PRIVATIZAION IN AZERBAIJAN
FROM QUANTITY TO QUALITY
The presence of a well-developed non-state-run sector consisting of private enterprises that are in competition with one another are seen as one of the grounds of a market-based economy. The existence of the component in the economic medium of any state is considered a pledge of the potential economic prosperity of a sociaty. The governments of all the states of former socialistic block aim to create such an economic medium. For this purpose virtually all post-Soviet countries used a single method - a mass privatization of state-owned enterprises. Azerbaijan was not an exception to the rule. For some objective reasons, Azerbaijan launched the process of the state-owned enterprises destatization later than other former Soviet republics, in May, 1997. However, under guidance of Azerbaijan President Heydar Aliyev, the republic completed the first phase of the destatization process ( a transfer of small-scale and most of medium-scale enterprises from the State to private ownership at the earliest possible date and came up to its qualitatively new level - a strategic privatization. In this story we will consider a legal framework of this process, the run of the mass privatization as well as will make an attempt to analyze a situation connected with "blue counters" sales.
THE LEGISLATION - TODAY AND TOMORROW
Privatization in Azerbaijan is regulated by a considerable number of laws forming a regulatory legal framework, the basic one of which is a law On State Program of Privatization for the 1995-1998 Period. The validity of the program has already been up now, and there is no legal framework for privatization to date. The extension of the validity for the first privatization program was suggested as a way out of the vague situation by some of the State institutions. However, the State Property Committee (SPC) insisted on the preparation of a new program. As yet the second program like a new law On Privatization was not adopted. There are just drafts for these documents that are under consideration by the country's Presidency. They are expected to be approved in the middle of this year. In view of this, to describe the legal framework of the privatization, we will show basic provisions of old program, which are sure to be introduced in the new law, as well as some of absolutely new articles.
The State privatization program ran for the 1995-1998 period arranges Azeri enterprises in five categories shown below:
The enterprises that are bound to be privatized without fail; The enterprises that are privatized on the basis of a decision of the SPC and the decision is to be dovetailed with the Cabinet of Ministers; The enterprises that are privatized by the SPC with a concent of local organs of executive authorities; The enterprises that may be privatized with specific authorization from Azerbaijan President. The enterprises that are ineligible for privatization. В первые 3 категории входят малые предприятия, торговые объекты и т.д. К четвертой категории относятся т.н. стратегические объекты – предприятия топливно-энергетического комплекса (ТЭК), сферы телекоммуникаций и т.д.
The first three categories encompass small-scale enterprises, trade entities ans so on. The fourth category cover so called strategic entities - the enterprises of the Fuel & Energy Complex (FEC), the telecommunications enterprises, etc.
According to the current legislation, the first phase of privatizing any medium-scale and large-scale enterprise includes its transformation into a Join Stock Company (JSV). It should be noted that out of the FEC enterprises only Azerigas and Azerenergy have already been incorporated as openly and closely held corporation, respectively. In the corporatization of enterprises the property of an enterprise is assessed and its authorized capital is in the making. After the existing method of assessment endorsed by a President's special decree, in the making of a statutory capital, accounts payable of an enterprise are deducted from its value and accounts receivable are added to it. In other words, a charter capital of the yet formed joint-stock company is becoming relatively clear of debts. Built on the basis of a few enterprises, a joint-stock company is incorporated at the Finance Ministry, and a preliminary prospectus of issuing its shares is registered at the Finance Ministry. There is an assumption that in a new program the function will be assigned to the State Committee on Securities set up in current year.
A joint-stock company's shares are put up for sale at cash, privatization check and closed (so called closed subscription to shares for the personnel of an enterprise under privatization) privatization check auctions. Under the existing legislation, the shares of a joint-stock company are distributed as follow :
15 percent of shares are referred to a closed (privatization) check auction, which the staff members of an enterprise or the persons who have the rights equal to those of staffers of an enterprise under privatization can participate in. 55 percent of shares are directed to an open check ( commercial or investment competitions) auction. 30 percent of stocks are sold at open cash auctions, which both local and foreign individuals and legal entities being able to participate in. It should be noted that in case of the FEC enterprises the same mechanism will be sure to be used, however a percentage of stocks referred to the above indicated kinds of auctions will be quite different. In the old program an opportunity is foreseen to set limits such as the establishment of a controlling stake (51%) or a blocking stake (26%) owned by the State.
