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Building Political Will to Enhance Transparency and Curb Corruption in Oil Sector; Lessons from Azerbaijan
By Dr. Vugar Bayramov, Chairman of Center for Economic and Social Development (CESD), Azerbaijan
Abstract
The aim of this paper is to construct an analytical space for analyzing the way in which civil society, understood here in terms of the NGO sector, can play a positive role in assuring transparency in usage of oil revenues in Azerbaijan. Azerbaijan is getting daily $ 40 million from oil sale now and the amount is expected to reach $ 70-80 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 figures confirm that very important job now is to create political will to work toward enhancing of transparency in oil usage. The paper seeks how civil society plays/or can play role in building political will in Azerbaijan. Of course, no doubt that governments are the main location of political will. Government programs can enhance transparency or use oil revenues more effectively. But we have to recognize the role of civil society organizations (CSOs); civil society, the media, business corporations, and active individuals can all play roles in creating political will. Sustained political commitment depends on systematically building institutions outside government that will influence the government activities to enhance transparency and fight against corruption.
The main objective of the paper is to analysis what role of CSOs plays in enhancing of transparency in oil spending and how civil society can build political will for participatory governance in oil-rich Azerbaijan. Participatory approaches to fighting corruption, and especially the importance of active involvement by civil society and the media, are now generally accepted as fundamental to any successful anti-corruption reform program. From this perspective, CSOs are playing fundamental role in building political will to enhance transparency and curb corruption in oil sector.
The paper found that in case of Azerbaijan political will set up and supported by CSOs is key to enhance transparency and fight with misusing/corruption in oil sector.
Building Political Will to Enhance Transparency and Curb Corruption in Oil Sector; Lessons from Azerbaijan
Azerbaijan is located in the South Caucasus region, bordering the Caspian Sea, between Iran and Russia, with a small European portion north of the Caucasus range. It is also bordering Georgia and Armenia.
The rapid increase in oil production resulted in Azerbaijan’s economy posting its fifth consecutive year of double-digit growth in 2006. Gross domestic product (GDP) expanded by a record 34.5% in real terms, the world’s highest growth rate for the second year running. By far, the greatest engine of growth has been the industrial sector, in which value added was up by just over 56%, bringing cumulative growth in 2005–2006 to almost 150%. Within the industry sector, it is the oil and gas sector that is driving the growth. The non-oil economy is still growing strongly, expanding by 11.2% in 2006, but its contribution to GDP is falling as the oil economy expands. Non-oil sectors provided 47% of nominal GDP in 2006, down from 58% a year earlier and 61% in 2004. The medium-term outlook for the economy of Azerbaijan is positive. GDP growth is expected to continue posting high double-digit growth over the next few years, mainly from increased oil and gas production and exports. Foreign investment is expected to decline over time as the major oil and gas projects move toward less intensive stages. However, the Government of Azerbaijan expects increased domestic public investment to offset some of this decline. Government expenditure rose by over 80% in 2006 and is projected to rise by a further 50% in 2007, which puts considerable pressure on inflation. In the long term, Azerbaijan’s high dependence on oil exports poses a potential threat to the economy given the potential volatility in the international oil market. Azerbaijan, the former Soviet republic, is increasing its importance thanks to the rich oil revenues in the country. Oil sector made up 60 % of the GDP in 2007. Azerbaijan's oil production to reach 450 million barrels in 2008. Revenues of the State Oil Fund of Azerbaijan will make up $4,3 billion, however, due to increasing of oil price in the world market, the revenue are forecasted to reach $ 8 billion. Beside that, Azerbaijan State Budget receives $ 6 billion from oil sale in 2008. More than $ 25 billion are forecasted to be received from oil sale next year.
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 2010. Budget revenues of SOFAZ as at April 1, 2008 has reached $6.1 billion, with assets standing at $3.35 billion. That is to say, over half of SOFAZ funds are already spent. 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.
All this engineers and instigates the Government to initiate a policy how to spend petrodollars fast enough. The Economy Development Ministry has said the government spending from all the sources in the country for 2008-2011 (2008-2011 State Investment Program) is predicted to be AZN 15.6 billion (over $17 billion). Not only has aggravated too fast spending of the oil revenues the negative impact on the country’s economy, but also has led to disbalance of inter-generation fairness in distributing oil revenues. Therefore, the economic and political reforms have lagged: instead, pseudo-institutions have been instituted in the guise of reforms.
