1. No category

VALIDATION REPORT: Azerbaijan
FINAL REPORT: 10 April 2015
Prepared for:
The EITI International Secretariat
Prepared by:
RCS Global
207 Regent Street, W1H 3HH
London, UK
contact@rcsglobal.com
www.rcsglobal.com
Validation of Azerbaijan 2015
10 April 2015
EITI International Secretariat
Dear Colleagues,
The RCS Global team is pleased to submit the report of the EITI Validation of Azerbaijan.
This report provides a summary of our research and 10 day validation mission in Baku in February 2015. The
Validation team would like to thank the Azerbaijan EITI Secretariat, particularly Abbas Abbasov and Farid
Farzaliyev, as well as the members of the Azerbaijan Multi-Stakeholder Group and others whose cooperation
ensured the mission was a success. We would also like to thank Sam Bartlett and the other members of the
International Secretariat for providing guidance on the Validation process.
Where possible we have provided evidence to back all assertions. Constraints in this regard included a lack of
detail in the minutes and documents only available in Azeri (key documents were translated). Where
controversial issues have arisen, we have endeavoured to strike a balance between contrasting opinions and
provide options for a way forward.
We thank you for the opportunity to provide the very first Validation report under the 2013 EITI standard.
Yours sincerely,
Harrison Mitchell
Dr Jeremy Weate
Dr Meruert Makhmutova
2
Validation of Azerbaijan 2015
ACRONYMS/ABBREVIATIONS ......................................................................................................................................... 4
1. EXECUTIVE SUMMARY ................................................................................................................................................... 5
OVERALL CONCLUSIONS ........................................................................................................................................................................... 5
RECOMMENDATIONS ................................................................................................................................................................................. 6
2. INTRODUCTION ............................................................................................................................................................... 8
3. PART I: MSG OVERSIGHT ........................................................................................................................................... 14
1.1-1.2: GOVERNMENT OVERSIGHT OF THE EITI PROCESS............................................................................................................ 14
1.3: STAKEHOLDER ENGAGEMENT AND MSG GOVERNANCE AND FUNCTIONING ...................................................................... 16
1.4: WORK PLAN .................................................................................................................................................................................... 22
4. PART II: EITI DISCLOSURES ...................................................................................................................................... 25
1. AWARD OF CONTRACTS AND LICENSES........................................................................................................................................... 25
2. MONITORING AND PRODUCTION...................................................................................................................................................... 34
3. REVENUE COLLECTION ...................................................................................................................................................................... 36
4. REVENUE MANAGEMENT AND DISTRIBUTION ............................................................................................................................... 46
5. SOCIAL AND ECONOMIC SPENDING .................................................................................................................................................. 51
5. PART III: OUTCOMES AND IMPACT ........................................................................................................................ 53
6.1 COMPREHENSIBLE, ACTIVELY PROMOTED REPORTS.................................................................................................................. 53
6.2 REPORT QUALITY............................................................................................................................................................................. 54
7.1 MSG ACTING ON LESSONS LEARNT ............................................................................................................................................. 54
7.2 MSG REVIEW OF OUTCOMES & IMPACT ..................................................................................................................................... 55
8. IMPACT ANALYSIS ........................................................................................................................................................ 57
ANNEX 1 ............................................................................................................................................................................... 59
LIST OF STAKEHOLDERS CONSULTED (IN FIRST TO LAST ORDER OF MEETINGS).......................................................................... 59
ANNEX 2 ............................................................................................................................................................................... 61
LIST OF MSG MEMBERS AND CONTACT DETAILS............................................................................................................................... 61
ANNEX 3 ............................................................................................................................................................................... 62
LIST OF REFERENCE DOCUMENTS........................................................................................................................................................ 62
ANNEX 4: .............................................................................................................................................................................. 63
EITI MSG MEMBERS............................................................................................................................................................................. 63
3
Acronyms/Abbreviations
ASAN
AzEITI
CSO
EED
EITI
GoAZ
HGA
IA
MOU
MSG
NGO
OSF
PSA
SGC
SOCAR
SOFAZ
TOR
Azerbaijan Service and Assessment Network
Azerbaijan EITI
Civil Society Organisation(s)
European Endowment for Democracy
Extractive Industries Transparency Initiative
Government of Azerbaijan
Host government agreements
Independent Administrator, MOORE STEPHENS
Memorandum of Understanding
Multi-Stakeholder Group
Non-Governmental Organisation
Open Society Foundations
Production Sharing Agreement
Southern Gas Corridor project
State Oil Company Azerbaijan Republic
State Oil Fund of the Republic of Azerbaijan
Terms of Reference
1. Executive Summary
Overall Conclusions
Following an EITI fact-finding mission to Baku, the 28th EITI Board meeting in Myanmar (October 2014) agreed
during a closed session that the situation for civil society organisations (CSOs) in Azerbaijan is unacceptable
and that EITI implementation was not able to take place given the current circumstances for CSOs. The EITI
Board called on the government of Azerbaijan to reaffirm its commitment to work with CSOs and ensure an
enabling participative environment. Specifically, the Board called on the government to ensure that NGO
Coalition Members could resume their role within EITI and are able to:



Access their bank accounts and register new grants for EITI implementation activities;
Speak freely about the EITI process and express views without fear of reprisal or harassment;
Organise training, meetings and events related to the EITI process.
There were two remedial actions agreed: that the EITI Board consider a high-level mission to Baku to convey
the Board’s decision and secondly, that Azerbaijan undertake early Validation in accordance with the EITI
Standard to commence on 1 January 2015. The fact-finding mission report submitted to the EITI Board via the
Rapid Response Committee was made available to the Validator in preparation for this assignment. As the
EITI Board has agreed that the report remain confidential, it is not commented on or assessed in this
Validation Report.
As a result of the findings from the early Validation mission in February 2015, the Validator’s overall
recommendation is that EITI in Azerbaijan (AzEITI) has made meaningful progress in implementing EITI in the
context of the seven requirements of the 2013 EITI Standard. The Azerbaijan EITI (AzEITI) draft 2013 report
(hereafter the draft 2013 report) is a significant step up from previous reports and provides a great deal of
additional information on the extractives sector in Azerbaijan. The NGO Coalition review of the draft report
provide an excellent summary of both the quality of the report and the increased participation of civil society
in the report’s preparation:
“This report can be regarded as a first paper that exposes integral components of sale of the
state's share of production, export, employment and material payments in extractive
industries, as well as main aspects of legal framework and fiscal regulations managing this field.
Unlike previous practices, MSG made a decision to establish Working Group to prepare the
Report. Thus, the contribution made by the parties to the development of the report,
particularly on contextual information part is very exceptional.”1
In this report, we identify areas where the draft 2013 report may be strengthened to be fully in line with the
2013 Standard. In this respect, the potential methodological issue of assessing Azerbaijan’s EITI
implementation on the basis of only one draft report under the new standard can be turned into an
advantage: it is an opportunity to strengthen the implementation process. We therefore recommend that
this report be used as an independent source of feedback on the draft 2013 report. At the same time, we are
careful to bear in mind that our assessment of the EITI progress is based on a draft report which is currently
being updated and is on schedule to be finalised before the end of 2015.
We are also mindful that any assessment of progress implementing EITI in Azerbaijan cannot ignore the
current highly sensitive geo-political context and the ramifications this has to shape thinking within
government at this time. Most pressing of issues for many in the Azerbaijani government is the conflict in
Ukraine, which is perceived as a signal for a possible existential threat to Azerbaijan itself and has led to an
increasing securitisation agenda in government. From the government’s perspective, an unfortunate side
effect of this agenda has been what is sometimes perceived to be a clamp down on CSOs. This has directly
affected the ability of the NGO Coalition for EITI to conduct implementation activities and fully participate in
1
See “A Review of the NGO Coalition for "Improving Transparency in Extractive Industries" on 2013 EITI report disclosed within the
framework of Extractive Industries Transparency Initiative Implementation in the Republic of Azerbaijan” October 31st, 2014
Validation of Azerbaijan 2015
current and future EITI activities due to the restrictions on funding and apparent difficulties with NGO
registration. The restrictions on CSOs and the NGO EITI coalition are fully discussed in section 1, using the EITI
Civil Society Protocol (January 2015) provided to the Validator as part of our TOR. In summary, it is the
Validator’s opinion that the restrictions on CSOs activities in Azerbaijan together constitute an impediment
to the ability of CSOs to meaningfully contribute to EITI implementation going forward and do not meet the
recommendations set out in the EITI Civil Society Protocol.
However, it is the view of the Validator that even in this difficult situation, there is a meaningful way forward
for EITI in Azerbaijan. During our mission to Baku, our team met with unanimous support for EITI and a strong
desire for the initiative to continue and strengthen, including from members of the NGO Coalition. The level
of discussion, engagement and commitment of all sides within the MSG is remarkable and in this context, the
Chatham House-type confidentiality rules adopted make sense. This report, in addition to the formality of
completing the validation exercise, is designed to make a set of recommendations to strengthen EITI in
Azerbaijan and to endeavour to steer a course between competing perceptions, to the mutual benefit of all
parties. This will require action on the following recommendations within the next twelve months, following
on from approval by the EITI Board of this report. The Validators believe that all of them are feasible and
achievable within a year and should see Azerbaijan once again playing a leading role within the EITI
community.
Recommendations
Part I: MSG oversight
1. The draft 2013 report should be updated to include all missing information identified in this
validation report required by the 2013 Standard;
2. The NGO Coalition should formally apply to register with the Ministry of Justice;
3. The Government of Azerbaijan (GoAZ) should facilitate the registration of the NGO Coalition if
and how required and provide capacity building support on financial management;
4. A funding mechanism for the NGO Coalition should be agreed with the Council on Support to
NGOs, to enable fulfilment of CSO components of annual work plans;
5. The review of frozen NGO bank accounts should be fast tracked, and the results made publicly
available;
6. The MSG should consider developing a transparency and accountability strategic framework that
shapes medium to long term thinking, going beyond the minimum requirements of the EITI 2013
Standard;
7. Financial support should be provided to implement (and develop) the 2015-18 NGO Coalition
Strategic Plan (Secretariat, capacity-building, project support), building on existing World Bank
support;
8. The MSG consider setting up an online automated continuous reporting system and web-based
reporting templates to reduce the cost of reporting;
9. The work plan should be updated to reflect best practice;
Part II: EITI disclosures
10. The IA should provide further details and explanations around licenses, reforms and laws as
outlined in the summary table and detailed in the report;
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Validation of Azerbaijan 2015
11. More information should be disclosed about PSAs, including the location of all active PSAs on a
publically available website;
12. Going forward, disclosures of beneficial ownership should be considered and discussed by the
MSG;
13. The 2013 EITI final report should include information on exploration activities;
14. The MSG should ensure the 2013 EITI final report includes information and data related to
unmet provisions outlined in this document;
15. The MSG should review the definition on materiality and specifically ensure that material
revenue streams are comprehensively covered by the final EITI report and an appropriate level
of disaggregation is provided by government departments and companies;
16. The MSG should consider including the encouraged provisions in the next EITI report;
17. The MSG should include details on quasi fiscal revenue and expenditure in the final 2013 report;
18. The MSG should include details on relevant social expenditure in the final 2013 report;
Part III: Outcomes and Impact
19. The IA should place emphasis on ensuring the language in the final report is comprehensible and
accessible;
20. The MSG should organize further outreach events, and ensure the NGO Coalition members have
access to funding to ensure they can report to the general public.
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Validation of Azerbaijan 2015
2. Introduction
Overview and background of EITI implementation
Azerbaijan was an early adopter of EITI (2003), becoming a candidate country in 2007 and the first country to
become compliant in 2009 during the Doha EITI Conference. The Coalition for Improving Transparency in
Extractive Industries was formed in 2004 and Azerbaijan played a key role in the adoption of the UN General
Assembly resolution on EITI in 2008.
Following reports of interference with the ability for CSOs to function2, the 27th EITI Board meeting in Mexico
(in July 2014) appointed a Rapid Response Committee to discuss Azerbaijan. A decision on Azerbaijan was
made at the 28th EITI Board meeting in Myanmar (October 2014), requesting CSOs be fully empowered (in
terms of access to funding, freedom of expression and association) and that the next validation was brought
forward to take place by February 2015.
Objectives for Implementation and Progress in Implementing the Work plan
AzEITI has defined its objectives each year in an annual work plan. The core focus each year has been the
preparation and disclosure of an annual EITI report. For the draft 2015 work plan, the other key focus was a
successful validation, as well as outreach to increase awareness of EITI and exchange experiences with other
countries. The 2014 work plan additionally included planning to transition to the EITI 2013 Standard. The
core objective here was to devise and agree on a new MoU for the MSG in line with the new standard. AzEITI
has made good progress in implementing the work plan, apart from outreach activities carried out by the
NGO Coalition and its members.
History of EITI Reporting




The first AzEITI report was produced in 2005 (within 18 months of being declared a candidate
country). Reconciliation reports have been produced for each subsequent year. AzEITI in fact
produces semi-annual and annual reports, with a total of 17 published so far (all are available on the
AzEITI website)
The latest report (currently in draft) is for the 2013 financial year. It is due to be published before the
end of 2015, in line with Requirement 2.2 that reports must cover data no older than the second to
last complete accounting period
The MSG MOU (provision 2) requires that the annual EITI report be prepared and published by
December 31st of the following financial year
The current Independent Administrator, Moore Stephens, was contracted to produce three annual
reconciliation reports – for the reporting periods 2012, 2013 and 2014
Key features of the extractive industry
Of all the countries in the world, Azerbaijan has the oldest tradition of petroleum as a feature of everyday
life. Burning gas has leaked from the ground in the Absheron Peninsula since the last ice age (Azerbaijan
means the “land of fire”). . In modern times, the world’s first mechanically drilled oil well was in Azerbaijan
(in 1848). Azerbaijan’s early oil barons were the Swede Ludwig Nobel and local oligarch Haji Zeynalabin
The Zoroaster
2
Human
Rights
Watch,
“Tightening
the
Screws”
,
http://www.hrw.org/sites/default/files/reports/azerbaijan0913_ForUpload_1.pdf
8
published
September
2,
2013.
Validation of Azerbaijan 2015
Taghiyev. The first oil tanker in the world (named the
Zoroaster) was owned by Ludwig Nobel. While from
a Western perspective the history of oil begins with
the Rockefellers and the rise of Standard Oil in the
US, the reality is that modern age of petroleum
began in Azerbaijan.
The past twenty years has seen a dramatic increase
in development in the petroleum sector in
Azerbaijan, beginning with the so-called “Contract of
the Century”, a landmark production sharing
agreement for the Azeri – Chirag – Guneshli deepwater oil fields signed by thirteen companies
((Amoco, BP, McDermott, Unocal, SOCAR, LukOil,
Statoil, Exxon, TPAO, Pennzoil, Itochu, Ramco, Delta) from eight countries (Azerbaijan, USA, Great-Britain,
Russia, Turkey, Norway, Japan, Saudi Arabia).3 Meanwhile, Azerbaijan has a growing network of pipelines
(the Baku-Tblisi–Ceyhan to Turkey, as well as the Baku- Supsa, Baku – Novorossiysk and the South Caucasus
pipelines) which will shortly be augmented by the Southern Gas Corridor Project (SGC), a $45bn 3,500km
pipeline from Azerbaijan to Italy that will secure and diversify Europe’s energy supplies). The first gas to Italy
is projected to occur in 2019.4
The era of a decade of high oil prices (for now, coming to a close) and the transition from President Heydar
Aliyev to his son Ilham Aliyev in 2003 coincided with a dramatic transition of the economy. The building blocks
for growth were put in place during President Heydar Aliyev’s tenure, with innovations such as the founding
of the State Oil Fund of Azerbaijan (SOFAZ) in 1999 to protect against oil price shocks. Nonetheless, the
economy has been unable to transition away from a dependency on oil.
Summary Economic data on extractives in Azerbaijan
 7 billion barrels estimated reserves
 18 PSAs: 12 onshore, 5 offshore
 870,000 bpd estimated production (3% drop)
 Largest oil field: Azeri-Chirag-Guneshli (650,000 bpd) – PSA published on the AzEITI website5
 Largest gas field: Shah Deniz – PSA published on the BP web site6
 43.4% GDP (2013)
 92% of export revenue (2013)
 65.8% of the budget (2013)
 SOFAZ now worth $37bn
Summary of engagement by GoAZ, Civil Society and Industry
The MSG has evolved since the formation of EITI in three formal stages – an MOU signed in 2004, an
Agreement signed in 2009 (after the first validation of AzEITI) and then an MOU signed in 2014. The
government Commission on EITI was established by the Ordinance of Cabinet Ministers in November 2003;
companies were formed into a “Company Group” (with details in the first Annex of the MOU) and NGOs
formed an NGO Coalition. Annex 2 of this report lists the current MSG members (including the alternates),
while Annex 4 lists the previous MSG members since 2010.
3
See http://en.president.az/azerbaijan/contract
http://www.tap-ag.com/the-pipeline/the-big-picture/southern-gas-corridor
5 http://www.eiti.az/index.php/en/senedler-2/agreements/266-azeri-chirag-deep-water-gunashli
6 http://www.bp.com/content/dam/bp-country/en_az/pdf/legalagreements/PSAs/SD-PSA.pdf
4
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Validation of Azerbaijan 2015
At the time of signing the MOU, 37 local and international companies were part of the company group and
109 NGOs were members of the NGO Coalition (although numbers of participating NGOs has fluctuated
significantly, with 158 NGOs listed in the 2012 Activity Report). The Company Group has a separate agreement
on participation on the MSG (which relate to the 2004 MOU). This agreement lays out how companies will
select representatives for the MSG, via a process of nomination and voting. The NGO Coalition elected new
Council and MSG members at its General Meeting on 13th December 2013.
The Validation Process
As laid out in the EITI 2013 Standard Validation Guide and based on the Validator Terms of Reference, this
report reviews the seven EITI Requirements. Where provisions are expected, we have provided an
assessment of either “met” or “unmet”, with the latter divided into two sub-assessments: “meaningful
progress” – meaning that there has been some progress in EITI implementation, but further action required
for the requirement to be considered met and “limited progress”, meaning that there is little evidence of
progress toward compliance and considerable additional actions are needed for the requirement to be
considered met. Where provisions are recommended or encouraged but not required items, the Validator
has provided commentary, but not considered them as part of the overall compliance status.
As well as an assessment of each of the seven requirements, this report provides a judgment on whether the
country is compliant with the EITI Standard overall, with three possible recommendations: full compliance
with the EITI Standard, Meaningful Progress and No meaningful progress. The validation process takes into
account all aspects of the EITI Standard, including the Civil Society Protocol, which was updated in January
2015. 7 The protocol notes that in assessing the civil society provisions, both the Board and appointed
validators will apply the following tests:





Expression: Civil society representatives are able to engage in public debate related to the EITI
process and express opinions about the EITI process without restraint, coercion or reprisal.
Operation: Civil society representatives are able to operate freely in relation to the EITI process.
Association: Civil society representatives are able to communicate and cooperate with each other
regarding the EITI process.
Engagement: Civil society representatives are able to be fully, actively and effectively engaged in the
design, implementation, monitoring and evaluation of the EITI process.
Access to public decision-making: Civil society representatives are able to speak freely on
transparency and natural resource governance issues, and ensure that the EITI contributes to public
debate.
Following an EITI fact-finding mission to Baku, the 28th EITI Board meeting in Myanmar (October 2014) agreed
during a closed session that “the situation facing civil society in Azerbaijan is clearly problematic. The Board
discussed the findings of the fact finding mission and expressed deep concern. The Board hopes that
Azerbaijan will open up more space for civil society to make its essential contribution to the EITI as laid down
in our Standard”8 The EITI Board called on the government of Azerbaijan to reaffirm its commitment to work
with CSO and ensure an enabling participative environment. Specifically, the Board called on the government
to ensure that CSO Coalition Members could resume its role and are able to:


7
8
Access their bank accounts and register new grants for EITI implementation activities;
Speak freely about the EITI process and express views without fear of reprisal or harassment;
The Civil Society Protocol is part of the EITI Standard and is available here https://eiti.org/document/standard
https://eiti.org/news/statement-eiti-chair-clare-short-azerbaijan
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Validation of Azerbaijan 2015

Organise training, meetings and events related to the EITI process.
There were two remedial actions agreed: that the EITI Board consider a high-level mission to Baku to convey
the Board’s decision and secondly, that Azerbaijan undertake early Validation in accordance with the EITI
Standard to commence on 1 January 2015.
The fact-finding mission report submitted to the EITI Board via the Rapid Response Committee was made
available to the Validator in preparation for this assignment. As the EITI Board has agreed that the report
remain confidential, it is not commented on or assessed in this Validation Report.
The assessment of the EITI provisions is structured into three parts as per the illustration below. Part I is the
assessment of the MSG oversight of the EITI process (provisions 1.1. – 1.4); Part II is the assessment of the
EITI disclosure provisions including the timeliness, comprehensiveness and reliability of the information
(provisions 2 – 5); and Part III is the assessment of the outcomes and impact of EITI implementation
(provisions 6-7).
Part I: MSG oversight
Government oversight (1.1, 1.2)
Stakeholder engagement (1.3)
MSG governance and functioning (1.3)
EITI workplan (1.4)
Part II: EITI disclosures
Award of contracts
and licenses
Legal framework (3.2)
License allocations (3.10)
License registers (3.9)
Contracts (3.12)
Beneficial ownership (3.11)
State-ownership (3.6.a &
3.6.c)
Timely, comprehensive and
reliable disclosures (2, 5)
Monitoring and
production
Exploration (3.3)
Production data (3.5.a)
Export data (3.5.b)
Timely, comprehensive
and reliable disclosures
(2, 5)
Revenue collection
Taxes and other EI
payments (4.1.b)
In-kind revenues (4.1.c)
Transport revenues (4.1.f)
Barter arrangements (4.1.e)
Subnational payments
(4.2.d)
SOE transactions (4.2.c)
Timely, comprehensive and
reliable disclosures (2, 5)
Revenue
management and
distribution
Sub-national transfers
(4.2.e)
Distribution of revenues
(3.7)
Social expenditures
(4.1.e)
Timely, comprehensive
and reliable disclosures
(2, 5)
Social and
economic spending
SOE quasi fiscal expenditures
(3.6.b)
Earmarked EI revenues
(3.8.a)
Budget and audit processes
(3.8.b)
Economic contribution (3.4)
Timely, comprehensive and
reliable disclosures (2, 5)
Part III: Outcomes and Impact
Public debate (6.1, 6.2)
Lessons learned and follow up on recommendations (7.1)
EITI outcomes and impact (7.2)
Following on from the EITI Board’s decision on the implementing country, the following pathways apply:
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Validation of Azerbaijan 2015
In the case of Azerbaijan, the EITI Board decided in October 2014 on the following possible pathways in line
with the above flow chart:




Should Validation conclude that Azerbaijan has met all EITI Requirements, Azerbaijan will maintain
its status as compliant with the EITI Requirements in accordance with Requirement 1.6.b.
Should Validation conclude that Azerbaijan has made meaningful progress towards achieving EITI
Compliant status but has not met all of the requirements, Azerbaijan will have its status downgraded
from compliant to candidate in accordance with Requirement 1.6.b.
Should Validation conclude that Azerbaijan has made no meaningful progress with EITI
implementation, Azerbaijan will be delisted in accordance with Requirement 1.6.b.
Should Validation conclude that it is manifestly clear that a significant aspect of the EITI Principles
and Requirements is not being adhered to, the EITI Board will suspend or delist Azerbaijan in
accordance with Requirement 1.7.a
Project Methodology
The second validation of Azerbaijan involved three phases of work:
Phase 1: Preliminary Desk Work (01.01.15 – 03.02.15)
The core focus of the desk work was an in-depth assessment of current draft 2015 work plan (which is
expected to be agreed by the MSG in March 2015) and the draft 2013 EITI Report to note progress against
the work plan in the previous two years – in line with the Requirement 1.4. We also assessed all annual EITI
reports since Azerbaijan became a compliant country in April 2009: 2008, 2009, 2010, 2011 and 2012, with
an emphasis on the two most recent years (2011 and 2012). We also reviewed the previous validation report
(from 2009) to assess how effectively the recommendations from that report have been implemented in
subsequent work plans. As part of our assessment, we conducted initial teleconference interviews with the
EITI National Coordinator, Farid Farzaliyev and his team. We also engaged with relevant stakeholders not
based in Azerbaijan, as well as a review of external documents, as part of our initial fact-and-analysis finding
12
Validation of Azerbaijan 2015
work. Prior to our country visit, we agreed a draft meeting schedule with the National Coordinator for
feedback and additions.
Phase 2: Country visit and Stakeholder Consultation (04.02.15 – 15.02.15)
This ten-day phase involved two team members visiting Baku to meet MSG members and other EITI
stakeholders. We met the MSG Validation Sub-Committee at the start of our mission, and presented our initial
findings to the full MSG on the last day. Annex 1 below lists all the consulted stakeholders. The draft report
was submitted to the International Secretariat and to the AzEITI MSG on the 15th February.
Phase 3: Report Writing, Respond to Comments (27.02.15 – 06.03.15) All comments on the draft report from the AzEITI MSG and the international Validation Committee were
addressed in this period (including those given verbally during the initial findings presentation). The Validator
requested clarifications from the EITI International Secretariat and the AzEITI Secretariat during this period,
with final requests for clarification from the AzEITI secretariat on 28th of February 2015. Where responses
have been provided in English in a timely fashion, we have included them in the report. The final report was
be submitted to the International Secretariat on the 6th March, 2015.
The Validator experienced a number of restrictions which affected the output:
 Time constraints: The first draft of the report was due 3 days following the end of mission. Generally,
we recommend ensuring more time for Validations going forward to ensure that fact checking and
follow up can take place;
 The first Validation under the 2013 standard: As this is the first validation under the new EITI standard,
the Validator experienced some teething issues, particularly with understanding the requirements
under the Validation guide. We provided these comments to the EITI Validation Committee in
advance of presenting the validation findings to the committee in March 2015
 Late receipt of Information: Information from the AzEITI secretariat was received a day before final
submission in Azeri, i.e. with no time to translate, and as a result has not been fully incorporated into
the report
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Validation of Azerbaijan 2015
3. Part I: MSG oversight
Overview
This section relates to government oversight of the EITI process, stakeholder engagement and the
environment for implementation of EITI in country, the governance and functioning of the Multi-Stakeholder
Group (MSG), and the EITI work plan.
Stakeholder engagement covers all aspects of the EITI standard, with further emphasis on the requirements
set out in the Civil Society Protocol (updated in January 2015): CSO Expression, Operation, Association,
Engagement and Access to Public Decision Making. In taking into account the Protocol, the Validator has
focused on relating the views of Azerbaijani CSO participants either interviewed during the in-country
validation or remotely.
1.1-1.2: Government oversight of the EITI process
Facts and Progress
Azerbaijan was an early adopter of EITI, participating in a conference in London in June 2003 to agree a
statement of principles and agreed actions to increase transparency over payments and revenues in the
extractives sector.9 At this conference, a delegation led by Ilham Aliyev, then First Vice President of the state
oil company SOCAR, indicated the willingness of Azerbaijan to join EITI. The closing paragraph of his speech
noted:
“As I mentioned before, Azerbaijan, from the very beginning expressed its support to the
initiative of transparency in extractive industries. It corresponds to what we have done in the
past and in the future, I am sure this policy will continue. We will promote this initiative inside
our country and if it is necessary, we are ready to play an active part in promotion it outside
our borders. We had full experience in creating transparency in the past and we have good will
to continue this policy in the future.”
This speech constitutes an unequivocal statement of Azerbaijan’s intention to implement EITI. In addition to
the initial statement, there have been multiple references to EITI by the President of Azerbaijan Ilham Aliyev.
These references were provided by the AzEITI Secretariat to the Validator:
“As a very active member of the Extractive Industries Transparency Initiative, Azerbaijan in an
open and transparent manner uses its energy revenues for the development of the country,
particularly building-up of human capital and eradication of poverty. Thus, we were able to
achieve a dramatic poverty reduction from 49 percent in 2003 to 11 percent in 2009. And I
strongly believe that through sustainable development Azerbaijan in upcoming years will attain
even more in this field” (Speech by President Ilham Aliyev at the 65th session of the United
Nations General Assembly, 23 September 2010; http://en.president.az/articles/764).
“We knew that Azerbaijan’s oil revenues would be managed at the highest level. With this
purpose Azerbaijan joined the Extractive Industries Transparency Initiative (EITI). Today, the
Executive Director of the Oil Fund has said that Azerbaijan has become the first country to
secure fully-fledged membership in the program. We are doing this not only to receive good
feedback from foreign centres. We are doing this because it strengthens our country”
9
http://collections.europarchive.org/tna/20070701080507/http:/www.dfid.gov.uk/news/files/eitireportconference17june03.asp
14
Validation of Azerbaijan 2015
(Expanded meeting of the Cabinet of Minister chaired by President Ilham Aliyev, 20 October
2010; http://en.president.az/articles/919).
“In general, one of our biggest achievements playing a role in the economy is transparency.
Azerbaijan joined the Extractive Industry Transparency Initiative eight years ago and is now a
full member of it. We have achieved complete transparency in our energy sector” (President
Ilham Aliyev Interactive session dedicated to Azerbaijan was held in Davos, 28 January 2012;
http://en.president.az/articles/4183).
“The Republic of Azerbaijan has joined the Extractive Industry Transparency Initiative (EITI) in
2003 and established State Commission charged with the implementation of this initiative. The
Implementation Mechanism for the initiative was defined by the State Commission, local and
foreign companies engaged in extractive industry, NGOs acting in the field of Increasing
Transparency in the Extractive Industry, subsequently leading to the signing of the
Memorandum of Understanding on the Implementation of the Initiative. Azerbaijan was
granted a status of the candidate and in 2009 was designated as EITI compliant. The State Oil
Fund was rewarded with the UN Public Service Award for its achievements in the area of Raising
Transparency, Accountability and Responsibility in 2007. In 2009, the EITI award was conferred
on Azerbaijan” (Open Government Initiative National Action Plan 2012-2015, Endorsed by the
Presidential Decree of the 5th September 2012; http://www.commissionanticorruption.gov.az/upload/file/OGP%20AP%20Azerbaijan%202012-2015%20Eng.pdf).
“Azerbaijan was one of the first countries to join the Extractive Industries Transparency
Initiative of the then Prime Minister of the United Kingdom, Mr. Blair. Azerbaijan became the
first full member of this initiative and there is now 100% transparency in the extractive
industries in Azerbaijan. We need to have the same percentage of transparency in our financial
and public services sectors, and we are working on that” (President Ilham Aliyev addressed the
PACE Summer Session, 24 June 2014; http://en.president.az/articles/12149).
Ordinance of the Cabinet of Ministers of the Republic of Azerbaijan number 224 from 2003 (now available in
English but at the time of the final version of this report not yet online) notes that the Chair of the Government
Committee on EITI will be the Executive Director of SOFAZ.10 Meanwhile, the latest MSG MOU states (in
clause 1.3.6) that “The chairman of the Commission shall be the Chair of the MSG on behalf of the
Government and shall chair its meetings. In the event of non-attendance of the chairman of the Commission
at a MSG meeting, the chairmanship is exercised by members of MSG representing Parties in turn.” The
current Executive Director of SOFAZ and the Chair of the MSG is Shahmar Movsumov.
Stakeholder Views
 Government stakeholders are proud of the government’s record of revenue transparency, with the
early adoption of EITI as testament;
 Other stakeholders agree that EITI has been an important opportunity to engage government in the
most significant sector of the economy. Shahmar Movsumov is widely respected in his role as
Executive Director of SOFAZ and Chair of the MSG.
Conclusion
Both sub-provisions are met.
10
http://www.eiti.az/index.php/en/senedler-2/ordinance2/270-ordinance-of-the-cabinet-of-ministers-of-the-republic-ofazerbaijan-224
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Validation of Azerbaijan 2015
1.3: Stakeholder Engagement and MSG Governance and Functioning
Facts and Progress
The MSG has evolved since the formation of EITI in three formal stages – an MOU signed in 2004, an
Agreement signed in 2009 (after the first validation of AzEITI) and then an MOU signed in 201411 - this is
therefore a clear and public Term of Reference for the MSG that was extensively and participatively discussed
(at the 28th, 29th, 30th and 31st MSG meetings). As the 2014 MOU sets out, the government “Commission” on
EITI was established by the Ordinance of Cabinet Ministers in November 200312; companies were formed into
a “Company Group” (with details in the first Annex of the MOU) and NGOs formed an NGO Coalition (with
details provided in the second Annex).
The 2014 MOU ensures that the invitation to participate in the group is open and transparent – section 1.2.1
states that “Each Party shall appoint with equal rights 3 (three) principal members and up to 3 (three)
alternate members to the MSG.” This ensures that there is adequate representation and each stakeholder
group has the right to appoint its own representatives. Annex 2 of this report lists the current MSG members
(including the alternates), while Annex 4 lists the previous MSG members since 2010. Meanwhile, the
Commission on EITI ensures that senior government officials are represented on the MSG.
At the time of signing the MOU, 37 local and international companies were part of the company group and
109 NGOs were members of the NGO Coalition (although numbers of participating NGOs has fluctuated
significantly, with 158 NGOs listed in the 2012 Activity Report). Through the NGO Coalition minutes (known
as protocols) there is evidence that CSO is free to select its own MSG members and to represent itself at
different EITI events in the coalition’s protocols (minutes) and has operational and policy independence from
government.13
The Company Group has a separate agreement on participation on the MSG (which relates to the 2004 MOU).
This agreement lays out how companies will select representatives for the MSG, via a process of nomination
and voting. MSG members representing companies are given 12 months tenure. Meanwhile, the NGO
Coalition has regulations for ordinary coalition members, as well as regulations for its Board. The NGO
Coalition is comprised of a general assembly, a coalition board (or “council”), a monitoring group and regional
representatives. Members of the Coalition Council have a two year tenure, voted by majority through a secret
ballot procedure. The board/council vote who will represent the coalition on the MSG. The NGO Coalition
elected new Council and MSG members at its General Meeting on 13th December 2013. The coalition is
currently finalising a 2015-2018 Strategic Plan with support from the World Bank.
The Validator observed or received no evidence of coercion during the process of change of membership of
any MSG member.
In June 2014 at the 31st MSG meeting, a draft EITI law was presented by the NGO Coalition members, showing
that the MSG has considered the legal basis of the group. However, the government and company
representatives rejected the proposal. The Validator was informed by the AzEITI Secretariat that while there
was no detailed discussion of law itself, however, there was discussion of the necessity of implementing the
existing legal framework. Also, the Chair of the MSG mentioned that an EITI law could negatively influence
the flexibility of implementation EITI in Azerbaijan. By the time of the July 2014 (32nd) MSG meeting –
emerging difficulties for CSOs were raised (however, the detailed discussion is not represented in the
minutes). This was against a background of amendments to the NGO law (which had previously been
11
http://www.eiti.az/index.php/en/senedler-2/memorandum
12 http://www.eiti.az/index.php/en/senedler-2/ordinance2/270-ordinance-of-the-cabinet-of-ministers-of-the-republic-of-azerbaijan-
224
13 For example http://eiti-ngo-azerbaijan.org/wp-content/uploads/2014/07/Protocol-N83-EN.pdf. All NGO Council minutes can be
accessed here: http://eiti-ngo-azerbaijan.org/?page_id=172
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Validation of Azerbaijan 2015
amended in 2009, and followed by a decree in 2011). In March 2013, a new amendment (number 24-1) was
made on donations and grants which had the consequence (at least for some NGOs) of making access to
foreign funds very challenging.
MSG members are substantially engaged in the design, implementation, monitoring and evaluation of the
EITI process, as is evident from the discussion on the 2015 work plan in the MSG meeting (number 34) on 10th
December, 2015.
Clause 1.1.1a of the 2014 MOU empowers the MSG to develop work plans, define the
Terms of Reference for and appoint the Independent Administrator (1.1.1.d). Meanwhile, 1.1.1g gives the
MSG the power to prepare, approve, publish and distribute EITI reports as well as annual activity reports. The
2014 MOU also gives details on the MSG’s internal governance rules, including meetings and decision making
(which is made by consensus voting as stated in Clause 1.4.2.). Clause 1.4.3 of the MOU states that “Any
position expressed by a member of the MSG is considered to be the position of the relevant Party. Therefore,
prior to the meeting, the members of MSG should seek to reach an agreement on the issue with the Party
that they represent.”
Venice Commission Opinion recommendations
The Venice Commission of the Council of Europe published an Opinion on 15th December 2014 on recent
amendments to the Non-Governmental Organisations (Public Associations and Funds) law (hereinafter the
“Law on NGOs”).14 The Opinion first of all lays out the legal framework for NGOs in Azerbaijan, by assessing
salient constitutional provisions (such as Article 26 on the protection of rights and liberties of citizens and
Article 58 on the right to establish a union, political party or public organisation) as well as the law on NGOs
itself. The opinion notes that the NGO law was adopted in 2000, replacing an older 1992 law, and was
generally welcomed as more progressive legislation. The Opinion also notes that in 2003 a Law on State
Registration and the State Registry of Legal Entities was enacted which includes details on registering NGOs.
However, the document notes that subsequent amendments to the NGO law (and in parallel, the law on
registration) have led to criticism, in terms of registration of NGOs and specifically registering local branches
of international NGOs. This view tallies with the reality: that international NGOs such as OSF, Oxfam, the
European Endowment for Democracy and some foreign embassies have all faced challenges and some
organisations have had to close. The Opinion goes on to analyse the various international legal frameworks
Azerbaijan has adopted, such as the 1966 International Covenant on Civil and Political Rights and the 1950
European Convention on Human Rights (ratified in 2002).
Following on from this national and international legal framework analysis, the Opinion comments (both
generally and specifically) on the amendments to the NGO law, noting that they raise barriers to the
establishment of NGOs through additional administrative requirements and checks as well as more
problematic registration procedures. The amendments also introduce more severe penalties for noncompliance and therefore fail to address significant recommendations made by the Venice Commission in its
earlier 2011 Opinion. Among the specific observations, the Opinion notes that the third set of amendments,
adopted by Parliament in October 2014 and signed by the President on 14th November, potential NGO donors
are limited to citizens or legal persons of Azerbaijan, thus preventing donations from foreign organisations
funding NGOs directly. The Opinion comments that, “The Venice Commission reiterates that, while foreign
funding might give rise to some legitimate concerns, it shall not be prohibited unless there are specific reasons
to do so. Even then, foreign funding should never be object of an outright ban.”
The Opinion concludes the detailed analysis with the following remarks (direct quotation):
 “The NGO registration process should be simplified and decentralised in order to decrease its
excessive length; specific measures should be taken to ensure full respect for the legislative
requirements and to prevent contra legem practices as the breach of deadlines for registrations,
14
http://www.venice.coe.int/webforms/documents/?pdf=CDL-AD(2014)043-e
17
Validation of Azerbaijan 2015