In 1997 in the sell-off of cotton-cleaning plants, the government made a decision to issue "a gold stock", the possession of which allowed the government to blockade a number of resolutions at assembly of shareholders, for adopting which ??? votes are needed. Without a shadow of doubt, in a new State program an opportunity to leave a controlling block of share and a blocking stake for the State will be taken into consideration. However, it is unlikely that the way things are now the principle of "a gold share" will be introduced in the legislation as, according to some experts' opinion, this method does not quite justify itself.
The privatization stakes will be used at the check auctions as a settle medium. A (privatization) stake is equal to four checks and in natural units one (privatization) check is equivalent to a 1/32000000th of all the state-owned property. From March 1 till August 15, 1997, 7.5 million of privatization checks were doled out among the population at free of charge on a one-off basis. It should be noted that unlike an experience of some of former Soviet republics, in Azerbaijan the privatization checks are tradable. The sale and purchase of the privatization stakes and checks are implemented through both state-run market in the form of special fund shops and an unofficial (shadow) market. From the date of giving out the privatization stakes, a market price for them was more likely somewhere in between $10 to $120.
Under the existing law, a decision for access to the privatization of strategic enterprises to be thrown open to foreign individuals and legal entities is made by Azerbaijan President at the same time with a decision to put up shares of a given joint-stock company for sale at an auction. In doing so, a condition is set before an investor to buy from the State Property Committee the state-owned privatization options granting the right to foreigners to have a concern in privatizing a given joint-stock company. The price of one option must be not less than 10 percent and not more than 15 percent of an average nominal value of a privatization check. An average nominal value of a privatization check is conditioned by the results of the past 10 check auctions. 19 million of options have been sold later this April. Out of them around 0.5 million have been withdrawn from circulation. At a check auction one option gives a foreigner the right to bid one check. In other words, when an investor puts in his bid at auction, he must present the same number of options (to be written off after a successful transaction) equal to the number of checks offered by him. At cash auctions a minimum check/share ratio rate formed during sale of shares of a given joint-stock company through check actions is taken as the ground for an option/share rate for a given enterprise.
One of the most interesting events of the upcoming strategic privatization is the opportunity to use commercial and investment competitions as well as the realization of individual projects for privatization (case-by-case-privatization). The basic components as well as the status of the method of privatization must still be determined by a new law.
However, the method has already begun to be used - the the Karadag cement-producing plant is privatized under a mixed scheme (the investment/commercial competition and cash privatization). It is expected that privatization through medium of commercial competition will mean that an investor will have to pay a maximum price for an object and to honor some conditions claimed by the State Property Committee. In doing so, the right to acquire a block of shares put up for sale at a competition will be given to the highest bidder. The State Property Committee also can set out as the terms of reference a certain business-plan encompassing information on a minimum volume of investments, the procedure and the term of honoring some conditions so on. The state-owned property privatization at an investment competition demands an investment program from a bidder. The bid of maximum investments is the basic criterion for selecting the winner of an investment competition. The privatization under a personal plan provides for taking a number of measures to do the groundwork for sales, assessment and sell-off of enterprises of special importance to the republic's economy. When a personal plan is putting into practice, the above mentioned forms of privatization can be used. A distinct characteristic of these methods is an opportunity to attract independent financial advisors to privatize strategic objects. The duties of a given financial advisor, who is selected by a bid competiton, include as follow :
The preparation of a financial overview of an enterprise, its industrial analysis, preparation of a preliminary informational memorandum for potential investors; Choice of a particular scheme for operations, including preparation and coordination with a customer of a price analysis for negotiations with investors, development of criteria for selecting investors, determination of a volume of a package of shares under realization, the methods of its sale, price and so on; Marketing an enterprise; A direct work with the investors concerned, furnishing them with the detailed additional information on an enterprise; Advising a customer in summing up, choice of a buyer and conclusion of a summarized agreement between a seller and a buyer. While familiarizing oneself with some provisions of the second program of privatization, it should be taken into account that its some components can undergo significant changes in the process of its ultimate endorsement.
