Download Macroeconomic development strategies flow into the

Vugar Bayramov,
Center for Economic and Social Development (CESD),
Azerbaijan
Public Administration Reforms in resource rich Azerbaijan in context of
usage of oil money; Lessons from Norway and Kazakhstan
Shirin Mirzeyev 76 "a"/33,
Baku, Az1002,
AZERBAIJAN
Phone; (99412) 4954248
Fax (99412) 4373240
Email; [email protected]
[email protected]
URL; www.cesd.az
Public Administration Reforms in resource rich Azerbaijan in context of
usage of oil money; Lessons from Norway and Kazakhstan
Abstract
The economic life of Azerbaijan is closely tied to oil. This study claims that the advantage of
possessing oil can quickly be spoiled if the revenues are merely spent to satisfy short-term
interests. However, if managed wisely, e.g. through proper defining and prioritising the longterm interests of the entire society owning the resources, having oil can be extremely beneficial.
Proper resource management ensures that the benefits are cumulative, sustainable and consistent.
But if these interests are not well-defined, agreed upon, and followed through, then the resources
run the risk of being squandered to serve short-term and small group interests only. zerbaijan is
getting daily $ 50 million from oil sale now and the amount is expected to reach $ 90 million by
the end of 2008. It means the country with 8 million populations will get about $ 30 billion
money each year only from oil sale.
The main question of the paper is whether Norway model is applied in usage of oil revenues in
Azerbaijan? If so, why there is no economic efficiency in Public Administration Reforms in the
country and if not, whether it is possible to apply it in Azerbaijan context? And what Kazakhstan
experience offers related to the public administration reforms in terms of usage of oil money.
Within the theoretical framework I will look different papers associated to the PA in oil
countries. John Wakeman-Linn, Paul Mathieu and Bert van Selm conclude efficiency of PA in
oil countries depends how oil funds are managed. The claimed that oil funds improve
coordination between monetary and fiscal policy and that they function best when they can be
separated from the state budget (Sterilization Policy). Yelena Kalyuzhnova sees the role of an oil
fund “as formalising – or giving institutional focus to – a set of fiscal rules” (Stabilization- Fiscal
Policy) Jeffrey Davis, Rolando Ossowski, James Daniel and Steven Barnett justify oil funds on
political economy grounds: “Such funds may help the government to resist spending pressures if
there are constraints on borrowing. These may reflect explicit fiscal rules or may arise from
political difficulties in issuing debt.” (Policy among sterilization and stabilization)
The paper analyses different scenarios of using the oil money and advocates for a strategy that
would involve the following steps:
•
oil rent money needs to be isolated from the economy and collected in an Oil Fund
•
the Fund should select the most efficient strategy
•
the Fund’s resources should initially be invested abroad only
•
a diversification plan needs to be prepared
•
ethical principles need to be outlined
•
the correlation of the percentage share of funds needs to be determined
•
the relationship between the risk, expected return, number of investments and overall
Fund resources needs to be determined
•
principles need to be developed for future possibilities for investing in the domestic
business sector
The study claims that the main challenge for Azerbaijan is to develop the non-oil sector to ensure
that the economy continues to grow on a sustainable path after the oil boom, meeting both shortterm expectations and longer-term demands. Key objectives include:
•
developing income-generating opportunities
•
creating new employment opportunities in the non-oil sector
•
building up small- and medium-sized entrepreneurship
The paper concludes that the efficiency gap in the management of oil money in Azerbaijan is
enormous. Improvements need to be made in the oil money accumulation, saving and spending
processes in order for this short-term national resource to better serve the long-term development
needs of the nation. The necessary changes include redefining and streamlining the Oil Fund in
parallel with improvements in budgetary and public investment work.
The government has an opportunity to use the money effectively or invest this new-found wealth
in development programs that will provide lasting benefit to citizens’ social welfare, economic
growth, security, and overall quality of life. On the other hand, the oil reserves, the centuries’
reserves now turned into liquid assets and mainly into cash bear in itself also the risks of
inefficiency and even of the misuse due to lack of institutional capacity and of traditions of
bottom-up control and participation as a legacy of the centralized economy. Now, the
government, aware that the flow of oil revenues has a finite life expectancy, must implement a
long-term macroeconomic strategy, fiscal rule and implementation mechanisms that ensures that
the oil money is saved in a most efficient way, and the benefits of the investments address high
priority needs, are highly integrated, and are sustainable.
The risk is that oil money if not well administered, does not fully benefit the economy; it
may get partially lost due to inefficiencies in the system and management, or may even be
harmful for the sustainable development of the economy and society. This is a well-known
phenomenon with developing countries rich of oil resources, and there is a rich vocabulary,
including “the resource curse”, “Dutch Disease”, “the paradox of plenty” and other notorious
terms recently coined by economists and other social scientists to denote the possible hazardous
effects from oil money in the economy. There are many ways of how the oil money can
destabilize the economy, and can be described using economic theories.
Many remedies
however fail, or cannot be implemented at all, due to the lack of institutional capacity, traditions
of bottom-up control and system of checks and balances. The legacy of centralized economy
does not help much develop these important prerequisites of reforming the public resource
management. The oil, however, gets extracted and exported meanwhile, making the attention on
this bottleneck of development not only important, but also urgent. The political and societal
dimensions of development should therefore get the earliest and utmost attention of both the