Consequently, the domestic economy has seen the following negative tendencies: - The economy now strongly depends on one resource – oil, and the oil sector’s contribution to Azerbaijan’s GDP was 55% in 2007; - Sharp changes in oil prices and oil revenues due to nonflexible demand for oil and fluctuating supply have caused Azerbaijan’s economic situation and policy to remain reliance on global oil market stability; - Because of sharp demand for investment dollars and technologies at the time of oil industry’s establishment, the trans-national corporations have been vested with full powers for payment and management issues; - The oil industry usually accounts for 1-2 percent of the total labor resources, thus restricting employment opportunities, leading to sharp increase in unemployment and poverty; - The oil sector employing high-qualified labor resources has appropriated and monopolized the most productive part of human capital; - Reliance on depleted resources, oil in particular, hastens the Government to open the way for investment in mega-projects that are distinguished by low profitability; - Instead of reduction, the number of red-tapes has mushroomed, state management expenditures have increased. Since public office expenditures financed out of 2008 State Budget grew 46%, compared to 2007. - Transparency and accountability in the oil sector and public financial management has trended downward in comparison with other sectors of the economy. - As State Budget is mainly based on oil sector, individual taxpayers are not duly traced, leading to indifference, civics stagnation.
Azerbaijan civil society organizations were the first in the world to support the Extractive Industries Transparency Initiative (EITI), whose objective is to increase transparency over payments and -revenues in the extractive industry sector in countries heavily dependent on these resources. The idea was generated by the former British Primer Minister and spread through oil rich countries. Azerbaijan’s NGOs were the first in the world to sign a memorandum to support the EITI. Twenty other oil-rich countries’ NGOs later followed suit. Azerbaijan’s CSOs have since continued to play a key role in establishing transparency in the oil sector and in combating corruption in the country. A significant step towards implementing the EITI in the Republic of Azerbaijan was taken on 24 November, 2004. The governmental Committee on EITI, foreign and local extractive industry companies (oil and gas) and the NGOs’ Coalition for Increasing Transparency in Extractive Industries signed a memorandum of understanding on a mechanism for the implementation of EITI in the country – which was a first in the world. The memorandum was between Azerbaijan NGOs, foreign and local state oil companies and the Azerbaijan government. Earlier, in May the same year, more than 30 Azerbaijani (Azeri) NGOs had signed a memorandum amongst themselves, and announced the establishment of the NGOs Coalition with the aim of “improving transparency in extractive industries”, in an effort to ensure public control over the revenue obtained through the exploitation of the country’s natural resources and their effective use.
Azerbaijan has oil. It is like winning a lottery ticket, it is like getting a huge patrimony and it is like a gift from heavens. And like a winning lottery ticket, a patrimony and a gift, oil can easily spoil. It will spoil if the resources are spent to satisfy the short-term interests. Contrarily, oil may become an advantage, if managed wisely, through properly defining and keeping in mind the long-term interests of the entire society owning the resources. This will ensure that the improvements are cumulative, sustainable and consistent. And when these interests are not well-defined, agreed, and followed there remains no other way to spend the life and resources, but act randomly and satisfy short-term and small group interests only. Oil is short-term, but the state is long-term, and the effective management of the government, shouldn’t depend on the oil, and should behave as there is no oil at all.
The efficiency gap in the
management of oil money in Azerbaijan is enormous. The improvements
need to be implemented in the oil money accumulation, saving and
spending processes to make the short-term national resource to
better serve the long-term development need’s of the nation. The
necessary changes include the Oil Fund redefining and streamlining,
in parallel with improvements in the budgetary and public investment
work.
The key initiative is to increase role of CSOs in usage of oil revenues by building political will. In order to build political will in Azerbaijan, CSOs set up EITI NGO Coalition and started influencing the government’s policy related to the oil revenues. The first initiative on the EITI was put forward by British Prime Minister Tony Blair in 2002. In June 2003, the current president of the Azerbaijan Republic, Ilham Aliyev, attended a London conference and made a statement about Azerbaijan joining the EITI and being a pilot country in the implementation of the EITI. In November 2003, President Ilham Aliyev issued an instruction to the Cabinet of Ministers, and on 13 November the Cabinet of Ministers decided to set up an inter-ministerial commission to implement the commitments undertaken by Azerbaijan at the London conference. The commission includes a number of government officials, including representatives of the State Oil Fund, the Foreign Ministry, the Ministry of Economic Development, the Ministry of Industry and Energy, the Ministry of Finance, the Tax Ministry, the Ministry of Ecology and Natural Resources, the State Statistics Committee and the State Oil Company.