A new program is a logic continuation of old program. Its basic task is the development of private business activity and robust market-based rivalry. Unlike the first program, the second program provides for a creation of more favorable conditions for foreign investors. For example, if under the first program any enterprise, in which a share of foreign capital is 25 percent of the authorized capital, was considered a foreign legal entity, in a new program the figure rose to 50 percent. And it means some of investors will not have to buy privatization options to take part in auctions.
Like old program in a new draft bill most of "blue counters" refer to a category of enterprises to be privatized under a special decree by Azerbaijan President. The forms of their privatization (check, cash auctions, investment and commercial competitions) are prepared by the State Property Committee and the Cabinet of Ministers and endorsed by the head of the state. In a draft bill On Privatization of State-owned Property for the 1999-2000 Period the following forms of destatization of state-owned property are provided :
The privatization of enterprises through auctions in favor of an individual or a legal entity outbid for a certain part of a given joint stock company. The method suggests both realization of 85 percent of shares of small-scale enterprises and a certain block of shares of medium- and large-scale enterprises through cash auctions and sale of some part of enterprises at check auctions of new type. Privatization of certain parts of joint-stock companies through the specialized check auctions, the experience of conducting which were widely used within the framework of the first program, The realization of a certain number of shares through medium of the specialized cash auctions; The privatization of the state-owned enterprises or their certain parts through commercial auctions. The privatization of the state-owned enterprises or their certain parts through investment auctions. The realization of the enterprise property through auctions. The method is planned to be adopted in regard with enterprises, the financial and economic highlights of which leaves much to be desired. The proceeds from the privatization will be designed above all for paying off a debt. The sale of an enterprise's shares by installments. This method will be used in regard to the enterprises, the shares of which were not bought at auctions within 10 months. For enterprises of real sector some supplementary privileges are provided. The forms of the privatization of banks and joint ventures in the draft bill are of interest. For example, under the draft bill, the destatization forms of banks are defined by a commission set up for a given bank and by the State Property Committee. In doing so, on the basis of the bank's ownership, its assets and liabilities, the authorized capital and the number of the securities to be issued are calculated, the shares belonging to private persons are again registered. Then, the number of stocks put up for sale at an open check auction are determined by a decree of President, the rest of the securities are set out at a cash auction. When a joint venture is sold off, 30 percent of a state-owned stake of a given enterprise are put up for sale at a check auction, the rest of the shares is realized at a cash auction.
Under the draft bill, it is banned in the process of privatization from setting up groups and holdings that are monopolists on a commodity market and a production market. For example, in the privatization of the enterprises that are monopolists, i.e., control more than 35percent of a market, one is prohibited from selling more than 50 percent of shares of a given enterprise to one legal entity or one individual.
PRIVATIZATIION PRACTICE
To characterize entirely the privatization in Azerbaijan, it is necessary to consider some important aspects of the process of destatization.
Check shops
In 1998 the State Property Committee issued 15 licenses (14 to legal entities and the one to an individual) entitling them to sell and buy the privatization checks. Later this year two licenses were revoked at request of their owners - the NM company and an individual. Among entities received a license from the SPC four companies are singled out in their activity. It is the Azerbaijan Investment Company (AIC) NIKOIL, the closely held corporation, the Minarest Group, Global Securities (Azerbaijan) Ltd. and A.J.G. Investments Ltd (Azerbaijan.
The Azerbaijan Investment Company (AIC) NIKOIL, the closely held corporation, was the first represented in the republic the interests of the Russian company of the same name which is a register holder and at the same time a large shareholder of oil company LUKOIL. HIKOIL opened two outlets engaged in selling and buying the privatization checks.
The company is third largest holder of vouchers among foreign firms. According to some unofficial assessments, it has several hundreds of thousands of the privatization checks.
In the wake of NIKOIL a right to sell and buy the privatization checks was granted to the Minaret Group, the largest firm that for a long time was a successful investment company on the privatization market of Azerbaijan. This company worked in the republic by an order of the largest investment institutions of the USA, among which is Omega Inc with an annual working capital of $4 billion. The company put $110 million into the Azerbaijan vouchers. And the total amount of Minaret's investments is over $200 million. The global financial turmoil made unpleasant changes to the company's activities and in the fall 1998 it was forced to reduce almost 75 percent of its personnel in the Baku branch office. But by this time the company had already performed its chief duty - the ordered number of the privatization checks have been collected. At first, it was fashionable to discuss the possible exit of some of customers, including Omega Inc., from Minaret, but de jury it did not occur as yet.
