Since the industrial production of the oil, Azerbaijan has been controlled by Tsarist Russia and Soviet Union for more than a century. For this reason, Azerbaijan had little experience in independently managing the oil industry and the revenues accumulated. This paper analyses different scenarios and management strategies of using oil money and advocates for the successful approach that would involve different tactics within the State Oil Fund of Azerbaijan Republic.
Oil Fund, where oil money is accumulated, has a huge part of responsibility of administering the oil falls. The creation and implementation of a long-term strategy of management of oil and gas revenues is becoming an important issue in government’s agenda. This subject has received high attention due to various occasions.
The high increase in oil and gas revenues after 2008, the possibility of a complete exhaustion of the current oil and gas wealth, the need for the preservation of macroeconomic stability, the effective use of the revenues for improving the well being of the current and future generation, stimulation of the development of the non-oil sector and ensuring the balanced development of the economy are some the main reasons why a long-term strategy of the Oil Fund is highly significant.
This report recommends a short-medium-long term strategy on management of oil and gas revenues for the supervisory board and executive director of the State Oil Fund. The report covers the period of 2010-2030. It intends to establish the main principles for the use of oil and gas revenues as well as the expenditure and investment policy for that period. The recommended strategy ensures the accurate management of the revenues acquired from sale of natural gas and oil.
INTERNAL AND EXTERNAL ANALYSIS The main issues that have to be taken into account at the outset of strategy development are the external and internal factors to a certain public sector organisation. There are two basic views: the external side stresses the environmental factors as a key matter for success, on the other hand internal approach looks at internal strategic capabilities, resources and cultures as a substantial prerequisite for more powerful strategy. ) SWOT & TOWS Analysis Framework SWOT summarises the key issues of the public sector environment and the strategic capability of an organisation that generate strategic options and assess future courses of action in strategy development. The main aim of SWOT analysis is to identify the extent of positive and negative denotes in the strengths, weakness, opportunities and threats of the organisation, meanwhile it measures the impacts and changes taking place in the environment as well.
This analysis is quite functional when it is used to explore the relationship between the environmental influences and strategic capabilities of an organisation compared with its competitors. Nevertheless it is more reasonable to use TOWS matrix methodology in developing strategies for the Oil Fund. Demonstrably, this is an effective way of combining a) internal strengths with external opportunities and threats, and b) internal weaknesses with external opportunities and threats to develop a strategy. 1) PESTLE Framework
The external environment is a source of survival, threats and opportunities for the both private and public sector organisations. For analysing and identifying the broad macro environment of organisations in terms of political, economic, social, technological and environmental (green) and legal factors PESTLE framework provides a comprehensive list of influences on the possible success or failure of particular strategies. It is important to note that, to identify the key drives for change among the complex list of these factors is more favourable for the managers to take a right action that allows an effective decision-making.
In the complex and rapid changing environments in order to develop affective strategies building scenarios offer a range of plausible possibilities and alternatives for future changes. |Political |Economical |Social | |Democratic institutions are weak |Protect & stabilize the budget and economy |Participation of Civil Society Representative| |Civil Society is underdeveloped |from excess volatility in revenues/exports |in Supervisory Council. |Independent Media are weak |Earn greater returns than on foreign exchange|Active Mass Media involvement in Oil Fund | | |reserves |activities | | |Assist monetary authorities dissipate | | | |unwanted liquidity | | | |Fund social and economical development | | | |Stabilization – insulting fiscal and monetary| | | |policy | | | |Maintaining fiscal discipline and increase | | | |savings for future generations | | | |Transparency in revenue management | | |Technological |Environmental |Legal | | | |SOFAZ is accountable and responsible only to | |SOFAZ web-site is fairly comprehensive | |the President | | | |Weak legal foundation of SOFAZ | | | |Ambiguity in the SOFAZ Mission and | | | |Objectives. | | | |Give Real Power to the supervisory Council. | | | | | | |Laws are imperfect | | | |The judiciary is dependent on the executive | | | |branch | | | |The legislature is dependent on the executive| | | |branch | ) Stakeholder Mapping / Power Interest Matrix framework Processes of creating and generating strategies in public sector organisations usually have political dimension. In order to make it efficiently, stakeholder mapping is a practical tool for analysing the political context in which strategies are developed; for assessing the political capability of a planned strategy; and for developing the strategy in a way which improves the chances of successful implementation. Consequently, the stakeholder mapping identifies stakeholder expectations, influences, power and interests, as well as facilitates in understanding and establishing broad political priorities.
