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People"Energy Transparancy & Social Development in Azerbaijan |
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| By Thomas Hirsh |
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Tranparancy in Energy Income
Democrats in capitalist countries are often at a loss, not knowing how to react to new levels of poverty in developing countries. The paradox of the dilemma is that such countries often have adequate natural resources and related export generated income to reduce poverty and bring about sustainable development. However, as clearly demonstrated in many case studies, they chose not to and would rather put the money in their pockets. Much of the money ended up in the hands of the ruling class and the divide between the "have" and "have-nots" widens.
The elimination of barriers for equal opportunity to act as a participating and contributing citizen of a country is a precondition for sustainable development. Relationships between the people and government interface with political and economic stability. However, that is lesson easier said than done. The primary challenge is to seek ways to document how much money is actually received and how the money is actually spent on the wider society. In1992 UN General Assembly declared October 17th (resolution 47 (196)) International day of elimination of poverty. At the Millennium summit, UN Secretary General Kofi Anan asked that leaders of all states that adopted the Millennium Declaration - document in which neatly are stated the values and priorities of work in new century, make a concerted effort to make this document reality. The goals included making significant commitments by 'making all possible efforts for delivering people from the clench of poverty, and humiliating human dignity.' This goal would set a countdown date, according to the Assembly's decision, where the numbers of people leaving in extreme poverty, facing hunger, lacking fresh drinking water must be reduced by at least half.
Strategies are needed move governments and civil society towards transparency of income that is derived from mineral and energy institutions. Track record of countries with vast wealth and poor people is substantial. Governments often fail to look at the needs of the vast majority of the population in terms of education, social policy, and sustainable development across all segments of the economy when money is flowing into state coffers from the export of energy. The result is that conditions for political stability increase and the masses feel alienated from being a fully participating member of society. Research conducted by Open Society Institute showed that countries having fewer mineral resources developed twice or even three times faster than those with vast wealth such as Angola and Nigeria. This trend, which has been repeated in many part of the world, is called the Dutch syndrome. Moreover, as a rule, political and social class confrontation follows in hand. Matters are further complicated by the cause and effect consequential connection where the political elites and closely connected "clans" are perceived as getting rich at the expense of the people and that money is not going to help the country but instead is being put in western bank accounts and being squandered.
Credit must be given to the imitative of British Prime Minister Tony Blear who announced in September 2002 during the Johannesburg World Summit on Sustainable Development the requirements of transparency in extractive industry (ETITI - Extractive Industry Transparency Initiative).
Azerbaijan Expressed Readiness of Cooperation
International financial institutions such as the EBRD require open transparent accounting in terms of proceeds derived from the export of Azeri hydrocarbon. Considering the track record and allegations of misuse of government funds, this requirement is not accidental. Thus, according to estimate by the International Finance Corporation (IFC), which is the leading arm of the World Bank Group. In the 20 years of exploitation of all three concessions, ('Azeri','Chirag','Giuneshli') the Republic of Azerbaijan profited $ 29 billion. The cash flow is anticipated in a relatively short pay back, in the forthcoming 12-18 months.
It should be highlighted that Azerbaijan was one of the first countries to respond to British Prime-Ministers initiative. Last year President Ilham Aliyev stated that work in this trend is already under way, e.g., a special commission on transparency of all financial resources from oil production, headed by Executive manager of State Oil Foundation Samir Sharifov was established with this purpose in mind. Within this framework, both the government and foreign oil companies are in the process of preparing the first complete report for 2003 and the findings will be distributed among oil companies operating in Azerbaijan as well as in response to special request under freedom of information. This process will shadow British and international standards.
However, the release of the report has been delayed. There have been several contributing factors: companies were ready to submit data but ran into difficulty in a revision of the data. Consequently Azerbaijan proposed to conduct the revision to IMF and World Bank but having no adequate authority, they declined the proposition. Moreover, some other reporting requirements were faced, such as the need for independent auditors to make a report on the accuracy of the information to be included in the report.
Under the requirements of ELITE three reports will be submitted. One of the reports envisages a presentation of the government's income from the sphere of oil-gas extraction; second - a summary report of foreign companies that provides fees and deductions to the Central government from oil-gas and the third - a report on Azeri companies on their oil-gas revenues. However, there are other concerns to be addressed. The validity of these figures must be reflective of acceptable standards and there should be a cross matching of the records in making sure the reports are in fact true of reflective.
Difficulty in Calculating Income: SOCAR
All this section is not very interes-ting: I would cut
The problems in resolving financial reporting issues could be fixed through International Financial Structures. As Sephton Derby, a political analyst of the British Department of International Development has readily admitted, "in meeting the British Initiative 1 million Pound Sterling has been set aside to help. Though, according to S. Darbi, it is not yet determined how the money will be actually spent. Adding, representatives of governments and International organizations showed interest in this imitative. Both Norway and the World Bank expressed their readiness to participate and the more stakeholders will result in more participation by outside interested parties. Gathered funds, according to Mr. Derby, would be provided for technical pilot projects to the states, which approved EITI. However, speaking about funds, expert accentuated that money wont be provided for increase of manpower of bookkeepers who in their turn could hamper activity of companies working in the extraction sphere. Today the members of Initiative, together with Azerbaijan are Nigeria and Ghana.
But even more problems could arise in calculation income and, especially expenditures of funds received from export of Azeri oil on world market. The point is that oil income in Azerbaijan is received and spent by two different sources - State budget and State Oil Foundation.
Profitable consignment of Azeri oil from deposits extracted with foreign firms is accumulated on State Oil Foundation's accounts. It must be admitted that activity of this foundation is managed in accord of foreign standards and is annually audited (tender on audit in 2003 won company Ernst & Young). Transparency of State Oil Foundation allows concluding that Azeri government could partially solve the problem in extracting industry (by January 1st 2004 assets of State Oil Foundation aggregated $ 815).
Incomplete settlement of the transparency issue in extracting industry in Azerbaijan is concerned with the fact that not all the companies of SOCAR involved in oil extraction moved to the International standards of accounting. Accordingly it is not possible to conduct an International audit.
What is this organization?
In addition, existence of mutual indebtedness between SOCAR, 'Azerigas' and 'Azerenergy' makes even more complicated the issue of precise determination of money flow movement, received from oil/gas production in Azerbaijan.
Transparancy Must Be Realized
Transparency ensuring issue situation in Azeri extracting industry is more or less on track. The matter is that forthcoming in the nearest future billions of US dollars will be placed on State Oil Foundation accounts which, in its turn, with the help of International Financial Institutions, meets the strictest reporting requirements. In addition, Azeri government, joining one of the first the Initiative of British Prime-Minister - EITI, expressed its willingness for future cooperation with the world's leading countries and International financial institutions in eliminating poverty. There is much poverty in Azerbaijan and this must be not be forgotten.
At the same time, the fact that financial accounting in SOCAR does not meet modern requirements, indicates not only existence of essential problems in the sphere of transparency in financial flows in extracting industry but also indicates the necessity and speeding-up of the reforms in economics. Otherwise it won't be possible to achieve full transparency of funds and their expenditures obtained through extracting industry.
The final result of the system that is put in place for transparency is paramount for sustainable and responsible development. Natural resource management and reporting is an increasingly complex task. A shrinking resource base and the lack of growing divergence in economic and social development have sharpened conflicts in many countries. The elimination in Azerbaijan of the public's perception that the government and it leaders seldom serve the people is necessary for the country to make true progress. If Azerbaijan is to really prosper in all segments, then people must become fully participating members of society and share somehow equally in the wealth that belongs to all.
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