Only because the timely interference of Farkhad Aliyev, Azeri Minister of Economic Development, the business image of Azerbaijan wasn't further damaged. This scandal, like others has something of a history, and it all started out from the situation at "Caspian Oil& Gas 2005" conference that was held in Baku at the start of June when the president of BARMEK, a private energy distribution company Azerbaijan Guseyn Arabul proclaimed loudly.

"There are problems in energy sphere management system in Azerbaijan". And based on the data shared by him, 23 billion k/h are produced annually (60 % is consumed by population and the rest by other sectors), which amounts to 1800 of k/h fall per capital of population. However, organizing the process to be able to supply electricity for the population and get paid for it is something that is yet to be achieved on a regular basis. To compare he noted that in Turkey where 150 billion of k/h are produced (40% of which is used by population and 60% by other consumers) annually, less than 900 of k/h of energy fall per head of population, and the system pays for itself.

Arabul believes that such an unjustified disproportional surplus of electricity consumption by Azerbaijan population testifies to incorrect organization of management in energy industrial sphere in the country, including the overall system of energy supply and distribution, which leaves much to be desired.

YUKOS COMPARSIONS

There was a reaction and immediately after this statement, government officials began to attack private company. Tax inspection employers were called into action to do what they do best, blaming BARMEK AZERBAIJAN for not declaring all income and tax evasion. The story line is one that is common in this region of the world when a company does not play by local rules. Now compare this to what happened in Russia and you can see that all went to the same school (at one time "YUKOS matter" also began with non-payment). The rest of the story is a matter of public record and has been well documented and commented upon in the international media.

The head of BARMEK AZERBAIJAN in his turn was speaking about more new facts about the reality of the energy reality in Azerbaijan. Existence of big technical losses, e.g., leakage, during energy distribution at level of 15-17%. Is this by accident or is part of the GOST plan '' something from another time. It is understood that world standards is 9% and Azerbaijan should not be so far from the standard. Naturally, there are other forces at work here and it does not take high education to understand how the system actually works. Now the Azerbaijan government plans to resolve the problem of electricity supply by bringing into operation additional energy generating capacities that are planned by AZERENERJI, and all within the framework of State Program on development of Azerbaijan fuel and energy complex. Such an opinion was expressed by Arabul in his statements.

He said, technical losses during electrical energy distribution make 500 MW and this corresponds to total capacities of the new power stations, which are planned to be built. And as a direct result, total losses will more than swallow up new capacities. That is why it would be more sensible if instead of new module stations construction the state gives a credit to energy distribution companies BARMEK AZERBAIJAN and BAYVA on sum about $260 million: it would allow companies to fully carry out 10-year investment program in a year and a half. This would allow enough resources to reequip and update the system of energy supply, by this way solving the problem of the losses.

CONTRACT WITHOUT TENDER

It is interesting to notice that that just after this conference that there was information appearing in local mass-media that under protection of state officials leaders of AZERENERJI about how a large contract was awarded, with a contract amount of more than 300 million euro without any tender to Wartsila, a Finnish company which some years ago offered its services to Azerbaijan almost times cheaper than what it is to receive today.

At the same press-conference the head of BARMEK AZERBAIJAN informed public that large state enterprises don't want to settle outstanding accounts with the energy distribution company. For this reason AZERSU and BAKMETROPOLITEN already are in arrears for consumed energy in the amount of 18 billion manats ($38,2 million). According to the agreement concluded with government in case of non-payment by state enterprises of the 1st category for consumed energy, the government ought to allocate it compensation. That is why BARMEK decided to write off debts of the various involved enterprises by way of reduction of payment to AZERENERJI SC of 15 billion manat ($3,18 million) on a monthly basis.

Specifically this circumstance served as a signal for some officials to finally put an end to matter of BARMEK AZERBAIJAN. The head of AZERENERJI SC, monopolist for energy production in Azerbaijan, Etibar Pirverdiyev addressed prime-minister of the country with a corresponding letter, which he said that energy distributing companies did not execute the conditions of the agreement and created improper and incorrect management system. In this regard, it was the recommendation of Pirverdiyev, head of the government to return the energy distributing department under control of AZERENERJI.

This amounts to a "Cold war" between AZERENERJI and BARMEK which has gradually heated up since then, and all were awaiting for interference into the matter by the Head of State who had been acting very reserved and standoffish during these last 2 months regards power supplies as if he did not want to get personally involved.

As a result, it was like a sign that allowed the head of BARMEK to go to the court of public opinion in detailing electricity problems facing the country in many spheres, including oil and gas. He stated that it would more sensible for Azerbaijan government not to spend such large amounts of money for electrical power stations construction but to overcome the energy deficit but other means, which would include but not limited to more accountability and cracking down on backhanders who were using their system for their personal gain. Much of the problem is directly associated with the high level of technical losses during electricial energy transportation (technical losses in Azerbaijan make no less than 5 billion of k/h with output of about 22 billion of k/h)

LACK OF TRANSPARENCY

According to independent experts, transparency of BARMEK for today doesn't come close to meeting the interests of the majority of government officials and this is understood. The matter is that there are 65% of population in the BARMEK zone of service, which provide more than 80% of GDP. And the remaining part of the country is attached to little-known company BAYVA ENERGY, which has never had experience in the sphere of large scale energy distribution. However by official statistics energy distribution between BARMEK and BAYVA is 60% and 40%. Although regions of the republic are supplied by electricity somewhat, not only in winter but also in other seasons but it is not with any degree of regularity or continuity of supply.

Nonetheless, we have to understand that things could have been much worst and things would not have been as transparent as they are now if it was not for timely efforts of Farkhad Aliyev, the minister of economic development into what is not a simple matter and one with many levels. part of the problem that solving problems with the public and public goods in mind is not always in the best interests of the few. This country has enough imagine problems in terms of the business climate and the divide between rich and poor and how this may grow more acute in the future as a result of the Dutch disease. Not only is the population and various watchdog groups very much aware of the problem, but also this not simple matter and does not just impact private property from the arbitrariness of officials. International financial organizations are also worried in terms of how this can impact access to large credit lines for macro' economic development. At the end of July at the conference dedicated to the result of the 1st half-year in the country's economy, the head of the state Ilham Aliyev dotted the "i's" but has not crossed all the "t's".

Endnote

In January-June, 2005 BARMEK AZERBAIJAN
invested $13 million total in Baku and Sumgayit

In the 1st half of this year Barmek Azerbaijan invested $12 million in the energy system of Baku and $13 million of Sumgayit. In general from the beginning of it's activity in Azerbaijan the company invested in the energy system of Baku and Sumgayit about $60 million. In 2004 investment of the company in the energy system of the capital of Azerbaijan made $13,91 million, in 2004-$12,75 million, in 2002-$8,2 million.