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Extractive Industries Transparency Initiative in Azerbaijan: Retrospective Review

Extractive Industries Transparency Initiative in Azerbaijan: Retrospective Review

By Gubad Ibadoglu, coordinator of the Coalition of Public Associations for Increasing Transparency in Extractive Industries of Azerbaijan

Although Azerbaijan’s Extractive Industries Transparency Initiative is based on the oil and gas industry, this initiative was later joined by the gold and silver mining industries. The main activities carried out by the government of Azerbaijan in this area are based on the Extractive Industries Transparency Initiative (EITI) announced by former British Prime Minister Tony Blair at the World Summit on Sustainable Development held in Johannesburg in September 2002. The aim of the initiative is to increase the transparency and accountability of the government’s revenues from the extractive industry in countries rich in natural resources (oil, gas and other mineral resources). To achieve this goal, joint activities based on mutual trust and cooperation are necessary between the government, extractive industry companies (whether they are private or state-owned), civil society and international organizations in each country that has joined the initiative. In order to implement the initiative and monitor the process, relevant standing committees representing all parties interested in ensuring the transparency of revenues in extractive industries (i.e. the government, local and foreign companies, civil society, parliament, etc.) are set up in each country. The International Board of Directors and its Secretariat manage the initiative at the international level and coordinate the activities of the countries that have joined the initiative.

When a delegation of the Azerbaijani government attended the International Conference on the EITI in London in June 2003, it officially joined the initiative. On 13 November of the same year, a government commission on the EITI was established by Cabinet of Ministers Decision No 224. On 13 May 2004, the NGO Coalition of Public Associations to Increase Transparency in Extractive Industries (hereafter, the EITI Coalition) was founded. The government signed a Memorandum of Mutual Understanding and started to cooperate with the EITI Coalition on the implementation of the EITI in Azerbaijan. As a result of joint cooperation, Azerbaijan was validated for the first time in the world in 2009 and gained the status of a compliant country.

Azerbaijan, which declared an interest in the Extractive Industries Transparency Initiative eight years ago and joined the initiative as a pilot country, is one of the 11 compliant states among the 35 members around the world. The past eight years are considered to be an important period for this initiative. Before 2009, Azerbaijan was mentioned as one of the leading countries for its achievements in the implementation of the initiative. However, our country, which successfully passed the validation process in 2009, lost its lead in the EITI because of its failure to make significant changes at the international and regional level and contented itself with its achievements gained before 2009. Therefore, the implementation of the EITI in Azerbaijan can be divided into 3 stages.

The first stage can be called a pilot phase. This phase was remembered by the fact that Azerbaijan became involved in this initiative as a pilot country and made the first EITI report in the world. This phase covers the period 2003-2005. This period can be called a period of the establishment and institutionalization of the EITI in Azerbaijan. Because it was during this period that the government commission on the implementation of the EITI was set up, the State Oil Fund of Azerbaijan was elected as an EITI champion, the NGO Coalition of Public Associations for Increasing Transparency in Extractive Industries was established and cooperation was launched in this context, most of extractive companies joined this initiative and a memorandum of mutual cooperation was signed between the parties. Although the parties had psychological difficulties with respect to each other during this period, those barriers were eliminated as a result of effective trilateral cooperation, and due to such cooperation, Azerbaijan achieved a number of successes that were appreciated at the international level.

The second stage covers the period beginning from the moment when our country became a candidate for membership of the EITI to the moment when it became a full member. This stage, which covers the period 2005-2009, can be called the period of the development of the EITI in Azerbaijan, because, during this period, Azerbaijan was ahead for the number of EITI reports it released and the initiatives it put forward and gained a reputation and position at the international level. The EITI resolution put forward on behalf of the government of Azerbaijan was put up for debate and adopted at a UN session, and it was recommended that other countries join the EITI and support it. One peculiarity of this stage was that Azerbaijan’s EITI experience was adopted and widely promoted as a model, especially for regional countries. Therefore, delegations from various countries beginning from Yemen to Cambodia, including Iraq, Ukraine, Georgia, Kazakhstan, Mongolia, Kyrgyzstan, Afghanistan, Tajikistan and Indonesia, visited Azerbaijan, closely familiarized themselves with our country’s successful experience and held meetings in this regard.

