United Nations Public Service Awards Case Studies

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) was established in accordance with the Decree of the President of the Republic of Azerbaijan on December 29, 1999.
SOFAZ is a state extra-budgetary fund, functioning as a separate legal entity, with its own specialist management team and government supervisory hierarchy. SOFAZ is lead by the Executive Director, who is appointed and dismissed by the President of the Republic of Azerbaijan. SOFAZ's activities in the field of asset accumulation and spending are overseen by a Supervisory Board, which consists of both representatives of executive and legislative powers including government ministers and members of the Parliament. The Supervisory Board is headed by the Prime Minster of Azerbaijan.
The cornerstone of the philosophy behind the Oil Fund is to ensure intergenerational equality of benefit with regard to the country's oil wealth, whilst improving the economic well-being of the population today and safeguarding economic stability for future generations. It is a mechanism whereby energy-related windfalls will be accumulated and efficiently managed.
A key measure to promote transparency within the Oil Fund's reporting system and operation is a regular audit of the Fund's financial activities by a reputable firm of international auditors. Ernst&Young was appointed as auditor for the Oil Fund's financial statements during the five years of its activity. At the same time, the Fund's activity may be examined by the Chamber of Accounts, established by Milli Majlis (the Azerbaijan Parliament). SOFAZ is a champion of the Extractive Industries Transparency Initiative (EITI). The Executive Director of the State Oil Fund is the Chairman of the National Committee on EITI. SOFAZ is overseeing work of the EITI Secretariat of Azerbaijan. The Committee on EITI was established in November 2003 after Azerbaijan pledged full support to the Initiative and committed itself to being a pioneer country in implementing EITI. Azerbaijan has subsequently become the first country to introduce an EITI implementation mechanism, with the Government, extractive sector companies and NGOs signing a framework document on November 24, 2005 that ensured submission of regular reports which are being audited by an internationally recognised audit firm.

The Oil Fund's assets stood at AZN 1374, 8 mln. (appr. 1.6 bln. USD) at September 30, 2006. During the period from 2001 to September 30, 2006 some 2 836,5 mln. AZN (USD 2 989,8 mln.) was received by the Fund. 47 per cent of the Fund's income was directed to different investment and social projects. SOFAZ has transferred AZN 835 mln. to the state budget up to September 30, 2006. In accordance with signed contracts SOFAZ is expecting to receive up to 150 billion USD in the forthcoming 15 years.
Information and press releases, and both quarterly and annual statements, in Azerbaijani and English, about the Fund's revenues and expenditures are regularly published in the local press and posted on the Oil Fund's web-site www.oilfund.az to reflect developments in varying areas of the Fund's activities, and also to promote transparency in the utilization of revenues from oil.

What is the initiative about? (the solution)
After the declaration at the EITI Lancaster House Conference on June 17, 2003 the decision of the Government of Azerbaijan to join EITI and support the international efforts for higher transparency in the extractive industries and becoming a pioneer country, the President Ilham Aliyev instructed to establish an interagency committee on EITI to implement obligations taken at the EITI Conference. The Committee is chaired by the Executive Director of the State Oil Fund. The Executive Director of the State Oil Fund is also overseeing the work of the EITI Secretariat of Azerbaijan which is hosted by the Oil Fund. The Secretariat is responsible for the day-to-day running of EITI in Azerbaijan, the appropriate coordination with the foreign extractive industry companies and also with the UK Department for International Development, which is functioning as an International Secretariat for EITI. The EITI Secretariat is closely cooperating with the foreign and local extractive industry (oil and gas) companies and NGOs to implement EITI in Azerbaijan. The main task for the State Oil Fund included: building understanding with EITI process stakeholders (the National Committee on EITI, extractive industry companies and civil societies), increasing awareness of government institutions involved in EITI process and developing credible implementation mechanism. It took almost one year to come to mutual agreement and as the result of productive cooperation Memorandum of Understanding (MOU) was signed on November 24, 2004 between the stakeholders. 21 foreign and local extractive (oil and gas) industry companies, including State Oil Company of the Republic of Azerbaijan, Exxon, Statoil, Total, Lukoil, Chevron, Shell, Devon Energy have signed the MOU. Currently the number of companies increased to 24 just as the number of NGOs. At the signing of MOU coalition of NGOs were represented by 29 organisations and at this time the number is greater that 100. Deloitte was announced a winner of the tender for aggregation and audit of the first reporting cycle. A new audit firm is selected for each reporting cycle. Azerbaijan has already disclosed four Transparency Initiative Reports (2003, 2004, first 6-months assertion of 2005 and annual 2005). The First report was disclosed on 15th March 2005. It was the first published reports of this kind in the world. Endorsing and implementing EITI was an important step for the Government of Azerbaijan to demonstrate its commitment to encouraging high standards of transparency and accountability in public life, government operations and in business within the legal framework of the country. This was first successful cooperation between the government of Azerbaijan, extractive industry companies and civil societies. Shaping mutually agreed Memorandum of Understanding was a very hard but rewarding exercise. The process showed that it is possible to change perception of the society towards the issue of transparency in revenues.