repeated unnecessary demands for correction of registration documents etc. The relevant provisions
should be amended to limit the grounds for refusal of registration to serious deficiencies.
The requirement for international NGOs to create local branches and representations and have them
registered should be reconsidered. Blanket restrictions on the registration and operation of branches
and representations of foreign NGOs, such as the absolute limitation of the number of branches and
representations of foreign NGOs in Azerbaijan, should be eliminated.
The amendment preventing foreign funding of NGOs should be revised as to authorize foreign
funding unless there are clear and specific reasons not to do so. The procedure for obtaining the right
to give a grant, if maintained, should be associated with clear criteria and procedural indications
clearly laid down in the legislation.
Provisions allowing unwarranted interferences into the internal autonomy of NGOs, i.e. reporting
obligations and state supervision on NGOs internal organisation and functioning, should be
removed.”
Stakeholder Views
Government




18
The government’s view is that there has been full and active engagement of all parties in the MSG
and that it has worked hard to create an enabling environment for both company and civil society
participation. Via the three-stage evolution of the MSG MOU in the past decade, the three
stakeholder groups are free to select their representatives to the MSG (the government via the EITI
Committee, the NGO Coalition via the CSO council, companies via the Company Group). Meanwhile,
the government’s view is that NGO registration law is in fact in line with international best practice
and the recent activity in ensuring compliance is to be expected in a complex region. One government
official involved in EITI stated that if there are any aspects of the NGO law that are not reflected in
international good practice, the GoAZ would amend the law.
In response to the draft version of this Validation report, the government EITI Commission noted,
“Civil Society actively participates in the EITI process in Azerbaijan, there are no restraint, coercion
and nothing restricts the right to speak freely. The government ensured the existence of enabling
environment for participation of companies and Civil Society in EITI process of Azerbaijan with regard
to relevant laws, regulations and administrative rules. During last 5 years 34 Multi-Stakeholder Group
(MSG) meetings with participation of Civil Society representatives (protocols available) were held
(some of meetings were initiated by the Coalition of NGOs), several Working Groups consisting from
all 3 constituencies including Civil Society were established, numerous other events and activities
with active involvement of Civil Society representatives took place. During that period of time MSG
in common and its constituencies separately conducted and participated in a number of outreach
activities through: radio, press-releases, local conferences, seminars, trainings, round tables, face to
face meetings, EITI Reports and etc.”
In consultation during the mission to Baku, Ministry of Justice officials stated that they will query the
recent Venice Commission recommendations formally in due course. They also noted that they
challenged specific aspects of an earlier (2011) Venice Commission report (while incorporating other
acceptable recommendations in the later amendments) and that the report writers acknowledged
their mistakes during a visit to Baku. However, the Validator was unable to gather evidence to back
up this claim. Finally, officials in this agency note that the NGO Coalition is not a registered body, and
that there has not even been an attempt to register the coalition (core members of the coalition
agree that they have not tried to register).
Meanwhile, GoAZ officials point to their record in improving registration and administrative processes
and interfaces between citizens and government. They point to the Azerbaijan Service and
Assessment Network (ASAN) service centres, which provides one-stop shop services to citizens (and,
officials have suggested, could possibly be extended to provide support to EITI, such as facilitating
Validation of Azerbaijan 2015
company administrative processes through training on financial management and book-keeping).15
More central to this requirement, the Council on State Support to NGOs contests any view that there
is political pressure being applied on the NGO sector, and points to its record supporting organisations
associated with opposition parties. Officials from the Council on State Support to NGOs also note
that of the eleven members of the council, eight are from civil society and are elected democratically.
They further explain that they provide resource and training centres (via the NGO Forum coalition)
and are planning (with USAID support) to roll out more. Their view is that the requirement that
foreign donors must apply via the Ministry of Finance to provide support is simply practising
administrative efficiency (to avoid duplication of resourcing). They also remarked that the same
registration processes for foreign donors also apply to Azerbaijan state agencies – all 26 agencies
providing support to NGOs also have to comply with the Council on State Support to NGOs.
Meanwhile, the government view is that the NGO sector has operated with little or no internal
accountability, and with issues of tax evasion and corruption prevalent. Officials finally stated that
they would also be willing to support the NGO Coalition should it have any issues with registration.
Civil Society

While there is a diversity of opinion within civil society (with members with different agendas and
political perspectives), a commonly held view from the Validator’s consultations with civil society
representatives contrasts sharply with the prevailing government view, to the extent of irreconcilable
differences in perception. It is impossible to describe a middle ground in perceptions between the
government view and the civil society, because one does not exist in either camp. A commonly held
civil society view is that the clampdown on EITI outreach activities began around the second quarter
of 2013. In terms of specific issues, civil society representatives point first to the facts: 20
organisations involved in the coalition have had their accounts frozen, including the organisation
whose account runs the coalition’s affairs – the Economic Research Centre. CSO representatives also
reported the following issues:
o
o
o
15
NGO Coalition members suggested that it is impossible to register the coalition, as there
aren’t stated regulations for coalitions in the law. They point out that in Azerbaijani law, if a
matter is not prescribed in law, it is illegal.
In 2014 the Coalition made a film about EITI for the AzEITI’s 10th anniversary, however hotels
and conference halls in Baku refused to hire out to the Coalition for the event because they
had received instructions not to host. For the same reason, all sub-national level events and
roundtables could not take place.
Due to restrictions in funding (lack of access to international donor funds and frozen
accounts) in 2014 the Coalition was not able to implement its components within the EITI
Work plan. The situation was the same in 2013. The issue was included in the 2013 Activity
report: the work plan component of “Increasing the awareness of the Azerbaijani population
on EITI” could not be completed. Roundtable discussions in universities, regions and regional
and central TV stations could therefore not be carried out. The Coalition provided three
reasons in the Activity report (direct quotation from the report follows):
1. “Coalition did not provide for funds in its projects for roundtable meetings in
universities. Therefore no initiatives were taken for execution of this liability.
2. Roundtable organizational activities in the regions were not possible due to the
unofficial prohibitions of actions in the regions.
http://www.asan.gov.az/
19
Validation of Azerbaijan 2015
o
o
o
o
o
o



3. The reason why the roundtables were not organized in central and regional TV
channels was that no broadcast time was allocated in central TV channels despite
numerous requests by the Coalition.”16
As the coalition is not formally registered, funds for its activities are channelled through the
Economic Research Centre, which acts as the financial agent for the coalition. The centre’s
accounts were frozen in the last quarter of 2014. 17
The European Endowment for Democracy (EED) funded a research project through the Oil
Workers' Rights Protection Organisation on best practices in extractive sector transparency.
The project account was frozen and the EED was labelled a “suspect donor”.
Civil society representatives stated that with increasingly more civil society actors and
activists imprisoned, self-censorship has become a critical issue. CSO representatives report
being very concerned about intimidation and reprisals.
CSO stakeholders note that the last time the Coalition spoke publicly about transparency and
revenue management issues was in the first quarter of 2013, when the NGO Coalition was
able to be represented on Radio Liberty thanks to a grant from the Revenue Watch Institute.
Meanwhile, the station has now been closed down.18
The Coalition “was forced” to vacate an office located in the “Life Center” in February 2014,
where it had been operating for three years.19
In an appeal to the EITI International Board, the NGO Coalition noted that it does not
recommend delisting AzEITI, stating that “However, the EITI NGO Coalition believes delisting
of Azerbaijan from EITI will bring existing platform for CSO and government collaboration to
an end. This will bring to deterioration of current situation, worsening condition of member
organizations and increase of pressure on them. The EITI NGO Coalition believes once
enabling environment for CSO is improved, collaboration with government and companies
could continue.”20
Nonetheless, NGO representatives fear that the Coalition will no longer able to function without
funding and will soon exist in name alone; they add that there is no legal provision to enable the
Coalition to be registered (the reason why it has not even applied) and that under Azerbaijani law, if
there is no prescription for an administrative process, that process cannot take place. The civil society
view is that the GoAZ prefers compliant government-backed NGOs, “GONGOS”. The view is that in
the context of a securitisation agenda, this stance is counterproductive, as the role of civil societies is
to provide balance and stability to society and to provide support (albeit sometimes critical) to the
government in furtherance of a better Azerbaijan.
In a statement in support of the NGO Coalition in Azerbaijan, Publish What You Pay (PWYP) noted
that “Publish What You Pay was disappointed that the International Board did not suspend
Azerbaijan, as it should have done according to the initiative’s rules.”21 The International Board could
have done so through provision 1.7 on suspension, which states that “Where it is manifestly clear
that a significant aspect of the EITI Principles and requirements are not adhered to by an
implementing country, the EITI Board will suspend or delist that country.”
A more general view from several civil society members during the Validation mission was that in
spite of the current security issues that plague the country, civil society organisations should not be
victimised and that the role of civil society is not to become unpaid government advocates. They
pointed out that civil society’s role is to uncover problems to help strengthen society.
.
16
See http://www.eiti.az/index.php/en/reports/2013
http://eiti-ngo-azerbaijan.org/?p=780
18 http://www.azadliq.org/contentlive/liveblog/26763625.html
19 http://eiti-ngo-azerbaijan.org/?p=627
20 http://eiti-ngo-azerbaijan.org/?p=780
21 http://www.publishwhatyoupay.org/resources/pwyp-statement-support-azerbaijan’s-civil-society
17
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Other Stakeholders


Despite the strident protests of CSO representatives, another view of the situation was captured
during the mission which lies some way between the two diametrically opposed positions. This view
was expressed by independent observers with a close familiarity both with government and with civil
society. From this perspective, the NGO coalition is bloated, with some member organisations whose
activities bear little or no relationship to advocating for transparency in the extractive sector. In
addition, these stakeholder’s argue that the civil society sector did require rationalisation and
stronger regulation, given tax irregularities and the misappropriation of funds – a view which echoes
to an extent the government position.
A company representative challenged the prevailing civil society view on a government clampdown
on activities It was noted that coalition members were in fact able to organize public events during
2014. Two examples were given: the 25th April 2014 roundtable EITI event organised by the Oil
Workers’ Rights Protection Public Union and the 22nd January 2015 roundtable on the possible effects
of decreasing oil prizes and the economic crisis in Russia on Azerbaijan. It was also pointed out that
the statements in the 2013 Activity Report about limitations on being able to implement the work
plan were not accepted by all MSG parties. It was also pointed out that the EITI Secretariat supported
the NGO Coalition in requesting for media slots (and that the coalition was therefore not
unsupported).
Conclusion
In terms of the Civil Society Protocol of the EITI Standard (which is not a compliance requirement) and
the three remedial actions requested by the EITI Board at its 28th meeting:

Expression: Civil society representatives are able to engage in public debate related to the EITI
process and express opinions about the EITI process without restraint, coercion or reprisal. The
remedial action given by the EITI Board here (at the 28th EITI Board meeting) is that coalition
members may speak freely about the EITI process and express views without fear of reprisal or
harassment
In feedback on the draft version of this validation report at a NGO Coalition Council meeting on
February 25th, the NGO Coalition noted that “With more and more civil society actors and activists
being put in jail, self-censorship is an issue. People are very concerned about intimidation and
reprisals.” Freedom of expression among civil society on extractive sector issues (and EITI
implementation specifically) is clearly not guaranteed at present in Azerbaijan.

Operation: Civil society representatives are able to operate freely in relation to the EITI process.
The remedial action given by the EITI Board here is that Coalition members are able to access
their bank accounts and register new grants for EITI implementation activities
This issue is complicated. The civil society view is that project funding for standard EITI activities has
been stalled and accounts frozen and that an absence of law means that registration of the NGO
coalition is not possible. Meanwhile, the GoAZ perspective is that civil society organisations are simply
going through the growing pains of internationally standard levels of regulations and that frozen
accounts are due to investigations of fraud and corruption, rather than related to specific types of
activity. The GoAZ also is keen to point out that there are no barriers to registering the coalition, and
that organisations known to be associated with political opponents are nonetheless funded through
the Council on State Support to NGOs.
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Validation of Azerbaijan 2015

Association: Civil society representatives are able to communicate and cooperate with each other
regarding the EITI process. The remedial action given by the EITI Board here is that Coalition
members are able to organise training, meetings and events related to the EITI process
While the 2014 Activity Report has yet to be completed, it is anticipated that it will report the same
issues as in the 2013 Activity Report, namely that the outreach and media engagement aspects of the
2014 work plan could not be completed, due to different types of restrictions on civil society activity
(frozen accounts, unofficial prohibitions on activities and lack of media broadcast slots being made
available).

Engagement: Civil society representatives are able to be fully, actively and effectively engaged in
the design, implementation, monitoring and evaluation of the EITI process.
Prima facie, this protocol requirement appears to be met as CSO members do not report being
restricted in their engagement with the EITI process itself. However, CSO members report that
limitations to participation, outreach and awareness raising activities due to restrictions on CSO funding
will likely become an issue this year.

