INTERNATIONAL POLICY  FELLOWSHIPS, 2005-2006

 

 

Тhe research proposal:  Azerbaijan: problems of good governance in extxractive

industries and mechanisms of effective public monitoring

 

From:                                       Sabit Bagirov

 

 

 

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 23 oil contracts, of which 16 are PSAs. 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 124-128th (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).

 

As is known, prioroty indicators of good governance in client-countries are different for such international organizations as World Bank,  UNDP, Asian Development Bank, Inter-American Development Bank, OECD and EBRD. Nevertheless, the opinions of many experts overlap on the following components of good governance:

§         accountability;

§         predictability - rule of law;

§         transparency;

§         participation;

§         responsiveness;

§         consensus oriented;

§         equity and inclusiveness;

§         effectiveness and efficiency.

Unfortunately, a comprehensive research of these components has yet to be carried out in Azerbaijan although the TI’s corruption perception index on Azerbaijan clearly shows that the situation is far from favorable.

 

The research project 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.

 

 

Methodology and procedures for fulfilling the project

 

Analysis of the legislation

As part of the proposed research, a study will be made of laws and government decisions to establish whether they meet the requirements of transparency, responsiveness, accountability and other good governance criteria. These will include the Constitution of the country and such laws as:

  • On public service
  • On fighting corruption
  • On state purchases
  • Tax Code
  • Customs Code
  • On Audit Chamber
  • On state budget and budget process
  • Other important laws from the standpoint of state governance and management of public funds, including: oil revenues, consolidated budget and credits of international financial institutions issued under government guarantee.

To be analyzed together with laws are government documents regulating the activity of the State Oil Company, the National Bank (managing the country’s hard currency reserves), the State Oil Fund (managing a great portion of the oil revenues from PSAs), the Finance Ministry (managing the consolidated budget) and other state bodies disposing of out-of-budget funds. The purpose in analyzing these documents is to identify the provisions that do not meet the requirements of transparency, responsiveness and accountability and do not allow for effective public monitoring.

The analysis of laws and government decisions will go in parallel with the drawing of comparisons with the experience of other countries that have achieved good results in the area of good governance.

 

Analysis of the mechanisms and procedures of decision-making and accountability in government bodies

This section of the research will include an analysis of governance decisions, procedures of their implementation, principles used in the selection of administrative personnel, accountability, and transparency in extractive industries.

As part of the project, documents and accountability procedures of government bodies in using public funds will be analyzed and an assessment given of government reporting systems.

 

Analysis of the independence and predictability (rule of law)

As part of the proposed research, main laws regulating the activity of courts, the procedures of selection and appointment of judges, the procedures and practice of court rulings, responsibility of judges for erroneous decisions and the transparency of legal proceedings will be studied. Focus groups will be established and interviews held with practising lawyers (judges, defence attorneys, prosecutors) and representatives of different categories of the population which have come across arbitration (namely businessmen).

 

Analysis of provisions in oil contracts

An analysis will be held of the provisions of PSAs and Joint Venture contracts that concern conditions of accountability and responsibility of the parties to a contract, taxes, duties, bonuses, etc. Also to be analyzed are the protocols on tax payments signed by the government and foreign companies in addition to the oil contracts. This analysis will be carried out in order to identify the opportunities of public monitoring of public revenues. The analysis will go in parallel with comparisons with the experience of other countries.

 

Assessment of expected oil revenues

The assessment will be based on different scenarios of possible development of oil projects and oil prices. A scheme will be prepared of different oil revenues (revenues from profit oil, bonuses, taxes, payments into social funds, customs payments, payment for leased technical facilities, buildings, etc.) paid into different government accounts.

 

Assessment of the consequences of bad governance

This section of the research will include an assessment of political, economic, social and demographic consequences of bad governance of major oil revenues. For this purpose, a macroeconomic analysis of different scenarios and strategies of the way oil revenues are spent will be conducted. Focus groups will also be established and indepth interviews held involving representatives of the government, parliament, judicial bodies and independent experts.

 

Analysis of the results of other researches

The research will be accompanied with the study of the results obtained by international organizations and financial institutions, as well as well-known research centers of good governance, namely those dealing with good governance of oil revenues.

 

Analysis of the civil society’s potential

This section of the research will include the following components:

  • Analysis of the laws On NGOs, On mass media, On television and radio broadcasts, On grants, the Tax Code, On state registration of legal entities and state register and other laws and government decisions regulating the activity of NGOs and mass media’
  • Analysis of the development and freedom indicators of NGOs and mass media;
  • Analysis of the NGO and mass media activity on monitoring public funds;
  • Analysis of different mechanisms and conditions for stepping up monitoring activities by NGOs and mass media.

 

Assessment of government’s cooperation with civil society

This section of the research will analyse the experience of interaction between government bodies and nongovernmental organizations in preparation and implementation of a number of state programs (namely, developing small and medium enterprises, social and economic development of the countryside), Azerbaijan’s involvement in the EITI and joint preparation of draft laws.

 

 

Utilization of the results of the research and 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.