Who proposed the solution, who implemented it and who were the stakeholders?
September 2002: Prime-Minister Tony Blair announces EITI May 2003: Azerbaijan indicates willingness to support EITI Jun 2003: Azerbaijan delegation joins EITI at the First International Conference on EITI held in London and volunteers to become a pioneer country November 2003: Azerbaijan established the National Committee on EITI November 2004: SOFAZ introduced world’s first EITI Implementation mechanism. Memorandum of Understanding (MOU) was signed between the stakeholders. December 2004: SOFAZ held the first EITI tender to choose an internationally recognized auditor to aggregate and audit the reporting process. Deloitte won the tender. March 2005: Azerbaijan disclosed first EITI reports in the World. August 2005: Azerbaijan disclosed second EITI report. September 2005: Executive Director of SOFAZ was selected as a member of the International Advisory Group (IAG) on EITI. September 2005: SOFAZ shared its EITI experience with the Government of Kazakhstan. January 2006:Azerbaijan disclosed third EITI report. April 2006:Azerbaijan hosted the meeting of IAG in Baku. August 2006:Azerbaijan disclosed fourth EITI report. September 2006: Executive Director of SOFAZ was selected as a member of the International Board on EITI to represent the Government of Azerbaijan.

Describe how and when the initiative was implemented by answering these questions
a. What were the strategies used to implement the initiative? In no more than 500 words, provide a summary of the main objectives and strategies of the initiative, how they were established and by whom.
The UK Prime Minister Tony Blair launched the Extractive Industries Transparency Initiative (EITI) at the World Summit for Sustainable Development in Johannesburg in September 2002. The First EITI Lancaster House Conference held on June 17, 2003 in London agreed the EITI Principles, which acknowledged that, the natural resource wealth of a country should benefit all its citizens. The delegation headed by the President of the Republic of Azerbaijan Mr. Ilham Aliyev declared at the EITI Lancaster House Conference the decision of the Government of Azerbaijan to join EITI and support the international efforts for higher transparency in the extractive industries and Azerbaijan volunteered to become a pilot country. The countries, the extractive industry companies and the non-governmental organizations adopted a Declaration on the principles of EITI: “Publish What You Pay” for the foreign and national companies of extractive industries and “Publish What You Receive” for host governments of extractive industries. The EITI supports improved governance in resource-rich countries through the full publication and verification of company payments and government revenues from oil, gas and mining industries. Many countries are rich in oil, gas, and minerals and studies have shown that when governance is good, these can generate large revenues to foster economic growth and reduce poverty. However when governance is weak, they may instead cause poverty, corruption, and conflict – the so called “resource curse”. The EITI aims to defeat this “curse” by improving transparency and accountability.

