How privatisation will reshape Azerbaijan's economy?
Caliber.Az analyst explains

ANALYTICS  31 January 2024 - 15:22

As early as this year, Azerbaijan is set to begin the next stage of privatising state property, which will cover strategic sectors of the economy - energy, telecommunications, banking, mining, as well as several shipping facilities. At a press conference held on January 30 to sum up the results of 2023 and the tasks ahead, representatives of the State Service for Property Affairs under the Ministry of Economy of Azerbaijan spoke about the prospects for the privatisation of large-scale state property. It should be noted that last year saw the highest indicators of real estate registration, expansion of digital property inventory in the Karabakh region and growth of budget revenues from privatisation.

During the years of independence, Azerbaijan carried out several stages of privatisation, each of which aimed to achieve different goals and resulted in different outcomes. In 1995, the first stage of large-scale privatisation of trade, services and other small objects was launched. This led to a significant increase in the share of the private sector in the economy.

The agrarian reform launched in 1998, with the privatisation of collective land and property and the establishment of farms as its key moment, had similar aims. Later, in the new century, the second stage of denationalisation began, covering small and medium-sized enterprises, including industrial enterprises, and a number of infrastructure and transport facilities. At that time, the government was interested in attracting investment and new technologies to idle enterprises as quickly as possible, in order to get them up and running under market conditions as soon as possible. This has been the case in most of the post-Soviet countries as well as in Azerbaijan.

In the first stages of privatisation, service and industrial enterprises were often sold at low book values, rather than to maximise budget revenues. In many respects, this strategy was justified, and according to the estimates of the global financial organisations (IMF, WB, EBRD), Azerbaijan was one of the first CIS countries to create efficient agricultural and food, trade, service, processing and other private enterprises and to transfer their work to the market rails. As a result, a large class of owners quickly emerged.

Between 1996 and 2022, a total of 51,867 small enterprises, facilities and vehicles were privatised in Azerbaijan. By the beginning of last year, 1476 of the 1566 joint stock companies (JSCs) established in Azerbaijan had been fully privatised, which means that 94 per cent of the state-owned JSCs were denationalised. It should be recalled that, according to the recently published statistics of the Ministry of Economy, the total investments through investment tenders in local enterprises privatised since 2003 amounted to about $900 million. More than 300,000 new jobs have been created and more than 220,000 people have become shareholders in companies as a result of denationalisation during the same period.

These figures show that the share of state property transferred to the private sector is quite large. However, the privatisation process has also had its drawbacks. In the first stages of privatisation, various irregularities were often observed in the selection of owners at auctions, and the principles of transparency were not followed in investment tenders. Worst of all, many owners deliberately delayed the modernisation of industrial plants, used them for purposes other than those intended, such as the creation of commercial and service establishments, or the development of industrial zones with apartment blocks and so forth. As a result, according to the results of the previous stages of denationalisation, about 55 per cent of the privatised state-owned enterprises have never returned to their core activities.

Subsequently, these negative aspects were taken into account and the legislative framework and administrative mechanisms were changed. The introduction of the "electronic auction" mechanism ensured transparency in the work of state agencies in the field of property management and privatisation. In particular, the functioning of privatisation auctions has been significantly improved, and the control over the fulfilment of investment obligations by new owners of property acquired through investment tenders has been strengthened. Without fulfilling the investment obligations assumed, no winner of a tender can become the actual owner of an enterprise. Not to mention the fact that the state can cancel the results of an investment tender.

Equally important, the digitalisation of the land and property registration process has helped improve the performance of the State Service for Property Affairs of Azerbaijan and its subdivisions. "In 2023, the highest rate of real estate registration in Azerbaijan was recorded - 477,351 property titles were registered, which is 25 per cent higher than the previous year's figures," Nigar Alimova, Chairman of the Board of the State Cadastre and Real Estate Register, told the forum the day before. It's noteworthy that last year's work covered Azerbaijan's liberated territories as much as possible: tens of thousands of archival data on pre-1991 real estate objects were studied, resulting in 25,000 documents being included in the Karabakh Digital Information System. This digital resource also includes more than 145,000 buildings, constructions and structures digitised on topographical maps, out of some 165,000 currently available.

In turn, the increase in revenues to the state budget from privatisation is due to the optimisation of state property management processes and their denationalisation. "The revenues for the state budget of Azerbaijan from denationalisation in 2023 amounted to $67 million, which is an increase of 105.4 per cent. As a result, 245 small state enterprises and objects, 111 land plots, 538 vehicles and shares in 9 joint stock companies were privatised," said Metin Eynullayev, head of the State Property Service, at the forum. According to him, the volume of state fees (over $18 million) for state registration of real estate increased by 12.6 per cent last year.

However, the above figures may seem insignificant compared to the billions of dollars in budget revenues expected soon, taking into account the plans to privatise strategic assets in a number of basic sectors of the Azerbaijani economy. It should be noted that according to the August decree of the head of state "On Measures to Attract Private Investment in State Enterprises of Azerbaijan", it is planned to attract private companies to further increase the capitalisation, restructuring and subsequent modernisation of eight large state enterprises and companies.

The list includes the country's largest financial and credit structure - the International Bank of Azerbaijan JSC, two key telecommunications structures providing internet and telephone services to the capital and regions of the country - Baku Telephone Rabitəsi and Aztelecom, and the Caspian Shipping Company JSC (ASCO), which owns a fleet of commercial, special and supply vessels for offshore petroleum extraction.

The list also includes the largest producer of non-ferrous and precious metals - AzerGold CJSC, as well as three of the country's largest petrochemical companies that are part of the "Azerkhimiya" structure - ethylene-propylene, urea and methanol plants. According to the document, the whole process of preparation for privatisation will be conducted with the involvement of renowned international consulting firms, studies will be conducted and proposals will be drawn up. These will cover restructuring, rehabilitation, valuation of state enterprises, identification of potential investors, liberalisation and anti-monopolisation of relevant markets, changes in the organisational and legal form of state enterprises and the possibility of transferring non-core activities to the private sector.

"In 2024, we will start preparing proposals to sell to private investors part of the state's stake in large state companies, in particular in the structures of SOCAR, AzerGold CJSC, ASCO, BakTelecom, AzTelekom and ABB Bank. The aim is to sell part of the stakes in trusts and CJSCs, but not direct and full privatisation. The preparation of proposals should be completed within nine months," said Metin Eynullayev, head of the State Service, on January 30, stressing that local and foreign investors will be able to participate in the privatisation process. However, some restrictions on land rights remain in place for foreign investors, who can only lease land.

In general, all these steps aim to increase profitability and reduce production and other costs in partially privatised state enterprises. This will contribute to the development of the domestic securities market through capital diversification, in addition to improving their market efficiency and competitiveness, attracting new technologies and strengthening corporate governance mechanisms.

Caliber.Az