The third final stage begins from the moment when Azerbaijan passed through the validation process and became a full member of the EITI. Although the implementation of the EITI in Azerbaijan did not undergo significant changes during this period, our country remained in the centre of attention. For example, during the validation process the EITI International Board gave the government of Azerbaijan recommendations in four spheres. These include the establishment of the Multilateral Group (1), the adoption of the action plan of the Multilateral Group (2), improvement of reporting (3) and increasing opportunities for public awareness of reports (4). The assessment of the Coalition of Public Associations for Increasing Transparency in Extractive Industries shows that although recommendations indicated in the first two of the spheres listed above were implemented, no significant changes occurred in the other two spheres.

As a result of the changes recommended to Azerbaijan, the management format of the EITI changed, a Multilateral Group was created equally representing the parties and its action plan was adopted. These processes continued until 2010, and after 2010, a period of stagnation began in the implementation of the EITI in Azerbaijan. For example, the initiatives put forward by the EITI NGO Coalition (the improvement of the memorandum, the adoption of a law on the EITI, adoption of individual reporting by companies, the expansion of payment indicators, etc.) were not implemented, and negotiations in this sphere lasted for a long time and proved unproductive due to the conservative position of the parties, in particular companies.

The draft law prepared by the EITI NGO Coalition was not even put up for debate at a meeting of the Multilateral Group because the government and companies argued that there was no need for that. Although the Coalition’s proposals to improve the memorandum were discussed for more than a year, they still have not been adopted. As for companies and individual reporting on payments, the main problem in the implementation of the EITI in Azerbaijan at the moment is transition to individual reporting on types of payment and companies. Despite the disclosure of 14 reports over the past period, they had a general nature for companies and reflected the most common and important payments. In general, depending on the general or individual nature of reports on companies’ payments to the government and types of payment, it is possible to divide the reporting format into four categories:

a. Aggregated reports on both companies and payments;

b. Aggregated reports on companies and disaggregated reports on types of payment;

c. Disaggregated reports on companies and aggregated reports on types of payment;

d. Disaggregated reports on both companies and payments.

Estimates show that the a) option is still being applied in Azerbaijan. This proves that the opportunities for improving EITI reports in Azerbaijan range from a) to d).

Up to now, Azerbaijan has disclosed 14 aggregated reports on the EITI , and 7 of them cover a period of one year. However, although the disclosure of improved reports is still considered to be the main area of activity for the parties (government and companies) in full members of the EITI, this process still has a generalized nature. For example, a study carried out by the EITI NGO Coalition in 2009 show that reports covering the 8-year period from 2003 to 2010 reflect mainly compact payments. According to the study, although reports disclosed in Kyrgyzstan reflect payments in 33 indicators, they reflect payments on 13 indicators in Azerbaijan, and only five of them contain relevant information while others remain empty because there are no payments in the remaining eight indicators. The study also revealed that the report does not contain information on several indicators in which payments were made to the government (social fees, customs duties, VAT, property and other taxes, non-tax payments).

Studies carried out by coalition experts show that an analysis of the experience of Kazakhstan, Kyrgyzstan and other countries of the region shows that unlike Azerbaijan, these countries included a number of payments in EITI reports. For example, in Kazakhstan, the EITI report reflects social insurance fees, income tax, road tax, car tax, customs duties, taxes and payments, as well as payments for the use of water, forests and other resources. As for Kyrgyzstan, the EITI reports in this country include not just state taxes reflected in the Tax and Customs Codes, but also local taxes. The Kyrgyzstan report reflects five sections: tax payments (1), customs duties (2), other important payments (3), economic indicators (4) and companies’ additional costs (5).