Access to public decision-making: Civil society representatives are able to speak freely on
transparency and natural resource governance issues, and ensure that the EITI contributes to
public debate
This protocol requirement has been addressed already in the above: civil society representatives do
not currently feel able to speak freely on transparency and natural governance issues.
In conclusion, while some sub-provisions are met, others are unmet with limited progress. Reviewed
together, the issues of lack of access to funding to fully participate, frozen bank accounts, as well as selfcensorship, would suggest to the Validators that CSOs do not currently have access to the level of freedoms
recommended under the EITI CSO protocol.
1.4: Work plan
Facts and Progress
The MSG maintains a current work plan. The Validator studied both the completed 2014 work plan22 and the
draft 2015 work plan for this report. While both work plans are to some degree linked to EITI Principles (for
instance, fostering outreach activities to increase awareness of EITI can be linked to the fourth EITI principle,
“We recognise that a public understanding of government revenues and expenditure over time could help
public debate and inform choice of appropriate and realistic options for sustainable development”) they do
so in quite a weak and unremarkable way; for instance, it is not possible to map many of the 12 principles
onto the work plans. However, neither work plan has objectives that clearly reflect national priorities or
ongoing reform efforts, nor is there substantive evidence of innovative approaches to extending EITI
implementation to increase the comprehensiveness of reporting and encourage high standards of
transparency and accountability in public life, government operations and in business. While the 2015 work
plan does include discussion on scope of reports, it’s not clear from the MSG minutes (which are summary in
nature) whether the MSG has considered extending the detail and scope of EITI reporting to address issues
such as revenue management and expenditure, transportation payments, discretionary social expenditures,
ad-hoc subnational transfers, beneficial ownership and contracts when reviewing the work plan.
22
Available here http://www.eiti.az/index.php/en/senedler-2/work-plan-for-implementation-of-eiti
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Validation of Azerbaijan 2015
Nonetheless, the work plans do reflect consultations with key stakeholders and are reviewed and approved
annually. For instance, during the 34th MSG meeting (10th December 2014), discussions took place on
implementation of the 2014 work plan and revising the 2015 draft work plan. Unfortunately, the summarised
nature of the minutes do not permit detailed analysis of the discussion. While, the two assessed work plans
do include measurable and time bound activities (and their funding sources, whether domestic or foreign),
they do not address and outline plans to address any potential capacity constraints across all three
stakeholder groups. Likewise, while the work plans do address the scope of EITI reporting, they do not
address any potential legal or regulatory obstacles to implementation, although the 2014 work plan did, in
section 2.4, include discussions on the creation of a legal basis for EITI. Both the 2014 and draft 2015 work
plan are not fully costed – they include items which have a funding source but are not costed (such as the
cost of the reconciliation exercise).
As noted in 1.2 above, 2013 and 2014 work plans have not been fully implemented in respect of CSO outreach
activities, but all other activities were completed.
The 2014 work plan is available on the AzEITI website (as are previous work plans from 2010). The 2015 draft
work plan’s timetable is in line with validation deadlines.
In order to ensure a smooth transition to the new 2013 Standard after its adoption at the Sydney Conference,
the MSG decided to verify whether the Standard complies with the national legislation. An independent law
firm (MGB Law Offices Limited) was appointed to identify any potential obstacles for EITI implementation in
Azerbaijan. 23
Stakeholder Views
In terms of assessing, outlining and addressing any potential capacity constraints, the MSG did not see any
potential capacity constraints for the provisions in the work plan during preparation, therefore they were not
reflected in the work plan.
In commenting on the draft version of this validation report at a NGO Coalition Council meeting on February
25th, the NGO Coalition noted that “the report mentioned review of 2015 EITI Work Plan of Azerbaijan for
several times, mentioning the work plan for 2015 was discussed at December 10th meeting of MSG. However
this plan was neither presented, nor discussed at MSG and meeting protocol proves that.”
Nonetheless, the minute for the 34th meeting notes that in discussing the second agenda item, “MSG
Members conducted a broad discussion of the implementation of the 2014 Work Plan and the draft 2015
Work Plan. In consideration of changes made by the EITI International Secretariat into the validation schedule,
MSG Members stressed the importance of reviewing and revising the 2015 Work Plan by the national
Secretariat.”
It is therefore not clear whether a) the minute to the 34th meeting is accurate or b) the NGO Coalition is
mistaken in its view that 2014 work plan implementation and the draft 2015 work plan were discussed.
Conclusion
Some sub-provisions are met, while others are unmet with meaningful and limited progress.
23
http://www.eiti.az/index.php/en/senedler-2/eiti- standards/517-mhsht-qanuni-huquqi-rey-2
23
Validation of Azerbaijan 2015
Summary Assessment Table
Summary assessment table: MSG oversight
EITI provisions
Summary of main findings
Government oversight of the EITI
process (#1.1-1.2)
Evidence of high level government references
< to
EITI and involvement
Stakeholder engagement and the
environment for their participation
in the EITI process (#1.3)
Although the environment within EITI is
inclusive and participatory a weakening
enabling environment and increasing
obstacles to participation mean CSOs not
able to speak and participate freely.
There is good communication between
constituency groups, inclusive decision
making and functioning working groups.
Although it is not clear what the national
priorities are, the work plan is endorsed by
the MSG, activities are measurable & time
bound and address all other issues in 1.4.
We recommend the work plan is updated
to follow best practice.
MSG governance and functioning
(#1.3)
Work plan (#1.4)
Validator’s
recommendation
on compliance
with the EITI
provisions
Met
Unmet with
meaningful
progress
Met
Met
Overall assessment:
AzEITI has made meaningful progress in meeting the provisions set out in
section 1.
Validator’s conclusions and recommendations:
1. The NGO Coalition should formally apply to register with the Ministry of Justice;
2. The Government of Azerbaijan (GoAZ) should facilitate the registration of the NGO
Coalition if and how required and provide capacity building support on financial
management;
3. A funding mechanism for the NGO Coalition should be agreed with the Council on Support
to NGOs, to enable fulfilment of CSO components of annual work plans;
4. The review of frozen NGO bank accounts should be fast tracked, and the results made
publicly available;
5. The MSG should consider developing a transparency and accountability strategic
framework that shapes medium to long term thinking, going beyond the minimum
requirements of the EITI 2013 Standard;
6. Financial support should be provided to implement (and develop) the 2015-18 NGO
Coalition Strategic Plan (Secretariat, capacity-building, project support), building on
existing World Bank support;
7. The MSG consider setting up an online automated continuous reporting system and webbased reporting templates to reduce the cost of reporting.
8. The work plan should be updated to reflect best practice
24
Validation of Azerbaijan 2015
4. Part II: EITI disclosures
1. Award of contracts and licenses
Overview
This section provides details of the legal regime, contracts and licenses, based on information in the 2013 EITI
draft report and provided to the Validator during the in-country mission.
3.2 Legal and Fiscal Regime
Facts and Progress
The EITI 2013 draft report covers the EITI legal framework and lists international agreements, codes and laws
relating to the extractive industry (section 3.2 of draft report). The report also includes the roles and
responsibilities of main government agencies. However, some key laws relating to the “Protection of FDI”,
Law “On Energy”, the State Programme on Development of Fuel-Energy Complex 2005-2015, and strategy for
management of oil resources weren’t included in the review.
The Subsoil Law expressly states that the regulation of energy issues will be subject to a specific energy law
(Article 3); the Law on Energy was thus passed on 24 November 1998 (the Energy Law). The Energy Law
further elaborates the main principles of government regulation as set out in the Subsoil Law. While the
Subsoil Law regulates different aspects of mineral resources, which by definition covers not just oil and gas
but also other sectors such as iron ore, sand and gravel extraction, etc., the Energy Law – as the name suggests
– is more specific to energy resources.
However, the draft 2013 EITI report doesn’t explain the existing fiscal regime comprehensively, rather
focusing only on Production Sharing Agreements (PSAs), while Azerbaijan’s fiscal regime in the extractive
industry consists of a combination of PSAs and host government agreements (HGAs).24 “In addition, the Law
on Application of Special Economic Regime for Export-Oriented Oil and Gas Operations (the Law) came into
force on 17 April 2009. The Law applies to export-oriented oil and gas operations carried out by contractors,
as well as by subcontractors, as defined in the Law. The Law will be effective for 15 years but maybe further
extended once this period is over.”25
Currently, HGAs apply to oil and gas pipeline projects. The Main Export Pipeline (Baku-Tbilisi-Ceyhan) (MEP)
and the South Caucasus Pipeline (SCP) activities are governed by respective HGAs.26 There are substantial
differences between the general tax legislation and the tax regimes of the existing PSAs, HGAs and the Law.
Generally speaking, PSAs, HGAs and the Law have negotiated taxes that provide for substantial relief to
investors, while those operating outside the above-mentioned agreements must pay the whole range of
standard Azerbaijani taxes under the statutory tax regime.27
The draft 2013 EITI report also does not include information on fiscal devolution as clause 3.2a of the Standard
requires. The Law of the RoA “On the State Budget of the RoA for 2013” in article 6 defines that “The
centralized incomes of the state budget of the Republic of Azerbaijan for 2013 are formed on the basis of
allocations on the norms provided from the following sources: incomes on Baku city (except the ones included
to the Roads Purpose budget Fund – 96.37 percent."
24
Ernst&Young Global Oil and Tax Guide 2012, Azerbaijan, p.37
Ibid.
26 Ernst&Young Global Oil and Tax Guide 2013, Azerbaijan, p.41
27 Ibid.
25
25
Validation of Azerbaijan 2015
Stakeholder Views
 The IA stated that only laws relating to extractive industry were included in the review. Their view is
that the PSA regime is sufficient to describe the current fiscal regime;
 An MSG member from the Tax ministry agreed that Azerbaijan’s state budget withdrew almost 97
percent of incomes of Baku city to the state budget.
 The NGO Coalition recommended adding other laws for the comprehensiveness of the legal
framework analysis.
 There is no clear opinion from stakeholder on planned/ongoing reforms in extractives.
Conclusion
This provision is unmet with meaningful progress. The Validator recommends to update the information in
the 2013 EITI report to meet the requirements of Standard. The draft 2013 EITI report requires further
attention to fiscal devolution as defined in clause 3.2.a. As a further recommendation (not a requirement) the
MSG should consider paying attention to planned/ongoing reforms in extractives as it is defined by the clause
3.2.b.
3.10. Allocation of Licenses
Facts and Progress
The 2013 EITI draft report states:
“A single license registry in Azerbaijan is carried out by the Ministry of Economy and Industry
(MEI). Pursuant to the Regulations (the "Regulations") on carrying on a single license registry
in Azerbaijan Republic approved by Order No.68, dated September 30, 2002 of MEI, registry of
all licenses issued in Azerbaijan is publicly available. On the other hand, the Regulations have
been adopted according to Decree No.782 by the President and thus, it can be concluded that
the registry of licences made in accordance with the Regulations comprises the information
only about the licenses (for example, licenses for sale of oil and gas products, licences for
production, processing, use and circulation of valuable metals and etc.) falling within the scope
of the mentioned decree.”28
The EITI report does not provide details of the allocation of licenses required under the 2013 EITI standard
3.10 a-d, and only refers to President’s decree and a link to the AzEITI website
http://eiti.az/index.php/az/senedler/sazishler which provides some summaries of certain energy sector
agreements.
Stakeholder Views
Minutes from 34th MSG meeting (10.12.2014) states that “the following information shall not be included in
the EITI Report on the grounds to be expounded in the 2013 EITI Report information on license registrations
and allocations.”
Conclusion
28
2013 EITI draft report
26
Validation of Azerbaijan 2015
The process for awarding or transferring the licenses pertaining to companies covered by the EITI report has
not disclosed in the report. Bid criteria or a list of applications (3.10.b) were not disclosed to the Validator.
Finally, the EITI 2013 Draft Report does not comment on the efficiency and effectiveness of the systems.
Sub-provisions are unmet with limited progress.
3.9 License Register
Facts and Progress
The 2013 EITI Standard requires that a country must maintain a publicly available register system with
information regarding each license of companies covered in the EITI Report i. License holder(s). ii. Coordinates
iii. Date of application, date of award and duration of the license. iv. For production licenses, the commodity
produced. Where this information is available, it is sufficient to include a reference or link in the EITI Report.
The 2013 draft report explains that a single license registry is administered by the Ministry of Economy and
Industry, and is on a publicly available website http://icazeler.gov.az/az/lisenses in Azeri. This license registry
provides information on licenses for all kinds of business not only of the extractive industry.
The 2013 EITI draft report confirms that it is possible to get information on type of permit, amount of payment
for permit issuance, number of days required for permit issuance, effective period of permit, list of documents
required for permit issuance, legal ground of permit (permit issuance procedure), name of executive body
issuing permit and other information.
In addition, the following information was provided by the AzEITI Secretariat:
“Licenses regarding exploration or exploitation of oil, gas and minerals resources do not fall
within the scope of the Decree No. 782 and under Azerbaijan legislation there exists no
procedure for obtaining such licenses. However, according to Presidential Decree No. 310,
dated March 28, 2000 exploration and exploitation of oil and gas belongs to exclusive
competence of the state and may be conducted only by state entities or state controlled joint
stock companies. Hereby Azerbaijan government retains all rights to execute such activities
and engage internationally recognized and experienced contractors. On the other hand these
rights and licenses to engage in activities regarding the exploration and exploitation of oil and
gas may be granted to third parties by way of signing Production Share Agreements between
the state (represented by state company) and third parties and these PSAs enter into effect
after the official confirmation by the Parliament of Azerbaijan Republic. The law acts confirming
the PSAs explicitly stipulate that the participating parties to PSA are granted all permits
and licenses to operate within the scope of PSAs (including explore or exploit oil, gas and
minerals resources) and these law acts are publicly available, there exists no
other licensing instrument for this purpose."29
Stakeholder Views

29
Minutes from the 34th MSG meeting (10.12.2014) state that “information on license registrations and
allocations shall not be included in the EITI Report on the grounds to be expounded in the 2013 EITI
http://www.president.az/articles/3410 and http://www.e-qanun.az/StatementDetails.aspx?statementId=8178
27
Validation of Azerbaijan 2015


Report.” Also these minutes state that “Azerbaijan had no license registration system and no single
license registry for extractive activities.”
The NGO Coalition suggest that Azerbaijan uses the PSA system rather than a licensing system.
The Secretariat explained that “The PSA is a permission for all activities in extractive industry, thus
licenses are not applicable”.
Conclusion
The Subsoil Law is not specific to the oil and gas sector alone. Its general principles, and other provisions
relating to the issue of licenses and permits, are also equally applicable to other sectors.30 In addition, the
AzEITI definition of materiality would suggest that any payment to government is considered material. Within
the context of the reconciliation report, all reporting companies would appear to be governed by PSA’s or
similar licenses.
Following a request for further information on PSAs and licenses to the AzEITI from the Validator on February
27th, the AzEITI secretariat provided the above information to the Validator on March 5th at 5pm CET. As a
result the Validator did not have sufficient time to confirm this information. However, what has been
communicated to the Validator suggests that:
 Not all active PSAs are available on a public register;
 That PSAs do contain the details set out in requirement 3.9.b. of the EITI standard (unconfirmed)
 There exists a register for mining licenses (unconfirmed)
Based on the evidence provided, this provision is unmet with limited progress.
3.12 Contracts
Facts and Progress
The EITI Standard states that implementing countries are encouraged to publicly disclose any contracts and
licenses that provide the terms attached to the exploitation of oil, gas and minerals.
The 2013 EITI draft report, chapter 3.9 refers to section 3.3 which provides summary details of 17 oil and gas
PSAs and one mining PSA. The Mining Law Review” 31 confirms that more than 20 PSAs have now been
concluded between the State Oil Company of Azerbaijan Republic (SOCAR) and foreign oil companies.
According to the AzEITI Secretariat, there are not more than 18 Active PSAs today as several of them were
suspended/desisted due to continuous unprofitable activity.
Only 5 PSAs are available on the EITI website, including ACG PSA. The Shah Deniz PSA is available on BP web
site.
It is a Standard’s requirement that the EITI report documents the government policy on disclosure of contracts
that govern the exploration and exploitation of oil, gas and minerals. However, the 2013 EITI draft report does
not include relevant legal provisions, actual disclosure practices, nor does it include details of any reform that
are planned or underway.
Stakeholder Views
 The SOFAZ oil contract department head stated that PSAs are open and transparent;
 MSG members stressed that PSAs in Azerbaijan are a statute of law so they are open and transparent;
30
31
The Mining Law Review (2014), Third Edition. Editor Erik Richer la Fleche. Chapter 3, Azerbaijan.
The Mining Law Review (2014), Third Edition. Editor Erik Richer la Fleche. Chapter 3, Azerbaijan.
28
Validation of Azerbaijan 2015