b. What were the key development and implementation steps and the chronology? No more than 500 words
In accordance with EITI principles we believe that the prudent use of natural resource wealth should be an important engine for sustainable economic growth that contributes to sustainable development and poverty reduction, but if not managed properly, can create negative economic and social impacts. Management of natural resource wealth for the benefit of a country's citizens is in the domain of Azerbaijani government to be exercised in the interests of its national development. 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. The State Oil Fund underlines the importance of transparency by the government and companies in the extractive industries and the need to enhance public financial management and accountability. It was agreed between all stakeholders (the government, extractive industry companies and civil societies) that achievement of greater transparency must be set in the context of respect for contracts and laws. By implementing EITI in Azerbaijan, the government also enhances the environment for domestic and foreign direct investment. There is high commitment in encouraging high standards of transparency and accountability in public life, government operations and in business in Azerbaijan. A broadly consistent and workable approach to the disclosure of payments and revenues was designed, which is simple to undertake and to use. Payments disclosure involves all extractive industry companies operating in Azerbaijan. All stakeholders make important and relevant contributions - including government and its agencies, extractive industry companies, service companies, multilateral organisations, financial organisations, investors and non-governmental organisations.

c. What were the main obstacles encountered? How were they overcome? No more than 500 words
After the declaration at the EITI Lancaster House Conference the decision of the Government of Azerbaijan to join EITI and support the international efforts for higher transparency in the extractive industries and becoming a pilot country, the President Ilham Aliyev instructed to establish an interagency committee on EITI to implement obligations taken at the EITI Conference. Cabinet of Ministers of Azerbaijan established National Committee on EITI on November 13, 2003. The Committee chaired by the Executive Director of the State Oil Fund (SOFAZ). The Executive Director of the SOFAZ is also overseeing the work of the EITI Secretariat of Azerbaijan which is hosted by the Oil Fund. The SOFAZ is responsible for the day-to-day running of EITI in Azerbaijan, the appropriate coordination with the foreign extractive industry companies. The EITI Secretariat is closely cooperating with the foreign and local extractive industry (oil and gas) companies and NGOs to implement EITI in Azerbaijan. The main task for the SOFAZ included: building understanding with EITI process stakeholders (the National Committee on EITI, extractive industry companies and civil societies), increasing awareness of government institutions involved in EITI process and developing credible implementation mechanism. It took almost one year to come to mutual agreement and as the result of productive cooperation Memorandum of Understanding (MOU) was signed on November 24, 2004 between the stakeholders. 21 foreign and local extractive (oil and gas) industry companies, including State Oil Company of the Republic of Azerbaijan, Exxon, Statoil, Total, Lukoil, Chevron, Shell, Devon Energy have signed the MOU. Currently number of companies increased to 24. The reports are being submitted twice a year: annual on March 15 and semi-annual on August 15. A new audit firm is selected for each reporting cycle. Deloitte was announced on December 20, 2004 a winner of the tender for collation of the first reporting cycle covering 2003 (annual) and 2004 (6 months). Since the Government of Azerbaijan joined the EITI, Azerbaijan has disclosed Four Transparency Initiative Reports (2003, 2004, first 6-months assertion of 2005 and annual 2005). The First report was disclosed on 15th March 2005. It was the first published reports of this kind in the world. The full report and the press-release had been disclosed on the SOFAZ website: www.oilfund.az and the EITI Secretariat of the UK DFID website: www.eitransparency.org and the NGOs Coalition website: www.eiti-az.org. The second EITI London Conference in March 2005 established an International Advisory Group (IAG) to guide the further work of the International EITI Secretariat on defining and refining proposals on the future of the EITI. Being pioneer of the EITI implementation process and having tremendous experience in the EITI implementation the Executive Director of the SOFAZ was nominated as IAG member to represent Azerbaijan. The IAG prepared a report on the future of EITI, which was presented at the third International EITI conference in Oslo, 16-17 October 2006. One of the main outcomes of the Oslo conference was establishment of the multi-stakeholder Board to manage EITI at the international level and to oversee the future operation of EITI. Azerbaijan’s membership in the EITI Board corroborates the country’s leading role in implementation of EITI. The Executive Director of the State Oil Fund is representing the government of Azerbaijan in the EITI board.

