Azerbaijan: Real estate privatisation hits record high Review by Caliber.Az

The last two years marked the growth of budget revenues from state property privatisation in Azerbaijan, which left behind the figures of the prosperous pre-crisis year of 2019. Moreover, in 2022 the country recorded the highest level of registration of property rights. On February 9, at an event to summarise last year's results and challenges ahead, experts of the State Property Service under the Ministry of Economy reported on the achievements in the field of privatisation and presented some prospects for the development of this sphere.

The new economic policy implemented in the post-pandemic period, amid the instability in global markets, high inflation, and other crises, is designed to improve the competitiveness of the economic complex of Azerbaijan. One of the goals of the reforms is to reduce unnecessary costs of state-owned companies and provide higher export opportunities for the non-oil sector. These tasks are to be solved also through optimisation of the state property management framework.

"In 2022 the State Service for Property Affairs transferred over 115.4 million manats to Azerbaijan's budget from privatisation of state property, which exceeds last year's figures by 1.2 per cent," State Service for Property Affairs' head Metin Eynullayev said at yesterday's event. He added that in 2021 this indicator was 112.7 million manats. For comparison, in the year 2019, which was prosperous in every respect, the state budget revenues from privatization of state property amounted to a little over 88 million manats. Thus, it can be stated that recently it has been possible to overcome the inertia of the crisis pandemic period and increase the investment activity of the business. In general, the privatisation process, which certainly spurs the development of entrepreneurship, serves to reduce inefficient state assets and create new jobs.

It is noteworthy that last year 14.6 million manats were invested in investment projects, which contributed to the creation of 374 new jobs and the receipt of a lump-sum payment of 8.5 million manats to the state budget. And in the future, the winners of investment competitions will invest 30 million manats and create over 300 additional jobs.

At the same time, 1,476 of the 1,566 joint stock companies (JSCs) created in Azerbaijan were privatised by the end of last year: 94 per cent of the operating JSCs were denationalised. Today, about 23 out of 90 non-privatised JSCs are owned by state, while the rest are on the balance sheets of other economic entities. However, in spite of this high privatisation rate of JSCs, it should be admitted that by no means all Soviet-era assets are involved in market transformations, modernised and used for their intended purpose. "Practice shows that about 55 per cent of the state-owned enterprises privatised in Azerbaijan have never been restored to operation. There are many reasons, among the main ones are obsolete equipment and technology, lost business ties, i.e. most state enterprises do not meet the requirements of the time and have lost their markets," Eynullayev said.

Today about one-third of privatised enterprises operate in accordance with their profile or changed function after modernisation, the rest just rent their premises, land, and production facilities.

The state considers the privatisation of large facilities and enterprises through investment tenders to be the right move because of the above-mentioned factors. "Investment tenders are the greatest guarantee of restoring an enterprise's operations because, without fulfilling the investment obligations undertaken, no winner of a tender can become the de facto owner of the enterprise. Moreover, if a potential investor fails to fulfill its obligations, the state can annul the results of the investment tender," Eynullayev explained, stressing that due to such clear rules, the winners of tenders themselves are interested in fulfilling the investment obligations they have undertaken.

At the same time, much greater market efficiency is achieved in the process of privatisation of small movable and immovable properties: due to the low investment costs for their rehabilitation and the possibility of quick connection to commercial and other turnovers, such properties are consistently in demand among entrepreneurs and citizens of the country. In particular, the year 2022 was marked by the highest real estate registration rate in the country: 382,319 property rights to real estate (mainly residential properties) were registered during the reporting period, thus ensuring a 25.2 per cent increase compared to the previous year. At the same time, according to Ilgar Gabiyev, head of the State Service's Strategic Planning Department, last year 304 small objects, 513 vehicles, and 262 hectares of land were privatised. Also, more than one thousand new land lease contracts and 858 contracts for the lease of non-residential premises were concluded. At the same time, the total state revenues from the lease of non-residential premises and land amounted to nearly 25 million manats.

It is noteworthy that over the past five years, following the establishment of the Azerbaijan Industrial Corporation by presidential decree in December 2017, significant progress has been made in rehabilitating and improving the efficiency of state property management in Azerbaijan. The aim of this structure, all of whose shares are owned by the state, is to establish an accountability and control system based on the principles of corporate governance, to establish beneficial cooperation links between state-owned enterprises, and to increase production capacity along the value chain. In particular, the country's largest enterprises in the Industrial Corporation, Azeraluminium Limited Liability Company, Azərpambığ ASK and Azəripək are now among the top 10 largest state-owned companies involved in export operations in the non-oil sector.

An equally important task of the Industrial Corporation is to increase the market value, modernisation, certification, introduction of corporate management methods, and advanced management at a number of strategically important state-owned assets in the process of preparing them for denationalisation. In particular, out of 29 enterprises on the balance sheet of Azerbaijan Industrial Corporation 6 have been privatised to date and 7 more have been offered for denationalisation through auctions. Thanks to the efforts of the Industrial Corporation, three LLCs, large agro-industrial enterprises such as "APC Azərtütün", "APC Şəki Şərab", as well as "APC Shoe Factory" have been privatised recently.

Similar processes are conducted in the privatisation of objects on the balance of Aqrarkredit: in January 2023, the head of state signed a decree on privatisation through investment auctions of 8 large enterprises specialised in the production of steel structures, building materials, textiles, etc.

It is expected that in the long term, Azerbaijan will start processes of denationalisation of the largest infrastructure and municipal facilities of power, heat, water, gas supply, household waste disposal, road maintenance, and so on. The process of rehabilitation and subsequent privatisation will eventually involve the telecommunication sector as well, including a number of facilities of production associations Aztelecom and Baku Telephone Communications.

As for the privatisation transformation of the financial sector, the plans for privatisation of the International Bank of Azerbaijan (ABB), which have been discussed for a decade and a half, have recently been given final clarity. "The Azerbaijani government does not plan to privatise the country's largest bank ABB, which is now on the balance sheet of the Azerbaijan Investment Holding," State Service's head Metin Eynullayev said the previous day. - The main purpose of the investment holding is to ensure the stability and profitability of its member organisations, and if a state-owned entity operates with a profit, there is no need for its privatisation. This message is quite justified if we take into account that ABB Bank ended the year 2022 with a net profit of more than 254.379 million manats and an annual growth of 21.8 per cent.