NGO Coalition notes that “PSAs having law status are almost not open; only 5 PSAs are open and they
are disclosed not by government institutions, but BP”.
MSG Minutes #28 from 19 February 2014 state that “Mr. Movsumov, MSG Chairman, noted that he
had familiarized with the list of contextual information drawn up by EITI NGO Coalition and the
proposal on disclosure of PSA text had only a recommendation character in the new EITI Standard.
The request had been sent repeatedly to companies in regard to disclosure of PSA texts, but no
positive opinion was received from all companies. Therefore up to now on the official web page of
Azerbaijani EITI only five PSA texts approved by all parties were placed.”
Mehty, author review of Azerbaijan in “Mining Law Review” states that “by its nature, a PSA is a
commercial contract, although admittedly it has a hybrid status since, following its execution, a PSA
would typically be enacted into law (approved by the parliament)”.
Conclusion
If the PSAs are truly public documents, the EITI report should be able to provide links directly to the full
documents. Likewise, this information should be linked on the AzEITI website.
The mandatory sub-provision 3.12b is unmet with meaningful progress, as the 2013 EITI draft report provides
only a cursory explanation of contracts under section 3.9.
3.11 Beneficial Ownership
Facts and Progress
The 2013 Standard states:
“It is required that the government and/or state-owned enterprises disclose their level of
beneficial ownership in oil, gas and mining companies operating within the country, and any
changes in the level of ownership during the accounting period covered by the EITI Report”.
The following information is provided in the 2013 EITI draft report.
“’Beneficiary owner’ conception is not recognized with the law of Azerbaijan and there is no
publicly available registry of beneficiary owners of cooperative enterprises in Azerbaijan.”
The report also refers to a 2013 MGB Law Offices legal opinion on the AzEITI website that states:
“Taking into consideration that there is no legal obligation on beneficial ownership conception
and providing information in connection with such ownership in Azerbaijan, disclosure of
information on beneficial ownership shall not be binding obligation for companies participating
in Extractive Industries Transparency Initiative.” (p. 34) 32
However, that same MGB legal opinion concludes:
“For the purpose of compliance with the EITI Standard and provision of transparency in respect
of this particular issue, the government may consider introducing the basic concept of
beneficial ownership into the Azerbaijani legislation and establish obligations of companies to
disclose information about beneficial ownership to relevant state registries, likewise to
introduce the amendments to the legislation permitting the special commission to obtain such
information for the purposes of making reports under the EITI Standard. 33
32
33
http://www.eiti.az/doc/legal_opinion%20_%28SOFAZ%29_eng.pdf. Page 3
Ibid
29
Validation of Azerbaijan 2015
Minutes from 34th MSG meeting (10.12.2014) state that the following information shall not be included in
the EITI Report on the grounds to be expounded in the 2013 EITI Report:
o
o
o
o
o
o
infrastructure provisions and barter arrangements;
subnational payments and subnational transfers;
SOCAR’s quasi-fiscal expenditures;
social expenditures;
license registrations and allocations; and
Beneficial ownership.
In addition, according to law dated June 12, 2012 about changes to the law "On state registration and state
registry of legal entities", information relating to the founder of legal entities has been considered a
commercial secret. Such information may be obtained by third persons only with the consent of shareholders
of these enterprises.
Stakeholder Views
 Minutes from the 34th MSG meeting (10.12.2014) state that “the following information shall not be
included in the EITI Report on the grounds to be expounded in the 2013 EITI Report:”
Conclusion
As above, we refer to the MGB legal opinion which states:
“For the purpose of compliance with the EITI Standard and provision of transparency in respect of
this particular issue, the government may consider introducing the basic concept of beneficial
ownership into the Azerbaijani legislation and establish obligations of companies to disclose
information about beneficial ownership to relevant state registries, likewise to introduce the
amendments to the legislation permitting the special commission to obtain such information for the
purposes of making reports under the EITI Standard. 34
As identified above, the MSG has discussed the constraints around disclosure of beneficial ownership
(meeting 34) and stated that a number of key pieces of information, including beneficial ownership will not
be disclosed in the 2013 report. However, this would appear to run contrary to the 2013 MBG legal opinion
on the AzEITI website which recommends that “the government establish beneficial ownership in Azerbaijani
legislation and provide these details to the ‘special commission’ for the purposes of making reports under the
EITI Standard.”
Going forward, beneficial ownership disclosure is expected to become a requirement of the EITI standard and
AzEITI is encouraged to address this issue again beginning with a definition of the term as per provision
3.11.d.ii. However, it is not considered as part of this Validation.
3.6. State Participation in the Extractive Sector
Facts and Progress
The 2013 Standard requires an explanation of the prevailing rules and practices regarding the financial
relationship between the government and Azerbaijan state-owned companies (SOCAR), regarding retained
earnings, reinvestment and third party financing.
34
http://www.eiti.az/doc/legal_opinion%20_%28SOFAZ%29_eng.pdf. Page 3
30
Validation of Azerbaijan 2015
While the draft 2013 report provides a range of data regarding SOCAR activities, there remain a number of
key pieces of information missing. Data is provided on SOCAR production of oil, gas, and oil processing in
2011-2013, revenue, total profit, profit before taxation and total income tax (pp. 32-33). In addition, the
report contains SOCAR payments and transfers of assets to the government, as well as SOCAR joint ventures
and ‘associates’, percentage of SOCAR (government) ownership of the joint ventures and their earnings,
assets and debts in 2013. Finally, the report also includes social expenditure of SOCAR and capital investment
programme.
Draft 2013 report notes “there were no changes in the level of beneficial ownership between the government
and SOCAR during the reporting period, including those held by SOCAR subsidiaries and joint ventures.
Minutes from 34th MSG meeting (10.12.2014) states that the SOCAR’s quasi-fiscal expenditures shall not be
included in the EITI Report. The 2013 draft report states that during the reporting period the quasi-fiscal
expenditures such as payments for social services, public infrastructure, fuel subsidies and national debt
services were not carried out by SOCAR.
Draft 2013 report provides details of SOCAR loans and loan guarantees. SOCAR has been awarded with the
AZN 750 million loan for 7 years with annual interest rate 3.15% by the International Bank of Azerbaijan
Republic in 16 July 2009 under the guarantee of the State of behalf of the Central Bank of the Republic of
Azerbaijan. As of 31 December 2013 500 million AZN remains unpaid.
Stakeholder Views
 The IA received information from SOCAR.
 The Coalition of NGOs stressed that the 2013 EITI draft report “does not release any information
about transfer of funds between the State Oil Fund of the Republic of Azerbaijan (SOFAZ) and some
state agencies, including the Ministry of Finance, State Social Protection Foundation, State
Employment Fund and others. Components on retained earnings, reinvestment and third-party
financing are not fully and comprehensively covered under this section as well.”
Conclusion


3.6.a: We do not find that the description of the prevailing rules and practices is sufficient as it does
not include details of third party financing, or full (exhaustive) details on the rules and practices
governing transfers of funds between the SOEs and the state.
3.6.c: The report discloses SOCAR joint ventures and associates, and the level of interest SOCAR has
in both. However,
o No details regarding terms attached to their equity stake, including their level of
responsibility to cover expenses at various phases of the project cycle, e.g. full-paid equity,
free equity, carried interest were disclosed.
o No change of ownership in the level of ownership was disclosed. This may be due to no
change occurring, however, if so, that should be stated.
o No details about loans or loan guarantees were disclosed.
All sub-provisions are unmet with meaningful progress.
Assessment of timeliness, comprehensiveness and reliability of the information disclosed

31
Timeliness: The 2013 EITI draft report does provide information on companies included within the
scope for 2013.
Validation of Azerbaijan 2015


Comprehensiveness: Key elements, including laws, reforms, allocation of licenses and PSAs are not
disclosed.
Reliability: As a significant part of the required information is not disclosed, it is difficult to make this
assessment. In general, references provided in the report provide the correct information in the
source document.
Summary Assessment Table
Summary assessment table: Award of contracts and licenses
EITI provisions
Summary of main findings
Validator’s
recommendation
on compliance
with the EITI
provisions (to be
completed for
‘required’
provisions)
Legal framework (#3.2)
While there is information on relevant laws, it is
not in depth, with substantive information only
on the roles and responsibilities of relevant
government agencies. There is no information on
fiscal devolution and the assessment of the fiscal
regime doesn’t fully cover the current tax
regime. The 2013 draft report provides an
overview of extractive industry, however there is
no information on ongoing reforms.
Unmet with
meaningful
progress
License allocations (#3.10)
EITI report doesn’t provide details of allocation
of licenses and only refers to the Presidential
decree. The Presidential decree provides
requirements for applicants, the bid criteria,
contain details of license information (following
EITI requirements except coordinates of license
area) and prohibits transfer of licenses. EITI
report must clearly state all of these points.
The IA must also disclose in the report where
licenses were awarded during the accounting
period covered by the EITI Report the list of
applicants. There is no evidence that MSG
discussed allocation of licenses.
http://icazeler.gov.az/az/lisenses refers only to
licensing processes and templates. No evidence
of discussion of license system appears in MSG
minutes
The draft EITI report doesn’t disclose any gaps in
the publicly available information and doesn’t
document errors to strengthen this system
Unmet with
limited
progress
License registers (#3.9)
32
Unmet with
limited
progress.
Validation of Azerbaijan 2015
Contract disclosures (#3.12.b)
Beneficial ownership
disclosure (#3.11)
State-participation (#3.6.a and
#3.6.c)
Report does not include relevant legal
provisions, actual disclosure practices and any
reform that are planned or underway.
No disclosures on Beneficial Ownership. EITI
Report doesn’t provide Beneficial Ownership
data, referring to legal gap in recognising
“beneficial owner” concept.
IA states that submission of such information by
governmental or state enterprises is not
possible.
Unmet with
limited
progress
There is data on the prevailing rules of SOCAR
but no explanation
Unmet with
meaningful
progress.
Overall assessment:
Unmet with limited to meaningful progress. The provisions in this section
require effort work to bring it up to compliance with the 2013 EITI standard.
Validator’s conclusions and recommendations:
1. The IA should provide further details and explanations around licenses, reforms and laws as
outlined in the summary table and detailed in the report
2. More information should be disclosed about PSAs, including the location of all active PSAs on
a publically available website
3. Going forward, disclosures of beneficial ownership should be considered closely by the MSG
33
Validation of Azerbaijan 2015
2. Monitoring and production
Overview
This section provides information on the information and data provided in the 2013 EITI Draft Report.
3.3 Extractive Industries Overview
Facts and Progress
Section 3.3 of the draft 2013 EITI report contains an overview of the industry which provides data on
companies of several PSAs in the hydrocarbon and mining sectors. Information on the geographical location
of oil reserves is provided in another chapter (3.4.4). The sector review does note where companies are
undertaking exploration activities, but there are few details. We note that the 2013 SOCAR report does
contain information on exploration activities.35
Stakeholder Views
 MSG members and the IA were satisfied with the level of information in the sector overview;
 The NGO Coalition recommended to add exploration information;
Conclusion
This provision is unmet with meaningful progress. If the IA updates this section with details on significant
exploration activities it will meet EITI Standard’s requirements.
Looking forward, the MSG may want to consider including information on oil trading activities, as per the
guidance provided by the EITI secretariat.
(https://eiti.org/files/EITI_Briefing_note_commodities_trading.pdf)
3.5 Production Data
Facts and Progress
 The Report discloses production volumes relating to oil and gas, gold and silver, with geographical
information on oil production.
 Total export volumes and the value of exports by commodity were provided in the report. Data clearly
shows that most of oil export were provided through Baku.
Stakeholder Views
 Most of the MSG members did not have specific comments to this data.
 The NGO Coalition recommended “to present distinctly the value of exports by pipelines under a
separate paragraph”.
Conclusion
The 2013 EITI Draft Report discloses production volumes of oil, gas, gold, silver for 2011-2013 (p.31-32, 3.5a),
as well as by regions but does not disclose the value of production by commodity. It also discloses total export
volumes and the value of exports by commodity (crude oil, oil products, natural gas), but does not provide
disclosures by region of origin (p.29, 3.5b). Sub-provisions are met or meet with meaningful progress.
35
http://www.socar.az/socar/en/economics-and-statistics/economics-and-statistics/socar-reports
34
Validation of Azerbaijan 2015
The Validator recommends the IA update the information to meet the requirements of the EITI Standard.
Assessment of timeliness, comprehensiveness and reliability of the information disclosed



Timeliness: Information is provided for 2013
Comprehensiveness: Information on exploration activities is missing
Reliability: The information provided is based on data provided by Azerbaijani Ministries
Summary assessment table
Summary assessment table: Monitoring and production
EITI provisions
Summary of main findings
Validator’s
recommendation on
compliance with the
EITI provisions (to be
completed
for
‘required’ provisions)
Overview of the extractive sector,
including exploration activities
(#3.3)
The 2013 EITI Draft report provides an
overview of extractive industry however
no information on exploration activities
Unmet
with
meaningful progress
Production data (#3.5.a)
Total production volumes and the value
of production by commodity, and, when
relevant, by state/region.
Total export volumes and the value of
exports by commodity, and, when
relevant, by state/region of origin.
Met
Export data (#3.5.b)
Met
Overall assessment:
Unmet with meaningful progress
Validator’s conclusions and recommendations:
1. The 2013 EITI final report should include information on exploration activities
35
Validation of Azerbaijan 2015
3. Revenue collection
Overview
This section is intended to review the following aspects of the 2013 EITI Standard:









comprehensiveness (#4.1.a, #4.2.a-b )
taxes and other payments (#4.1.b)
in-kind revenues (#4.1.c)
transport revenues (#4.1.f)
barter and infrastructure transactions (#4.1.e)
subnational direct payments (#4.2.d)
transactions between SOEs and government (#4.2.c)
assessment of timeliness of the information disclosed (#2)
data quality (#5)
4.1 and 4.2
Facts and Progress
The MOU defines that MSG determine material revenue sources and the level of material amounts/volumes.
MSG minutes #19 from 30 January 2013 determine the important revenue sources included in the report.
The revenue sources that are considered as important by the MSG are:
 in kind and cash for oil production,
 natural gas and associated gas in kind and cash,
 the main and precious metals in kind and cash,
 income tax,
 signing and other bonuses,
 acreage payments and transit fees,
 Royalties, value added tax, land tax, property tax, price differences and other taxes (individuals’
income tax, allocations to the State Social Protection Fund and taxes withheld at source are excluded).
These revenue sources cover more than 99 per cent (99.99%) of the revenues received from the
extractive industry of the country.
According to the 2013 EITI Report (p.9), the MSG defined materiality as follows:

Natural and associated gas production revenues in kind and in cash
o Oil production revenues in kind and in cash
o Base and precious metals production revenues in kind and in cash
o Profit tax
o Signing bonuses and other bonuses
o Acreage and transit fees
o Royalty, VAT, Land tax, Property tax, price change and other taxes (excluding employee profit
tax, contributions to the State Social Protection Fund and withholding tax)

The report further defines the materiality threshold as follows: “Transfers to the GoAZ from the
mentioned revenues are considered as material if their sum/volume exceeds zero (0)”.
Minutes of the MSG do not provide details of discussions on materiality; and minutes of the WG
weren’t provided to the Validator. The AzEITI Secretariat points to Minutes 19, January 2013, 5th issue
as evidence of discussion, although the Validator was unable to confirm this independently.

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Validation of Azerbaijan 2015
The reporting templates found in Annex 3 of the EITI draft report, require details of company transfers to the
government (in kind and in cash) and section 5.1 confirms that the reconciliation of in-kind payments to the
GoAZ reported by foreign companies and government don’t have discrepancies (p. 42).





The EITI draft report does not contain information on infrastructure provisions and barter
arrangements as well as social expenditures
Prov. 4.1.f Revenue Streams of foreign companies (p.50) contains information on transportation
tariffs to SOFAZ. The 2013 EITI Draft Report explains the nature of transportation tariffs as
follows:
“Each month SOFAZ and contractors pay transportation fees to the Azerbaijan International
Operating Company (AIOC), the operating company of the ACG oilfield), the levels of which are
determined by the Republic of Azerbaijan and Georgia for the transportation of oil (Government’s
entitlement to oil profits) through Western Route Pipeline and operating costs (operational and
capital expenditure). AIOC pays Georgia’s share from the total fees collected. SOFAZ receives only
the transportation tariff’s share determined by the Republic of Azerbaijan.”
The report does not cover the dividends resulting from the Ministry of the Economic
Development’s share in AzBTC Co and other projects.
The 2013 EITI Draft report as part of SOFAZ revenues contains transit fees (page 28). In addition
some of the Reconciliation Sheets of companies in Annex 4 contain “transportation tariff to
SOFAZ” (please see reports of STATOIL APSHERON A. S., ITOCHU OIL EXPLORATION, SHEVRON
KHAZAR LTD, and others).
Stakeholder Views
 The NGO Coalition notes in their review that 2013 EITI Draft report does not contain payments of
dividends.
 The TOR of Auditor provided to the Validation did not specifically refer to dividend payments
(although does refer to payments) so it is not clear if the IA was specifically asked to review such
payments.
 The minutes from the 34th MSG meeting (10.12.2014) state that the following information shall not
be included in the EITI Report on the grounds to be expounded in the 2013 EITI Report:
o Infrastructure provisions and barter arrangements;
o Social expenditures;
Conclusion
The Validator concludes the following:
Comprehensiveness (#4.1.a, #4.2.a-b ):
 4.1.a: Has the MSG agreed on a materiality definition, including any reporting thresholds, as well as
the options considered and the rationale for the materiality definition?
o Yes The MSG has agreed on a definition of materiality including reporting thresholds.
However, no details could be ascertained as to the options considered and the rationale
for the materiality definition due to a lack of detail in the Minutes
 4.1.a: Does the EITI report include a description of each revenue stream considered material, related
materiality definitions and thresholds.
o Yes, a list of material sources are provided and a threshold established (zero).
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Validation of Azerbaijan 2015
Taxes and other payments (#4.1.b)
 Have the following revenue streams been considered in the EITI Report?:
o The host government’s production entitlement.
 Not clear
o National SOE production entitlement
 Not clear
o Profits taxes
 Profit taxes from companies is provided (pg 57)
o Royalties
 Disclosed (pg 56)
o Dividends
 Not clear
o Bonuses, such as signature, discovery and production bonuses.
 Bonuses are disclosed in company disclosures, but it is not clear if they are
included in government revenues (pg 55)
o Licence fees, rental fees, entry fees, and other considerations for licences and/or
concessions
 It is not clear if they are disclosed (pg 55)
o Any other significant payments and material benefit to government.
 VAT, property taxes, land taxes and ‘other taxes’ are disclosed. It is not clear
if they represent the only material taxes
In-kind revenues (#4.1.c)
 What is the MSG’s definition of materiality with regards to in-kind revenues?
o In kind revenues are considered material vis-à-vis oil production revenues, natural and
associated gas production revenues, and base and precious metals production.
 Where in-kind revenues exist and are considered material as per the MSG’s definition, does the EITI
Report include disclosures of in-kind revenues disaggregated to levels commensurate with the criteria
for reporting of other payments and revenue streams?
o In kind revenues are provided in summary table form broken down by type of production and
in aggregate form. Additionally, in kind payments made by companies are provided for some
companies. Where provided, the disclosures are commensurate with other disclosures.
Transport revenues (#4.1.f)
 What is the MSG’s definition of materiality with regards to transportation revenues?
o The transportation tariff is considered a payable amount in relation to transit of crude oil and
gas entitlement (pg 16)
 Where transportation revenues exist and are considered material as per the MSG’s definition, have
these revenues been disclosed in accordance with the criteria for reporting of other payments and
revenue streams?
o Yes. Inflows from gas transportation to Government are provided on page 58 and further
details provided in individual company disclosures. However, it is unclear whether
transportation tariffs for crude oil are included in these figures
Barter and infrastructure transactions (#4.1.e)
 What is the MSG’s definition of materiality with regards to mandatory social expenditures?
o The 2013 EITI Draft report excludes employee profit tax, contributions to the State Social
Protection Fund and withholding tax.
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Validation of Azerbaijan 2015
o
o
The 213 Draft EITI Report states “During the EITI Reporting period the quasi-fiscal
expenditures such as payments for social services, public infrastructure, fuel subsidies and
national debt servicing were not carried out by SOCAR” (pg 36)
The MSG the 34th MSG meeting (10.12.2014) state that the following information shall not
be included in the EITI Report on the grounds to be expounded in the 2013 EITI Report:
 Infrastructure provisions and barter arrangements;
 Social expenditures;
Sub-provisions 4.1 a.c.) are met, 4.1 (b. f. ) are unmet with meaningful progress, 4.1. (d. e.) are unmet with
limited progress.
4.2 Defining Reporting Scope
Facts and Progress
 Annex 2 of the 2013 EITI draft report lists 35 foreign and 3 local extractive companies, including
SOCAR. All these companies disclose payments to government based on the approved materiality
definition
 Only one company, R.V. INVESTMENT GROUP SEVICES PSA operates in gold, silver and copper, with
all other PSAs in oil and gas
 The report does not provide information on subnational payments and subnational transfers
 Minutes of the 31st MSG meeting from 10 June 2014 indicate that the MSG agreed that the ToR of
the IA shall be deemed as approved by MSG and a Working Group shall be established to support the
preparation of the synthetic tables and contextual data that would be specified in the IA’s report.
Stakeholder Views
 Reporting scope was agreed with MSG members.
 The Secretariat explains that the MSG agreed to adhere to mandatory requirements only. The
minutes from 34th MSG meeting (10.12.2014) state, that the subnational payments and subnational
transfers shall not be included in the EITI Report on the grounds to be expounded in the 2013 EITI
Report.
Conclusion
39