government and the public in large. The oil economy, on the other hand, may encourage the rentseeking behavior, that cause difficulties for political and societal reforms, and link therefore the
vicious cycle.
The way out can be the government’s and overall citizens’ appreciation the
finite life
expectancy of oil revenues, and collaboration to prepare and implement multidimensional
remedy plan that would include developing strategy, awareness, participation, legal basis and
institutional capacity and framework. This can be the sure way towards the practices of using the
oil money responsibly and effectively, to ensure so that this wealth provides lasting benefit to
social welfare and security, economic growth, and overall quality of life. This would help the
development of platform where the government and overall citizens present mutual interests to
ensure that the oil money is managed in a most efficient way, and the used of it address high
priority needs and are highly integrated and sustainable. Azerbaijan is now free to run and decide
on its own economy, but the Soviet legacy does not provide strong institutional and legal
framework and traditions for public expenditure management, public policy formulation and
public participation and accountability. The flush of oil money, being accompanied with early
formulations of these elements of modern state, provides therefore the economy not only with
opportunities but also with risks. Exporting the oil does not necessarily make the overall society
richer than before, but simply turns the non-liquid assets into cash. Cashing the all generations’
reserves should also put a heavy duty on the current generation with a heavy emphasis on
efficient and transparent administration of public resources.
INTRODUCTION
The Azerbaijani economy is dominated by natural resource-based revenues which have risen in
spectacular ways in the past few years. However, the non-oil sector of the economy remains
undeveloped and fragile. Total public spending grew rapidly raising wage and input costs and
heightening inflationary expectations, and underscoring the fragile competitive climate facing
economic agents in non-natural resource sectors of the Azeri economy. And Azerbaijan has
experienced a massive increase in public investment expenditures over the past few years with
capital spending increasing by approximately 1200% in 2003-2008. This increase in capital
expenditures has not been matched by an improvement in the rigor and transparency with which
public investment programs and projects are developed and approved.
Currently the State Oil Fund of Azerbaijan (SOFAZ) is not performing well its central objective
- preserving oil money to future generations – due to the external pressures. It is difficult to
protect the money from consumption appetite. The followings are the transfers from SOFAZ to
the State Budget: US $686 million in 2007, to US $4.713 billion in 2008, to US $6.125 billion in
2009 and US $6.125 billion planned in 2010. The exisiting policy framework and executiuon
have clearly failed and new one need to be designed and implemented to ensure the efficient and
ethical management of the oil money.
The global crisis affected Azerbaijan’s economy through lower oil prices and declining
external demand. The financial sector has remained relatively unscathed because of limited
exposure to the international credit markets, although credit growth has recently slowed. The
National Bank has tightened regulatory requirements for banks and took measures to support
liquidity in the financial sector. This, along with stronger banking supervision and better
portfolio and risk management skills by banks, is important to secure financial sector stability. In
2009, the total GOA expenditures that in 2008 still showed an increase of 62%, decreased with
4%. This reduction and the global slowdown that showed a decline in food and commodity
prices provided Azerbaijan with the benefit of a decreasing inflation from 21% in October 2008
to 5% in May this year.
However, since January 2009, when the world price for oil hit bottom, oil prices are
raising again, it these projections might increase. The financial sector has remained relatively
unscathed because of limited exposure to international credit markets, although credit growth
slowed. The National Bank tightened regulatory requirements for banks and took measures to
support liquidity in the financial sector. This, along with stronger banking supervision and better
portfolio and risk management skills by banks, is important to secure financial sector stability. A
new “one-stop shop” for business registration and fewer licensing requirements have improved
the business environment. Sustained efforts to fight corruption and break up monopolies are
essential for the development of the non-oil sector and for achieving sustainable long-term
growth.
Inflation was high reaching 19.5% in December 2007. The global slowdown reduced the
high inflation that afflicted the economy since 2005. A sharp decline in international food and
commodity prices reduced it to 1.4% at end-February 2009.
Poverty in Azerbaijan is decreasing; the GoA reports a poverty decrease in households
living below the poverty level from 46.7% in 2002 to 15.8% in 2007. Also in term of income
distribution Azerbaijan scorers relatively well; its gini ratio is 0.365 which is 54th in the world.
The economic outlook remains benign, but is sensitive to the unstable external environment and
performance of the oil sector. However, now oil prices increasing again, the financial future is
improving. The government has adopted a more moderate pace of fiscal expansion than before.
While this was 81% in 2008, in the 2009 budget the expansion was reduced till 14%.
Main findings and key recommendations;
The economic life of Azerbaijan is closely tied to oil. This study claims that the advantage of
possessing oil can quickly be spoiled if the resources are merely spent to satisfy short-term
interests. However, if managed wisely, e.g. through proper defining and prioritising the longterm interests of the entire society owning the resources, having oil can be extremely beneficial.
Proper resource management ensures that the benefits are cumulative, sustainable and consistent.
But if these interests are not well-defined, agreed upon, and followed through, then the resources
run the risk of being squandered to serve short-term and small group interests only.
The paper analyses different scenarios of using the oil money and advocates for a strategy that
would involve the following steps:

oil rent money needs to be isolated from the economy and collected in an Oil Fund

the Fund should select the most efficient strategy

the Fund’s resources should initially be invested abroad only

a diversification plan needs to be prepared

ethical principles need to be outlined

the correlation of the percentage share of funds needs to be determined

the relationship between the risk, expected return, number of investments and overall
Fund resources needs to be determined

principles need to be developed for future possibilities for investing in the domestic
business sector
The study claims that the main challenge for Azerbaijan is to develop the non-oil sector to ensure
that the economy continues to grow on a sustainable path after the oil boom, meeting both shortterm expectations and longer-term demands.
The paper concludes that the efficiency gap in the management of oil money in Azerbaijan is
enormous. Improvements need to be made in the oil money accumulation, saving and spending
processes in order for this short-term national resource to better serve the long-term development
needs of the nation. The necessary changes include redefining and streamlining the Oil Fund in
parallel with improvements in budgetary and public investment work.
The recommended improvements regarding the development of the institutional and legal
framework will address and make the implementation of the proposed financial strategy for the
Oil Fund possible. This will include the development of instructions, guidelines and standards
for portfolio investments as well as the rules and standards for transfers from the Fund to the
state budget and other domestic public and private uses. The recommended institutional and
legal improvements are on the other hand based on the existing situation and current practices,
and have political feasibility implications for the suggested changes, which are more extensively
discussed in the analysis section of this paper.
Azerbaijan is rich in mineral resources, mainly oil and gas. Our country is in the midst of an oil
boom brought on by the development of its vast hydrocarbon resources in the Caspian Sea
region. Oil revenues are expected to peak in 2011. The country’s oil and gas revenues are
forecasted to be $200 billion until 2024. The State Oil Fund of Azerbaijan (SOFAZ), created to
invest the revenues garnered from the country’s extensive oil reserves, is predicted to explode to
over $50 billion by 2014. Azerbaijan also expects to boost natural gas production and export
starting from 2010. The country has proven natural gas reserves of roughly 2 trillion cubic
meters. So, in near- and medium-term perspective, oil and gas revenues will be averaged at 10
billions of dollars.
Azerbaijan has an Oil Fund (SOFAZ) in which oil revenues are deposited, so the lion’s share of
responsibility for administering oil income falls on the managing of the Oil Fund resources. If
Azerbaijan’s oil advantage is to benefit not only this generation but also posterity, the Fund
needs to be rescued from popular programmes. As in every issue concerning the nation’s future,
society’s long-term interests need to be prioritised in order to prevent short-term or small group
interests from taking over the Fund’s resources. But first, those long-term interests need to be
identified, and then a mechanism for adhering to them needs to be created and implemented.
The Fund was created eight years ago and serves to separate oil revenues from the rest of the
economy. However, clearer resource management principles are needed to ensure that the Fund
is operated in a way that will maximise the benefit to the overall economy. Money from the Fund
is currently being spent with no strategy or criteria to measure the effectiveness of the spending
decisions against alternative ways of using the Fund.
Our lives would be different without oil. Oil affects and changes our priorities as well as others’
priorities concerning us. And we would run our economy differently if we did not have oil
resources to rely upon. However, as a short-term and finite resource, oil cannot be part of our
national values and long-term interests, which should ideally be permanent. That leaves room for
oil to serve as a temporary instrument only. Oil is short-term, but the Fund is long-term, and the
effective management of the Fund should not depend on oil, but behave as if there were no oil at
all. Norway’s Pension Fund is analogous to Azerbaijan’s Oil Fund and could serve as an
example of successful management. Oil revenues are isolated from Norwegian society, or, put
another way, society is isolated from the oil revenues almost as if the sector did not exist. The
strategy of the Oil Fund needs to be at least as efficient. That strategy must flow from the
purpose and mission of the Fund. If Azerbaijan wants to ensure an intergenerational balance or
save money for the future, then it must resist short-term or any other non-productive programmes
and save the maximum amount, which should include at least all of the oil money. By at least we
mean that the Fund may also generate additional money and that money can be partially
accumulated in the Fund.
If the economy can survive without the Oil Fund, then it should be even more robust with
assistance coming from the Fund. However, popular programmes must not be allowed to eat the
seed corn.
The main strategic issues regarding the Oil Fund are whether to transfer the revenues to the state
budget or not, and how to invest the money that remains in the Fund. The principles of modern
finance can be applied to help identify the best investment strategy. Diversification is the rule of
thumb for lessening risk: investing the oil wealth among a wide range of allocations diversified
across many levels (countries, industries, businesses, etc.) may guarantee high returns with lower
risk. An index fund, which ensures that the investment in each company is proportional to its
market value, can be used as an instrument for diversifying. But diversification only works well
with a realistic and prudent approach to every investment decision. Expert advice and some
scepticism are necessary, and the pitfalls of the underlying risk lurking behind seemingly high
returns need to be carefully analysed. Decisions should not be guided by intuition or astrology.
