Legal Regulation of Privatization in
Azerbaijan
Introduction
Realization of privatization of state property began to implement after
adoption of the "State Program of Privatization of the State property in
Like
in other transitional countries there were problems during the privatization in
Here the question of a role of state during economic transformation in general and privatization as a part of it comes to the light. The role of state during this process first of all must include establishment of the “rules of game” for all economic actors and enforcement of the implementation of these “rules”.
The
goal of this paper is to evaluate the nature and effect of legal regulation on
privatization in
1.1.
The Constitution of
Every individual may possess movable and immovable property. One can be dispossessed only by the decision of court. It is also mentioned that property shall not be totally expropriated and in case of the alienation of the Property for the public or social needs shall be allowed only upon preliminary fair reimbursement of its value. According to the Article 29 the state is to secure the succession right.
1.2.
Laws and Normative Acts Regulating the Process of Privatization
The
basic legal act is the Law “On Privatization of State-Owned Property”.
Actually there have been two such laws. First one was adopted in 1992. Then in
2000 there was adopted analogous act and after entering into force it canceled
provisions of the Law of 1992 as well as State Program of Privatization of the
State-Owned Property in the years 1995-1998. This act has entered into force
since
Law on Privatization of
State-Owned Property stipulates that
state provides full guarantee for investment. There is no limitation on sale of
enterprises, part of enterprises or their shares purchased by foreign investor
in the privatization process on the basis of this Law to other foreign or local
investor. However, they are entitled to participate in the privatization process
with special options, which are not needed for local investors. The
Law defines "foreign investors" as citizens of foreign states, foreign
legal entities and their representative offices, as well as local legal entities
with more than 50% foreign investment. This contrasts with the provisions of
previous Law that Azeri legal entities, even with 100% foreign investment, would
not be required to submit privatization options to participate in privatization
of state property.
It
in terms of privatization gives following classification of the state-owned
property (Article 6):
·
property, prohibited to privatize;
·
property that must be kept under the state ownership
until issuance of a special decision;
·
property to be privatized through decision of the
relevant agency of the executive power;
·
property to be privatized through decision of the
seller of the state-owned property.
It also determines state property, which will not be privatized and will
remain in the ownership of the state, namely soil, forests and water reserves;
patent, standardization and measurement enterprises; natural reserves and
preservations; highways, bridges and tunnels of state importance.
According
to this Law privatization in
· selling property to staff of state-owned enterprise and persons considered equal to them with discount rates;
· privatization on the basis of specific projects;
· privatization through the check and cash auctions;
· privatization through auctions;
· privatization through investment competitions;
· selling of the rented state-owned property;
· selling the state-owned enterprise through announcing it insolvent.
It also touches on other rules of the privatization, documentation of the privatization agreements, rights and responsibilities of the parties, etc. We will discuss these issues in detail in the next chapter.
Law
on Ownership (November 4, 1997) describes property rights well as forms of
ownership. It determines rights and responsibilities of an owner. It also
stipulates the condition when cessation of the ownership rights may happen.
According to this act cessation of ownership rights is not allowed without will
of the owner except the cases of execution on this property under the owner's
obligation in cases and order those stipulated by the legislation.
Law
on Protection of Foreign Investment (January 15, 1992) governs legal and
economic principles of foreign investment in
Foreign enterprises may be engaged in all activities not banned by the
legislation of
Legislation regulating land
rights in
The second step of the Land
Reform Law is a privatization of land used by agricultural co-operatives and
collective organizations with subsequent transfer of agricultural land to
individuals. The Land Reform Law also permits privatized legal entities to
acquire the tract of land on which they operate and announces the right of
residents (citizens and legal entities) of
The state transfer of land
into ownership of citizens and legal entities of
1.3. State Programs of Privatization of
State-Owned Property in
The First program classifies enterprises as small, medium and large. All medium and large businesses intended to go private shall be transformed into joint-stock companies, and then privatized.
The following 4 privatization forms were established:
· privatization of small businesses;
· privatization of medium and large businesses;
· privatization of jolt-stock and pooled banks;
· selling the shares in specialized industry and inter-industry investment funds.
