Economic

  

  

CESD Policy Paper on Oil and Transparency
 

Management of Oil Revenues in Azerbaijan: Transparency and Effectiveness

 

Main findings and key recommendations;

 

  The economic life of Azerbaijan is closely tied to oil. This study claims that the advantage of possessing oil can quickly be spoiled if the resources are merely spent to satisfy short-term interests. However, if managed wisely, e.g. through proper defining and prioritising the long-term interests of the entire society owning the resources, having oil can be extremely beneficial. Proper resource management ensures that the benefits are cumulative, sustainable and consistent. But if these interests are not well-defined, agreed upon, and followed through, then the resources run the risk of being squandered to serve short-term and small group interests only.

The paper analyses different scenarios of using the oil money and advocates for a strategy that would involve the following steps:

  • oil rent money needs to be isolated from the economy and collected in an Oil Fund the Fund should select the most efficient strategy
  • the Fund’s resources should initially be invested abroad only
  • a diversification plan needs to be prepared
  • ethical principles need to be outlined
  • the correlation of the percentage share of funds needs to be determined
  • the relationship between the risk, expected return, number of investments and overall Fund resources needs to be determined principles need to be developed for future possibilities for investing in the domestic business sector

The study claims that the main challenge for Azerbaijan is to develop the non-oil sector to ensure that the economy continues to grow on a sustainable path after the oil boom, meeting both short-term expectations and longer-term demands.

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CESD has published new book. Ending Dependency.

The book was prepared by Center for Economic and Social Development (CESD), Azerbaijan, with the financial suport of Partnership for Transparency (PTF) Download the book

                             

 INTRODUCTION

Hydrocarbon revenues dominate the economy of Azerbaijan
since the past few years, and keep still growing, while the non-oil
sector of the economy remains undeveloped and fragile. For example,
Azerbaijan has experienced two-digit real GDP growth during
the past few years, mainly due to the oil sector development, while
its share in total employment is only 2% of the total employment,
but the growth in the agriculture sector, which accounts 40% of
total employment remains around 1%. Moreover, the oil revenues
affect the fiscal structure and relations within the state and make
the government more prone to rent-seeking behavior. For example,
the investment expenditures of the government have increased by
almost 1000% during the 2003-2007 years. But this increase has
not been accompanied by an improvement in efficiency and transparency
of investment planning and implementing processes.
The economy of Azerbaijan now faces serious challenges. The
rapid influx of petrodollars far surpasses the institutional capacity
of the implementing agencies and absorptive capacity of the economy.
There are many problems resulting from past policy errors,
soviet legacy in public resource management and little transparency
and participation. There are many legacy processes in the current
system that result in inefficient use of resources and allow corrupt
practices to develop. There is an overt manifestation of inflation
and of the challenges for the non-hydrocarbon export capacity
at the same time. The fleeting nature of the hydrocarbon wealth
is another reason to raise an alarm to expedite getting engaged in
reform processes.
Many officials recognize the need for reforms, yet the changes
are slow and ineffective. It is essential that the government and the
public in general receive the information from different perspectives
on how the economy functions and what are the tendencies
to get timely involved to save the economy and ensure the sustainable
social development. This book is developed therefore to raise
the awareness and introduce policy perspectives on effective use
of oil management. The book presents four studies….
The first study encompasses the survey was conducted within
the framework of "Monitoring of State Oil Fund of Azerbaijan
Republic" Project with funding of The Partnership for
Transparency (PTF). The aim of the survey at determining on level
of public awareness on usage of oil revenues and becoming familiar
with attitude of both government bodies and companies.
The second case study serves as a vivid example to demonstrate
the problems with trasparency issues in the management of State
Oil Fund of Azerbaijan Republic (SOFAR) and of overall oil revenues.
SOFAR is the fund where Azerbaijan accumulates oil revenues.
The monitoring revealed some problems within the Fund's
management, mainly the transparency issues.
The third study revealed that by doing so, as much as $50mln
had been misappropriated in a year alone. Once the price of houses
constructed within the project was compared with the market
price, it was evident that the houses had been artificially overpriced.
And another problem is substandard work during the construction
process thus aiming to consume few funds, but overprice
the project.
The aim of the last study was to construct an analytical space
for analyzing the way in which civil society, understood here in
terms of the NGO sector, can play a positive role in assuring transparency
in usage of oil revenues in Azerbaijan. Azerbaijan is getting
daily $ 40 million from oil sale now and the amount is expected
to reach $ 60 million by the end of 2009. It means the country
with 8 million populations will get about $ 30 billion money each
year only from oil sale. The figures confirm that very important
job now is to create political will to work toward enhancing of
transparency in oil usage.

 

THE AUDITING OF THE LOCAL GOVERNMENT’S FINANCIAL MANAGEMENT IN AZERBAIJAN; COMPARATIVE ANALYSIS

The audit delivered in the country mainly aims to obtain reasonable assurance about whether the financial statements of economic entities are free of material misstatement . Historically, practices of audit function were directly associated with the interests of firms and their owners. Yet there has been a pressing need to audit the financial affairs of governments in respective countries over the past decades. It is in the first place attended by improvement of fiscal transparency and accountability by promoting good practices of audit function and enhancement of efficiency in government’s management.

Local governments’ financial management is markedly different from the similar system in the business sector, since accounting of the private sector must provide for profit and market adaptation . But local government function is limited to State Budget subventions and it chiefly targets to render public services rather than making profit. Therefore, accounting standards used by local governments must cover and/or reveal budgeting and realities of budget execution as a major mechanism for management of financial resources .