As a basic tool of stakeholder mapping the “power interest matrix” is a scheme on which different stakeholder groups can be mapped on the basis of their political priorities. The matrix can be used for repositioning or maintaining some key stakeholders depending on the level and nature of the interest and the extent of the power. The list of stakeholders |State Oil Company of Azerbaijan Republic – is the state-owned oil |Extractive Industries Transparency Initiative | |and natural gas corporation of Azerbaijan |IMF and World Bank | |President Administration |Foreign Oil and Gas Companies – (AMOCO, BP, McDermott, UNOCAL, | |Cabinet of Ministries SOCAR, LUKOIL, Statoil, Exxon, Turkish Petrol, Pensoil, Itochu, | |Central Bank of Azerbaijan |Remco, Delta) | |Ministry of Industry and Energy |Local Oil and Gas Companies – (AzBTC (Baku-Tbilisi-Jeyhan) and etc)| |Ministry of Finance |Civil Society Institutions, Non Governmental Organisations | |Ministry of Taxes |Azerbaijani Refugees as a result of Armenian – Azerbaijan, Nagorno | |State Customs Committee |Karabakh conflict – due to the project on the Settlement of the | |Ministry of Economic Development |problems of refugees and internally displaced persons. |Ministry of Transport |Citizens of Azerbaijan Republic | |Ministry of Ecology and National Resources |Financial Institutions such as Deutsche Bank AG and Clariden Bank | |National Parliament |(Credit Suisse), Barclays (UK), BNP Paribas (France), Dresdner Bank| |Ministry of Education |(Germany), JP Morgan (USA), HSBC (GB), Royal Bank of Scotland (GB),| |Students studying abroad |Society General (France), Commonwealth Bank of Australia | |Azerbaijan Investment Company – due to Oil Fund support for | | |Formation of the statutory capital of Azerbaijan Investment Fund | | |Citizens of Azerbaijan Republic | | |Mass Media Institutions | | These are suggested repositions of the current stakeholders in the future: 1) As the Oil Fund shall be accountable and responsible to the President of the Republic of Azerbaijan, there are no limitations to the president’s discretion. There are no checks and balances to provide oversight. All strategic decisions are made by the president, including the decision to liquidate the Fund altogether.
In my opinion, it’s better to lower the power and interest of the President on the Oil Fund to the medium level in Future. 2) In most oil funds, parliament plays some role in spending decisions. This absence of a role for parliament does not fit with the Oil Fund’s function of serving to protect “the interests of citizens of the Republic of Azerbaijan and their future generations. ”Members of parliament are elected by Azerbaijan’s citizens and, as such, should have a voice in decisions over how the country’s wealth is being stored and spent. Therefore, I would suggest raising the power of the National Parliament in the management of the Oil Fund. ) To improve its credibility and accountability, the supervisory council should include representatives from civil society and independent finance/economist professionals. For that reason the role of international and local civil society institutions, such Non Governmental Organisations, alliances, unions have to be enhanced in the management of the Oil Fund. There are not any representatives from civil society and non-governmental-organisation in the supervisory council of the Fund. 4) In order to create active public discussion and reinforce public involvement in SOFAZ activities the mass media institutions such as newspapers, TVs, radios and other structures press attention is extremely desirable. ) There is a great need to the foreign educated young people in State Oil Fund. But for now, the fund is lacking of effective and experienced managers in order to develop and implement long-term investment strategies. In fact, State Oil Fund financing the “State Program on education of Azerbaijan youth abroad in the years 2007-2015”, accordingly there should be high interest of young professionals in building their career in the field of oil and gas revenue management. 1 Year Strategy Oil is short term, but the fund is long-term and the effective management of the fund, shouldn’t depend on the oil and should behave as there is no oil at all.
