To obtain the following articles, please contact USACC
E-mail: chamber@usacc.org

Privatization: Independent Perspective, 2000
Daniel R. Matthews, Baker & McKenzie Baku

Privatization: Recent Developments
and Future Perspectives, 2000
Glenn S. Kolleeny and Kamal Mamedzade
Salans Hertzfeld Heilbronn

Privatization in Azerbaijan
Farhad Aliyev, Minister
State Property Committee, Azerbaijan

Since independence, Azerbaijan has pursued the policy of economic prosperity while trying to overcome the challenges of transition from a centrally planned economy to a market economy. During this transitional period, privatization of state property has been a major step towards radical economic reforms and development.

Compared to other post-soviet republics, Azerbaijan launched its privatization process late. Although the body implementing the privatization policy (i.e. State Property Committee) was established in 1992, and the Law "On Privatization" was adopted in January 1993, the privatization process was delayed for various reasons. The major factor contributing to this delay has been the conflict between Armenia and Azerbaijan over the Nagorno-Karabakh Region. In addition, political instability existed in Azerbaijan. After President Heydar Aliyev came to power, a cease-fire was achieved between Armenia and Azerbaijan, and stability was restored in the country.

Macroeconomic stability has been achieved in the country through a consistent policy of economic reforms and tight fiscal policy pursued by the government. Since the implementation of the new fiscal policy, the inflation rate has declined, and GDP has risen. In 1999, GDP growth was 7.4%. The private sector's share in GDP reached 62%.

Reports by international financial institutions commend the low inflation rate in Azerbaijan. The growth of private sector's share in GDP has become possible through expedited privatization.

The emergence of the political and economic stability in the country had initiated the adoption of "The State Program of Privatization of State Property in the Azerbaijani Republic for 1995-1998" (the first phase). The Program outlines Azerbaijan's privatization policy and lists its goals as following:
- Establishment of self-regulated market economy based on private property and free competition;
- Reconstruction of the national economy in accordance with the market economy requirements;
- Promotion of investment in the economy (including foreign investment);
- Reconstruction of various enterprises; and
- Establishment of new production spheres and work places.

Unlike some Eastern European and CIS countries, which have ignored the principle of "enhancing the state budget through privatization," the Azerbaijani Government has considered the principle of "social justice" and "acquisition of enterprises by investors with further development" as one of the privatization's primary purposes. Such a preference has proved successful. Well-known international financial consultants were invited to prepare the sale of shares of "Baki-Tyutyun ("Baku Tobacco), "Bakelectrogaynag" ("Baku Electric Welding") and other Open Type Joint Stock Companies at investment tenders with participation of foreign investors.

During the first phase (from August 1996 to the end of 1998), more than 21,000 small and approximately 1,000 medium and large-scale enterprises were privatized.

There has been significant foreign investor participation in large enterprise privatization in Azerbaijan. Foreign buyers have purchased majority stakes in 50 enterprises. The approximately 18 million privatization options sold to foreign investors prove the interest of foreign investors in privatization. These investors have either purchased shares in enterprises being privatized or participated in privatization through purchase of vouchers. Taking into account the number of vouchers put into circulation and privatization of 70% of enterprises through vouchers in the first phase, we can state that purchase of 18 million options by foreigners is a testament to their interest in Azerbaijan as a whole.

In addition, I would like to note that although the sale of 70% of the enterprises against vouchers is considered to serve the principle of "social justice," it could not prove as the most rational method in allowing enterprises to be privatized by strategic investors. "New owners" have not yet appeared for many of medium and large-scale enterprises. No success has been achieved in attracting new technology, know-how, corporate management and investment to enterprises because of share division among portfolio investors. Such enterprises could not start full production, and these investors prefer to "wait for dividends."

Main market economy institutions, like a securities market, financial insurance, bankruptcy institutions, a judicial system, legislative base, etc., have not fully developed in Azerbaijan. Therefore, such investors could not profitably sell their shares, nor could the government apply any bankruptcy mechanisms against them.

To address such problems more effectively, further strategic privatization and increase the status of the body implementing the privatization policy, the President issued a decree, which liquidated the State Property Committee and established the Ministry of State Property. The latter has more status than the former and has full responsibility for implementation of the privatization policy.

Soon after its creation, the Ministry drafted the Law and Program on Privatization of State Property, as well as other legislative documents and presented them to the Parliament for discussion. The lessons of the first phase were taken into consideration while drafting these documents, and some changes were introduced in the new draft to avoid mistakes in the future. Thus, pilot privatization (based on individual projects) of enterprises with particular importance for the national economy was emphasized in the new legislation. The new legislation also outlines the process of liquidation and piecemeal sale of insolvent enterprises at auctions through application of bankruptcy mechanisms.

To evaluate properties and prepare enterprises for the pilot privatization, international financial consultants have been drawn in the process. We have already established business relations with various high-qualified, well-known international consulting companies. In addition, the new case-by-case sale method (direct sale of shares to strategic investors) has been included in the Program.

One of the components distinguishing the new Program from the previous one is the organization of state property management. For instance, the previous Program did not focus specifically on the management of an enterprise during pre-privatization period. Due to the lack of private ownership, former "director corps" mishandled the property. For the time being, we intend to avoid such cases and implement wide scale legislative enactments for pre-privatization to lead to healthy enterprises.

One of the components distinguishing the new Program from the previous one is the organization of state property management. For instance, the previous Program did not focus specifically on the management of an enterprise during pre-privatization period. Due to the lack of private ownership, former "director corps" mishandled the property. For the time being, we intend to avoid such cases and implement wide scale legislative enactments for pre-privatization to lead to healthy enterprises.

Making use of the opportunity, I would also like to clarify the issue of using vouchers at the second phase of the privatization process in Azerbaijan. I understand that this is a matter of concern for foreign investors. Due to certain interest in strategic enterprises, the State Oil Company of the Azerbaijani Republic (SOCAR) for example, some foreign investors have taken advantage of the system. They have purchased vouchers for a very low price from Azerbaijani citizens who have received these vouchers for free.

The experience of the developed countries reveals that experts, who possess certain expertise in specific areas, should run certain sectors of the economy. The transition to a market economy reminds us that it is impossible to earn profit in all cases. One may incur losses as well. I would like to attract the attention of foreign investors to the fact that for the time being, all vouchers remain effective and valid.

Future spheres of privatization include: telecommunications, natural gas, power, water supply, machinery, metallurgy, hotels, railroads, water-and-air transport, chemistry, etc.

President Aliyev supports "The Open Door" policy in order to realize the interest in the above mentioned spheres and stimulate foreign investors' activities in Azerbaijan. With the purpose of establishing the most favorable conditions for foreign investors to participate in privatization, the legislation is being improved, including a number of influential enactments against corruption, bureaucracy and other negative cases. We also continue to offer favorable investment conditions, like tax incentives, customs and other privileges, freezing the enterprises' liabilities owed to the state for a certain period, etc. These conditions are designed to encourage the participation of foreigners in the privatization process.

The Ministry of State Property is in constant consultation with various international and national financial institutions to increase its chances of implementing the privatization policy successfully. While drafting the new Privatization Law and Program, we have carefully listened to their advice and taken it into account. We have created every opportunity to implement the second phase of privatization based on the principles of openness, healthy competition and social justice in accordance with the political and economic policies of the country. We will further employ these and other available opportunities to meet the expectations of Azerbaijani citizens and their foreign partners.