By the same token, non-transparent management is likely to lead to self-satisfying behaviour and
inefficient investment decisions. For the management of a public fund such as the Oil Fund, a
methodology needs to be prepared in which investment decisions will take into account not only
the risks and returns from investments, but also brokerage and investment charges. Higher
investment options are often described as a trade-off between a good dinner and a good night’s
sleep. This is to say that a large number of riskier investments could indeed increase the overall
return for an investment portfolio, but then the group responsible for investments needs to have
permanent control and keep track of ups and downs in order to be able to change investment
decisions in a timely manner. However, a good night’s sleep can be guaranteed with government
bonds; although these yield lower returns, they are often inflation indexed and entail lower risk.
Meral Karan provides information on how Oil Fund (SOFAZ) resources should be used by the
state agencies and treats the Fund as a secondary state budget. However, this approach conflicts
with the mission and purpose of the Fund and will not provide the expected benefits.1
Let us look at and compare the international experience first. The table below compares the
growth of expenditures in several countries. “After the boom” is a relative term, since the
countries on the list still produce oil. In addition, “boom” refers here to the rise in production but
not to the production itself.
Norway’s economy is widely considered to be the most successful in translating its oil money
into sustainable development of the country. The Norwegian government’s determination to
spend its oil revenues wisely is considered the key to the country’s economic success as well as
its ability to overcome the pitfalls associated with the oil boom.
To manage its oil wealth, Norway established the Petroleum Fund (the prototype of Azerbaijan’s
Oil Fund), where it accumulated all of its oil money. This money then was transferred into bonds
and corporate equities to generate a more stable flow of income that was not dependent on the
current rate of oil production in the country. Later, the Fund’s functions were integrated with the
national insurance scheme, and the fund continued to function under the name of the Pension
Fund. The strategy of isolating the economy from oil money did not change, however. The
amount of money the government may withdraw from the Fund for budgetary purposes is again
not a function of the country’s current oil production, but of the growth rate of the Fund apart
1
Fighting the resource curse: The Azerbaijan response
Meral Karan
from current oil revenues. However, there were cases when the non-oil deficit of the budget was
over the estimated annual non-oil growth of the Fund.2
Ulrich F.W. Ernst characterises Norway’s strategy in managing the oil revenues as follows:3
1. The Norwegian economy is isolated from oil revenues; fund reserves are entirely invested
abroad.
The exchange rate between the krone (local currency) and other European currencies is kept
stable through economic rather than monetary policies.
The name of the fund has been changed to better reflect its image and mission.
However, there is some emerging sensitivity to “domestic” arguments, since the amount of
capital flowing out of the country is increasing while the fund continues to grow. The fund is
becoming the largest single-managed fund in the world.
2. Investments are made in both fixed income and equity instruments – since 1998, up to 50% of
the total reserves have been permitted to be invested in stock markets (foreign only). Now the
investments in foreign markets have reached a level of approximately 40 percent.
The issue is to determine whether a 50% ceiling and the current 40% of investments in the equity
market is sufficient or too large. This is more a debate over how much risk can be afforded
versus the expected returns.
Now the fund is spreading investments across industries and regions to diversify in an effort to
reduce risk. And the management guidelines now limit the fund’s investments to 5 percent of the
capital of any given company (the limit was 3% before 2007). The fund’s exposure in the
companies in which it has invested now averages 0.3 percent.
2
Bjorn Taraldsen. 2007. Management of the Norwegian Government Pension Fund. Norwegian Central Bank.
Norway.
3
Foiling the resource curse: Norway’s Petroleum Fund, Ulrich F.W. Ernst
3. Ethical issues are intertwined with the investments. Efforts must be made to avoid conflicts of
interest and to make the fund’s allocations internationally responsible. The fund should not
invest in businesses involved in non-peaceful or environmentally bad practices.
If these ethical standards were to be applied in Azerbaijan, some countries, businesses and
particular companies would have to be stricken from the list of the investment options for
SOFAZ.
Yelena Kalyuzhnova focuses more on the stabilising role of oil funds, and thus provides analyses
and recommendations on how to protect the economy from sharp changes in oil prices.4
She sees the role of an oil fund “as formalising – or giving institutional focus to – a set of fiscal
rules”. She also evaluates the effectiveness of the fund as deriving from this role, i.e. how it is
reflected in the policy rules, and how market expectations buffer the economy from price shocks.
She admits that “history provides many illustrations, where stabilisation policies relating to
commodities collapsed with the rapid exhaustion of finance”. She further argues that the
stabilising approach should be pragmatic and that there is no universal set of management
techniques to make that function optimal.
John Wakeman-Linn, Paul Mathieu and Bert van Selm conclude that oil funds improve
coordination between monetary and fiscal policy and that they function best when they can be
separated from the state budget (and thus cannot be easily deployed by state agencies). The
authors dismiss the necessity of a stabilisation function for oil funds, arguing that “Shortfalls in
state budget must be made up through changes/improvements in the state budget”.5
4
Overcoming the curse of hydrocarbon: goals and governance in the oil funds of Kazakhstan and
Azerbaijan. 01-DEC-06 Comparative Economic Studies. Kalyuzhnova, Yelena
5
Oil Funds in Transition Economies: Revenue Management