Two larger holders of vouchers - Global Securities (Azerbaijan) Ltd. possessing, according to unofficial assessments, more than 100,000 privatization checks and A.J.C. Investments Ltd. (Azerbaijan) - have the SPC's licenses. Last year suspicion fell on the latter in illegal activity and their privatization checks bought by the company by an order of foreign investors were arrested temporarily by law-enforcement authorities. However, earlier this year a fraud investigation rejected allegations of shady transactions and A.J.G. got the opportunity to freely use its several hundreds of thousands of stakes.
Incomes from privatization
In 1998 incomes from privatization were more than 141 billion of Azeri manats. Out of the sum 91,460,750,000 were the proceeds from sale of small-scale objects and enterprises. 817 million were gained from sale of options. The sale of shares of medium- and large-scale state-owned enterprises yielded 45.5 billion of manats. The sale of land lots occupied by the privatized enterprises brought in 3 billion of manats and other incomes amounted to 233.5 million of manats.
The total income from the state-owned property privatization has been about Manat 300 billion for the 1996-1998 period, including Manat 45.3 billion from sale trading enterprises were remitted to the budget, Manat 9 billion from sale of catering enterprises, Manat 44 billion from non-housing premises, Manat 52 from options, Manat 69.5 billion from shares of joint-stock companies, Manat 17 billion from gas stations, Manat 14.6 from objects providing paid consumer services, Manat 12.7 billion from small-scale industrial enterprises, Manat 10 billion from building sites and enterprises.
Shareholders
At the end of last year the registers of 649 joint-stock company and the first specialized Check Investment Fund (Sigma) were in safe custody at the Mupk National Depositary Center (NDC). 42706 accounts were opened for individuals and 31 accounts were opened for legal entities. The Center concluded contracts with 231 joint stock companies for providing services to keep the registers (of shareholders). For one year the NDC has registered 474 contracts for selling and buying shares costing Manat 22.125 billion of 61 emitters. More than 840 bargains had been stricken by now, their value is in excess of Manat 44 billion. The registers of shareholders were issued to 220 joint-stock companies. Register statements were handed over to 2281 shareholders and 300 certificates of shares. According to the results of the check and cash auctions conducted in the 1997-1998 period as well as closed subscriptions 60,721 persons became shareholders.
Cash and check auctions
In 1998 the State property Committee conducted 26 cash auctions for selling shares of joint-stock companies. The blocks of shares of 547 new joint-stock companies, total nominal worth of 277.3 billion of manats, were put up for sale at auctions. The shares of 127 joint stock companies as well as those of 23 out of the joint-stock companies, the shares of which were set out in 1997. So, in all the blocks of the shares owned by 150 joint-stock companies were sold at cash auctions last year. The total value of the shares was 44.4 billion of manats and a part of these funds was transferred to the budget as early as this year. The blocks of the shares owned by 5 out of 150 joint-stock companies were sold to foreigners, who in addition to the full value of the shares themselves also paid the worth of the appropriate number of the options.
Last year 22 check auctions were held. The first of them was held from the 5th till 18th of January and the last one took place from the 7th till 30th of December. 546 new joint-stock companies built on the basis of medium- and large-scale state-owned enterprises were bid for sale at the auctions. At least 55 percent of shares of 537 joint-stock companies were sold and 30 percent of shares of 10 joint-stock companies were realized. The total authorized capital of 547 joint-stock companies was equal to 924.5 billion of Azeri manats and the total nominal value of the sold shares was 568 billion of Azeri manats.
