TRANSPARENCY SNAPSHOT

Azerbaijan was among the first countries to endorse the Extractive Industries Transparency Initiative. An NGO coalition to improve EI transparency was formed in 2004, and it quickly became a part of the global Publish What You Pay (PWYP) coalition. The government has taken another important step toward transparency by publishing annual reports from the State Oil Fund of Azerbaijan (SOFAZ).

Despite this progress, many local activists acknowledge that the implementation of the EITI has yet to provide adequate information to hold the government fully accountable. Recent efforts at economic modernization have been hampered by continued increases in public spending, and slowness to improve the business climate or deepen financial intermediation. And though EITI membership makes SOFAZ the government's most transparent body, Azerbaijan remains in the bottom fifth in corruption rankings by the World Bank and Transparency International. Furthermore, 29% of the population continues to live in poverty, including 8% in extreme poverty, according to the World Bank.

Furthermore, the remarkable growth in Azerbaijan's mineral economy raises the importance of EITI. In 2007 the mineral economy accounted for roughly 46% of the country's GDP. Real GDP growth reached a record high 29% in 2007, due to increases in oil production and international oil prices. Azerbaijan was the largest contributor to growth in the non-OPEC oil supply during 2006-2007.

The oil-sector grew by an extraordinary 52% in 2007, but this pace is unsustainable. At the current rate of extraction, oil production will start to decline by 2010. The combination of the current oil boom and uncertainty about the spread of good governance initiatives casts a shadow over the long-term prospects for transparency in Azerbaijan.

Revenue Transparency

Azerbaijan continues to lead the international community in adopting revenue transparency standards. In February 2008 the government presented a UN Resolution to the 62nd session of the general assembly advocating for the international community's endorsement of revenue transparency standards.

Oil and gas revenues currently flow directly to the SOFAZ and directly to the budget. While taxes paid by the state oil company and foreign oil companies flow directly to the budget, SOFAZ's income is generated mainly by revenues from the state's share of oil and gas from PSAs, bonus payments, royalties and earnings from the transport of oil and gas through the Baku-Tbilsi-Ceyhan (BTC) pipeline, according to the Caspian Oil Windfalls report from Revenue Watch and the Open Society Institute.

The government took two key steps-implementation of EITI and publication of SOFAZ's annual reports-to signal some willingness to increase the transparency of oil revenues.

SOFAZ published annual reports on its website that provide a breakdown of its sources of revenue. Some local activists told Revenue Watch Institute that the information was clear and useful.

To increase the transparency of revenues that flow directly to the budget, in June 2003 Azerbaijan became one of the first countries to endorse the EITI. In September 2007 the EITI International Board concluded its first pre-validation exercise which resulted in Azerbaijan being deemed as one of nine countries to reach "Candidate Country" status. To-date, the government had published seven EITI reports. All of the 26 oil and gas companies in Azerbaijan participate in the EITI process, according to Revenue Watch allies, however only a handful of companies have agreed to disaggregated reporting.

But local activists remain concerned that the country's EITI reports do not provide adequate information to hold the government accountable. A survey published by the Economic Research Center in 2006 on public attitudes towards EITI revealed that, out of 46 respondents from civil society (both NGOs and media), only one respondent was satisfied with the current level of public oversight over oil revenue payments.

Because oil revenue data is reported as an aggregated figure, it is difficult to use the reports to hold public officials accountable. The Publish What You Pay (PWYP) coalition has recommended that the government publish disaggregated oil revenue data in order to improve revenue transparency. Revenue Watch's 2006 report, Eye on EITI, offers more detail on the status of revenue transparency according to the members of Azerbaijan's PWYP coalition, and others.

Expenditure Transparency

According to the International Budget Project's Open Budget Index, Azerbaijan's government provides "minimal" information to its citizens about the budget. Although the government publicly discloses some aspects of the executive's budget proposal, it provides no information about progress in implementing the budget, nor does it issue audit reports to the public. However the Public Finance Monitoring Center notes some positive improvements with regard to access to budgetary information and documentation, including recent enhancements to the Ministry of Finance website, where the public can access half-year budget reports, receipts from larger tax payers, and more details on revenue sources.

Although the state oil fund SOFAZ has also increased access to information about oil and gas revenues, there is little evidence that the fund is designed, governed or managed in a way that ensures expenditures are geared towards poverty alleviation or the delivery of other public services.

One problem is that the spending guidelines for the fund are extremely general and do not specify that the fund be used for social development objectives. The fund's governing regulations call for uses that foster "socioeconomic progress of the country," for "solving the most important national problems." The fund is also supposed to "promote the development and increase the competitiveness of the non-oil sector of the national economy," according to Caspian Oil Windfalls.

Another problem is the fund's governance structure. One of the first provisions in the fund's regulations states that: "The fund shall be accountable and responsible to the President of the Republic of Azerbaijan." There are no institutional constraints-no checks and balances-to limit the president's discretion. In countries such as Norway and Kazakhstan, and in Alaska, the legislature plays some role in the fund's spending decisions, but in Azerbaijan the parliament plays no role.

According to the Economist Intelligence Unit, in 2006 the authorities directed fund revenue towards re-housing refugees and the internally displaced persons from the Nagorny Karabakh conflict, and for healthcare, education, roads and utility supply networks. But in one clear violation of the fund's guidelines regarding non-oil development projects, the fund was used to finance part of the state oil company's share in the BTC oil pipeline.

Freedom of Expression

Because of government repression of the media, it is increasingly difficult for civil society groups to publicize information to hold public officials accountable. Over the past five years, several reporters working for opposition newspapers were physically harassed by police and government officials. According to World Press Freedom Review report, more than seventy journalists were injured during the October 2003 demonstrations following fraudulent presidential elections.

The government has also initiated several criminal and civil libel suits against journalists and editors. In 2007 Human Rights Watch reported that media freedom had deteriorated, with increasing violence against and arrests of journalists, as well as numerous defamation cases orchestrated by government officials.

On the eve of the country's 2008 presidential elections even harsher crackdowns on the media are under way. TV and radio outlets are largely controlled by the state, and print journalists are subject to excessive self-censorship. Despite pressure from the OSCE and others, improvements in freedom of the media and freedom of expression are highly unlikely.