The
First Program also gives a definition of State Ownership Share, which consists
of four vouchers of the same value. In total there must be issued 32, 000, 000
vouchers and circulation period was established for three years.
It also determines the State Privatization Option granting to its owner
foreign investor rights to purchase a voucher for the subsequent participation
in privatization. The Option's circulation period was also set as three years.
The First Program establishes more complicated privatization process of medium
and large enterprises.
The
privatization of joint stock and pooled companies shall be performed by the
State Property Committee through of selling their shares held by the State,
irrespective of the organization/legal form, in auctions. When selling the
shares of state-owned pooled banks SPC must take in to consideration the opinion
of the National Bank of
The
Second Privatization program was adopted on
It
introduces a special committee - the State Committee for Control over
Privatization, composed of top officials of various ministries. Exact
composition of the Committee, as well as regulations applicable to its
operations are to be approved by the President.
Unlike
the 1995-1998 Privatization Program, it is not designed to cover any specific
period, and will be effective during an indefinite period of time.
According
to the Second Program there are four types of property:
·
property, privatization of which is prohibited;
·
property owned by the state prior to the date of
decision on privatization;
·
property to be privatized by Presidential decree;
·
property to be privatized by decision of the MSP[1].
The
Program also sets up seven forms of privatization of state property:
1.
Privatization of state enterprises by individual
projects.
2.
Privileged sale of shares to employees. This method
implies submission of certain number of privatization vouchers for shares of the
company:
3.
4.
5.
6.
7.
Declaration of the state
enterprise bankrupt and subsequent sale. Decision is to be adopted either by the
President (upon proposal of the MSP) or the the MSP itself.
The
Second Program defines three categories of enterprises - small, medium and large.
The foreign investors have the right to participate in privatization with
net profit obtained in
Owners
of privatized enterprises are permitted to exercise a right of first refusal
with respect to the purchase of the land underlying such enterprises. Though
privatized companies may purchase land subject to these and other restrictions,
foreign investors (and stateless persons) still are not permitted to own land in
All
above-mentioned legal acts created a basis for implementation of privatization
in
Main responsibilities of the
Ministry of State Property include pursuing international relations and
cooperation in the specified order, purchase and sale of property on behalf of
Azerbaijan Republic, acting as the seller of state-owned property, keeping
statistical and accounting records of privatization revenues and transferring
those revenues to the state budget, keeping a register of state owned property
in the capacity of a guarantor of a storage of shares owned by the state,
property interests of the state in Azerbaijan and abroad.
In accordance with Decree of
President of Azerbaijan Republic (
In order to participate in voucher privatization foreigners have to buy options, which costs them more. Thus government’s aim was to create more preferable conditions for locals who usually have fewer financial resources. This aspect was reflected in both First and Second Programs. Actually, it can be seen that foreign investors were quite passive during “small” privatization waiting for beginning of privatization of large enterprises – “blue chips”. By 1999 it turned out to be that within the short period in the country there were sold about 20 million options and more than 30 million vouchers were distributed among the population, absolute majority of which was subsequently outbid, according to official government data, furthermore by foreigners. (Abbas 2001).
Another restriction towards foreigner actors is the ban on
foreign ownership of land. In my opinion this restriction was connected with the
fear of government that rich foreigner actors would get and own large share of
land in
Besides voucher autcion privatization there are also such methods as selling property to staff of state-owned enterprise and persons considered equal to them with discount rates, privatization on the basis of specific projects, privatization through cash auctions, privatization through auctions, privatization through investment competitions, selling of the rented state-owned property and selling the state-owned enterprise through announcing it insolvent.
Under
the Rules on Regulation of the Circulation of State Privatization Vouchers of
2000, sale and purchase of vouchers may only be effected by licensed
professionals. Persons who possess more than 400 privatization vouchers and do
not have receipts for the purchase of the privatization vouchers were obliged to
register their privatization vouchers with the
State Securities Committee ("SSC") within 45 days. Vouchers may
only be used to purchase shares in privatizing state enterprises if they have
been deposited with the
The deadline of validation of vouchers was prolonged from beginning of 2002 to the mid 2004.