4.2.a Does the EITI report provide a comprehensive reconciliation of government revenues and
company payments, including payments to and from SOEs, in accordance with the agreed scope in
4.1?.
o Yes

4.2.a Has the MSG identified all government entities receiving material revenues and have those
government entities fully reported all receipts in accordance with the materiality definition of 4.1?
o The IA report states “We have prepared a draft EITI Report that comprehensively reconciles
the information disclosed by the reporting entities, identifying any discrepancies.”
o The 2013 EITI draft report identifies the following relevant government agencies:
 State Oil Fund of the Republic of Azerbaijan;
 State Oil Company of the Azerbaijan Republic;
 Ministry of Taxes of the Republic of Azerbaijan; and
Validation of Azerbaijan 2015
o

 Ministry of Ecology and Natural Resources of the Azerbaijan Republic.
The IA makes no statement on whether the disclosing entities comprehensively address all
relevant material revenues
4.2.b. Has the government fully reported all revenues, including any revenues below the materiality
thresholds?
o According to the IA “All companies and government agencies included in the reconciliation
process had submitted their reporting templates.”
Subnational direct payments (4.2.d)
 What is the MSG’s definition of materiality with regards to direct subnational payments?
o Minutes from 34th MSG meeting (10.12.2014) state, that the subnational payments and
subnational transfers shall not be included in the EITI Report on the grounds to be expounded
in the 2013 EITI Report.
Transactions between SOEs and government (4.2.c)
 Does the EITI Report describe the role of SOEs operating in the country?
o Yes
 Where SOEs make payments to the government, collect material revenues on behalf of the state,
or both, and where financial transfer between government entities and SOEs exist and are
material, have they been fully disclosed? Does the EITI Report comprehensively address the role
of SOEs, including material payments to SOEs from oil, gas, and mining companies, and transfers
between SOEs and other government agencies?
o SOCAR and SOFAZ are comprehensively discussed in the 2013 EITI draft report.

4.2.e. Are there any constitutional, statutory or other mandatory revenue sharing requirements
for transfers between national and sub-national government entities related to revenues
generated by the extractive industries
o Not disclosed
4.2 (a. b. c) sub-provisions are met, while others (4.2 (d. e.) are unmet with limited progress.
5.1 Independent Reconciler Appointment
Facts and Progress
 The last procurement process of an IA was in 13 February 2013 and the IA was selected for the
subsequent three years.36
Stakeholder Views
 The Secretariat and the IA explained that according the procurement of services of IA was fixed for
three years term.
 The MSG meeting #20 Minutes from 13 February 2013 discussed the selection of an auditing company
to analyse and reconcile the EITI reports covering 2012, 2013 and 2014, respectively. The auditing
companies that wished to participate in the competition sent the required documents one week prior
36
MSG meeting #20 Minutes from 13 February 2013. Baku
40
Validation of Azerbaijan 2015


to the financial offers being due to be opened, and the Secretariat has forwarded these documents
to all members of the MSG. The selection appointed the auditing company to reconcile the EITI
reports for the subsequent three years. Moreover, the MSG was informed that the new criteria had
been added to the Selection Criteria and the changes had been made to the points of the criteria.
Sealed bids were received from Moore Stephens, Baker Tilly, Grant Thornton, BDO and Nexia in
response to the individual invitations sent to internationally recognized companies, including the “big
four”, operating in Azerbaijan and the announcement in the media. Ernst & Young had sent a letter
declining to bid. Moreover, it was stated that the representative of Moore Stephens, F. Ahmadov,
had come to the meeting to participate in the opening of the bid from his company. Thus the bid from
Moore Stephens was opened in his presence. Mr Ahmadov gave detailed information about the
company, and supported the information provided in the offer submitted. He then left the meeting.
The other bids were opened, and the financial offers of Baker Tilly, Grant Thornton, BDO and Nexia
were declared. The offers received were discussed in detail, and the MSG evaluated the offers
submitted by the companies. As a result of the evaluation, Moore Stephens was appointed to analyse
and reconcile the 17th, 18th and 19th EITI reports (for 2012-2014).
MSG meeting #27 Minutes from 24 January 2014 discussed updating the IA Terms of Reference in
accordance with the new EITI Standard. The MSG decided as follows: 1. Azerbaijan EITI Secretariat is
to obtain from International Secretariat the information about necessity of repeated selection of IA
for reconciliation of 2013 report. 2. IA is to make necessary changes and amendments in ToR package
to be used in Azerbaijan and to present draft version and methodology of collection of contextual
information in the next MSG meeting the IA agreed to continue work with some adjustment of budget
(to allow for contextual analysis).
Conclusion
This provision is met.
5.2 Agreement of TOR
Facts and Progress
The EITI Standard states that in agreeing the ToR, the MSG and the IA are required to:
a) Agree the reporting templates for the EITI Report in accordance with the scope of the EITI Report
(see Requirement 4).
b) Review audit and assurance practices. The multi-stakeholder group, in consultation with the
Independent Administrator, is required to examine the audit and assurance procedures in companies
and government entities participating in the EITI reporting process, including the relevant laws and
regulations, any reforms that are planned or underway, and whether these procedures are in line
with international standards. It is recommended that the EITI Report includes a summary of the
findings.
c) Agree on the assurances to be provided by reporting entities to the Independent Administrator.
The Terms of Reference must outline what information should be provided to the Independent
Administrator by the participating companies and government entities to assure the credibility of the
data. The multi-stakeholder group and the Independent Administrator should document the options
considered and the rationale for the assurances to be provided. Where deemed necessary by the
Independent Administrator and the multi-stakeholder group, assurances may include:
i. Sign-off from a senior company or government official from each reporting entity attesting that the
completed reporting form is a complete and accurate record.

41
A confirmation letter from the companies’ external auditor that confirms that the
information they have submitted is comprehensive and consistent with their audited financial
Validation of Azerbaijan 2015

statements. The multi-stakeholder group may wish to phase in any such procedure so that
the confirmation letter may be integrated into the usual work programme of the company’s
auditor. Where some companies are not required by law to have an external auditor and
therefore cannot provide such assurance, this should be clearly identified, and any reforms
that are planned or underway should be noted.
Where relevant and practicable, government reporting entities may be requested to obtain a
certification of the accuracy of the government’s disclosures from their external auditor or
equivalent.
d) Agree appropriate provisions relating to safeguarding confidential information.
e) The multi-stakeholder group is required to agree the level of disaggregation for the publication of
data. It is required that EITI data is presented by individual company, government entity and revenue
stream. Reporting at project level
is required, provided that it is consistent with the United States
Securities and Exchange Commission rules and the forthcoming European Union requirements.
Several MSG minutes discussed of ToR of the IA, scope of work and templates for reports.

Prov. 5.2.a the scope of IA ToR and reporting templates were discussed several MSG meetings, #
27, #28, #29, #30, #31. Additionally a WG was established and the MSG minutes #32 from 21 July
2014 noted “that meeting of WG should be organized after the collection of contextual data by
the IA”. The next MSG meeting #33 from 3 October 2014 state that the initial draft of contextual
report was submitted to WG by the IA however it was difficult to gather the members of WG. There
are no minutes from the WG meetings.

Prov. 5.2.b The EITI report and MSG minutes do not provide a summary of the findings of a review
of audit and assurance practices in companies and government entities participating in the EITI
reporting process, including the relevant laws and regulations, any reforms that are planned or
underway, and whether these procedures are in line with international standards.

Prov. 5.2.c EITI report states that in order to comply with EITI Requirements 5 and to ensure the
credibility of data submitted:
o Companies were requested to have their reporting templates signed by a Senior Official;
o All government template declarations must be signed by a senior official;
o The government and SOEs publish or make the annual audit report from the Auditor
General available to the reconciler; and
o Reporting entities could provide evidence of the payments/receipts that have been
processed on a payment by payment basis.
For any changes made to the original data reported on the templates, the agencies and companies
were asked to provide supporting documents and/or confirmation before any adjustments were
accepted.


42
Prov. 5.2.d MSG minutes do not provide information that agree appropriate provisions relating to
the safeguarding of confidential information.
Prov. 5.2.e ToR of the IA was approved by the MSG and the data in EITI report is presented by
companies, government entities and by revenue streams. MSG minutes do not provide information
that reporting at project level that is consistent with the United States Securities and Exchange
Commission rules and forthcoming European Union requirements was discussed.
Validation of Azerbaijan 2015
Stakeholder Views


The MSG meeting #31 from 10 June 2014 decided to approve ToR for IA and to establish a Working
Group to support the preparation of tables and contextual data that would be specified in IA report.
MSG member from a company stated: “It is clear from MSG decisions and last year reports that the
decision was made to go for the enforced option 5.2.i “That a senior company or government official
from each reporting entity signs off on the completed reporting form as a complete and accurate
record.” The rationale behind this decision must have been documented in our meeting minutes.
Furthermore, as a good practice, additional assurance is provided by the Independent Auditor by
doing a “spot-check” of supporting documents. The draft 2013 report features a table at least for the
companies with the names of senior officials, who signed their respective reporting forms.”
Conclusion
5.2. (a. c) sub-provisions are met, while others (5.2 b. d. e.) are unmet with either meaningful or limited
progress.
5.3 Assessment and Recommendations from Independent Administrator
Facts and Progress
 The IA noted that during the reconciliation process the extractive companies made common mistakes
while filling out the reporting template. The nature of errors were routine – omission of figures,
including the amount and volume which should not be included in the report
 The IA recommended to include additional comments on previous experience of staff of companies
and to organise seminars and training for the participants on the reconciliation process to increase
the productivity and decrease the number of recurrent administrative issues each year.
In order to comply with EITI Requirements 5 and to ensure the credibility of data submitted:




Companies were requested to have their reporting templates signed by a Senior Official;
All government template declarations must be signed by a senior official;
The government and SOEs publish or make the annual audit report from the Auditor General available
to the reconciler; and
Reporting entities could provide evidence of the payments/receipts that have been processed on a
payment by payment basis.
For any changes made to the original data reported on the templates, the agencies and companies were asked
to provide supporting documents and/or confirmation before any adjustments were accepted.
The Validator was not able to verify that the MSG and the Independent Administrator have agreed on
appropriate provisions for safeguarding confidential information.
Stakeholder Views
 A follow up of the recommendations of the 2012 EITI report shows that training was conducted in
2013.
 The 2013 EITI Report was not approved by the MSG yet.
Conclusion
The Validator is not able to verify that relevant electronic data files have been published together with the
EITI Report and that summary data from the EITI Report has been submitted electronically to the International
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Validation of Azerbaijan 2015
Secretariat according to the standardised reporting format provided by the International Secretariat (5.3.b)
due to the fact that our review was of a draft report.
Have the MSG and the Independent Administrator agreed on appropriate provisions for safeguarding
confidential information?
5.3.a. c. e. f. are met , while 5.3.c is not applicable and 5.3.d is unmet with limited progress.
5.4 MSG Endorsement of Report
Facts and Progress
 MSG Minutes #31 confirm that the ToR for Auditor was approved on 10 June 2014
 MSG minutes #33 from 3 October 2014 noted the presentation of an Auditor’s report and a final
Government's report. There are no details of discussion of report in the minutes provided to the
Validator.
 The EITI 2012 report contains a Statement of the EITI Committee (Annex 1) that payments/revenues
received by Government from foreign companies (Annex 2) was prepared in accordance with MoU
signed between Government, foreign and local companies and the NGOs detailed in Annex 3.
Stakeholder Views
 The EITI report for 2013 will be published towards the end of 2015.
 The Statement of the EITI Coalition of NGOs on the EITI 2012 report was approved at the Council of
the EITI NGO Coalition meeting on 02 August 2013.
 The Report of the Committee on EITI for 2012 was disclosed at the MSG meeting on 10 June 2013.
Conclusion
The draft 2013 report cannot be endorsed by the MSG as it is a draft report. Therefore this provision is unmet
with meaningful progress.
Assessment of timeliness of the information disclosed



Timeliness: Information is provided for 2013
Comprehensiveness: While significant information has been provided, a number of provisions lack
required data
Reliability: The government information provided is based on data provided by Azerbaijani Ministries
and information provided by companies is based on data from annual reports or signed off by a senior
company official.
Summary assessment table
Summary assessment table: Revenue collection
44
EITI provisions
Summary of main findings
Comprehensiveness (#4.1.a, #4.2.a-b )
Report contains definition of materiality
as defined by MSG, provides government
Validator’s
recommendation
on compliance
with the EITI
provisions (to be
completed
for
‘required’
provisions)
Met
Validation of Azerbaijan 2015
revenues and payment of companies and
provides data on total revenues from
each benefit stream
Data quality (#5)
Taxes and other payments (#4.1.b)
In-kind revenues (#4.1.c)
Transport revenues (#4.1.f)
Barter and infrastructure
transactions (#4.1.e)
Subnational direct payments
(#4.2.d)
Transactions between SOEs and
government (#4.2.c)
MSG appointed the IA and template
approved by MSG. However, several gaps
in the data quality assessment outlined
above suggest there is further work
required before the final draft.
Report includes required revenue
streams, but its unclear if it is
comprehensive
Report includes in-kind payments
Report contains transportation fees, but
no explanation and not disaggregated
MSG decided that this information
(infrastructure, barter provisions & social
expenditures) shall not be included in
report
No data on payments from companies to
sub-national government
Report does not include material
payments to SOCAR from other
companies and transfers between SOCAR
and other government agencies
Unmet with
meaningful
progress
Unmet with
meaningful
progress
Met
Unmet with
limited
progress
Unmet with
limited
progress
Unmet with
limited
progress
Overall assessment:
There is a significant amount of data provided in the 2013 EITI draft report.
Provisions are both met and unmet with meaningful and limited progress.
Validator’s conclusions and recommendations:
1. The MSG should ensure the IA includes information and data related to unmet provisions
outlined in this report;
2. The MSG should review the definition on materiality and specifically ensure that material
revenue streams are comprehensively covered by the final EITI report and an appropriate level of
disaggregation is provided by government departments and companies;
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4. Revenue management and distribution
Overview
This section covers the publication and distribution of revenue from the extractive sector.
4.2.e Sub-national transfers


There is no information on constitutional, statutory or other mandatory revenue sharing
requirements for transfers between national and sub-national government entities related to
revenues generated by the extractive industries provided in the report.
Minutes of the 31st MSG meeting from 10 June 2014 indicate that the MSG agreed that the ToR of
the IA shall be deemed as approved by MSG and a Working Group shall be established to support the
preparation of the synthetic tables and contextual data that would be specified in the IA’s report.
Stakeholder Views
 Reporting scope was agreed with MSG members.
 The Secretariat explains that the MSG agreed to adhere to mandatory requirements only.
 Minutes from 34th MSG meeting (10.12.2014) state, that the subnational payments and subnational
transfers shall not be included in the EITI Report on the grounds to be expounded in the 2013 EITI
Report.
Conclusion
4.2 (a. b. c) sub-provisions are met, while others (4.2 (d. e.) are unmet with limited progress.
3.7 Distribution of Revenues
Facts and Progress
The 2013 Standard requires the EITI Report should indicate which extractive industry revenues, whether cash
or in-kind, are recorded in the national budget. Where revenues are not recorded in the national budget, the
allocation of these revenues must be explained, with links provided to relevant financial reports as applicable,
e.g. sovereign wealth and development funds, sub-national governments, state-owned enterprises, and other
extra-budgetary entities.
The 2013 draft report provides information on government revenues from the extractive sector in section
3.4. (p. 28 EITI report 02.02.2014) and explains that extractive revenues made up 65.8% of the total budget
revenues.
The receipts from the extractive industry for the year 2013
Types of revenues
Amount (million manat)
State Oil Fund of Azerbaijan Republic37
Receipts from the sale of profit oil and gas
13,108.0
Bonuses
1.9
Acreage fees
1.8
Transit fees
8.1
State Treasury Agency of the Ministry of Finance of Azerbaijan Republic38
37
Percentage
67.24%
0.01%
0.01%
0.04%
“State Oil Fund of Azerbaijan Republic”, “Annual report 2013”, 14 October 2014,
http://www.oilfund.az/uploads/annual_2013az.pdf.
38 “State Oil Fund of Azerbaijan Republic”, “Government reports on EITI”, November 2014, http://www.oilfund.az
46
page
36,
Validation of Azerbaijan 2015
Profit tax
Mining tax
Value Added Tax
Land tax
Property tax
Exchange difference
Other taxes
Total
1,504.7
119.3
108.6
10.0
38.1
369.9
2,6
15,273.0
7.72%
0.61%
0.56%
0.05%
0.20%
1.90%
0.01%
78.35%

The 2013 draft report also provides SOFAZ revenue and expenditure data as an allocation of revenue
from extractive industry (p. 36 EITI Report 02.02.2015). Most of SOFAZ revenues are proceeds from
oil and gas sales at Azery-Chirag-Gunashli - 97.3%.39

In 2013, most of the revenue from SOFAZ was forwarded to the state budget. Revenues were also
spent on construction of the “Star” Oil Refinery project in Turkey, improvement of social conditions
of refugees, Samur-Absheron irrigation system, administrative expenses of SOFAZ staff, education of
youth abroad, and the new Baku-Tbilisi-Kars railway construction (p. 36 EITI Report 02.02.2015).