After establishing EITI NGO Coalition, CSOs has work to increase the awareness of government agencies involved in the EITI. At the same time, work was carried out to create mutual understanding between the sides involved in the EITI and an exchange of opinions was held on its implementation. Both existing and potential spheres were identified during the process of identifying extractive industries in Azerbaijan. The existing spheres are oil and gas extraction while potential spheres are extraction of precious metals, including gold, silver, platinum, and at the same time, metal extraction, including iron and copper. Work was carried out to create mutual understanding between the sides involved in the initiative in Azerbaijan. This included regular meetings, and extracting companies, various government officials and non-government organizations actively participated in these meetings. The meetings discussed practical issues and established a deadline for extracting companies and the Azerbaijani government to submit a report on incomes from extractive spheres. Report forms and instructions on fulfilling them were prepared. The signing of the memorandum on mutual understanding between the sides that joined the EITI (three sides - the government represented by the EITI commission, foreign and local extracting companies and the coalition of non-government organizations) on 24 November 2004 is of special importance here. Report forms for local and foreign companies were agreed between the parties to the memorandum. These forms are now reflected in the memorandum. Procedures for the disclosure by the government of revenues in the extractive industry were prepared and after the memorandum was accepted, Azerbaijan started implementing the EITI. The memorandum was first joined by 21 local and foreign companies and then by one more foreign company. These companies represent 11 countries: the USA, Britain, France, Japan, Russia, Canada, Turkey, Norway, China, the United Arab Emirates and Azerbaijan.
CSOs are mostly focused on establishing transparency in the broad economic system, and the Centre for Economic and Social Development in Azerbaijan works to ensure that future revenue funds will be invested in the region and expended for the benefit of the public – in poverty reduction, education, and public health – through the promotion of transparency, civic involvement and government accountability. The Centre has put the issue of transparency on the national agenda in Azerbaijan, as a key to reducing poverty and achieving economic growth.
Above picture shows the importance of building of political will. By doing it, NGO Alliances are able to promote sustainable development in the country.
"Political will" is not, however, simply the "will of politicians". There are leaders throughout society - professional groups, the private sector, trade unions and other civil society groups - who can be energized in the cause of containing corruption and furthering integrity. The emergence of a champion can lead to the establishment of a coalition in support of change, which is drawn from several sectors.
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. As an activist force for change, it is a crucial catalyst for building political will.
Political will”, as the concept refers to the demonstrated credible intent of political actors (elected or appointed leaders, civil society watchdogs, stakeholder groups, etc.) to attack perceived causes or effects of corruption at a systemic level. It is a critical starting point for sustainable and effective anti-corruption strategies and programs. Without it, governments' statements to reform civil service, strengthen transparency and accountability and reinvent the relationship between government and private industry remain mere rhetoric. Neither the presence nor the absence of political will can be presumed in any single initiative. It is manifest in the degree to which reform initiatives are participative and incorporate a range of political actors and civil society. Political will is affected by many variables that can be the subject of action. The rules of the political game, such as the prevalence (Sahr Kpundeh, 2008).
The CSOs are one of main power groups in Azerbaijan although there is still no “warm” relations between some government bodies and civil society groups. But through CSOs actions related to become strong institute in the country, now CSOs has real power to influence decision-making process. Even due to the development of civil society institutes, the Council on Civil Society Organizations has been established with decree of the Azerbaijan President and members of the council have been selected by CSO in the national NGOs meetings.
Since CSOs are getting stronger the attitude of the government bodies to CSOs has been dramatically changed. If there are almost none relations among two national institutes, to-day CSOs are able to attend the monitoring of state projects. The government, in fact, is not really interested in cooperation with CSOs, however, civil society institutes use different methods to make the government more accountable.
The political will is important to create the rules for the effective management, and having the strict rules is no less important in saving the nation’s resources from the short-term and populist programs, as well as from the corruption. And the presence of the clear efficiency criteria and the strict rules along with the level of development of the civil society makes the transparency in the management more possible. Reciprocally, that transparency becomes a guarantee of the fund’s effective management and growth in the society’s wealth, and increases the sense of ownership and the level of civil society along with democracy.
It is, however, crucial to build political will to fight corruption and enhance transparency, and to play a full part in regional and global initiatives to fight corruption, not only by signing and ratifying the EITI Memorandum and other international documents, but also forcing their successful implementation. Only after NGOs’ pressure the Azeri government and some oil companies did public disclosure of necessary information and periodically gave information to public about their activities. Azerbaijan NGOs Coalition actively participates in monitoring of usage of oil revenues and building of “Baku-Tbilisi-Ceyhan” Pipeline and play key role in anti-corruption initiatives.
CSOs are trying to strengthen public disclosure or awareness in oil revenues by having access to audit report. Selection Group where civil society institutions have representative determine an audit company and an agreement on the provision of the appropriate services is concluded between the audit company and the EITI Committee. The experience of EİTİ NGO Coalition in Azerbaijan confirms that building of political will is crucial to enhance transparency and curb corruption in oil sector.
