capacity as shareholder about the results of the efficiency of the internal control and risk management system within the annual report of the company.
Source: AzerGold corporate governance standards (AzerGold, 2023[29])
References
[3] AIH (2020), Charter of Azerbaijan Investment Holding (AIH), https://aih.gov.az/about/charter?lang=en.
[31] ASCO (2023), ASCO XƏBƏRLƏRİ, https://ascoistiqraz.az/2023/03/01/asco-istiqrazlarina-abun%c9%99-yazilisi-ugurla-basa-catib/.
[10] Asian Development Bank (2020), Reforms, Opportunities, and Challenges for State-Owned Enterprises, International Bank for Reconstruction and Development/The World Bank.
[26] Azerbaijan Caspian Shipping Company (2019), ASCO five year report 2014-2018.
[29] AzerGold (2023), AzerGold corporate governance standards.
[30] Baku Bus (2023), Corporate Governance Standards.
[19] Cantekin, K. (2023), Azerbaijan: New Law on Public-Private Partnerships Published, https://www.loc.gov/item/global-legal-monitor/2023-02-06/azerbaijan-new-law-on-public-private-partnerships-published/#:~:text=The%20law%20declares%20that%20public,4.).
[18] Caspian Legal Center (2023), “Public-Private partnership in Azerbaijan: a new law approved”, Caspian Legal Center.
[12] Central Bank of Azerbaijan (2001), Regulations on related party transactions for banks, https://www.cbar.az/law-45/regulations-on-related-party-transactions?language=en.
[24] GAN Integrity (2020), Azerbaijan Corruption Report, https://www.ganintegrity.com/portal/country-profiles/azerbaijan/.
[13] Government of Azerbaijan (2024), Law on Public Procurement, https://e-qanun.az/framework/1029.
[4] Government of Azerbaijan (2023), Corporate Governance Standards in Banks, https://e-qanun.az/framework/55125.
[11] Government of Azerbaijan (2004), Law on Banks, https://e-qanun.az/framework/5825.
[2] Government of Azerbaijan (1999), Civil Code, https://e-qanun.az/framework/46944.
[21] Government of Azerbaijan (1999), Labour Code, https://e-qanun.az/framework/46943.
[17] Hashimova, K. and Z. Kadyrov (2017), The Current Situation and Problems of State-Owned Enterprises in Azerbaijan, Center for Economic and Social Development (CESD).
[28] International Bank of Azerbaijan (2023), ABB Sustainable Development Report 2022.
[16] International Bank of Azerbaijan (2023), Registered charter of ABB.
[5] Kaufman, D. et al. (2018), World Bank Governance Notes - Broadening the use of alternative dispute resolution in Azerbaijan, https://documents1.worldbank.org/curated/zh/276851523861467867/pdf/125281-BRI-PUBLIC-GovNotesBroadeningtheUseofAlternativeDisputeResolutioninAzerbaijan.pdf.
[15] 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.
[25] OCCRP (2022), BP Turned a ‘Blind Eye’ to Corruption in Prize Azerbaijan Gas Project, https://www.occrp.org/en/investigations/bp-turned-a-blind-eye-to-corruption-in-prize-azerbaijan-gas-project.
[14] OECD (2022), Anti-Corruption Reforms in Azerbaijan: Pilot 5th Round of Monitoring Under the Istanbul Anti-Corruption Action Plan, OECD Publishing, Paris, https://doi.org/10.1787/3ae2406b-en.
[23] Paris (ed.) (2019), ISTANBUL ANTI-CORRUPTION ACTION PLAN - FOURTH ROUND OF MONITORING, OECD Publishing, https://www.oecd.org/corruption/acn/OECD-ACN-Kazakhstan-Progress-Update-2019-ENG.pdf.
[1] Paris (ed.) (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, OECD Publishing, https://doi.org/10.1787/9789264244160-en.
[20] Republic of Azerbaijan (2022), Law on Public-Private Partnerships.
[27] SOCAR (2022), SOCAR Sustainability Report 2021.
[8] The Law Society of England and Wales (2023), Stakeholder Submission to the UN Human Rights Council’s Universal Periodic Review – AZERBAIJAN (44th session), The Law Society.
[22] U.S. Department of State (2022), 2022 Country Reports on Human Rights Practices: Azerbaijan, https://www.state.gov/reports/2022-country-reports-on-human-rights-practices/azerbaijan/.
[6] U.S. Department of State (2021), 2021 Investment Climate Statements Azerbaijan, https://www.state.gov/reports/2021-investment-climate-statements/azerbaijan/.
[7] U.S. Embassy Baku (2021), 2020 COUNTRY REPORTS ON HUMAN RIGHTS PRACTICES: AZERBAIJAN, https://az.usembassy.gov/2020-country-reports-on-human-rights-practices-azerbaijan/.
