Anti-Corruption Measures in the Energy Sector: EITI in Azerbaijan

This article was originallypublished by the Center for Security Studies on 5 October 2015.

Abstract:

Azerbaijan eagerly joined the Extractive Industries Transparency Initiative (EITI) because doing so helped legitimize the election of President Ilham Aliev in 2003. Since EITI focused on transparency in government revenue, it did not harm the elite’s ability to spend state money in corrupt ways. Accordingly, the initiative failed to ensure that oil money went to society’s benefit and, as the government began to intensify its crackdown on local civil society, EITI downgraded Azerbaijan from its once exalted status. Since Azerbaijan now views itself as a rising regional power, and is less concerned about its standing within the international community, it is not clear if the EITI downgrade will influence government actions.

Corruption Patterns in Azerbaijan and the EITI

In Azerbaijan, corruption is structurally rooted, affecting almost all spheres of public life. The majority of government institutions are badly affected. There are only some isolated areas kept free from corruption, such as the State Oil Fund, the State Exams Committee, the Diplomatic Service and a recently established agency for public service delivery, ASAN. The government purposely upholds these institutions as best practise show case examples. However, as corruption is highly centralised, the ruling elite plays a major role in related practises.

Regarding corruption channels, a major difference can be drawn between general corruption outside the oil and gas sector and corruption strategies related to the country’s wealth of natural resources. General corruption practises go back to Soviet (and pre-Soviet) rule and can be found in many resource-poor countries in the post-Soviet space. They are related to a centralised system of bribes. In this context, people pay money in order to get their matters arranged more quickly and more effectively, or to gain material advantages at the expense of others. Besides, public positions are sold.

Parts of the money then flow upward in the informal pyramid system that pervades the public sector. However, in Azerbaijan, such practises have obviously lost importance during the last couple of years. The establishment of the ASAN Service Centres was a milestone in this context. Moreover, both locals and foreign businesspeople report that it has become more difficult to get (small) things done, as there are fewer informal contact persons present today. The decrease in low level petty corruption goes hand in hand with a slight improvement in the country’s Transparency International Corruption Perceptions Index (CPI). While the 2010 CPI ranked the country 134 out of the 178 states that it tracks, the country was ranked 126 out of 175 countries in 2014.

The general view is that these improvements have taken place as the ruling elite are less dependent on such sources of income today. In fact, the influx of huge oil incomes since 2006 has opened up new, and enhanced old, business and rent-seeking opportunities. In Azerbaijan, the president informally acts as the central power broker between the seven most influential persons/families and their clientelistic networks. While two of these groups are mainly political actors, two other groups are solely active in the business sphere with large holdings.

The other three players unite both political and economic power, as they are not only ministers, but also control huge holdings. Besides legal business activities, these groups are engaged with the private consumption of oil and gas incomes at the expense of the society. In this context, corruption patterns are centred on the expenditure side of public resources, particularly when huge sums are directed from the untransparent state-budget into in the country’s bloated construction sector, controlled by the ruling elite’ own enterprises. According to insiders, 40 percent of the over 13 billion U.S. dollar state budget of 2009 was spent on public investment projects. An estimated 70 percent of this money was spent inefficiently, disappearing in murky channels.

Rent-seeking and inefficiency in public resource management are problems characteristic of most resource rich countries worldwide. As such, these are problems the Extractive Industries Transparency Initiative (EITI) directly addresses. The initiative claims that natural resources can lead to economic growth and social development. However, when poorly managed they too often lead to corruption and even conflict. As a response to that, EITI was launched to ensure that all citizens see results from the extraction of their natural resources. To improve openness and accountability in the management of revenues from natural resource production, EITI provides an institutional framework for cooperation between three stakeholder groups, in particular extracting companies, governments of resource extracting countries and the local civil society. The initiative addresses transparency at the income side of public resources, as it ensures the full disclosure of taxes and other payments made by extractive companies to governments.

The following discussion deals with the EITI in Azerbaijan. The next section sums-up the history and the current status of EITI implementation in Azerbaijan. This is done very briefly, since the EITI Validation report available online offers an in-depth documentation of EITI implementation in Azerbaijan. Subsequent sections go beneath the surface. What are the initiative’s outcomes and non-intended side effects in this particular country case? This article draws on recent publications and background conversations as well as on field research carried out in Baku in 2009 and 2010.

EITI Implementation in Azerbaijan

For a long time, Azerbaijan was praised as an “EITI pioneer and pilot country”. In fact, EITI implementation was favoured by the fact that the government regularly expresses its willingness to carry out reforms. Both domestically and internationally, President Ilham Aliyev declares his strong support to transparency and efficiency in revenue management to the benefit of the entire population.

At the first EITI conference on 17 June 2003 in London, Ilham Aliyev announced the government’s decision, to take part in the EITI and to actively support all international efforts to enhance transparency in the extracting industries. Azerbaijan became a candidate country in 2007. As a result of rapid EITI implementation, Azerbaijan was awarded compliant status as the first country worldwide on 16 February 2009. The audit report concluded “that Azerbaijan has complied with all the indicators contained in the Validation Guide and that additionally, the process is consistent with the EITI’s Principles and Criteria”.

However, on 15 April 2015, Azerbaijan was graded down to Candidate Country again, following reports of interference in NGO functioning. During the last decade, Azerbaijan has seen a continuous and gradual increase in authoritarianism. However, against the background of the Arab Spring, the Maidan revolution and economic crisis due to recent oil price shocks, the government has significantly increased pressure on civil society. As the latest EITI validation report puts it, in order to resume their role in EITI, the national NGO Coalition (“EITI Coalition”) members have to be able again 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; and organize trainings, meetings and events related to the EITI process.