Azerbaijan and Kazakhstan
John Wakeman-Linn, Paul Mathieu and Bert van Selm, October 16, 2002
Jeffrey Davis, Rolando Ossowski, James Daniel and Steven Barnett justify oil funds on political
economy grounds: “Such funds may help the government to resist spending pressures if there are
constraints on borrowing. These may reflect explicit fiscal rules or may arise from political
difficulties in issuing debt.”6
In addition, the revenue from deploying nonrenewable resources represents a depletion of wealth
that could be saved for the future generations. It is also not sustainable for the long-term, and in
that respect it differs from other revenue types.
6
Stabilization and Savings Funds for Nonrenewable Resources
Experience and Fiscal Policy Implications
Jeffrey Davis, Rolando Ossowski, James Daniel, and Steven Barnett
2001 International Monetary Fund, April 13, 2001
Public Administration Reforms in Azerbaijan
The absence of cohesive coalitions working for regional and international cooperation limits the
effectiveness of civil society’s lobbying and advocacy around accountability of governments and
international agencies. According to the CIVICUS report, Azerbaijani CSOs are characterised as
“inefficient in achieving their purposes, particularly in increasing their members’ access to
financial resources and in providing technical and informational support of their activities.
Perhaps one of the most serious challenges facing Azerbaijani civil society is the extremely low
level of cooperation between CSOs and among CSOs in different sectors, as well as their weak
international linkages” (R. Sattarov et al: Civil Society In Azerbaijan: Challenges And
Opportunities in Transition - CIVICUS Civil Society Index Report for Azerbaijan, 2007).
Across the country, central and local governments restrict core civil society freedoms of
association, assembly and expression through repressive legislation and ideological dominance.
Even though the country constitutions and other major legal acts provide for the freedoms for
civil society and citizen participation, the mechanisms for the realisation of these freedoms are
missing or very basic and unusable. In the country, civil society remains weak, with not much
influence on public policy or opinion. Partially as a legacy of the old Soviet regime, the concept
of citizenship -- including the responsibility of constituent involvement -- has yet to take root
among much of the population and therefore lacks the concept of political will. As for the sociocultural context, there are “relatively low levels of interpersonal trust and public spiritedness,
representing significant socio-cultural and psychological barriers to the development of a vibrant
civil society” (R. Sattarov, 2007).
Although Azeri civil societies exist in quite restrictive environments, there are some windows of
opportunity for civil society advocacy. A vibrant civil society can play a significant role in the
fight against corruption, legitimizing political leadership and counter- balancing recidivism. On
the other hand, a weak civil society may also undermine reform, failing to provide leadership for
the role it must play in strengthening the reformers' position (V. Bayramov: Ending Dependency:
How is Oil Revenues effectively used in Azerbaijan, Baku, 2009, p.77, the report is available at
www.cesd.az ).
According to the Law on Civil Service in Azerbaijan, the civil service is based on the principles
of the rule of law, separation of powers among legislative, executive and judicial branches,
oversight over and accountability of government institutions and civil servants; transparency and
fair competition in civil service recruitment, equality and meritocracy in eligibility for
government positions, equality of civil servants irrespective of their race, ethnic, language, sex,
religion, social origin, family or social status. The right of civil servants to professional
development is guaranteed by Article 21 of the Law on Civil Service. Article 24 of the same law
stipulates that civil servants pursuing and succeeding in professional development and dedication
to their duties shall be distinguished by awards (Order “For Service to the Country” and Medal
“For Civil Service Distinction”. Also, the attestation process (a 5-year review cycle of all staff)
prescribes the consideration of civil servants’ training needs. The Academy of Public
administration has operated under the president’s authority since 2000. Capacity building
measures to improve management skills are envisaged, including a system which will allow
senior civil service employees to gain work experience in the private sector (UN: Public
Administration Country Profile in Azerbaijan, New York, 2007).
Although The Civil Service Commission under the President of the Republic of Azerbaijan was
established in 2005 there are gaps in public administration reforms in Azerbaijan. According to
its statute, the Commission is a central executive agency that arranges enforcement of the
statutory legal acts passed in the Republic of Azerbaijan in the civil service field, provides
implementation of the policy stipulated by legislation of the Republic of Azerbaijan in the field
of recruitment in civil service on the competitive basis, professional development of civil
servants, their certification and social protection as well as other issues related to the civil
service. Financing of the Commission’s activity is carried out at the expense of the state budget
of the Republic of Azerbaijan as well as other sources not prohibited by legislation. It is
mentioned here that the total number of civil servants is 27300 from them 27,9 % of civil
servants are women and 57 % of civil servants aged between 35-54 years old.
International organizations and local think tanks still play significant role for holding trainings
civil servants in Azerbaijan. The Lithuanian Institute of Public Administration implemented
project titled “Training for HR managers from Azerbaijan” with support of
the International Cooperation Agency of Germany (GTZ - AZ). Project purpose was to provide
HR managers from public bodies of Azerbaijan with theoretical and practical knowledge about
modern management of human resources (for more information, please visit
http://www.livadis.lt/_en/index.php?content_id=16&menu_id=0).