[9] World Bank (2022), Azerbaijan Country Memorandum, https://documents1.worldbank.org/curated/en/099100009222236784/pdf/P17532606988e2056084e603c9c48ddc618.pdf.
← 1. Including the National Priorities Strategy 2022-26 and Azerbaijan 2030.
← 2. An example is Presidential decree No. 152 of 15 June 1994 “On Measures for Financial Stabilisation of the Economy”, which establishes a tariff pricing strategy for specific sources of energy on domestic retail and wholesale markets. In the context of energy price volatility and uncertainty prominent at the time the decree was introduced, the primary objective of the regulation was to stabilise the national economy by facilitating the reduction of price volatility of energy utilities, thus maintaining steady profitability of the national oil and gas company SOCAR.
← 3. The World Bank Team's review of the early 2023 draft corporate governance standard for Tamiz Shahar found that AIH actively participates in pivotal roles across the General Meeting, supervisory board, and management of the company. Other insights include that AIH assumes responsibilities such as acting as a secretary for the General Meeting, ensuring compliance with corporate governance standards on equal footing with the supervisory board, implementing an advanced corporate governance system akin to the management board, providing recommendations for the state representative in the supervisory board, offering advice to the executive board, and fulfilling managerial roles on behalf of both boards. The extensive involvement of AIH in various facets of the company's governance suggests that AIH not only provides advice but also intervenes in the day-to-day management of the company.
← 4. Reference is made to section 1.3.2 for more information on corporate governance standards at the level of PCs.
← 5. Reference is made to, e.g. article 34 of the corporate governance standards of ASCO (ASCO, 2023[31]) and AzerGold (AzerGold, 2023[29]). The assessment team has confirmed that this article is also included in the other four revised PC corporate governance standards.
← 6. Reference is made to sections 3.7.4 and 3.7.8 for information on the independence of board members at PCs.
← 7. Reference is made to section 3.7.2.
← 8. Reference is made to article 32 of, e.g. AzerGold’s corporate governance standards (AzerGold, 2023[29]).
← 9. As noted, AIH has implemented corporate governance standards for six PCs and is still awaiting approval for three PCs. Reference is made to section 1.3.2.
← 10. Reference is made to Box 1.1 above.
← 11. ABB Charter, section 8.7
← 14. Including the Laws “on Accounting”, “on Official Statistics”, and “on Securities Market”.
← 18. For instance, the annual report discloses that the persons holding management positions (the company's President, its first Vice-President and nine Vice-Presidents) received AZN 1 342 mln in 2021 and AZN 844 mln in 2022.
← 19. For instance, Baku Bus’ corporate governance standards include the following provision: “15. The main corporate governance principles are: “[...]15.2. separation of the shareholder (owner) and regulatory functions of the state.” ASCO’s corporate governance standards article 31.3 requires the supervisory board to “ensure the separation of proprietary and regulatory functions of the state.”
← 20. Presidential decree No. 4078, signed on 31 August 2023.
← 21. https://az.azvision.az/news/335581/--mediasiya-surasinin-3-ayliq-hesabati-%E2%80%93--sened---.html
← 22. Reference is made to section 1.2.4.
← 23. For instance, the objectives of ASCO are described in clause 1.2 of its Charter and are particularly broad (unofficial English machine translation): “The company [ASCO] operates in the areas of local and international cargo and cargo transportation between the seaports […], increasing the efficiency of transportation and strengthening the transit potential of the Republic of Azerbaijan, as well as providing services on the types of activities of commercial shipping. It is a commercial legal branch that provides services […] of modern business activities, including in offshore oil and gas projects and other projects, as well as local, procurement, physical and legal entities.”
← 24. For instance, SOEs primarily involved in public policy activities such as Baku Bus, Baku Metro all incur substantial losses. Reference is made to their company profiles in chapter 2.
← 25. AIH and the CBA have indicated that this exemption is meant as a temporary solution for ABB and ATB until qualified candidates for independent board members can be found.
← 27. SOCAR, ASCO, AzerGold and ABB have all issued corporate debt on the BSE. Reference is made to the relevant individual company profiles in chapter 2 for more information.
← 28. According to SOCAR’s financial statements, the Government, through the Ministry of Finance, acts as a guarantor for certain borrowings of the SOCAR. Total amount of borrowings was AZN 1 342 mln in 2021, AZN 1 021 mln in 2022.
← 29. According to AZAL’s financial statements, payment of the government guaranteed loan and lease liabilities by Ministry of Finance on behalf of the AZAL amounted to AZN 3 308 mln and AZN 31 465 mln respectively. These were recognised as a loan to the Ministry of Finance in 2021.