d. What resources were used for the initiative and what were its key benefits? In no more than 500 words, specify what were the financial, technical and human resources’ costs associated with this initiative. Describe how resources were mobilized
By implementing EITI the government of Azerbaijan achieved full accountability and transparency in oil and gas revenues. Provided that Oil Fund is expecting to receive more that 150 billion USD in forthcoming 15 years, insuring transparency in receiving these revenues is of utmost vital importance to our country. Azerbaijan has also gained an improved investment climate which is providing a clear signal to investors and the international financial institutions that the government is committed to greater transparency. EITI also assists in strengthening accountability and good governance, as well as promoting greater economic and political stability. This, in turn, contributes to the prevention of conflict based around the oil, mining and gas sectors. Political instability caused by opaque governance is a clear threat to investments. In extractive industries, where investments are capital intensive and dependent on long-term stability to generate returns, reducing such instability is beneficial. Transparency of payments made to the state oil fund also helps to demonstrate the contribution that their investment makes to a country. Endorsing and implementing EITI is an important step for the Government of Azerbaijan and companies to demonstrate their commitment to encouraging high standards of transparency and accountability in public life, government operations and in business within the legal framework of the country.

Is the initiative sustainable and transferable?
EITI implementation has become a sustainable process. The government of Azerbaijan through the leadership of SOFAZ on regular basis (twice a year) makes publication of all material oil, gas and mining payments by companies to government (“payments”) and all material revenues received by government from oil, gas and mining companies (“revenues”) to a wide audience in a publicly accessible, comprehensive and comprehensible manner. Reconciliation of payments and revenues being done by a credible, independent auditor, applying international auditing standards and the auditor’s opinion being published regarding that reconciliation including discrepancies, should any be identified. All companies including state-owned enterprises are engaged in EITI implementation process. The government also made sure active involvement of civil society as a participant in the design, monitoring and evaluation of EITI implementation process. Being the leader in the EITI implementation process Azerbaijan has become a source of invaluable expertise which is in high demand among EITI candidate countries. The State Oil Fund executive Director and Azerbaijani EITI Secretariat representatives visited Kazakhstan at the invitation of the Government of Kazakhstan with the purpose of sharing relevant experience and assisting the Government of Kazakhstan in implementation of the Transparency Initiative in extractive industries. Many other recourse rich countries during the EITI Oslo Conference expressed their willingness to learn from Azerbaijan’s success. Being selected to the international Board of EITI will allow Azerbaijan to participate in the global distribution of EITI principals in countries with extractive industries.

What are the impact of your initiative and the lessons learned?
This was first successful cooperation between the government of Azerbaijan, extractive industry companies and civil societies. Shaping mutually agreed Memorandum of Understanding was a very hard but rewarding exercise. Inclusion of civil society validated the whole implementation process. The process showed that it is possible to change perception of the society towards the issue of transparency in revenues. After the disclosure of the information about a huge revenues Azerbaijan is about to receive there were lots of rumours and speculations about possibility of money being mismanaged. After the implementation of EITI the question of huge revenues were squandered was eliminated from the debate agenda and daily newspapers and focus was moved to ideas on how to spend these revenues. The government also proved that it can achieve full transparency and improve its international image. Azerbaijan was highly praised by international community for its commitment and success in the process of EITI implementation.


Institution Name:		The State Oil Fund of Azerbaijan
Institution Type:		Government Agency
Contact Person:		Shahmar Movsumov
Title:		Executive Director
Telephone/ Fax:		+994 12 490 57 30
Institution's / Project's Website:		+994 12 490 58 42
E-mail:		office@oilfund.az
Address:		20 Bul-Bul
Postal Code:		AZ 1014
City:		Baku
State/Province:
Country:		Azerbaijan

The Problem

Solution and Key Benefits

Actors and Stakeholders

(a) Strategies

(b) Implementation

(c) Overcoming Obstacles

(d) Use of Resources

Sustainability and Transferability

Lessons Learned

Contact Information