The section on other important payments reflects social insurance fees, fees for the use of natural resources, compensation for the loss of agricultural products, fees for expected benefits in agricultural production, dividends for the state share, incomings from the sale of property and assets, payments for the purchase of licences from government agencies and payments for extending the licence for the use of natural resources.

The Economic Indicators section shows the volume of production in current prices.

The section on companies’ additional costs includes support for education and support for the social and industrial infrastructure, including fees to the reclamation fund.

Along with that, companies in Azerbaijan have not yet adopted disaggregated reporting. Civil society’s long-time initiatives in this field have been unproductive so far. For example, although the number of companies (Middle East Petroleum, Binagadi Oil Company, BP, Shell, and Statoil-Hydro) which agreed to adopt individual accountability has slightly increased over the past period, changes in the previous position of the leading company of Azerbaijan’s oil industry, SOCAR, raise new questions. While all companies have agreed to disclose individual reports, SOCAR, which expressed its agreement to adopt individual reporting, said it was not ready to support this initiative.

In this regard, discussions held at Multilateral Group revealed that companies were not ready for this transition as a whole. Although the Dodd-Frank Wall Street Act, which was adopted by US Senate and obliges oil, gas and mining companies registered on the US securities market and stock exchanges to disclose their payments to the government from revenues from the use of natural reserves regardless of the country where they operate, increases hopes in the implementation of the initiative in this field, there are no concrete results yet. One of companies’ main arguments in respect of this issue is that it is not included in EITI objectives. Disagree with this, we should note that the first criterion of the EITI – “the regular publication of all existing revenues in an understandable, comprehensive and clear way for the general public” – is not being observed by companies working in most of the countries that have joined this initiative. International experience shows that only in 7 of the 35 countries that have joined the EITI (Norway, Ghana, Guinea, Nigeria, Liberia, Gabon and Mongolia), do companies present their governments and public with disaggregated reports.

At the same time, empirical studies carried out so far prove that unlike the aggregated method of reporting, the method of disaggregated reporting has an important advantage in revealing manipulation with revenues in reports. In this sense, since the method of individual reporting includes all the details, it has practical advantages in the reporting and evaluation of extractive industry revenues. Taking this into account, disaggregated reporting should be given preference in order to achieve the objectives of the EITI. The most effective approach to ensuring transparency in extractive industry revenues is the “individual reporting” approach that covers all revenues and payments, i.e. it is a method of dividing revenues and payments among private companies and revenues. The presentation of such information in disaggregated reports may allow local participants to compare payments between companies and increase the government’s accountability in this area.

Therefore, the EITI NGO Coalition recommends the following to improve reporting:

1. The Memorandum of Understanding on EITI implementation in Azerbaijan should be improved in accordance with modern standards and the parties should sign a new version of it;

2. Separate statements should be made on companies, and transition to an individual reporting system should be ensured;

3. The regulation of the EITI in Azerbaijan should have an imperative legal basis through the adoption of a separate law or amendments to relevant laws, and the EITI should be financed from the state budget;

4. Separate lines on all taxes of national importance (VAT, income tax, land, property and road taxes), customs payments (customs duty, VAT on imports, customs fees), social insurance fees and the government’s incomings from foreign companies (Section 3) and local companies (Section 4) should be included in the Tax and Customs Codes of Azerbaijan, decisions of the Cabinet of Ministers, as well as relevant sections of financial reports by local and foreign companies;

5. The Customs Committee and the State Social Security Fund should be represented in the government commission on the EITI. Within the framework of the EITI, these bodies should submit reports on their incomings from the extractive industries;

6. Considering the specific nature of the gold and silver mining industry, as well as the conditions of production sharing agreements signed with companies engaged in this sector, a separate report form should be prepared and reports complying this form should be submitted in 2012;

7. In order to bring Azerbaijan’s EITI reports in conformity with the comparative analysis, the government’s share in foreign companies’ reports should be shown in the monetary equivalent;

Azerbaijan Today Magazine. 2011