Rebooting Azerbaijan's state assets An analysis of recent reforms

The post-industrial era reforms underway demand enhanced competitiveness among Azerbaijan's large state-owned enterprises in the non-oil sector, achieved by attracting private capital, new technologies, and corporate governance mechanisms.

To boost the market appeal and efficiency of industrial and other state assets, the Azerbaijan Investment Holding (AIH) was established four years ago. As a logical progression of this policy, on November 7, Azerbaijani President Ilham Aliyev signed a decree to create the Azerbaijan Transport and Communications Holding (AZCON), aiming to increase the economic viability and profitability of sector-specific enterprises.

Private holding structures trace their origins to the mature economic and legal frameworks of the United Kingdom and the United States, where they began to emerge prominently at the turn of the 19th and 20th centuries. By the early 20th century, North America had also established its first government holdings and corporations, focusing on sectors such as mining, electricity, railways, postal services, and broadcasting. 

In the 1920s, during the USSR's New Economic Policy (NEP) and subsequent industrialization, state-run sectoral trusts became a key strategy. Through centralized management and significant capital accumulation, these trusts facilitated large-scale procurement of imported equipment and standardized production cycles. Similar entities appeared in European and Asian countries after World War II, playing a critical role in post-war reconstruction and ensuring state-backed support for key industries.

In advanced market economies, some holding structures are entirely government-owned, although joint-stock companies with mixed public and private investment are more common, with the government maintaining a controlling share. These government corporations are typically established as legal entities of public law with a corporate framework. Unlike private holdings, the government usually owns the majority of their shares. However, the boards of directors of these corporations are generally independent of direct government management. They operate commercially and compete on equal footing with private companies, securing funding from both state and private investors. Nonetheless, state holdings often align with governmental objectives, serving as tools for political and economic strategy.

These principles have underpinned the formation of government corporations in the post-Soviet space over the past 15 years. Russia and Kazakhstan, in particular, have established a significant number of state corporations aimed at protecting national interests during privatization processes and strengthening state regulation of the economy throughout the transition period.

In recent years, Azerbaijan has followed a similar trajectory. On August 7, 2020, President Ilham Aliyev signed a decree establishing the Azerbaijan Investment Holding (AIH) to oversee state-owned companies, enterprises, and entities with government stakes, operating under unified principles. Since its creation, AIH has focused on reducing losses and increasing profitability among Azerbaijan's largest state-owned enterprises under its management. These include key organizations such as telecommunications companies Baktelecom (Bakı Telefon Rabitəsi) and Aztelekom, the Azerbaijan Caspian Shipping Company (ASCO) responsible for managing the trading fleet and supply vessels, AzerGold CJSC, a leading producer of precious and non-ferrous metals, and three major petrochemical plants under Azerkimya—the Ethylene-Propylene, Urea, and Methanol plants. 

AIH experts have worked systematically to enhance the market (pre-privatization) value of state-owned companies by increasing capitalization, supporting modernization through advanced technologies, securing certifications, and introducing corporate governance and modern management practices. This initiative gained further momentum following the presidential decree in August, "On Measures to Attract Private Investment in Azerbaijan’s State Enterprises."

Today, at the initiative of the Azerbaijani president, another major entity is being established in Azerbaijan—the Azerbaijan Transport and Communications Holding (AZCON), a public legal entity. As stated in the preamble of the presidential decree, the new state holding is tasked with improving the operations of state enterprises in the transport and communications sector, including building a flexible management system that meets modern standards to enhance their economic profitability and increase revenue contributions to the state budget. The charter capital of the new holding is set at 10 million manats ($5.9 million), funded by payments from state institutions transferred under the holding's management. The organization and further activities of the holding will be financed through funds from state companies under AZCON's management and other sources permitted by law.

According to the decree, the exercise of the founder's powers for the new holding is entrusted to the President of Azerbaijan. These powers include approving and amending the holding’s charter, determining the size of its charter capital, establishing governing bodies, and appointing and dismissing members of the Supervisory Board (SB) and the executive director. The decree also grants authority for the liquidation and reorganization of the structure. The overall management of AZCON is overseen by the Supervisory Board, which is chaired by the Minister of Digital Development and Transport of Azerbaijan. The SB's responsibilities include approving the budget for income and expenses of the state-owned enterprises within the holding, as well as managing funds generated from these entities' operations. Additionally, the SB evaluates the profitability of state enterprises based on performance indicators and monitors the implementation of income and expenditure budgets.

Under the decree, key assets in the transport sector have been included in AZCON, such as Azerbaijan Airlines (AZAL), Azerbaijan Railways, Azerbaijan Caspian Shipping Company, Baku International Sea Trade Port, Baku Metro, as well as BakuBus LLC, Baku Taxi Service, and Baku Shipbuilding Plant. Additionally, several state entities from the telecommunications sector have been transferred to the new holding, including Azerspace, Aztelecom, AzInTelecom, Azerpost, and the Radio Television Broadcasting and Satellite Communication enterprise.

The ultimate goal of establishing AZCON is to implement institutional reforms within the country's largest state-owned enterprises, including restructuring, revitalization, and subsequent modernization and digitalization efforts. With the support of international consultants, the opportunities for the liberalization and demonopolization of state companies will be studied, taking into account the competitive dynamics of the local market. The holding will also identify promising high-tech areas for the companies' operations. AZCON is tasked with introducing modern management practices within state enterprises, with a focus on expanding corporate governance mechanisms.

These measures are aimed at increasing profitability, reducing production costs and technical losses in the listed state companies, and improving their market efficiency and competitiveness, including in international markets. In turn, these reforms will create conditions for expanding cooperation between private entities in the country and the largest state-owned enterprises in key sectors. Additionally, through the prospective diversification of capital, the reforms will contribute to the development of the domestic securities market. As these goals are achieved, the next phase may involve attracting private investors to further increase capitalization in these structures.