New rules have also been adopted to regulate the sale and use of privatization options, which foreign investors are required to use to participate in investment, voucher and cash tenders as well as in connection with purchases of shares of privatized companies in the secondary market. The Rules On Regulation of Issuance, Circulation and Cancellation of State Privatization Options provides that at registration, a buyer of options must present, inter alia, a receipt for the prepayment of 5% of the value of options (on the date of the filing of the investor's application to acquire the options). Submission of bids to purchase shares in privatizing companies must be considered by the SSC within 3 business days, and if the bidder is accepted the whole option price is paid. If the bid is rejected the 5% deposit is returned to the bidder.
The number of options required to be submitted at privatization tenders as well as in connection with purchases of shares of privatized joint-stock companies on the secondary markets has also been clarified:
· voucher auctions for shares of joint-stock companies - 1 option for each voucher tendered;
· cash auctions for shares of joint-stock companies - the minimum share/voucher ratio set for the voucher auction for shares of the particular enterprise;
· the secondary market - the minimum share/voucher ratio set for the voucher;
· privatization of small enterprises or purchase on the secondary market of small enterprises - option price set on the date of the sale-purchase agreement with respect to the enterprise based on the entire value of the enterprise determined by the MSP;
· investment tenders, etc. - as determined on a case-by-case basis by the MSP in conjunction with the SSC.
Delivery of options is not required for the purchase of small enterprises or transactions involving shares of privatized companies among foreign investors.
Vouchers more or less have been used in all methods of privatization.
Privatization through auctions takes place when buyer buys property without any conditions and wins the one who offers highest price. In case auction failed seller can reduce price (“Dutch” manner) (Gacs, Karimov and Schneider, 1993). During investment competitions full investment program should be required.
According to legislation on privatization state-owned enterprises and entities of great importance for country’s economy is privatized through individual projects and 51 or more percent of shares is offered for sale in order to attract strategic investors.
Another
conventional method of privatization – so called “insider privatization”
has been used in
2.4.
Legal procedures of privatizing state-owned property
Legal
procedures of privatizing state-owned property includes issues of payment for
privatized property, getting information about an object of privatization,
requirements set by the state for new owners, legalization of documentation and
responsibility for the violation of laws. These procedures are regulated by Law
on Privatization and the Second Privatization Program.
According to the Second
Privatization Program buyer may pay for privatized enterprise as lump sum or
during certain period of time. Period for payment for state-owned property is
defined in the buying-selling agreement can not exceed two years. If buyer fails
to pay for privatized state-owned property during defined period, an issue of
termination of buying-selling agreement may be raised in accordance with
applicable legislation. That’s what happened, for example in case of
privatization of Garadagh Cement Plant.
Cash proceeds from the
privatization include cash proceeds and other profits gained from selling of
privatized entities and shares, privatization options, collecting fees imposed
during privatization. Cash from the privatization must be transferred to the
state budget. It is expected that 25 percent of this amount will be obtained by
MED to cover costs of involvement of independent financial consultant,
privatization of state-owned property, organization of the information support
and pre-privatization restructuring of enterprises.
Informational-methodical support to the
privatization process, including promotion activity is a responsibility of MED,
its local branches and state mass media. State mass media jointly with the MED
are to provide systematic announcements to the population on the course of
privatization in their news reports. Schedules of voucher auctions and
competitive bidding, information on specific enterprises being privatized must
be published in mass media and special publications at least 30 (thirty) days
prior to the beginning of a competitive bidding, auction or open selling of
shares. Information on sale of enterprises that may be of interest to foreign
investors may be posted on the web site of the MED.
Results of privatization of
state-owned enterprises should be published in mass media within 15 days. This
information should include address of enterprises offered for sale through
auction, amount of funds to be paid to government budget in the result of
auction, rule and timing of clearance with other participants of auction. In
case of transfer of privatized enterprises to joint stock companies full and
shortened name of the joint stock company and number and type of issued shares,
book value of shares offered for sale as well as number and type of sold shares
are also included.
Very important part of legal
regulation of privatization in
Environmental requirements
during the privatization of the state-owned property are also imposed.