According a principle of subordination, before privatization the enterprises put up for the bids at check an cash auctions might be divided into categories as follow :
Agriculture Ministry - 103 joint-stock companies or 18 percent of the total number of joint-stock companies, of which shares were set out in 1998 for the first time; Autotransport, the state-owned concern - 85 joint-stock companies or 15.6 percent; The Board of Trade - 76 joint-stock companies or 5.3 percent; Azgur, the joint-stock company, - 29 joint-stock companies or 5.3 percent; Hotels - 24 joint-stock companies or 4.4 percent; Paid Services, the yet shut down state-owned concern, - 17 joint-stock companies or 3.1 percent; Azerpromstroy, the joint-stock company, - 17 joint-stock companies or 3.1 percent; Health Ministry - 15 joint-stock companies or 2.7 percent; Azerpischprom, the yet folded state company - 14 joint-stock companies or 2.6 percent; Commodities for the Households, the yet shut down state-owned concern - 14 joint-stock companies or 2.6 percent; Promtorg, the yet closed down state-run concern, - 14 joint-stock companies or 2.6 percent; Azervodstroy, the joint-stock company, - 12 joint-stock companies or 2.6 percent; Azercontract joint-stock company - 8 joint-stock companies or 1.5 percent; Azerkhimia, the state-controlled company, - 5 joint-stock companies or 0.9 percent; Khleboproducts (Bread and Bread Products), the yet closed down state company, - 5 joint-stock companies or 0.9 percent; Metallurgy, the state company, - 5 joint-stock companies or 0.9 percent; Azercelbodstroy, the yet shut down state concern, - 5 joint-stock companies or 0.9 percent; Other state-controlled organizations and head offices - 98 joint-stock companies and 17.9 percent.
Privatization of Land
From the middle of last year, under a special decree by the republic's President, the State Property Committee has started privatizing and leasing land allotments on which stood objects under privatization. Later last year some by-laws and orders were signed to sell land lots occupied by 148 privatized enterprises and transactors. Out of their proprietors the owners of 112 enterprises have already received the appropriate certificates, and the total income of the State from these sales hit over 3 billion and 144 million of Azeri manats. Within a year, 148 land lots occupied by the privatized objects were leased by the owners of the objects. The proceeds from the transactions ran up to 187 million of Azeri manats.
How to privatize Fuel & Energy Complex?
Many people are today interested in how the most attractive enterprises will be privatized. Among them are the State Oil Company of the Azerbaijan Republic (SOCAR), the closely held corporation Azerigas and openly held corporation Azenergy. The methods of putting the process into practice are not less important. There are some options shown below for sell-off of the FEC enterprises :
The first option - the above indicated companies are divided into several spin-offs. Joint-stock companies are formed and they are privatized by the methods provided by the legislation. One of the most important conditions in doing so is that a monopoly cannot be built up on the market, the State put up the money for the rehabilitation before the privatization in doing so.
For a detailed and thorough analysis of ways and methods of how to privatize the FEC enterprises, it is necessary to focus attention on them in greater depth and turn attention to a specific nature of each of three mainstays of Fuel & Energy Complex.
Within the framework of one of options it is suggested to divide the Production Association for oil and gas production on land and the Production Association for offshore oil and gas production into several parts (spin-offs) and to privatize them singly. In particular, in their various interviews senior officials put forward the proposal time and again and the destatization of oil and gas resource directories on land is on hand if the option is approved. For example, oil production from the onshore fields is far from high levels, the cost price of crude is high and reserves are relatively low. It is of benefit to the State to sell the onshore oil ans gas resource directories as soon as possible and in doing so it may bring in the following profits :
The revenues, which the republic needs very much in the current crisis, will flow to the republic's budget; A momentum is built up to increase a moribund lately interest of foreign investors in big Azeri sell-off; The State is released from its obligations to pay wages and salaries to a huge staff of employees working at the onshore oil and gas resource directories. After buying the onshore oil and gas resource directories by strategic investors and putting their money into the onshore projects, the volume of crude being produced from these oil fields might rise. In case if a part of the shares of the oil and gas resource directories are sold by the privatization checks, an interest and foreign investors' trust in vouchers and, thus, in the privatization options will rise significantly. The households stand a chance to receive its "chunk in the fat oil pie". It is also profitable to investors to purchase the oil and gas resource directories on land because the announced volume of oil reserves in the onshore oil fields is big and it means the opportunity to increase liquid hydrocarbon recovery and, in addition, it can give impact on an increase in a quotation for the shares of a company-buyer on the stock exchange worldwide.
As to an offshore segment of SOCAR, a chief issue is that whether the State will grant the exclusive right to a potential openly held corporation to develop if only some portion of the republic's offshore fields. According to Barat Nuriyev, deputy chairman of the State Property Committee, if the right is granted, the State might gain an income of several billion dollars from the privatization of even 30 percent of SOCAR's shares through medium of cash and commercial auctions. A separate subject matter is the privatization of a stake and earnings (set down in the production sharing agreements signed) of SOCAR and its commercially affiliated companies. There is no clearness yet in the issue. Perhaps a stake and incomes of the State Oil Company will be transferred wholly and entirely to the State or they will be privatized after a quite different method than the destatization of SOCAR.