Center for Economic and Social Development (CESD), leading economic think tank in
Azerbaijan, has recently held Training for Trainers (ToT) for Civil Society Organizations
leaders, on the 8 subsequent topics. The ToT was a 5 day intensive training led by an
international trainer and was effective to equip 10-15 prospective local trainers with the skills,
tools and creative techniques to deliver the project’s future interactive open training events in a
way that makes learning enjoyable and effective. This served to strengthen the capacity of civil
society organisations and local authorities as a pre-condition for a more equitable, open and
democratic society through support to their “own initiatives”. The ToT was aimed at CSO
leaders and members of the partner organisation as well as other civil society actors in
Azerbaijan, who are interested in developing their skills and understanding effective training for
CSOs and play an active role within the project. It also provided the local trainers with an
introductory understanding of the theory and practice of civil society strengthening,
organisational development and capacity building:
a. Understanding Civil Society and Setting Up of CSOs: At the end of the course
participants were able to: Build an understanding of CSOs and organisational
development; Identify organisational strengths and weaknesses in relation to other actors
in society; Develop awareness of an organisation’s existing and potential role in
strengthening the civil society sector; and Increase understanding of how different sectors
in society relate to each other and for what purpose.
b. Project Design and Management: At the end of the course participants were able to:
Understand projects within a broader strategic framework; Understand and be able to use
tools and approaches for developing project concepts as appropriate for their
organisation; and Prepare better proposal documents.
c. Strategic Visioning and Planning in CSOs: At the end of the course participants were
able to: Define different ways of thinking creatively and strategically; Explain different
approaches to strategic and creative thinking; Apply tools in strategic and creative
thinking; Understand and appreciate environmental context for strategy development;
Apply models and tools in strategic planning.
d. Managing Staff and Volunteers in CSOs: At the end of the course participants were able
to: Provide an overview on the strategic approach to recruiting and managing volunteers
and staff; Introduce the key elements of a volunteer recruitment and retention strategy;
Share ‘good practice’ in people management; Exchange experiences and concerns
regarding volunteer and staff management.
e. Fundraising for CSOs: At the end of the course participants were able to: Provide an
overview on the fundraising issues and approaches; Conduct fundraising planning; Share
top tips in fundraising and examples of successful fundraising strategies; Explore the
funding environment in Azerbaijan, including the availability of funding from
international and local sources.
f. Communication and Outreach for CSOs: At the end of the course participants were able
to: Understand the importance of communication for CSOs; Develop skills for
communicating with main target groups; Understand the main communication channels
and activities; Understand the function of public relations in CSOs; Prepare sponsorship
packages, media kits, press releases; Develop an understanding of brand building and
branding; Establish image and reputation for their CSOs.
g. Advocacy and Campaigning in Civil Society: At the end of the course participants were
able to: Analyse the policy-making dynamics and be able to identify appropriate ‘levers
of influence’; Understand the role of research and evidence in campaigning; Understand
the various stages of the advocacy planning cycle; Lobby decision makers and relate to
the media with more confidence; Embed monitoring and evaluating systems and
procedures within advocacy programmes.
h. Networking and Relationship Building: At the end of the course participants were able to:
Discuss the importance of working together within the Azerbaijani context; Review types
and models of partnerships, including social partnerships; Explore the development of
networking; Look at the existing debates around partnerships and networking; Discuss
potential benefits, limits and limitations of relationships; Consider issues of
accountability and shared governance; Unpack the dynamics of power within
relationships; and Understand the link between successful relationships and a strong civil
society in Azerbaijan.
CESD tried to involve more people in ToT within Azeri civil society are filled with the
knowledge and capacity to communicate effectively with others and transfer knowledge about
capacity building to CSOs and local authorities. The trainers improved their skill sets and be
equipped to design training sessions and create an effective learning environment; understand
and manage different training strategies and learning styles; use appropriate presentation and
facilitation skills; use of a range of participatory training methods, including visual aids, drama,
forum theatre, role plays, etc.; and evaluate training courses.
Within the another program titled as “Sector Policy Convergences in Trade and Cross-Border
Cooperation in Azerbaijan to EU Eastern Partnership Initiative” implemented by CESD, the
center experts supported capacity building in Azerbaijan towards EaP principles and priorities of
better economic integration with the EU and increased mobility and contacts between people
through sectoral policy convergence with EU in trade and cross-border cooperation.
CESD developed staff needs analysis and training needs analysis in Azeri government, train
relevant ministries/state agencies to ensure policy ownership, to improve public administration
skills vital for the gradual sector policy convergences in trade and cross-border cooperation, and
to ensure the sustainability of the process. Those trainings also assisted know-how transfer with
respect to the above objectives to government officials and local staff, including development of
the capacity for the follow-up regulatory needs assessment and regulatory impact analyses.
Along that series of seminars and training have been held by CESD on necessary sector policy
