IMF offers four recommendations to reform state-owned enterprises

A successful SOE reform would support a transition to a private-sector led growth model and help reduce fiscal risks,Report informs, citing IMF's Staff Concluding Statement of the 2022 Article IV Mission.

"An important impediment is the large footprint of SOEs in the economy. The number of SOEs is large, and there has been limited progress in implementing the government’s strategy to reduce state participation. However, the recent establishment of Azerbaijan Investment Holding (AIH) provides an opportunity to reinvigorate reforms. The following steps could be considered: (i) separate commercial from noncommercial activities, with the latter to be financed from the budget; (ii) increase SOE transparency and performance monitoring through AIH; (iii) facilitate privatization and financial restructuring where needed; and (iv) introduce measures to mitigate the social impact of SOE reforms. A successful SOE reform would support a transition to a private-sector led growth model and help reduce fiscal risks," the fund said.

Previously, the Asian Development Bank (ADB) also urged the Azerbaijani authorities to continue expanding reforms aimed at introducing corporate governance standards in large state-owned companies and pay more attention to the financial recovery of enterprises put up for privatization.

The implementation of the reform program in state-owned enterprises began in June 2019, the bank said, adding that, in particular, the rules and standards of corporate governance were adopted, including the rules for evaluating the effectiveness of state-owned enterprises, and a bonus system was created based on the results shown. In August 2020, the Azerbaijan Investment Holding was created, under the management of which state-owned enterprises were transferred, most of which operate at a loss. Supervisory Boards were established in all large state-owned enterprises, the Asian Development Outlook 2022 noted.

ADB proposes to expand reforms in this direction. As part of these reforms, according to ADB analysts, it is necessary to improve public procurement procedures, create a high-quality dividend policy, change the system for appointing heads of state enterprises, create a new bonus system, etc.

In addition, it is necessary to increase the transparency of the publication of quarterly financial reports, strategies of state-owned enterprises, the results of their activities, and the conclusions of external auditors. Furthermore, more attention should be paid to the financial recovery of state-owned enterprises open for privatization, the review says.

The Asian Bank notes that state-owned enterprises play an important role in the economy of Azerbaijan: 14 large state-owned enterprises provide a quarter of all tax revenues to the state budget, and the largest taxpayer in the country is SOCAR.

At the same time, ADB points out that the state budget of the country is facing serious risks due to the inefficient work of most state-owned enterprises, their high debt burden, operating at a loss and the risk of losing solvency. The loss-making of state-owned enterprises is often due to the fact that they also provide non-core services. According to the bank's analysts, the inefficient work of state-owned enterprises, in general, negatively affects the economy of Azerbaijan.

According to ADB estimates, another reason for the inefficient operation of state-owned enterprises is the fact that they are closely involved in the implementation of government policies in the field of employment and social security. In addition, almost all state-owned enterprises need support from the state budget due to the unfavorable financial situation in them.