← 30. For instance, pursuant to article 6.2.10 of its Charter, the supervisory board of AzerGold defines the powers (maximum size) of the bodies on the attraction of the debts and approves the debts within its own authority and identifies the maximum limits on the attraction of the funds from the credit organisation and allocation of funds to banks.
← 31. Reference is made to section 2.2.1.
← 33. Presidential decree No. 2307, dated 19 August 2023.
← 35. As was noted in section 1.3.2, the voluntary “Azerbaijan Corporate Governance Standards” of 2011 are not adhered to by either bank.
← 36. Reference is made to section 1.3.2.
← 37. AIH has set and implemented mandatory corporate governance frameworks for ASCO, Port of Baku, Baku Metro, Baku Bus, AzerGold and Tamiz Shahar. It is currently awaiting approval for SOCAR, AZAL and ADY.
← 38. Unofficial English machine translation: “If the changes made in the normative legal acts of the Republic of Azerbaijan after the date of conclusion of the public-private partnership agreement leads to an increase in the expenses of the private partner under the public-private partnership agreement or a decrease in the income to be obtained, the private partner is compensated in the manner determined by the rules of the public-private partnership. In this case, the amount of compensation to be paid can be determined in the public-private partnership agreement.”
← 39. https://aih.gov.az/media/news/loan-agreement-without-a-sovereign-guarantee-signed-with-ebrd-169?lang=en.
← 40. Database of specific instances - Organisation for Economic Co-operation and Development (oecd.org)
← 41. Environment Performance Index; climate risk index; all greenhouse gases emissions https://idea.usaid.gov/cd/azerbaijan/environment-and-global-climate-change
← 42. Reference is made to Table 3.1 and section 3.6.1.
← 43. Reference is made to Box 3.8.
← 44. Reference is made to section 3.7.3.
← 53. Reference is made to Box 3.8.
← 54. It is caveated here that Tamiz Shahar’s and Baku Bus’s financial statements of 2022 were only available in draft form at the time of review.
← 55. Report can be found at https://azergold.az/en/haqqimizda/maliyye-ve-audit-hesabatlari
← 56. Although as mentioned, only a draft financial statement for 2022 was available.
← 57. Idem.
← 58. The reports can be found on AzerGold’s company website through https://azergold.az/en/ksm/hesabatlar.
← 59. Reference is made to section 3.6.1.
← 61. https://aih.gov.az/
← 62. Reference is made to, for example, articles 46 of the corporate governance standards of ASCO (ASCO, 2023[31]) and AzerGold (AzerGold, 2023[29]).
← 63. Chapters of the ASCO, AzerGold, Baku Metro, Tamiz Shahr, Baku Bus, Port of Baku, ABB
← 64. See for instance, article 6.2 of ASCO’s Charter (ASCO, 2023[31])
← 65. For Baku Bus, a Presidential decree was issued on 15 February 2024. Https://president.az/az/articles/view/64061.
← 66. Reference is made to, for instance, articles 32 and 42 of AzerGold’s corporate governance standards (AzerGold, 2023[29]).
← 67. Reference is made to, for example article 31 of the standards of ASCO (ASCO, 2023[31]), AzerGold (AzerGold, 2023[29])and Baku Bus (Baku Bus, 2023[30]).
← 68. Reference is made to section 1.3.2 and Table 1.3.
← 69. Article 3.1(e) of the standards stipulate that “In case of a conflict of interest between the company and the director, such director must not allow personal interests to prevail over the interests of the company and never use his/her corporate position to make a personal profit or to gain other personal advantage. In addition, the members of the supervisory board have a duty to present any business opportunities which are relevant to the company’s present or prospective business activities to the board before pursuing the matter on his or her own behalf or for others.” As noted, these standards are applied to the PCs.
← 70. Reference is made to, for example, articles 45.6 and 37.1.6 of AzerGold’s Charter (AzerGold, 2023[29]).
← 71. It is noted that some years ago, the chairs of supervisory boards of SOEs were officially affiliated with political parties but in recent years these individuals have reportedly terminated their party membership. Despite these changes on paper, there has presumably been little to no changes in the close ties between the political system and SOEs.
← 72. Reference is made to, e.g. article 39 of the AzerGold (AzerGold, 2023[29]) and ASCO (ASCO, 2023[31]) corporate governance standards.
← 73. Reference is made to the ASCO and AzerGold standards, where these three committees are named in article 61.
← 74. Reference is made to e.g. article 63 of the AzerGold and ASCO corporate governance standards.
← 75. Reference is made to section 1.3.2 for an overview of applicable corporate governance frameworks for PCs.
← 76. Azersigorta is excluded from this list, as this PC is in the process of liquidation as of January 2024.
← 77. To assess whether the non-board affiliated members on specialised boards can be identified as independent board members, further research would be required.