Sabit Bagirov

INTERNATIONAL POLICY FELLOWSHIPS, 2005-2006

Project:

Azerbaijan: problems of good governance in extxractive

industries and mechanisms of effective public monitoring

THE ISSUE PAPER

September, 2005

Background

Azerbaijan’s extractive industry today is mainly represented by the oil sector which plays an important role in the country’s economy by contributing 40 percent of budget revenues and 80 percent of exports. Engaged in this sector today are both the national company and foreign companies, including transnational oil giants. Starting from 1994, the country has signed 25 oil contracts. Although eight of them have been terminated due to failures in exploration operations, work on the other eight is progressing. As part of two of these contracts gigantic oil (Azeri-Chirag-Guneshli has 5.3bn barrels of oil) and gas (Shah-Daniz has 700bn cubic meters of natural gas) fields have been discovered.

Of 15m tons of oil produced in 2003 about 9m tons was produced by the national company, while the rest was contributed by foreign oil companies. In 2005, however, after the Baku-Tbilisi-Ceyhan regional pipeline is put into service, the situation will start changing dramatically: the volume of oil produced by the consortium will start increasing and will reach 50-55m tons by 2010.

The volume of gas production will start growing from the current 6bn cubic meters in 2006 and will double by 2008. The gas produced from Shah-Daniz will be transported through the Baku-Tbilisi-Erzurum regional gas pipeline to Turkey. Gas production from this field is expected to considerably increase, and the gas will be exported to European markets.

So, the country is on the threshold of major oil revenues. Calculations show that the contract on Azeri-Chirag-Guneshli alone fetch from $30 to 155bn in the time period stretching till 2030 depending on crude prices (the calculations are based on a price of $15 and $45 per barrel). The main recipients of oil revenues will be the State Oil Fund ($35-140bn), the state budget ($6-9bn) and the State Oil Company ($3-5bn). The State Social Security Fund and a number of state enterprises will also receive revenues. All these are state bodies, therefore, it is extremely important to ensure their good governance.

Unfortunately, Azerbaijan cannot boast of good governance today. According to one indicator of the quality of governance – Transparency International’s corruption perception index for 2003 – Azerbaijan is ranked 124-128^th (together with four other countries: Angola, Georgia, Cameroon, Tajikistan) of a total of 133 countries of the world. The high level of corruption in the country was confirmed by a sociological survey conducted by Transparency Azerbaijan in May 2004 among 1,000 people. Over 86.9 percent of those polled think the level of corruption in the country is quite high (52.2 percent) or very high (34.7 percent).

Over the past several years, the government has made a number of important decisions intended to prevent the treat of the Dutch disease, to develop a long-term strategy for governing oil and gas revenues and weaken the dependence of the country’s economy on the resource factor.

However, the risks of losses resulting from ineffective governance are still quite high. They are preconditioned by the fact that the government is not very experienced in managing major revenues, the laws regulating the activities of the government are imperfect, the legislative and judicial branches are dependent on the executive one, civil institutions are too weak, high corruption, etc.

objectives

The objectives of the research are:

• Studying and assessing good governance components in Azerbaijan in general and in extractive industries in particular. Preparing recommendations on improving the quality of governance;
• Analyzing the risks of ineffective use of oil revenues, budget resources and the loans received by the government. Developing a detailed scheme of the existing currents of public finances from all sources and consumer groups and registering all risk points with a three-level classification of the resource loss risk;
• Analyzing the potential and capabilities of the civil society (namely, NGOs and mass media) to monitor the government’s activity/inactivity. Preparing recommendations to improve the potential and capacity of the civil society.

policy recommendation

The recommendations on improving the quality of govertnance will be presented at different seminars and round tables held by different organizations in Azerbaijan and, if possible, in other countries. Also, a round table on Good Governance will be held as part of the project, where the results of the research will be put on discussion.

The results of the research will be published in the form of a book. Specific results of the research will be published in local newspapers.

A brief outline of the proposed recommendations to improve the quality of governance will be published in the form of a brochure to be handed out to government bodies, parliament and judicial bodies, as well as international organizations and financial institutions.

The recommendations to strengthen monitoring activities of NGOs and mass media will be discussed at a special round table. A brief outline of the recommendations will be published in the form of a brochure to be handed out to NGOs, mass media, as well as international organizations and financial institutions.