Undoubtedly, it is just possible to assess how far the accounting system is effective thanks to its adequate scrutiny. The results of the audit local governments’ financial management and auditors reports provide the solution to a number of issues. First, such reports highlight full and factualinformation on how far the efficiency of receipts and expenditures forecast is enhanced and the financial operations are performed.

Secondly, it enables to assess factual financial needs to implement a multiple of social and economic programs of local governments . Thirdly , it provides for fiscal transparency in local government function . Finally, it helps to measure the efficiency and effectiveness of programs implemented by local governments .

Proceed ing from the above above-mentioned, we can classify to three groups potential users of information on the system of local government audit. The external users group of financial information includes local communities, donors and funders, sellers of goods (work, services) for local governments. The internal users group of financial information includes specialists employed by local bodies (financial managers, experts in charge of supervising budget planning, et all in particular). The last information users are the group that is a key factor in greatly enhancing the performance of local governments, yet this group has not been directly involved in their daily function. It consists of state-run structures rendering subventions to local governments in diverse forms, as well as legislative structures. The former p articularly may require a special accountability system to make sure how far the use of the subventions is effective

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STRATEGY FOR STATE OIL FUND OF AZERBAIJAN REPUBLIC  

 

We have oil. It is like winning a lottery ticket, it is like getting a huge patrimony and it is like a gift from heavens. And like a winning lottery ticket, a patrimony and a gift, oil can easily spoil. It will spoil if the resources are spent to satisfy the short-term interests. Contrarily, oil may become an advantage, if managed wisely, through properly defining and keeping in mind the long-term interests of the entire society owning the resources. This will ensure that the improvements are cumulative, sustainable and consistent. And when these interests are not well-defined, agreed, and followed there remains no other way to spend the life and resources, but act randomly and satisfy short-term and small group interests only.

The paper analyzes different scenarios of using the oil money and advocates for the strategy that would involve the followings:

All the oil rent money need to be isolated from the economy, and collected in the Oil Fund, meaning that should not be transferred into the State Budget, and at the same the Fund shouldn’t replicate any of the functions of the State Budget

The Fund should select the saving strategy and employ the smooth distribution function at the expense of the stabilization function

The Fund resources should initially be invested abroad only

The diversification principle need to be prepared to illustrate the ceilings expressed in percentages of the Fund’s resources can be allocated in each country, each type of the business, and each company

The ethical principles need to be prepared to outline the countries, the businesses and the companies where the Fund money cannot be allocated

The correlation needs to be determined, where the more the Fund grows, the more the percentage share of it can be invested in equity shares rather than in the T-bills The relationship between the risk, expected return, number of investments and overall Fund resources needs to be determined for the investors to serve the maximization principle, sticking to the Fund’s rules but not on their own discretion that may have a goal not fully overlapping with the Fund’s goal

Principles need to be developed for the future possibilities in investing in the domestic business sector, in the form of the separate bank that would expect the return for the Fund form the investing in the local business higher than from the investment abroad

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Why 90 per cent of FDI goes to oil sector in Azerbaijan; Institutional reasons of the unsteadiness between oil and non-oil sectors


This paper is searching correlation between credibility and development in oil sector. The main question of the paper is that why 90 per cent of foreign direct investment (FDI) goes to oil sector. Based on theoretical and practical approaches the paper argued that volume of foreign direct investment (FDI) depends on credibility index of Azerbaijan. Since oil companies "play its own rules" mostly they are interested in investing in oil sector in Azerbaijan. Almost none internationally recognized "non-oil project" has been registered in the country last years. The conclusion is that no protection of property rights, institutional form of the government, government monopoly, and no perfect competition make country's economic credibility lower, it has a strong negative influence to the unsteadiness between oil and non-oil sector and private sector responses to low political credibility.

Why more than 90 per cent of FDI goes to oil sector in Azerbaijan; Institutional reasons of the unsteadiness between oil and non-oil sectors

Lack of political credibility, legal guarantees had scared away investors, had hindered economic development and economic growth. This paper is searching theoretical aspects and methodologies of impacts of "political credibility" as institute on unequal sectoral development in Azerbaijan. However, "political credibility" is very broad term, and there are too many definition which offered by different scholars. But the paper directly focuses on relations and influence among political credibility and FDI...

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COMPARATIVE ANALYSE OF PRIMARY HEALTH CARE (PHC); A LESSONS FROM AZERBAIJAN

 Since June 2005, Centre for Economic and Social Development (CESD) has been conducting a research aimed at increasing the efficient use of healthcare expenditures financed out of the State Budget, and designing effective mechanisms for public financing of primary health care (PHC) systems. This study targets to improve the quality of PHC and to increase its public availability in accordance with objectives of the United Nations Millennium Development Goals (MDGs) and the State Program on Poverty Reduction and Economic Development (SPPRED). In this paper we have analyzed the current situation on financing and organization of healthcare services in our country, in particular related to PHC; accessed experiences on PHC financing and organization in certain countries (including developed, FSU, and developing); investigated reform-related practices in the CIS nations and related studies carried out by a variety of international organizations (WHO, UNDP, USAID, WB, etc) and commentators. In addition, the study has encompassed roundtables and consulting assignments with participation of local experts, interviews for public comments on availability and quality level of PHC delivery in the regions, including a set of similar activities.

 As we are well aware, a variety of international development organizations, including but not limited to, the World Health Organization (WHO), Oxfam-GB, USAID, the United Nations Development Programme (UNDP), USAID, the International Medical Corpse (IMC), the World Bank (WB), etc, have recently elaborated and issued reports and guidelines after conducting a number of studies towards investigating the current situation and implementing structural reforms in the healthcare sector across Azerbaijan.

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