State-owned enterprises (SOEs) in Azerbaijan are pivotal to the country’s economy, contributing approximately 40% of its GDP. From energy to transportation, these entities play a vital role in delivering essential services and driving national growth. However, their operations have often been criticized for inefficiency, lack of transparency, and poor governance. Recognizing these challenges, Azerbaijan established the Azerbaijan Investment Holding (AIH) in 2020, aiming to reform its most strategically significant SOEs. The OECD’s recent review of AIH provides critical insights into the progress and areas for improvement in this ambitious endeavor.
The Role of AIH
AIH was established as a management body tasked with overseeing 12 of the country’s key SOEs, including major players like SOCAR (State Oil Company of Azerbaijan Republic) and Azerbaijan Airlines. Unlike a traditional holding company, AIH does not own shares in these entities but acts as a representative of the state’s interests. Its mandate includes enhancing governance, improving transparency, and preparing these enterprises for potential privatization.
The creation of AIH aligns with broader global trends emphasizing the importance of corporate governance in public enterprises. By introducing supervisory boards, implementing international financial reporting standards (IFRS), and establishing key performance indicators (KPIs), AIH has made strides toward aligning Azerbaijan’s SOEs with international best practices.
Key Achievements and Challenges
The OECD’s review highlights several achievements. Supervisory boards and board committees have been introduced for the first time, and financial reporting has improved significantly across all 12 portfolio companies. These changes have contributed to notable performance improvements, particularly in 2021 and 2022, driven by SOCAR’s recovery and overall economic growth.
However, significant challenges remain. The continued presence of ministerial representatives on SOE boards raises concerns about conflicts of interest, and none of AIH’s portfolio companies currently have independent directors. Furthermore, while transparency has improved, AIH has yet to publish annual aggregate reports on its portfolio—a key recommendation by the OECD.
The Bigger Picture: Transparency and Accountability
Azerbaijan’s SOEs have historically underperformed compared to their private-sector counterparts, with inefficiencies costing the economy an estimated 4.2% of GDP annually, according to an Asian Development Bank study. Addressing these inefficiencies is not merely a matter of economic performance but also a step toward reducing corruption and fostering a business environment conducive to private investment.
The OECD’s report underscores the need for a holistic ownership policy that delineates the state’s objectives and expectations for its enterprises. Such a policy could level the playing field for private companies and address long-standing issues related to the overlap of regulatory and ownership functions.
The Road Ahead
As Azerbaijan looks to attract private investment and integrate more deeply into the global economy, the reforms led by AIH are a critical test case. Success in this endeavor could transform Azerbaijan’s SOEs from fiscal burdens to engines of economic growth and innovation. However, this requires a sustained commitment to governance reforms, transparency, and accountability.
The establishment of AIH marks an important step, but it is only the beginning. The government must address the recommendations outlined in the OECD report, from introducing independent directors to publishing comprehensive annual reports. These measures are not just technical fixes; they are essential for building trust among investors, stakeholders, and the Azerbaijani public.
Conclusion
Azerbaijan’s efforts to reform its SOEs through AIH represent a bold attempt to modernize and enhance the country’s economic infrastructure. While progress has been made, much work remains. The OECD’s review provides a roadmap for the future, highlighting the importance of transparency, accountability, and a clear separation between regulatory and ownership roles. By embracing these principles, Azerbaijan can unlock the potential of its SOEs and pave the way for a more prosperous and equitable future.
For further information, see the full report https://www.oecd.org/en/publications/oecd-review-of-the-corporate-governance-of-azerbaijan-investment-holding-and-its-state-owned-enterprises_6764976e-en.html