Regulation of SOCAR’s relations with the state’s financial fund

Eurasia Extractive Industries Knowledge Hub Expert Group Summary : State participation in the oil and gas extraction industry in Azerbaijan is carried out through the State Oil Company of Azerbaijan (SOCAR). SOCAR is the largest company and taxpayer in Azerbaijan. The share of SOCAR’s tax payments in total tax revenues of the state budget is 15%. In 2018, 75.6% of tax and other obligatory payments from state-owned taxpayers were made by the company. Financial transfers are regular between SOCAR and the state. The state allocates funds to SOCAR in the form of authorized capital, investments or loans, and SOCAR transfers to the state in the form of taxes and investments. It is no coincidence that, despite being the largest company and taxpayer in 2018, the oil company paid 1.43 billion manats to the budget, but also got back more than $ 1.49 billion that year. The research analyses the relations between the biggest company of the country and The oil fund and Central Bank. Analysis of both government and SOCAR reports shows that large amounts of money are being transferred between the company and the state for various purposes every year. However, there is no clear and transparent system for regulating SOCAR's financial relations with the state. The current legal framework does not reflect the special relationship between the state and state-owned companies, that have a special role in the country's economy. As a result, this interaction is indistinguishable from the relationship between the state and other businesses. The only document reflecting the special position of SOCAR in terms of financial transfers from the state is the Resolution No. 534 by the Cabinet of Ministers on December 30, 2016 "On the Revenue and Expenditure Estimates of Large State Companies". The decision does not regulate fiscal transfer rules, but rather regulates the involvement of the state in the preparation, approval and state control procedures of SOCAR's revenue and expenditure estimates. According to the Resource Governance Index (RGI), developed by the Natural Resources Governance Institute (NRGI), SOCAR has 100 points out of 100 possible for the existence of transfer rules between the state and the company. The index refers to the decision of the Cabinet of Ministers "On revenues and expenditure estimates of large state companies" as a rule governing financial relations between SOCAR and the state budget. The Budget System Law, which regulates budget relations at all levels contains no provisions on regulating financial relations between state companies and the state budget. The Tax Code does not specify a different tax regime for state-owned companies. Issues related to taxation and tax control, tax exemptions and privileges in the Alat economic zone and parties of the Production Sharing Agreement (PSA), are not covered by this Code. For example, there is no excise and price margin tax on income from the extraction within Azeri Chirag Gunashli PSA crude oil and condensate extracted from the Shah Deniz PSA. The study also looks at SOCAR's financial relationship with the State Oil Fund and the Central Bank. SOCAR, the main donor of the Oil Fund, has to utilize the Fund's resources to attract financial resources from abroad. The Oil Fund is closely involved in financing the activities of SOCAR. This funding is usually provided by SOCAR's separate activities and provides financial support as part of partner participation in projects. Unlike the Ministry of Finance and the State Oil Fund, the practice of transferring funds between the Central Bank and SOCAR is not widespread. According to the official survey of the Central Bank has provided loans to SOCAR only twice (totaling 1,222 million manats) amounting to 750 million manats in 2009 and 472 million manats in 2014. These funds were allocated through authorized banks as set out in the relevant orders of the Cabinet of Ministers and are now fully returned to the Central Bank. The study has revealed the following results based on the analysis of the current state of financial relations of SOCAR with the state budget, the State Oil Fund, and the Central Bank: -The budgetary resources that SOCAR receives from the budget exceed its payments to the budget -There are no clear and precise regulations governing financial flows between the company and the state -The legal framework for money transfers between the company and the state budget is based on one-off decisions. -Information about money transfers between the company and the state budget is unsystematic. -Despite the fact the company constantly emphasizes the use of corporate governance systems in its reports, its management does not comply with corporate governance standards. Based on these to improve the efficiency of financial relations with SOCAR, to achieve transparency and accountability the following steps are advised: Adoption of relevant regulations and rules for financial flows between SOCAR and the state Inclusion of provisions regulating budget transfers between the state budget and state companies to the Law on Budget System Introduction of a separate tax regime, tax control system for mining companies, including state companies into the Tax Code Establishing clean frameworks for transparency and accountability commitments for the regular public disclosure of transfers between the state budget and the company Transparency and accountability of extractive companies, including SOCAR, should be added to the "Open Government Promotion National Action Plan 2020-2022". Amendments to the Information Acquisition Act should specify SOCAR in the category of information owners (Article 9) and disclosure of financial and operational information related to the activities of the company should be included in the list of information required for disclosure (Article 29). Making the audit report of the Chamber of Accounts in the state companies, including SOCAR by publishing it on the website Posting the Decree of the Cabinet of Ministers on the distribution of state-owned funds on the website e-qanun.az To strengthen the state control over the activities of SOCAR, to ensure that the Company's organizational and legal form is transferred from the status of a state-owned enterprise to a state-owned joint-stock company. The main shareholder of the company could be the Ministry of Economy or the Ministry of Energy. Implementation of corporate governance standards towards the company. For this purpose, the governing structure should be changed and the existing Board of Directors should be abolished by making changes to the Charter. Instead, a Supervisory Board (or Board of Directors) in charge of the strategic management appointed by the President should be set up. The Supervisory Board (or the Board of Directors) appoints heads and employees of the executive body - the Management Board and the Audit Committee. Development of a framework that articulates the participation of SOCAR in-state program irrelevant for its functions The Company's annual reports should include all of its social expenses, including spendings on sports activities.