SOEs of Azerbaijan: Natural Inefficiencies

It is an inevitable fact that State-Owned Enterprises (SOEs) are in every aspect of our daily lives in Azerbaijan. From basic utilities, such as electricity, gas, water, to transportation and banking, we are surrounded by large SOEs. Some of these enterprises, such as “Azerishiq”, “Azerqaz”, “Azersu”, “Baku Metro”, “Azerbaijan Railways” operate in an absolute monopolistic environment where there is no other provider in the industry. Some others, including “International Bank of Azerbaijan”, “Azer-Turk Bank”, “State Insurance Commerce Company of the Azerbaijan Republic” and “Azerbaijani Airlines (AZAL)” operate in a slightly more competitive setting. However, just like everything that has got something to do with government in our economy, these SOEs also take their fair share of problems.

Firstly, a compelling problem that almost all SOEs of Azerbaijan have is accountability. More precisely, lack of it. Regardless of playing an enormous role in the economy, even the largest SOEs don’t usually share their financial statements with public. On the other hand, when they do, it bears almost no information. Sizeable enterprises such as “Azerbaijani Airways”, “Azerishiq”, “Azerbaijan Melioration and Water Resources OJSC”, “Aztelekom” and a number of others do not post any report regarding their financial situation online, which significantly limits the monitoring power over their activities. The government does have the requirement for big enterprises to post financial statements, but it seems like the majority of the SOEs simply overlook the regulation.

Another problem that needs to be mentioned is the lack of incentive for the top management to ensure that the company is operating efficiently. Majority of the time, the compensation package of the management is uncorrelated with the performance of the enterprise, meaning that when the company is making great profit or huge losses, they get to take home the exact same salary. In a lot of the cases, the SOEs take large debts from international sources and blatantly wait to get bailed by the government. Even in the cases of colossal losses or high indebtedness, the management remains unchanged and the cycle starts over again with an ever-increasing strain on the state budget.

Nonetheless, there are some constructive points to be specified. Most importantly, an important development from the point of transparency and accountability is that majority of SOEs operating in financial sectors, such as “International Bank of Azerbaijan”, “Azer-Turk Bank” and “Aqrarkredit” have some sort of a supervisory board. All in all, these boards act as a check to the actions taken by the top management and oversee the process. They should also have the competency of relieving the executives from their duties if deemed necessary. For the purpose of achieving maximum efficiency, supervisory boards must not be consisted of or be related to the executives and be politically balanced to the greatest extent. Establishing these boards in all large SOEs can be a good step towards a more transparent public sector.

Now let us look at two different cases of absurdity concerning SOEs in transportation sector.  Firstly, “Azerbaijani Railroads” CJSC. This is an enterprise that has total monopoly over all railroads of the country as no other company, both local and international is not allowed to use the tracks. One might suppose that to put constraints over the power of this monopoly, the government would regulate the industry thru the Tariff Council and set upper boundary for fares. However, that is not the case, because with a marvelous decision on January of 2016, the Cabinet of Ministers excluded this service from the list of “good and services regulated by the state for prices[1]” Despite there was not a serious price increase since then, the system is fundamentally flawed. I am usually not in favor of government intervention into the economy, however, in this case it can be justified on the grounds of protecting the interests of consumers. As far as common sense goes, an unregulated absolute monopoly is set to bring undesirable developments. Although the Tariffs Council is regularly criticized for its decisions to raise the tariffs, its role in regulating the monopolies can not be denied and absence of its governance in state owned monopolies only makes them more powerful.

Secondly, let’s look at a natural monopoly in transportation sector. As you can see from the table below, a good aspect of the 2017 state budget was the decreased subsidies to “Baku Metro” CJSC, as the allocated amount was decreased by 21%.

Table 1: Subsidies to “Baku Metro” CJSC

(Thousand AZN) 2013 2014 2015 2016 2017 2018
Baku Metro CJSC 29,243 36,026 37,998 37,998 30,000 45,000

Source: Chamber of Accounts

The Chamber of Accounts explained this move by stating that the enterprise is going to save money after curbing expenditures such as costs unrelated to passenger transportation and abnormally high business trip allowances, as well as bringing accounting norms to the state standards[2]. This was indeed a very forward-looking development and a step ahead to shrink the burden of SOEs on the government budget. However, it seems like the savings from the above-mentioned sources did not realize, as the subsidies to the company from the state budget hiked once again by a staggering 50% in the state budget of 2018. The boost looks particularly unnecessary when considering that the tariffs for Metro was also increased by 50% on July 2018 with the decision of Tariffs Council[3]. According to the State Statistical Committee of Azerbaijan, a total of 228.8 million people used the metro in 2017[4]. This means, assuming the number of people doesn’t vary considerably, the 50% extra charge is going to bring around 22.9 million AZN in 2018. Now maybe it is only me, but doesn’t it seem a bit ludicrous that this enterprise is going to get a significant extra revenue from transportation AND 50% more subsidies from the state budget? Maybe the officials were not informed about the potential price adjustments when drafting the budget, but surely, they should have known about it by June when the amendments were being made. Yet the fact that the subsidies were not decreased leaves three possible explanations behind this scenario: (a) the government institutions are not communicating well enough with each other or (b) officials drafting the budget often disregard the small but unnecessary expenditures or (c) combination of the previous two. Which one is the case I cannot say.

At the end, it must be said that the government, as the main shareholder, ought to take the necessary actions for making the SOEs more efficient and transparent, because those enterprises are financed by the taxpayers’ money.

Footnotes

[1] http://www.azerbaijan-news.az/index.php?mod=3&id=89779

[2] http://sai.gov.az/upload/files/r_LAYIH%C6%8F-2017-R%C6%8FY-FINAL.pdf

[3] http://www.tariffcouncil.gov.az/?/az/news/view/170/

[4] https://www.azstat.org/MESearch/search?departament=26&lang=az

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