Outcome

The question of the outcome of EITI in Azerbaijan addresses two basic aspects. Firstly, did the initiative enhance transparency and efficiency in public resource management? Secondly, does the initiative strengthen civil society? Point two is also crucial, as the initiative not only aims at short-term results, but also at creating a critical public in order to push the government to more transparency and efficiency from the “bottom-up” in the long term.

In terms of question one, it was a common view among local experts in Baku in 2009/10 that the EITI is inadequate to ensure transparency, efficiency and sustainability in revenue management. As a Western diplomat in Baku pointed out, he “doubts whether the EITI is the right instrument to guarantee transparency”. He, as well as other experts, pointed to the reason that EITI is limited to transparency in the field of revenues, while the ruling elite can persist with its corruption and rent seeking interests in the field of expenditures. As a former member of the EITI Board put it, “EITI relates to one aspect of transparency only”. In fact, “the problems with corruption persist, as the expenditure side is more sensitive (in the case of Azerbaijan).” A leading member of the national NGO Coalition was particularly sceptical: “Before the EITI was implemented, the government institutions could do with the oil revenues what they wanted. As the initiative has been implemented now, nothing has changed in this regard. (…) Given that, we do not believe that the EITI process will have a deeper impact on society.”

Despite this, the vast majority of local NGOs continued their work in the “EITI Coalition”. The head of an opposition party underlined his pragmatic view, stressing that if the EITI did not exist, “the entire situation would be even worse.” Unlike in the past, basic information on oil revenues is now available. Moreover, as several NGO leaders positively highlighted, EITI created a platform, enabling the exchange their own positions with those of the government. This is, in fact, a major opportunity of the initiative. Cooperation frameworks, within which companies and civil society can work together with the respective government are usually weak or do not exist at all in authoritarian environments. However, in recent years, EITI in Azerbaijan turned out to be incapable of maintaining a minimum degree of political freedom, necessary for such cooperation frameworks to work. It remains to be seen whether the country’s downgrade to Candidate Country will generate enough political pressure on the government to change this.

Already before the recent clampdown on civil society, in 2009/10, local observers were sceptical about whether the initiative could strengthen civil society and create a critical public. Some argued that the civil society of Azerbaijan is too weak to use the EITI as a first step in promoting transparency. As the head of an opposition party criticised, “civil society has no mechanisms at all to ensure public control over oil management. We have to admit that there is no real civil society and no transparency. The president (of Azerbaijan) is the one who takes any decision. It (the oil money) is his money”. Others noted that “nobody living in the countryside of Azerbaijan is interested in the opinion of the EITI Coalition any way” and that they “are not even aware of its activities”.

Non-Intended Side Effects

As a local civil society representative in Baku criticised, “the government could not wait joining the EITI”, as they realised that the “initiative is not adequate to tackle corruption and to bring more influence to civil society” while, at the same time, bringing about considerable advantages for them. Several civil society experts in Baku highlighted that the government uses the EITI to boost its own image.

As a member of the EITI Board put it, “when you are `number one´ in the EITI, it means that you are transparent”. A local finance expert criticised, in this way, the government “misuses the EITI as imitation”. The regional coordinator of an institute working on revenue transparency took a similar view, highlighting that the government uses the EITI “as shield against criticism”. A leading member of the local EITI Coalition, in turn, pointed out that the EITI “allows the government to cover its corruption practises” and “to boost its image at the international level.” However, there is another problematic aspect in his eyes. “By being committed to the EITI, they send the signal to the population that they are transparent. (…) They demonstrate, even if there are people in Azerbaijan not satisfied with their style of governance, the entire international community supports them.”

In other words, the government uses the EITI to legitimise its rule both externally and internally. According to a local finance expert, the best example of this were the events surrounding the illegitimate transfer of power from the former president Heydar Aliyev to his son Ilham by rigged elections in 2003. This was a critical juncture for the ruling elite’s hold on power. For this reason, the government tried to strengthen its position at the international level. “For the president, the EITI (that had just been launched) offered an opportunity to integrate himself into the international community.”

Particularly in the early years, the EITI fell on fertile ground in Azerbaijan, as international recognition is important to the government to a certain degree. Besides, it also fulfilled economic purposes. As a local finance expert highlighted, Azerbaijan shall become economically attractive to foreign investors as a hub between Europe, the USA and Asia. However, during the last couple of years, such aspects increasingly lost importance. This is related to the government’s new self-image as a rising political and economic power in the region, less responsible to the international community.

Conclusions

In Azerbaijan, EITI has been successful in guaranteeing transparency on the revenue side of public resources. However, the ruling elite can persist with its corruption and rent seeking practices in the field of expenditures. Only if EITI is extended to the expenditure side, it will ensure transparency and efficiency in public resource management. Although the new “2013 Standard” cautiously tries to expand the initiative, the focus remains on revenue transparency.

However, if the EITI is extended to the expenditure side, the question will arise of how to force governments to implement the initiative. The Azerbaijani government was willing to implement the initiative for the reason that EITI brings about significant political and economic advantages, while, at the same time, not posing any real threat to the ruling elite’s hidden interests. In this context, the initiative has even had non-intended contra-productive side-effects.

A major opportunity of EITI lies in creating a cooperation framework between companies, civil society and governments. However, the initiative can only strengthen civil society in the long-run, when there is a minimum degree of political freedom. In Azerbaijan, this is not the case anymore. Consequently, EITI has come under pressure to take actions against Azerbaijan. However, the government’s new self-image as a rising political and economic power in the region and threats to quit the EITI raise doubts as to whether Azerbaijan’s downgrade to Candidate Country will change this constellation.