If we look at the experience of analogous sovereign wealth Funds such as Norwegian Pension Fund, we can realise that oil revenues are isolated from the society in those countries. But in the case of Azerbaijan, where the purpose and the mission of State oil Fund is to ensure an intergenerational balance or save money for future, then what might the reasons not to follow these objectives? Generating the oil revenues and partially use of their assets would be more reasonable than spending the current budget for the short-term reasons or any other non-productive projects and programs. Analogously, another important concern in the Oil Fund existing strategy is to identify whether to make transfers to the state Budget or not.
No direct transfers should be allowed from the Fund into any public investment project or program in next year. All the Oil money need to be isolated from the rest of the economy and accumulated in the Oil Fund. The Fund resources should initially be invested in foreign markets only; the domestic investments will be allowed after the new management principles adopted and evaluated through several years. The Fund shouldn’t be regarded and treated as an extraordinary budget and/or replicate any of the functions of the State Budget. But there’s a need to develop a budget stabilization strategy in order to direct money to the budget in case of a crisis like an external price shock.
In the frame of strengthening the legal foundation for SOFAZ, necessarily a parliamentary law should be formed to increase parliament’s role in oversight, by requiring parliamentary approval of spending from the Oil Fund. This will allow parliament to elect its own members to the supervisory council without president’s approval. In addition the supervisory council should also be given the authority to vote against spending projects if they are inconsistent with the longer-term spending policy adopted for Oil Fund. Although it is required to meet at least on quarterly basis, the council are meeting once or twice a year and doesn’t have any real power. To summarize it is suggested that… 5 Year Strategy –
The amount of transfers from the Fund into the State Budget in any year shouldn’t be above the Fund’s average portfolio profits that will additionally account the fluctuations, population change and the inflation and the overall depreciation the Fund’s assets in all invested currencies. The diversification principle need to be prepared to illustrate the ceilings expressed in percentages of the Fund’s resources can be allocated in each country, in each currency, each type of the business, and each company, as well as ceilings expressed in percentages of the invested company’s assets. The investment methodology needs to be prepared and discussed attracting the experts. This methodology needs to be evaluated and updated annually from the perspective of the Fund’s mission only.
The portfolio investment guidelines and the instructions for the investment group need to be prepared based on the methodology and recommended administrative principles, and applied. The ethical standards need to be prepared to outline the countries, the business and the companies to be excluded from the list of potential investment allocations. A long-term, diversified investment strategy should be developed. The fund’s investment decisions, as well the management strategy need to be transparent; there are efficiency implications in the transparent management and strategy. The allocation report needs to be prepared for the every portfolio investment by the Fund.
The report will replace the feasibility study, as a justification of selection based on transparent criteria and methodology, as well as the appraisal document that would explain why the selection is made vis-a-vis with other possible allocations. As a main rule of lessening the risks, diversification guarantees a high return while investing the oil wealth among a wide range of allocations diversified through many lines. Subsequently, expert advice and scepticism are necessary, as well as realistic analyze and prudent approach have to be considered in every investment decision. Also it is suggested to invest in alternative energy resources in order to balance the risk.
Diversification …. outgoing revenue 10 Year Strategy – Principles need to be developed for the future possibilities in investing in the domestic business sector, in the form of separate bank that would expect the return for the Fund form the investing in the local business higher that from the investment abroad. First local.. This could be achieved by taking over an existing bank or by founding a brand new bank. 20 Year Strategy – Principles need to be developed for the future possibilities in investing in the foreign financial markets in the form of separate bank or sovereign wealth enterprises that are owned and owned by the State Oil Fund.
This will allow greater flexibility for the fund to manage its resources and provide higher returns on this investment. Should act as a private enterprise… it can start building hotels in various capitals worldwide. Brunei as an example New Public Management, focus on profit maximisation CONCLUSION: As I already stated above, State Oil Fund is financing “State Program on education of Azerbaijan youth abroad in the years 2007-2015”. Thus I got a scholarship from this program in order to attain my Master’s degree at the University of York. Therefore I really enjoyed completing this in-depth report about the long-term strategies of the State Oil Fund.
I believe as in every issue concerning the nation’s life, the society’s long term interests need to be central in managing the fund’s resources in order to avoid the annoying signals of short-term or small group interests. However in order to achieve this aim, those long-term interests also need to be addressed, and then the mechanism of sticking to those interests should be identified and implemented. Nevertheless, oil is a short-term resource and it cannot be part of our national values and interests which are long term and ideally, permanent. On the other hand, as a Scholarship recipient, there is a requirement on returning to Azerbaijan and work for five years in both private or public sector. In this perspective, after returning home I am planning to apply for a position in State Oil Fund.
