In January the Azerbaijani authorities announced plans for a major privatisation programme that would raise much-needed capital for the state amidst the economic crisis, while enhancing efficiency in key sectors of the economy. Nine months later and the slow progress of the programme, coupled with the small scale of the companies on offer, speaks to Baku’s indecisiveness between the need to raise new money and its reluctance to let private investors in on its business.
Observers like the International Monetary Fund (IMF) have long urged the Azerbaijani authorities to balance the state budget by conducting painful, but necessary fiscal, financial and macroeconomic reforms. But changing the centrally planned and oil-dependent economy, in which the state controls large swathes of the economy through public companies as well as many private businesses, has been easier said than done.
If anything, the ruling elites have tightened their grip on political power in recent months, while the oligopolies and monopolies in sectors like construction, telecommunications, agri-business and hospitality, which are largely run by politically-connected individuals and groups, have proven resilient to the ongoing economic crisis that is pushing their smaller competitors out of business. Meanwhile, other sectors of the economy like energy and power will remain under full government control for the foreseeable future, observers contend.
Against such a backdrop, on September 14 the country’s State Committee for Property Affairs (SCPA) organised the first of four auctions scheduled for September and October to privatise public properties and shares in private companies. But despite being heavily publicised, the event so far has raised a mere AZN1.8mn (€0.96mn) from the sale of 36 public companies.
Such piecemeal privatisations are not new to Azerbaijan, Razi Nurullayev, chairperson of the opposition Popular Front party and founder of the Baku-based International Analytical Centre think-tank, explains in an email to bne IntelliNews.
“Privatisations in Azerbaijan began in earnest in 1996 and took place at a fast pace up until 1999. Citizens received privatisation vouchers in March 1997 for the denationalisation of medium-sized state-owned enterprises,” he explains. Once oil money started pouring in in the early 2000s, Baku slowed the process significantly, though it never stopped privatising altogether. “More than 1,000 small public properties were privatised in 2015. This year’s wave of privatisation is nothing new, it is just more publicised than in past years,” Nurullayev says.
The publicity surrounding this year’s privatisation was undoubtedly a premeditated attempt to appease rising tensions over the declining standards of living, skyrocketing inflation, monetary instability and President Ilham Aliyev’s attempts to expand his power, which prompted isolated street protests in January and September.
Azerbaijan’s ruling elites may abuse their power, but they are not unresponsive to popular discontent, unlike, say, the Turkmen or Uzbek elites. Instead, Baku’s preferred crisis management model consists of short-sighted populist measures like increasing pensions and salaries overnight, and making sure that the state’s propaganda machine reports ad nauseam the smallest efforts it makes toward economic recovery.
To showcase how transparent its processes are despite common knowledge to the contrary, Baku went so far as to create a privatisation portal in July where it listed all the companies that it would put up for sale. To date, the profiles of some 200 companies have been uploaded to the website. But names that foreign investors might have expected to see on the portal – like electric utility Azerenerji, Azerbaijan Railways or even flag carrier Azal – are notable for their absence.
Nurullayev explains that despite its need for money, Baku is not desperate enough yet to privatise such strategic companies, scrambling instead to come up with alternatives. Power generation and distribution is notoriously out-of-date and in need of refurbishments, but Baku has resisted calls to sell the utilities Azerenerji and Azerishiq, choosing instead to borrow $750mn from the Asian Development Bank (ADB) to revamp its power sector.
Meanwhile, transport and communications are essential to fulfil the authorities’ ambitions of turning the country into a logistics hub – and to thus bring about much-needed economic diversification from oil and gas. And despite the fact that Azerbaijan’s railway network is largely obsolete, just like the power distribution network, Baku has instead chosen to invest heavily in rehabilitating portions of the network that would connect it to neighbouring Iran and Russia, and in building a new connection to Georgia and Turkey. In light of the billion-dollar investments in railway projects, privatising a company that would reap the benefits of all those investments is a non-starter. Besides, it would be ill-advised to sell Azerbaijan Railways right now given the negative near-term outlook for freight shipments in Azerbaijan and the Caucasus.
The situation in civil aviation is similar; Baku has invested heavily in buying new aircraft for the airline, so aviation is off the table. Meanwhile, ancillary operations like ground and freight transportation are controlled by a holding company that the ‘Panama Papers’ leak of documents revealed to be linked to the president’s daughter, Arzu, so also not up for privatisation.
The state gem, oil and gas company Socar, will definitely not be up for privatisation anytime soon either, although it is perhaps the company that most foreign investors would be interested in. Socar is the vehicle that turns oil into money for the state and the ruling elites, so the government would have to be very desperate to privatise its cash machine, regardless of how inefficient and corrupt it may be.
So what is up for sale then?
While the auctions scheduled for September 20 and 27 and for October 11 are open to any local or foreign investors, Nurullayev expects the majority of bidders to be local because of the small size of the companies on offer. “Some foreign investors may be present, but I expect them to be small and largely from Turkey,” he says.
The largest company on offer at the auctions will be the Dashkesan mining and processing plant, which used to be part of the Azerbaijani Steel Production Complex. “In July, President Aliyev ordered the plant to be restructured and rehabilitated, and it was placed under the authority of the SCPA. Initial estimates place the investment necessary in the plant at $1bn,” Nurullayev elaborates.
Other medium-sized companies on offer will be two producers of technical equipment, Baku Elektroautomat and Mingechevir Regenerat, and resin manufacturer Mingechevir Teknik Rezin.
Nurullayev is sceptical about Baku’s ability to raise AZN100mn from privatising these companies by year-end, as it announced in January. But he believes that the privatisation process could hold some surprises, and that some of the state-owned telecommunications companies like internet provider Aztelekom might be put up for sale soon.
“The government is working with international consultancies like KPMG, Ernst& Young, Deloitte, PWC, McKinsey and Baker & McKenzie on its privatisation programme, and they may persuade it to auction some of the more strategic state-owned enterprises. Besides, the [newly-appointed] presidential aide on economic reforms Natiq Amirov has confirmed that the government is considering privatising communications companies and facilities,” he says.
As for the future, Nurullayev expects that Baku could consider attracting foreign investment into some 600 joint-stock companies that are partly privately owned already, and in which the state holds shares of between 30% and 50%. “If these enterprises were fully privatised, their sale would bring in considerable foreign direct investment in Azerbaijan. None of them are yet on the list for privatisation, but I expect them to appear on the list very soon,” he says.
Unsurprisingly for Azerbaijan, Nurullayev expects for there to be some politicisation of the privatisation process in the sense that Baku will most likely seek to exclude any bidders that may have been contrary to its policies in the past.
But the auctions in September and October are likely to be overshadowed by a more important political development, namely a referendum to expand Aliyev’s powers on September 26. The event has been heavily contested by the opposition, including by the Popular Front party. In recent weeks, authorities have arrested some two-dozen critics, human rights watchdogs have reported, targeting disproportionately Popular Front members, as well as members of another opposition movement, Nida.
As such, Baku’s dispirited but heavily publicised privatisation auctions may find a serious contender for newspaper headlines in its vigorous-as-ever crackdown of dissent in the coming weeks.