convergence (approximation/harmonization with EU regulations and practices), for civil servants
capacity building with emphasis on methodology, formulation, decision making process,
implementation, control and evaluation of public policies. They also included policy debates and
roundtable discussions with representatives of second target groups (civil society) to raise
important problems and jointly discuss them. The subjects included EaP and EU policies and
programs in Azerbaijan and the region; EU system and criteria of the European Integration;
instruments for cooperation; ongoing issues; each of the priority sectors as a focus of policy
reforms towards sector policy convergence; harmonization with EU laws and policies; public
administration capacity building in respective areas, including the regulatory needs assessment,
and regulatory impact assessment. Participants were selected form respective state agencies to
ensure sustainability of project outputs and to implement the skills obtained and carry forward to
others in their offices. The following is preliminary agenda for each of priority sector:
-
EU and Azeri trade policies; comparative analysis;
-
Internal borders of EU: ongoing process of integration;
-
Two sides of the medal - integration and delimitation of frontiers;
-
Importance to determine the product country of origin;
-
Application of tariff and non-tariff instruments of trade regulation, the statistics of
international trade;
-
WTO Agreement on Rules of Origin and Kyoto Convention;
-
EU's support to ensure the border security; export opportunities for Azerbaijan;
Azerbaijan towards European Integration.
Based above mentioned facts, we can conclude that in spite of the fact Public Administration
Reforms implemented in Azerbaijan, there are further needs to set up trainings for civil servants,
Unlike some government bodies, international organizations including UNDP are very active on
this sphere. For this purpose UNDP has been implementing “Good Governance through civil
service reforms: Implementing MDG 9” project where the overall objective is to operationalize
the commitment of the Government of Azerbaijan to “Good Governance” and public sector
reform. Role of local think tanks in providing trainings for civil servants has been dramatically
increased recent years. The CESD very often organize trainings for Civil Society Organizations
leaders meanwhile the center train also civil servants from both central and local government
bodies.
Main findings of the research
The efficiency gap in the management of oil money in Azerbaijan is enormous. Improvements
need to be made in the oil money accumulation, saving and spending processes so that this shortterm national resource can better serve the long-term development needs of the nation. The
necessary changes include redefining and streamlining the Oil Fund in parallel with
improvements in budgetary and public investment work.
Sustainable long-term development needs to be a major focus and the only criterion for the use
of oil money, as with any public resource. The short-term availability of this resource, however,
makes the issue more subtle and brings additional concerns. The need for sustainable long-term
development makes the macroeconomic concerns a priority. This is to say that the nation’s
strategy for the use of oil money needs to focus on the long-term growth of GDP, fiscal stability
and independence, and monetary concerns in order to avoid inflation, account for the capacity of
the public sector and prevent the creation of an environment conducive to corruption. The
strategy must clearly delineate the share and dynamics of national consumption, public
investments, government expenditures and trade with other countries with the hydrocarbon
resources deducted and oil money added to the national assets. A good strategy will measure and
use the oil money not for separate consumption expenditures or investment projects, but in line
with all public spending, while accumulating and saving that oil money separately.
The traditional literature suggests that the budgets in oil-producing countries depend on the oil
prices on the international market. The Oil Fund thus needs to include a stabilisation function,
i.e. a way to bridge budget deficiencies in recession years. This paper argues and takes as a basis
for further analysis that (1) it is not the oil price but overall oil revenues that matter (the latter
includes many other factors, including the amount of oil production) for the decisions between
the budget and the Fund, and (2) it is not the budget but the overall income that depends on oil
revenues; due to political processes and decisions, the budget is often linked to short-time oil
revenues. The Fund could eliminate that link and allow the budget to rely on long-term and
secure incomes.
Stabilisation should not protect the economy from fluctuations in oil prices but be negatively
linked to the overall revenues. It should link budget transfers to the spending capacity of the
government (i.e. how much of government expenditures reach beneficiaries, generate benefits
and translate into sustainable development).
Macroeconomic development strategies flow into the financial strategy of the Oil Fund as an
institution that accumulates and saves money. Once the extent of the application of oil money
(i.e. what exactly needs to be accumulated in the Fund) is determined to reflect the nation’s the
most pressing long-term interests, then strategies for portfolio investments, transfers to the state
budget and public investment projects (if the strategy finds it appropriate) must be adopted and
implemented.
A strategy is important for creating the rules for the effective management of the Fund. Having
these strict rules is no less important for saving the nation’s resources from short-term and
populist programmes, as they are for stemming corruption. And the presence of clear efficiency
criteria and strict rules along with civil society development facilitates transparency in the
management of the Fund. Reciprocally, that transparency becomes a guarantee of the effective
management of the Fund and the growth of society’s wealth, and thus increases the sense of
ownership and the level
General and specific recommendations
The following is the list of recommendations by this paper for the management of oil money in
Azerbaijan:

The amount of transfers from the Fund into the State Budget in any year, shouldn’t be
above the Fund’s average (calculated for the several past years) portfolio profits that will
additionally account the fluctuations, population change (that would change the Fund’s
assets per capita) and the inflation and the overall depreciation the Fund’s assets in all
invested currencies.

The diversification principle need to be prepared to illustrate the ceilings expressed in
percentages of the Fund’s resources can be allocated in each country, in each currency,
each type of the business, and each company, as well as ceilings expressed in percentages
of the invested company’s assets.

The ethical standards need to be prepared to outline the countries, the businesses and the
companies to be excluded from the list of potential investment allocations.

Principles need to be developed for the future possibilities in investing in the domestic
business sector, in the form of the separate bank that would expect the return for the Fund
form the investing in the local business higher than from the investment abroad.

Develop a long-term, diversified investment strategy. With a longer-term spending policy
in place, SOFAZ can then shift its investments to a longer-term horizon and be able to
diversify from the highly liquid but low-yield investments it made in 2001.

The allocation report needs to be prepared for the every portfolio investment by the Fund.
The report will replace the feasibility study, as a justification of selection based on
transparent criteria and methodology, as well as the appraisal document that would
explain why the selection is made vis-à-vis with other possible allocations.

Clarify the SOFAZ mission and objectives. The decree establishing the Oil Fund explains
that it can be used for the “socio-economic progress of the country” and for “solving the
most important national problems.” Detail mission and objectives are recommended to be
settled on.

The regular (at least, annual) evaluation of the Fund’s management needs to be
conducted where the Fund’s performance (profit, risks, ethical standards and
administrative management) will be evaluated against the allocation reports prepared, and
the average expectations in the market.

The standards (financial and ethical) and administrative principles (such as preparation of
the allocation report and appraisal, and evaluation principles) need to be developed based
on the recommendations here and/or of different expert groups.
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