The 2013 EITI draft report does not provide revenues of SSPF which also is funded by social taxes paid
by employers (22%) and workers (3%) of extractive industry.

A review of the MSG minutes shows that they do not refer to the national revenue classification
system, or international standard such as IMF Government Statistics Manual;
A recent report by the World Bank40 provides a comprehensive assessment of public expenditure and financial
accountability performance report. It contains an assessment of the national classification system, and other
useful information, including tables of budget data that provide a good guide to understanding the role of
extractive industry revenues in the consolidated budget (below).
39
40
http://www.oilfund.az/uploads/annual_2013en.pdf
World bank (2014), Azerbaijan: Public Expenditure and Financial Accountability (PEFA) Performance Report. Repeat Assessment.
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Validation of Azerbaijan 2015
Source: World Bank (2014), Azerbaijan: Public Expenditure and Financial Accountability (PEFA) Performance Report.
Repeat Assessment
According to the World Bank report41 the current functional classification was developed in collaboration with
the IMF and WB in 2014, but it is not fully consistent with GFSM Classification.
Stakeholder Views



MSG members suggest that the draft report provides sufficient information on revenue distribution.
Minutes of MSG meeting #19 from 30 January 2013 discussed important payments in the extractive
industry of Azerbaijan. “Chairman S. Movsumov brought to the attention of the MSG the importance
of determining significant payments for the EITI in 2012. The inclusion of payments made to the State
Social Protection Fund, which is on the agenda but unresolved, in the EITI reports was again discussed.
A proposal was put forward to receive updated information from the State Social Protection Fund
before adopting a final decision on this matter. Mr Movsumov suggested that important payments
be approved once and for all, but on the condition that this matter can be raised at any time, not on
an annual basis, by any party. Also, he added that since dividends are not specified in the EITI reports,
it would be appropriate to remove the dividend paragraph from the important payments section. “
Then several subsequent meetings also noted this issue. MSG Minutes #21 from 15 April 2013 states
that “Information regarding the contributions to the SSPF for 2011-2012 by local and foreign
companies operating in Azerbaijan and engaged in oil, gas and other extractive companies, operating
was reviewed at MSG. MSG decided that:
“1. The payments made by local and foreign companies operating in Azerbaijan and engaged
in the oil, gas and other extractive industries to the SSPF shall not be included in the 2012 EITI
Report.
2. As of the next year, the payments made by local and foreign companies operating in
Azerbaijan and engaged in the oil, gas and other extractive industries to the SSPF shall be
analysed on annual bases.”

MSG Minutes #28 from 19 February 2014 again discussed this point. “MSG member A. Yusubov stated
noncompliance regarding individual income tax in reporting forms drawn up by the NGO Coalition, as
well as non-completion of decision on inclusion into EITI reports of sanctions and allocations to SSPF.
MSG Minutes #30 from 15 April 2014 states that MSG decided “the receipts from extractive
industries companies to SSPF for mandatory state social insurance contributions should be included
in the contextual information
Conclusion
Sub-provision 3.7a is met. The draft 2013 EITI report provides information on receipts from the sale of profit
oil and gas as well as mining tax receipts.
There is no evidence that a national revenue classification system was discussed by the MSG (sub-provision
3.7b) but it is “encouraged” by the EITI standard, not a compliance requirement. The Validator recommends
that the MSG discuss the current classification system with the World Bank team of auditors.
41
Ibid.
48
Validation of Azerbaijan 2015
3.8. Further Information on Revenue & Expenditure
Facts and Progress
The multi-stakeholder group is encouraged to include further information on revenue management and
expenditures in the EITI Report, including:
a) A description of any extractive revenues earmarked for specific programmes or geographic
regions. This should include a description of the methods for ensuring accountability and efficiency in
their use.
b) A description of the country’s budget and audit processes and links to the publicly available
information on budgeting, expenditures and audit reports.
c) Timely information from the government that will further public understanding and debate around
issues of revenue sustainability and resource dependence. This may include the assumptions
underpinning forthcoming years in the budget cycle and relating to projected production, commodity
prices and revenue forecasts arising from the extractive industries and the proportion of future fiscal
revenues expected to come from the extractive sector.
The MSG minutes do not suggest that the MSG discussed further information on revenue management and
expenditures in the EITI report. Likewise, the 2013 draft EITI report does not provide further information on
revenue management and expenditures. However, all members agreed that they would consider only
required provisions for the 2013 EITI report.
Stakeholder Views
The MSG believed that this section of the standard is a recommendation only and as they only focused on
requirements, the issue was not discussed at all.
MSG members supported verbally that they agreed to consider only required fields, and this is not in the protocol.
Conclusion
This provision is encouraged only.
Assessment of timeliness, comprehensiveness and reliability of the information disclosed



Timeliness: The information provided is based on data in 2013
Comprehensiveness: The information provided is brief and could be further detailed.
Reliability: The information provided appears contradictory between the information in the text and
the information in tables. In addition, the text refers to the ‘mining sector’ rather than the extractive
sector and it is unclear what this term encompasses. The IA should confirm that the information and
data provided is correct.
Summary assessment table
Summary assessment table: Revenue management and distribution
EITI provisions
49
Summary of main findings
Validator’s
recommendation on
compliance with the
EITI provisions (to be
completed
for
‘required’ provisions)
Validation of Azerbaijan 2015
Sub-national transfers (#4.2.e)
NA, or unmet
There are no constitutional, statutory or
other mandatory revenue sharing
requirements for transfers between
national and sub-national government
entities related to revenues generated by
the extractive industries detailed in the
EITI report.
Distribution of revenues (#3.7)
Report provides basic data on which
revenues are recorded in the national
budget. The MSG has not referenced a
revenue classification system
a. No description of any revenues
earmarked for specific programmes in
the regions. Description of the methods
for ensuring accountability and
efficiency.
b. No description of the country’s
budget and audit processes and links to
publicly available info on budgeting,
expenditures and audit reports.
c. MSG didn’t discuss (minutes) and
Report does not refer to medium-term
budgeting or info that will further public
understanding
Information on revenue
management and
expenditures (#3.8)
Met
Overall assessment:
Mandatory provisions are met.
Validator’s conclusions and recommendations:
1. The MSG should consider including the encouraged provisions in the next EITI report.
50
Validation of Azerbaijan 2015
5. Social and economic spending
Overview
This section reviews social and economic disclosures on revenue and spending.
3.6.b SOE quasi fiscal expenditures
3.6.b: Section 3.6 of the draft EITI report provides details of revenues and expenditures of the State Oil Fund
- SOCAR. However, details from other SOEs are absent from the report. In the minutes of the MSG (Minutes
34) the MSG decided that SOCAR’s quasi-fiscal expenditures would not be included in the 2013 EITI Draft
Report.
4.1.e Social expenditures
The MSG decided that information on infrastructure, barter provisions & social expenditures should not be
included in the 2013 EITI Draft report (Minutes 34).
Conclusion
The MSG’s definition of materiality provided in the 2013 EITI draft report would suggest that elements in both
3.6.b and 4.1.e are considered material for the purposes of EITI reporting.
Both provisions are therefore unmet.
3.4 Contribution to the Economy
Facts and Progress
The 2013 EITI Draft report includes:
 Information on the size of extractive (report uses term “mining)” industry contribution to GDP in
absolute terms and as a percentage of GDP;
 Government revenues from the extractive industry;
 The share of oil and gas export in total export of country, both in absolute terms and as a percentage;
 Employment in extractive industry in absolute terms and as a percentage of the total employment;
 Key regions where production is concentrated.
Stakeholder Views
 MSG members and Independent Administrator were satisfied with the information for this
requirement;
 In the review of the 2013 draft report, the NGO Coalition recommended the disclosure of information
on the share of local and foreign employees working in extractive industries.
Conclusion
All sub-provisions are met.
Assessment of timeliness, comprehensiveness and reliability of the information disclosed



51
Timeliness: The information provided is based on data in 2013
Comprehensiveness: The information provided is brief and could be further detailed.
Reliability: The information provided appears contradictory between the information in the text and
the information in tables. In addition, the text refers to the ‘mining sector’ rather than the extractive
sector and it is unclear what this term encompasses. The IA should confirm that the information and
data provided is correct.
Validation of Azerbaijan 2015
Summary assessment table
Summary assessment table: Social and economic spending
EITI provisions
Summary of main findings
Validator’s
recommendation
on compliance
with the EITI
provisions (to be
completed
for
‘required’
provisions)
SOE quasi fiscal expenditures (#3.6.b)
MSG decided that information on quasi
fiscal revenue and expenditure should not
be included in the report
Unmet
with
limited progress
Social expenditures (#4.1.e)
MSG decided that information on
infrastructure, barter provisions & social
expenditures should not be included in the
report
a. Size of extractive industry in absolute
terms and as share of GDP. No information
on informal sector.
b. Govt revenues from extractive industry
in absolute terms and as percentage of
total govt revenues
c. Exports from extractive industry in
absolute terms and as a % of total export
Employment in EI in absolute terms and as
percentage of total employment
d. Key regions where production is
concentrated
Unmet with
limited
progress
Contribution of the extractive
sector to the economy (#3.4)
Met
Overall assessment:

Based on the definition of materiality provided in the 2013 Draft report, both
quasi-fiscal expenditures and social expenditures are considered as material
payments and this should be included in the final report.
Validator’s conclusions and recommendations:
1. The MSG should include details on quasi fiscal revenue and expenditure in the final 2013 report
2. The MSG should include details on relevant social expenditure in the final 2013 report
52
5. Part III: Outcomes and impact
Overview
This section provides details of reports, activities and the impact of EITI reports.
6.1 Comprehensible, actively promoted reports
Facts and Progress
EITI Reports for AzEITI have continuously improved: there is a huge difference in information provided in the
first reports compared to the draft 2013 report. All reports are easily available online from the AzEITI website
(www.eiti.az). 400 print copies of the 2012 report were printed and a similar volume is anticipated for the
2013 report. At present, the draft report is a little confusing to read and should be better structured. The
language veers off into “accountant-speak” at times. Because of difficulties with funding, the NGO Coalition
has not been able to support the dissemination of the 2012 EITI report, and, unless there are changes, may
not be able to do so for the 2013 report once it is published. In terms of outreach events to publicise the
2012 report, the 2013 Activity report lists (and provides some details) on the following:





September: RWI workshop on the 2013 Standard
September: 10th SOFAZ anniversary conference
September: debate on Open Govt on Azadlig Radio
October SOFAZ/OSCE workshop on the 2013 Standard
December General meeting of EITI Coalition
Meanwhile, the 2012 Activity Report notes that a training event on EITI was held at SOFAZ for media
representatives in July that year. In the 2011 Activity Report, a conference on the 20 th anniversary of
independence hosted by SOFAZ on the “State Oil Fund in the National Oil Strategy” included presentations
on EITI.
There are no activity reports on the NGO Coalition website (content is empty on both the projects and reports
pages underneath the “Activity” navigation label), however, the coalition does produce a bulletin (of which
36 have been published so far). 42 The most recent bulletin notes that three broadcasts on the Open
Government programme of the Azadlig radio included participation by coalition members (from December
2013 to February 2014).
Stakeholder Views
All stakeholders agree that the reports are increasingly comprehensible and have been actively promoted.
In a review of the draft 2013 report, the NGO Coalition writes “The requirements on disclosures made by the
state-owned enterprises on financial relationship with state budget, oil fund and other agencies, as well as
information on quasi-fiscal expenditures, social expenditures are of great importance… this report can be
regarded as a first paper that exposes integral components of sale of the state's share of production, export,
employment and material payments in extractive industries”
In response to the draft Validation report, the EITI Commission noted that the “MSG considers the draft
Report as comprehensible enough, however that question was raised and will be brought to agenda for
consideration. All outreach activities, including the preparation and dissemination of easy-understandable
Summary of the EITI Report 2013 (work plan 2015, 1.9) will take place as soon as the report is approved by
the MSG.”
Conclusion
In general, there is little substantial evidence that EITI has contributed significantly to public debate on the
extractives sector in Azerbaijan.
42
The
latest
bulletin
(at
the
time
content/uploads/2014/07/Bulleten_36_corrected.pdf
of
this
report)
is
here
http://eiti-ngo-azerbaijan.org/wp-
Validation of Azerbaijan 2015
Two sub-provisions are met, while two are unmet with meaningful progress.
6.2 Report quality
Facts and Progress
 There are currently plans for the results of the 2013 report to be machine readable (a downloadable
dataset by spreadsheet)
 Summary reports: A summary report will be produced for the 2013 report, after publication of the
latter.
 Compare revenue streams to total amount accruing to each level of govt
 Automated online disclosure: This has not currently been planned by the MSG.
 Capacity building efforts to increase awareness/understanding are planned in the 2015 work plan.
Stakeholder Views
Stakeholders are happy with the 2013 reporting scope, however, the NGO Coalition in its review noted several
key drawbacks of the current draft version.
Conclusion
The sub-provisions of 6.2 are all encouraged, so do not require an assessment from the Validator.
7.1 MSG Acting on Lessons Learnt
Facts and Progress
In the 2012 reconciliation report (the most recent completed and MSG-approved report), the Independent
Administrator recommended that reporting templates be amended to include revenues disaggregated by
mineral type, payments disaggregated into revenue types (tax, royalty etc.) the deletion of irrelevant items
from the forms and in-kind and in-cash payments separated from each other. It was also recommended that
(in line EITI Rules 12 and 13), completed government and company templates should be certified by an
external auditor. It was not possible for the Validator to check if these recommendations have been fully
and explicitly implemented in the draft 2013 reconciliation report, as the TOR for the Independent
Administrator is not available in English.
In the draft 2013 report, it is nonetheless noted that all recommendations from the previous report have
been implemented in the current report and that the report is in line with the 2013 Standard (including the
requirement that revenue types are disaggregated, irrelevant items are deleted, that cash and in-kind
payments are separated and that completed templates are certified by an external auditor). The 2013 report
makes two general recommendations: firstly notifying companies that repeat errors in their completed forms
on a regular basis and informing them of correct procedures and requirements and secondly, organising
seminars for those tasked with completing forms on behalf of government agencies and companies.
The MSG has not formally reviewed the impact of EITI implementation on natural resource governance in
Azerbaijan. There is no evidence to suggest that civil society is unable to provide feedback on the ability of
EITI reports to contribute to wider public debate, however, this input appears not to have been made to the
MSG.
However, the 2013 Activity Report does include a section on “Improvements of EITI as recommended by the
Validator and Auditor” which focused on a review of improvements of the technical quality of reporting
(including the decision to use “100% inspection” of selected government and private sector organisations.
In terms of other forms of progress outside of the reporting framework, following on from 2009 Validation,
MSG developed an Agreement, which was then updated in 2013 to a new MOU. Meanwhile, the AzEITI
54
Validation of Azerbaijan 2015
Secretariat has held training sessions after each report to reduce errors due to administrative
misunderstandings
Stakeholder Views
Stakeholders agree that AzEITI has undergone continuous improvement since inception.
Conclusion
All sub-provisions are met.
7.2 MSG Review of Outcomes & Impact
Facts and Progress
Full annual activity reports have been published since 2011, with full participation in their preparation. The
reports contain a summary of activities; an assessment of progress in terms of meeting and maintaining
compliance, an overview of responses to recommendations from the Independent Administrator; an
assessment of progress measured against achieving the objectives of the work plan and a narrative account
of efforts to strengthen EITI implementation. However, the activity reports do not include an assessment of
the impact and outcomes of the work plan objectives.
Stakeholder Views
Stakeholders agree that the activity reports contain all the EITI Standard requirements and are drawn up in a
participative fashion. The Activity Reports include feedback on from stakeholders which is not agreed on by
all parties. An example of this is the 2013 Activity Report, where the NGO Coalition explanation for the failure
to implement outreach events was not agreed to by company and government MSG representatives, but was
nonetheless included in the report.
Conclusion
The sub-provisions are all met.
Summary Assessment Table
Summary assessment table: Outcomes and impact
EITI provisions
Summary of main findings
Public debate (#6.1)
Print and online copies published. The
comprehensibility of report requires
attention. Outreach events have been
limited and will be further constrained
due to limitations to CSO funding
Data accessibility (#6.2)
Lessons learned and follow up
on recommendations (7.1)
55
Validator’s
recommendation on
compliance with the
EITI provisions (to be
completed
for
‘required’ provisions)
Met with meaningful
progress
Contextual Information is provided
2013 Activity Report & new Agreement is
evidence of lessons learned
Met
Validation of Azerbaijan 2015
Outcomes and impact of
implementation (#7.2)
Full annual activity reports since 2011
(2014 Activity report being prepared)
and participation is noted
Met
Overall assessment:
Unmet with meaningful progress.
Validator’s conclusions and recommendations:
1. The IA should place emphasis on ensuring the language in the final report is comprehensible
and accessible;
2. The MSG should organize further outreach events, and ensure the NGO Coalition members
have access to funding to ensure they can report to the general public.
56
Validation of Azerbaijan 2015
8. Impact analysis
Impact
First and foremost, the impact of AzEITI over the past twelve years is that it has provided credible data, which
helps further the understanding of the most significant sector to the Azerbaijan economy and is a vital tool
for macro-economic analysis and policy debate. The desire to place transparency as a national priority firmly
at the centre of extractive revenue processes in Azerbaijan has been achieved, fulfilling President Ilham
Aliyev’s words back in 2003:
“Transparency is one of the key elements of the oil strategy our country is conducting for the
last almost ten years. Ten years of successful cooperation with the major oil companies of the
world resulted in a multi trillion investments in our country. And today, Azerbaijan is a leader
among all the former republics of the Soviet Union, as far as amount of the direct foreign
investments per capita is concerned. And we, I am sure, will continue to keep this leading
position.”
This is reflected in the trust international oil companies have in Azerbaijan contractual arrangements.
Meanwhile, the latest EITI report under the 2013 Standard introduces considerable additional information on
the sector, especially in terms of contextual analysis. Again, AzEITI has been a considerable success in terms
of a genuinely multi-stakeholder dialogue process, and one of the few opportunities for civil society,
companies and government to come together for frank and constructive discussion. From the MSG
perspective, the Chatham House levels of confidentiality as captured in the third section of the most recent
MOU are important – they allow for an open exchange of views which can touch on matters of commercial
confidentiality.
The one obvious area of weakness of implementation in the past two years has been in terms of outreach
and civil society participation, and is part of a broader set of concerns about the ability of CSOs to continue
to meaningfully contribute to the EITI going forward. This is something the MSG must now address in order
for Azerbaijan to regain a leadership position within the EITI community, beginning with ensuring the NGO
Coalition is formally registered and a funding mechanism devised which is to the satisfaction of all parties and
enables the outreach and discussion activities overseen by the NGO Coalition and its members to be
implemented.
However, registration and funding is but the first step in ensuring EITI leads to more informed public debate
in Azerbaijan; outreach work must be sustained and deepened. Even before the current set of restrictions
were placed on CSOs (starting in the second quarter of 2013), there is not much evidence in the 2011 and
2012 AzEITI Activity reports of substantial civil society outreach activity. Of course, this may simply be a failure
to capture this information adequately in the activity reports, but the obstacles placed in front of CSOs would
suggest that Azerbaijan must be careful to safeguard against further reductions in outreach activity, which is
at the heart of ensuring meaningful information on the extractive sector is communicated to the broader
public. Future work plans must include more substantial and detailed outreach activities, informed by a fully
elaborated NGO Coalition strategic plan. The potential outcome here is significantly strengthened EITI
understanding throughout the country, with a higher-level potential outcome of increasing the pressure to
go beyond satisfying minimum mandatory requirements and develop a strategic perspective on transparency
and accountability.
Challenges and Sustainability
Despite all the gains stated above, AzEITI is in a somewhat precarious position at present. Government
officials caution for instance that should AzEITI not be judged by the International Board as compliant through
this validation process, the Government may pull out of the initiative. This is compounded by the difficulties
faced by some NGOs in registration and funding. This second validation review is the opportunity the MSG
has to put this right. While a temporary downgrade to being a Candidate country may be unpalatable for
57
Validation of Azerbaijan 2015
some, it should be viewed as necessary medicine to strengthen the process and position EITI in Azerbaijan as
sustainable in the long-term. There is therefore an opportunity to build on the initial legal footing of the three
cabinet ordinances to develop, through the appropriate legal instrument, an institutional grounding for EITI
which formally recognises governance bodies of the three stakeholder groups: the Commission, the NGO
Coalition and the Group of Companies and provides a further basis to facilitate registration of the NGO
Coalition. The MSG should discuss the optimum mechanism, but it would have the result of giving the MOU
itself legal status.
However, beyond NGO and government perspectives, there are fundamental issues within Azeri legislation
that may remain at odds with EITI principles. In particular, the absence of a law on beneficial ownership and
secrecy around contracts, are likely to cause issues for EITI disclosures in forthcoming years.
Innovations
The main innovation for AzEITI in recent months has been the adoption of the EITI 2013 Standard, which is
embedded within the new (second) MOU for the MSG. In parallel, planning and implementation of the 2013
EITI Report has been guided by the new standard, and includes innovations such as project-based reporting.
It is the first step towards ever-richer data on the extractives sector in Azerbaijan. Including machine-readable
data as part of the final 2013 report will allow researchers access to a powerful dataset for further analysis.
Lessons Learnt
The second Validation for Azerbaijan is an opportunity to build on the gradual evolution of EITI in the country,
ahead of milestone events in 2015 such as the signing of the EU Strategic Modernisation Agreement (May),
the EU Games (June) and the November G20 meeting which President Aliyev will attend. This could include
(as suggested above) providing a strengthened legal basis for EITI that formalises the institution of the MSG
and its three constituent groups. A move towards web-based reporting for the 2014 report (if possible) would
greatly facilitate the administrative (and cost) burden of EITI reporting going forwards and could be
accompanied by continuous automated (pre-audited) disclosure of data. The Validator believes there is a
need to ensure that a diversity of voices within civil society voices are allowed to be expressed, within and
beyond the MSG. In addition, the MSG should begin to review and address fundamental disclosure issues,
such as beneficial ownership, in forthcoming years.
58
Annex 1
List of stakeholders consulted (in first to last order of meetings)
Name
Fuad Muradov
Dereck J. Hogan
Dexter C. Payne
Araz Yusubov
Kamran Maharramov
Zaur Fatizadeh
Shahmar Movsumov
Iftikhar Huseynov
Gubad Ibadoglu
Shamil Movsumov
Azer Mehtiev
Position
Member of Parliament
Deputy Chief of Mission
Deputy Economic Chief/Energy Officer
Team Leader Communications and External
Affairs (& MSG Member)
Lead Economist at the Risk Management
Department (& MSG Member)
Head of Division of Special Tax Regime
Enterprises (& MSG Member)
Executive Director & Chair of MSG
Chairman of the Administration (& MSG
Member)
Senior Economist (& MSG Member)
NGO Coalition member
NGO Coalition member (& MSG Member)
Mammadhasan Murad
Hasanov
Malahat Murshudlu
NGO Coalition member
Segadet Pashayeva
Nasrulla Nurullayev
NGO Coalition member
NGO Coalition member
M. Kahramanly
NGO Coalition member
Saban Nasirov
NGO Coalition member
Huseynli Jegar
NGO Coalition member
Zaur Akbar
Taleh Aliev
NGO Coalition member
NGO Coalition member
Razi Nurullayev
Chairman
Sevinc Isgonderova
representative
Mehman Aliev
Fariz Ahmadov
Hikmet Allahverdiyev
Elshan Gurbanov
Adrian Lee
Andrew Harvey
Turgay Teymurov
Ingilab Ahmadov
Executive Director
Deputy Director
Audit partner
Senior Advisor Economics & Energy
Deputy Head of Mission
Second Secretary Political and HM Consult
Partner, Assurance Services
Dean (and former International EITI Board
member)
Director of the Oil Contracts Department
Economist of the Oil Contracts Department
İsmayil Manafov
Ali Sultanli
NGO Coalition member
Organisation
National Assembly
US Embassy
US Embassy
BP Azerbaijan - Georgia Turkey Region
SOCAR
Ministry of Taxes
SOFAZ
Ministry of Energy
Economic Research Centre
Individual member
Support for Economic
Initiatives Public Union
Support for Mine Victims
Independent Teachers
Union
Individual member
Care for Elderly
Intellectuals
Oil Workers’ Right
Protection Organisation
Human Rights Public
Union
Social Strategic Studies
and Analytical
Investigation Public Union
Youth Club Public Union
Civil Society Institute
Public Union
“Region” International
Analitical Center
Civil Initiative for
Democracy Public Union
Turan News Agency
Moore Stephens
Moore Stephens
British Embassy Baku
British Embassy Baku
British Embassy Baku
Ernst and Young
Khazar University
SOFAZ
SOFAZ
Validation of Azerbaijan 2015
Marko Soldic
Deputy Head of Mission
Azay Guliyev
Chairman & Member of Parliament
Ilgar Dadashov
Project Coordinator
Jeroen Willems
Alexandra Nerisanu
Toralf Pilz
Head of Cooperation
Project Manager Operations Section
Head of Section, Political, Economic,
Press&Information
Country Director of Azerbaijan Resident
Mission
Economics Officer
Senior Adviser of the Intenational Relation
Department
Olly Norojono
Elvin Imanov
Mahammadali
Khudaverdiyev
60
Turana Gasimova
Chief Adviser of the Information Provision
Department
Elnur Sultanov
Chair
Akhmed Gumbatov
Project Manager
Larisa Leshchenko
Sadig Aliev
Country Manager for Azerbaijan
Infrastructure Specialist
The Royal Norwegian
Embassy in Baku
The Council on State
Support to NGOs
The Council on State
Support to NGOs
EU Delegation in Baku
EU Delegation in Baku
EU Delegation in Baku
Asian Development Bank
Asian Development Bank
State Agency for Public
Service and Social
Innovations under the
President of the Republic
of Azerbaijan
State Agency for Public
Service and Social
Innovations under the
President of the Republic
of Azerbaijan
Caspian Centre for Energy
and Environment
Caspian Centre for Energy
and Environment
World Bank
World Bank
Annex 2
List of MSG members and contact details
Name
Shahmar Movsumov
Zaur Fatizadeh
Iftikhar Huseynov
Shahmirza Safarov
Position
Email
GOVERNMENT COMMITTEE ON EITI
MSG Chair/SOF
shmovsumov@oilfund.az
Ministry of Taxes/Primary
z.fati-zadeh@taxes.gov.az
Member
Ministry of Energy /Primary
iftixar.huseynov@minenergy.gov.az
Member
Ministry of Ecology and
alunit@box.az
Natural Resources /Alternate
Member
NGO COALITION
Azer Mehtiyev
Chairman of Public Union
Support for Economic
Initiatives/Primary Member
amehtiyev@gmail.com
Elchin Abdullayev
Chairman
of
Democratic Institutions and
Human Rights Social Union
/Primary Member
Senior Analyst, Economic
Research Centre/Primary
Member
Chairman of Democratic
Development and Economic
Cooperation Public
Union/Alternate Member
Chairwoman of Center of
Political
Culture
for
Azerbaijani women
/Alternate Member
Journalist/Alternate Member
logmanoglu@gmail.com
Gubad Ibadoglu
Ilham Huseynli
Mehriban Vazir
Dunya Sakit
Araz Yusubov
Jamila Hadiyeva
Kamran Maharramov
Bakhtiyar Akhundov
Rasim Akhundov
Vaqif Abdullayev
GROUP OF COMPANIES
BP/Primary Member
Statoil/Primary Member
SOCAR/Primary Member
Chevron/Alternate Member
Total/Alternate Member
Neftechala/Alternate
Member
gubad.ibadoglu@gmail.com
ihuseinli@yahoo.com
mehribanvezir@gmail.com
dunya_sakit@yahoo.com
yusua0@bp.com
konjaga@statoil.com
kamran.maharramov@socar.az
bafj@chevron.com
Rassim.akhundov@total.com
Vagif.Abdullayev@noc.az
Annex 3
List of reference documents
1. Minutes of MSG meetings in 2012-2014.
2. Memorandum of Understanding on Implementation of the EITI in the Republic of Azerbaijan
signed by parties in 2014. Approved by MSG in
3. EITI 2012 Annual Report.
4. Draft EITI 2013 Report.
5. EITI 2012 Activity Report.
6. Review of the NGO Coalition for "Improving Transparency in Extractive Industries" on the draft
of 2013 EITI report (This review has been discussed and endorsed at the 127th Council meeting
of the NGO Coalition for "Improving Transparency in Extractive Industries" held on October 31,
2014)
7. Ernst&Young Global Oil and Tax Guide 2012, Azerbaijan, p.37
8. Ernst&Young Global Oil and Tax Guide 2013, Azerbaijan, p.41
9. World bank (2014), Azerbaijan: Public Expenditure and Financial Accountability (PEFA)
Performance Report. Repeat Assessment
10. The Mining Law Review (2014), Third Edition. Editor Erik Richer la Fleche. Chapter 3 on
Azerbaijan
11. MGB Law office Legal Opinion available at:
http://www.eiti.az/doc/legal_opinion%20_%28SOFAZ%29_eng.pdf
12. SOCAR 2013 Annual Report available at: http://www.socar.az/socar/en/economics-andstatistics/economics-and-statistics/socar-reports
13. SOFAZ 2013 Annual Report available at http://www.oilfund.az/uploads/annual_2013en.pdf
14. Law of the Republic of Azerbaijan on the State Budget of the Republic of Azerbaijan for 2013
http://www.maliyye.gov.az/en/node/965
15. State Statistical Committee of the Republic of Azerbaijan (2014), Statistical Yearbook of
Azerbaijan 2014.
16. State Statistical Committee of the Republic of Azerbaijan (2014), Energy of Azerbaijan.
Statistical Yearbook of Azerbaijan 2014.
17. European Commission for Democracy through Law (VENICE COMMISSION) Opinion on the
Law
on Non-Governmental Organizations (Public Associations and Funds) as amended of the
Republic of Azerbaijan. Adopted by the Venice Commission at its 101st Plenary Session.
Venice, 12-13 December 2014
18. Confidential fact finding report of the fact-finding mission report submitted to the EITI Board
via the Rapid Response Committee
Validation of Azerbaijan 2015
Annex 4:
EITI MSG Members
2010-2011
The EITI Committee:
Shahmar Movsumov, Executive Director of SOFAZ, Chairman of the EITI Committee,
Chairman of MSG (January 2010 - December 2011)
Feyzulla Muradov, representative of the Ministry of Industry and Energy
(January 2010 - December 2011)
Zaur Fati-zadeh, representative of the Ministry of Taxes
(January 2010 - December 2011)
Gazi Hajikarimov, representative of the Ministry of Environment and Natural Resources
(alternative member) (January 2010 - December 2011)
Group of Companies:
Bahtiyar Ahundov, representative of Chevron (January 2010 - December 2011)
Anwar Gasimov, representative of SOCAR (January 2010 - December 2011)
Timothy Martin, representative of Exxon (January 2010 - June 2010)
Ayla Azizova, representative of BP (June 2010 - June 2011)
Araz Yusubov, representative of BP (June 2011 - December 2011)
Bayba Anda Rubesa, representative of Statoil (alternative member) (January 2010 - June 2011)
Willy Egset, representative of Statoil (alternative member) (June 2011 - December 2011)
NGO Coalition:
Sabit Bagirov, representative of the NGO Coalition (January 2010 - December 2011)
Gubad Ibadoglu representative of the NGO Coalition (January 2010 - December 2011)
Fuat Rasulov representative of NGO Coalition (January 2010 - February 2011)
Sahib Mammadov, representative of NGO Coalition (February 2011 - December 2011)
Alimammad Nuriev, representative of the NGO Coalition (alternative member) (January 2010 December 2011)
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Validation of Azerbaijan 2015
2012
The EITI Committee:
Shahmar Movsumov, Executive Director of SOFAZ,, Chairman of the EITI Committee, Chairman of
MSG
Feyzulla Muradov, representative of the Ministry of Industry and Energy
Zaur Fati-zadeh, representative of the Ministry of Taxes
Gazi Hajikarimov, representative of the Ministry of Environment and Natural Resources (alternative
member)
Group of Companies:
Bahtiyar Axundov, representative of Chevron
Anwar Gasimov, representative of SOCAR (January-October)
Ayaz Huseinov, representative of SOCAR (October-December)
Araz Yusubov, representative of BP
Willy Egset, representative of Statoil (alternative member) (January-February)
Jamila Hadiyeva , representative of Statoil (alternative member ) (February-December)
NGO Coalition:
Sabit Bagirov, representative of the NGO Coalition
Gubad Ibadoglu, representative of the NGO Coalition
Ilham Guseynli, representative of the NGO Coalition
Azer Mehtiyev NGO Coalition representative of the (alternative member)
2013
The EITI Committee:
Shahmar Movsumov, Executive Director of SOFAZ, Chairman of the EITI Committee,
Chairman of MSG
Feyzulla Muradov, representative of the Ministry of Industry and Energy
Zaur Fati-zadeh, representative of the Ministry of Taxes
Gazi Hajikarimov, representative of the Ministry of Environment and Natural Resources
(alternative member)
Group of Companies:
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Validation of Azerbaijan 2015
Ayaz Huseinov, representative of SOCAR
Araz Yusubov, representative of BP
Jamila Hadiyeva representative of Statoil
Bahtiyar Axundov, representative of Chevron (alternative member)
NGO Coalition:
Sabit Bagirov, representative of the NGO Coalition
Mohammad Talibli , representative of the NGO Coalition
Mubariz Tagiyev, representative of the NGO Coalition
İlham Hüseynli, representative of the NGO Coalition (alternative member)
2014
The EITI Committee:
Shahmar Movsumov, Executive Director of SOFAZ, Chairman of the EITI Committee,
Chairman of MSG
Zaur Fati-zadeh, representative of the Ministry of Taxes
Iftikhar Huseynov, representative of the Ministry of Energy
Shakhmirza Safarov - Ministry of the Environment
Group of Companies:
Bahtiyar Axundov, representative of Chevron
Jamila Hadiyeva, representative of Statoil
Araz Yusubov, representative of BP
Kamran Maharrammov, representative of SOCAR
Rasim Axundov, representative of Total
Vagif Abdullayev, representative of Nefthechala
NGO Coalition:
Gubad Ibadoglu, representative of the NGO Coalition
Azer Mehtiyev, representative of the NGO Coalition
Elchin Abdullayev, representative of the NGO Coalition
Ilham Guseynli, representative of the NGO Coalition (alternate member)
Mehriban Vazir, representative of the NGO Coalition (alternate member)
Duniya Sakit, representative of the NGO Coalition (alternate member)
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