True, there is a different concept in regard to SOCAR, too. For example, by now the republic had signed with foreign investors 17 oil contracts altogether. It means that by 2001-2010 a chief percentage of oil will be produced by foreign consortia that are in fact private companies. As a result, having not embarked yet on the SOCAR privatization, Azerbaijan virtually transferred a part of its oil industry to private ownership. In this event, providing that SOCAR is restructured, i.e., its collateral subdivisions such as the construction organizations, oil processing plants and so on, are sold off, the privatization in the oil industry might be carried into effect after former method, i.e., by signing "a production sharing agreement."
At the same time, the State can issue SOCAR's mortgage backed securities supported by oil owned by SOCAR as a collateral. The securities can be floated on the world's stock exchanges. By the way, the proceeds gained from this process might be directed to the contsraction of the MEP running from Baku through Georgia ans across Turkey to the deepwater oil terminal at Ceyhan. The backers of the option put down their proposal on the half-way policy in the SOCAR privatization to the destatization process itself being not a purpose but a stepping stone allowing to get the economic growth in a certain sphere. If while signing oil contracts, Azerbaijan may win the economic upsurge in oil industry, it is not worth using an additional and rather risky method of privatization, the more so when this process affects the interests of the tremendous natural monopoly.
There is also an unambiguous situation in the case of the Azerigas closely held corporation privatization. The way things are now, as a distribution company with the extremely old-fashioned distribution system, Azerigas will not attract foreign investors. As a matter of fact, who needs the company that entirely depends on the volume of gas produced by SOCAR and its pricing policy in the field. In fact, if the present state of the Azerigas closely held corporation is retained, Azerigas will be "a free appendix to SOCAR". There are only hopes for the transit of Turkmen gas, but one cannot survive only on hope of future. In the opinion of the State Property Committee, the situation can be corrected if only the Azerigas closely held corporation is given the right to develop gas fields owned by SOCAR. In this event, Azerigas becomes an a vertically integrated gas company with all far-reaching consequences. The value of the assets of the company that already distributes its own gas rather than gas not belonging to it will go up many times. And it means that one will be able to hope for significant earnings from sale of a part of the Azerigas closely held corporation's stocks.
The Azenergy openly held corporation also faces an institutional challenge. Above all, it is relevant to an unbalanced tariff policy. The company sells electricity to some consumers at a price that exceeds its cost price 2-3 times. It is done to cover losses originating from sale of electricity to households at a price that is lower than its cost price. But such a policy hits the industrial enterprises which are unable to pay for electricity consumed by them. As a result, today the Azenergy openly held corporation has a whole army of debtors and several billions of "dead" manats.
There are other proposals on the property of Azerigas and Azerergy. It concerns, in the first place, their transport infrastructure. One of them is to give their pipeline and energy systems on lease. In other words, the Azerbaijan government may give some part of power supply system on long-term lease. An investor, who will take the network on lease, is to put the money into its upgrade and refurbishment. In doing so, a power generator pays to the investor a certain sum for electricity transmission to a consumer. In principle, the government has already begun to pursue the economic policy when earlier this year it gave electric networks of some Azerbaijan's provinces on long-term lease
The largest challenge the State and potential investors will hit in the privatization of the FEC "monsters" is a problem of non-payments. After the existing method of estimating the value of property of an enterprise under privatization, in the exercise of the authorized capital of a joint-stock company, accounts payable are to be deducted from its value and accounts receivable are added to it. So, a joint-stock company privatized is responsible for debts of its legal predecessor - a state-owned enterprise, on the basis of which the joint-stock company was formed. In case of the FEC enterprises, possibly it makes sense for the State to take these companies' arrears on itself (both accounts payable and accounts receivable) and in this case the companies, which would be seen as cleared off their debts, would be sold at a maximum price. After appropriate netting of default debts have been conducted, it will be bound to become clear that, indeed, the total arrears of the FEC enterprises may be turned out to be much less than the expected proceeds from sale of a part of their shares. In this event, everyone will benefit from the privatization and it will not hurt the State.