Throughout the process, we made successful steps towards the democratization of the society at large. For instance, our major attempt was to provide for equal participation and representation of interests of key stakeholders in our final choice of Audit Company. Accessible public information on oil revenues and awareness activities in co-operation with civil society institutions; Building the capacity of civil society institutes; Development of the scope and authority of media via co-operation with media; Campaigning for more public awareness and interest of citizens for the efficient use of oil revenues.
Correspondingly, our future plans will seek to extend the transparency at companies by pushing them to come up with disaggregated figures and elaborate monitoring activities to achieve efficiency and finally make maximum use of Oil fund financed projects by making related information accessible to the mass-media and carrying out awareness activities; Development of institutional and expertise capacity in order to fulfil the commitments of the Coalitions as per the memorandum on EITI.
These future plans and other ideas will underpin our recommendations for improved decision-making in terms of companies’ responsibilities to further provide their reports with disaggregated figures, elaborate MOU and promote social investments locally.
The recommended improvements addressing the development of 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 and the rules and standards for the transfers 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, more extensively discussed in the analysis section of the paper.
The macroeconomic development strategies flow into the financial strategy of the Oil Fund as an institute accumulating and saving that money. Once the extent of the application of oil money (i.e. what exactly need to be accumulated in the Fund) is determined to reflect the nation’s the most long-term interests, the strategies for portfolio investments, for transfers to the State Budget and to the public investment projects (if the strategy finds it appropriate) must be adopted and implemented.
However, we are confronted with several challenges in a sense that, first of all, the implementation still remains restricted to only oil and gas sector and companies do not seem interested in disaggregated reporting. So far no working plan has been set in place to consider all stakeholders’ interests. Another challenge is the lack of human and financial resources and low public awareness in this regard. The major concern is that the idea of additional measures towards more transparency is not promoted at higher levels.
Correspondingly, our furture plans will seek to extend the transparency at companies by pushing them to come up with disaggregated figures and eloborate monitoring activities to achieve efficiency and finally make maximum use of Oil fund financed projects by making related information accessible to the mass-media and carrying out awareness activities; Development of institutional and expertise capacity in order to fullfil the commitments of the Coalitions as per the memorandum on EITI.
Throughout the process, we made successful steps towards the democratization of the society at large. For instance, Our major attempt was to provide for equal participation and representation of interests of key stakeholders in our final choice of Audit Company. Accessible public information on oil revenues and awareness activities in co-operation with civil society institutions; Building the capacity of civil society institutes; Development of the scope and authority of media via co-operation with media; Campaigning for more public awareness and interest of citizens for the efficient use of oil revenues.
The main strategy is to build political will in Azerbaijan we reached was concentrating power of CSOs and by this way influencing on decission-making process. After establishing EITI NGO Coalition we were able to focus transparency issues in oil sector, to require information from both government bodies and oil companies. Aliancing strategy was used in other sectors, such on state budget transparency, health service. Developing civil society (programs aimed to increase organizational and advocacy capacity of the sector, developing resource centers and structures as community groups, advocacy alliances, networks, self-help groups) is the main task to build politicial will in Azerbaoijan.
Endnotes
Our vision socio-economic development that reaches all levels of society and becomes sustainable, rational thinking in public decisions and active public participation. We believe that active citizen participation and transparent system are necessary elements to foster and accompany the civil society development. We believe that promoting the socio-economic rights through awareness programs is important for active public participation. We believe that developing the sense of ownership is essential both for private and community development. We value strategic partnerships with governmental agencies, and various sectors of civil society as essential for the society’s sustainable development. We believe that high-quality applied research and professional learning projects are the key to initiating and maintaining the development processes. And we believe the power of civil society institutes is the key in achieving sustainable development.
Conclusion
By building political will CSOs were able to influence the government’s decision-making process in Azerbaijan. The main way to reach political will was to set up CSOs Alliances in order to concentrate all opportunities in civil society sphere. Now, Azerbaijani CSOs has right to attend auditing process in oil revenues, State Oil Fund of Azerbaijan Republic regularly report to EITI NGO Alliance.
At the same time NGOs in the country are working towards enhancing transparency of budget expenditure, where oil money is more than 50 percent of the total budget revenues. The government has again conceded to NGOs pressure and campaigns and has published the oil budget and distributed it among different groups, and also through informative methods such as live TV talk-shows and published articles. The Attention of influential groups such as government, parliament, the media and others was drawn to oil and budget issues. The CESD also attended parliamentary discussions and some of the suggestions they submitted were considered in the formulation of the budget. Prior to this intervention, budget documents had never been publicly published in the country. However, due to the CESD campaign the government now publishes budget documents and some CSOs have taken this advocacy on budget transparency further, and now, four years after the initiative started, even ordinary people have access to budget information! That’s the power that civil society has in ensuring transparency and accountability.
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