For this reason, this assignment created me a chance to have deeper theoretical and practical knowledge about State Oil Fund in terms of managing fund’s resources effectively through making short-medium-long term strategies. REFERENCES: 1) Lynch, R. (2009). Strategic Management. 5th ed. London: FT/Prentice Hall. p302-304. 2) Johnson, G. , Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy. 8th ed. London: FT/ Prentice Hall. p32-89. 3) Johnson, G. & Scholes, K. (2001). Exploring Public Sector Strategy. London: FT/Prentice Hall. p34-56. 4) Tsalik, Svetlana. (2003). Caspian Oil Windfalls: Who Will Benefit?. New York: Open Society Institute. p 5) 5) 6) STATE OIL FUND The State Oil Fund of the Republic of Azerbaijan (SOFAZ) was established in December 29, 1999 by the presidential decree.
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 security for future generations. The main responsibility of the Fund is to manage foreign currency and assets generated from oil and gas exploration and development. This Fund may be categorized as a savings fund for future generations, which diversify portfolio assets from a non-renewable resource and manage the effects of Dutch disease. The revenues that flow to the Oil Fund consists of profits of oil sale, bonus payments, per-acre payments, lease payments, sale of assets, rentals, placement of funds and transit fees. SOFAZ is an independent legal entity and off-budget institution with its own administrative structure.
SOFAZ’s activities in the field of assets accumulation and spending are overseen by a Supervisory Board. The Board is to review Fund’s draft annual budget, annual report and financial statements along with auditor’s opinion and provide its comments. Members of the Supervisory Board are appointed by the President of Azerbaijan and shall represent both state bodies and civil society. Current Supervisory Board chaired by the Prime Minister and consists of the several ministers, chairman of Central Bank and National Academy of Sciences. SOFAZ’s management is vested with the Executive Director, appointed by and accountable to the President of the Republic of Azerbaijan.
SOFAZ’s Executive Director as a chief executive officer is vested with the powers to be a legal representative of the Fund, organize and conduct business of the Fund including appointment and dismissal of employees, management and disbursement of the assets of the Fund in conformity with the rules and regulations approved by the President of Azerbaijan. One of the important issue being in the centre of attention of SOFAZ activity is implementation of effective personnel policy. The personnel policy of SOFAZ is to attract highly qualified and professional personnel. Many employees of SOFAZ are graduates of the world top universities. There are 80 people, who work at SOFAZ. [pic]
According to the Sovereign Wealth Fund Institute headquartered in USA, SOFAZ ranked in 26th place with the 13. 9 US Billion Dollars wealth out of 50 Sovereign Wealth Funds. Most importantly, The Linaburg-Maduell Transparency Index which was developed by Sovereign Wealth Fund Institute assesses transparency of State Oil Fund with 10 points scale out of 10. According to the accepted rules for accumulation, investment and management of SOFAZ’s hard currency resources, the assets can be held in central and commercial banks in the form of bonds issued by governments or state agencies with high credit ratings, securities issued by international financial institutions such as the World Bank, and promissory notes of highly rated commercial banks.
The Foreign currency composition of investment portfolio, 50% of the total amount of the investment portfolio of the Fund is to be invested in assets denominated in US Dollars, 40% in assets denominated in Euro, 5% in assets denominated in GBP, whereas 5% of the total amount of the investment portfolio of the Fund is to be invested in assets denominated either in currencies of countries with the long-term country ratings (sovereign debt) not less than the credit ratings A (Standard & Poor’s, Fitch) or A2 (Moody’s); in US Dollars or in US Dollars, Euro, GBP and Japanese Yen based on their respective weight. Main external managers of the Fund are Deutsche Bank AG and Clariden Bank (Credit Suisse), meanwhile SOFAZ has trading arrangements with various financial institutions and banks such as Barclays (UK), BNP Paribas (France), Dresdner Bank (Germany), JP Morgan (USA), HSBC (GB), Royal Bank of Scotland (GB), Society General (France), Commonwealth Bank of Australia and etc.