Seller has to provide information on environmental situation of the subject
of privatization. Environmental requirements may be envisaged in the
buying-selling agreement.
During the privatization of
the state-owned property, with exception of specialized auctions, selling-buying
agreements are concluded between seller and buyer in accordance with the Civil
Code of Azerbaijan Republic, this Law and the Second Privatization Program.
In case the privatized
property has been given to other owner during the effectiveness of the
privatization agreement, implementation of these commitments is compulsory for
new buyers. The seller of the state-owned property shall implement supervision
over the implementation of commitments under the buying-selling agreement.
Ownership rights of the buyer
over the privatized property shall be documented by a certificate of ownership
issued by the seller of the state-owned property. Owners of the privatized
entities may purchase or rent with right of further purchase the land plot where
this entity is located in accordance with the legislation, also he/she may use
the land plot temporarily or permanently. If there is restriction with this
regard, including the cases where buyer is foreign physical and legal person or
stateless per-son, they may rent the land plot without right of purchase.
Buyer gets the ownership
rights for shares he purchased at the check or cash auction just after approval
at the auction.
In
case of violation of laws and regulations as well as agreements on privatization
of state-owned enterprises MED at the name of state has right to prosecute
violators in judicial order.
As a basis for vitiation of
privatization agreements can be determined:
·
violation of the legislative documents and regulations defining rules of
privatization of the state-owned property;
·
privatization of the state owned property by one, who is not recognized a
buyer of the state-owned property.
The 1995-1998 Program was relatively successful in
quickly privatizing many smaller enterprises. The Program holds some promise for
the successful privatization of many state-owned enterprises, including large,
"blue chip" enterprises. However, the government is not going to
actually privatize its major state-owned enterprises of fuel-energetic complex.
This makes foreign investors cautious. Moreover,
they have been facing relatively discriminatory practice of requiring only
foreign investors to deliver privatization options in cash, voucher and
investment tenders as well as for the purchase of shares of privatized companies
in the secondary market, and the ban on foreign ownership of land. After all,
the privatization process has been discredited by cases of impropriety in
connection with the big scandals during the privatization.
Another interesting aspect of the privatization in
However, majority of external assessment also
suffer from subjectivity as they are don’t take into consideration specific
environment in which privatization was elaborated, implemented and regulated.
First of all, I mean war and occupation of the territory, about one
million of refugees, authoritarian political regime and its effects on economy
as well as strategic role of oil sector for the national economy.
Talking about legal regulation we should
distinguish between two issues: adoption of needed legislation and enforcement
of laws (Ramasastry, Slavova, 1999).
Fuad Aliyev
Budapest, Hungary
December 2001
Publications:
Abbas,
Ali: Second Tour of Privatization Will Ruin the Investors That Did not Ruin in
the First (in Russian), (Второй
тур
приватизации
в
Азербайджане
разорит тех
инвесторов,
которые
уцелели в
первом) online magazine RusEnergy:
http://www.rusenergy.com/caspianregion/a03042001.htm
Gacs,
J – Karimov, I – Schneider C.: Small Scale Privatization in
Grekhova, Lubov: Victor Kozheny. Weekly magazine "КоммерсантЪ-ДЕНЬГИ" (Commersant-Money) No.13, 2000
Kornai,
Janos: The Principles of Privatization in
Laki, Mihaly: Lectures on Economic Reform and Privatization, Fall
Semester 2001/2002, Political Science Department, CEU
Mamedov, Chingiz: “Velvet” Adventure For …Privatization.
Pistor,
Katarina - Raiser, Martin - Gelfer, Stanislaw; Law and Finance in Transition
Economies, Economics of Transition, Vol. 8 (2), pp. 325-368
Ramasastry,
Anita - Slavova, Stefka Market Perceptions of Financial Law in the Region –
EBRD survey results. Law in Transition, spring 1999
Other:
The
official web-site of Ministry of Economic Development of Azerbaijan Republic:
[1] In December of 1999 State Property Committee had been transformed into Ministry of State Property. As a result of the public administration reforms in April of 2001 this Ministry was abolished and its responsibilities were passed to newly established Ministry of Economic Development.