The history of the fund

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 # 240 dated December 29, 1999 "On Establishment of the State Oil Fund of the Republic of Azerbaijan". Statutory Regulations of the State Oil Fund of the Republic of Azerbaijan was approved by the President of the Republic of Azerbaijan # 434 dated December 29, 2000. SOFAZ got to work after "Asset Management Rules (Guidelines) for the State Oil Fund of the Republic of Azerbaijan" approved by Decree # 511 of the President of the Republic of Azerbaijan on June 19, 2001. Creation of the Oil Fund became possible mainly as result of the oil strategy skillfully implemented by Azerbaijani National Leader Heydar Aliyev since 1994.

The purpose of the Oil Fund

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. It is a mechanism whereby energy-related windfalls will be accumulated and efficiently managed. In so doing, the government is demonstrating its over-riding desire and determination to avoid the inherent risks for any nation in the midst of an oil and gas boom to spend excessively and create macroeconomic distortions.

The management of the fund

The State Oil Fund of the Republic of Azerbaijan, sometimes called SOFAZ, is a legal entity and an extra-budgetary institution.

SOFAZ's activities are overseen by a Supervisory Board. The Supervisory Board, chaired by the Prime-Minister, consists of both representatives of executive and legislative powers, including government ministers and members of the Parliament. 9 members of the Supervisory Board were appointed in accordance with Presidential Ordinance # 2177 dated May 16, 2007. The Board is to review the Fund's draft annual budget, annual report and financial statements along with independent auditor's opinion and provide its comments.

SOFAZ is lead by the Executive Director, who is appointed and dismissed by the President of the Republic of Azerbaijan. The Fund's Executive Director carries out operational management of the Fund's activities. The Executive Director may appoint and dismisses employees of the Fund in a manner as determined by the legislation. The Investment Board, comprising senior officials of the Fund, manages all investment related activity in SOFAZ.

Execution of the SOFAZ budget, which has to be duly approved by the appropriate Presidential Decrees, is undertaken in line with a set of asset management guidelines (AMG) and specified expenditures. SOFAZ assets are managed in accordance with AMG approved by the Presidential Decree on "Asset Management Rules (Guidelines) for the State Oil Fund of the Republic of Azerbaijan" # 511 dated June 19, 2001

Sources of the formation of the fund and directions of its expenses

The major sources of income for SOFAZ are:

1. Proceeds generated under production sharing agreements from sales of the Republic of Azerbaijan's share of hydrocarbons;
2. Bonuses paid under the terms of production sharing agreements;
3. Acreage fees paid by foreign investors for use of the contract areas in connection with the development of hydrocarbon resources;
4. Dividends paid under the terms of production sharing agreements;
5. Revenues generated from the transit of oil and gas over the territory of the Republic of Azerbaijan;
6. Revenues generated from the transfer of assets from investors;
7. Revenues from management of SOFAZ assets;
8. Grants and other disinterested aid.
9. Other income.

Major expenses of the fund

In compliance with regulations relating to SOFAZ, the Fund's assets may be used for solving major problems affecting the nation, and for construction and reconstruction of strategically important infrastructure to support socio-economic progress.

Transfers to the state budget also constitute a significant component of the Fund's outflow. A very small portion of the Fund's assets is utilized to cover operating costs. As per the Law "About Budget System" of the Republic of Azerbaijan, all SOFAZ expenditures, except for operating expenditures, are incorporated as part of an annual consolidated government budget presented to the Parliament for approval. In compliance with this Law, SOFAZ can only execute expenditures envisaged by its budget. Execution of expenditures is through the state treasury.

To improve the effectiveness and efficiency of utilization of oil and gas revenues, “The Long-Term Strategy on the Management of Oil and Gas Revenues” approved by Presidential Decree No.128 of September 27, 2004. This foundation was laid to ensure effective and optimal usage of hydrocarbon resources bestowed upon the Azerbaijani nation, to provide comprehensive support to the country’s economy and to create a substantive foundation for the nation’s prosperous future. The strategy adopted the concept of constant real expenditure in regard of policy governing the disbursement of accumulated oil wealth into the economy of the country. It also sets annual expenditure limits relative to the revenues from sales of hydrocarbons. Strategy covers period from 2005 till 2025. This document sets principle of constant real expenditures and non-oil deficit for macroeconomic policy and budget planning.

Major projects financed by the Fund

SOFAZ is funding major projects of national scale. They are:

1. Azerbaijan's equity share in the Baku-Tbilisi-Ceyhan (BTC) oil pipeline project;
2. building of housing and improvement of socio-economic conditions of refugees and internally displaced persons who were forced to flee their native lands as a result of Armenian-Azerbaijan conflict;
3. Oguz-Qabala-Baku water supply system;
4. reconstruction of the Samur-Absheron irrigation system;
5. formation of the statutory capital of the State Investment Company and
6. finanacing Baku-Tibilisi-Kars railway
7. financing “The state program on the education of Azerbaijan youth abroad in the years 2007-2015”

The reporting system of the Fund

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.

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.

In development of its media relations, press-conferences are held regularly to provide direct, accurate and professional briefings on Oil Fund activities and to offer an opportunity for the media to ask questions regarding management of the Oil Fund and its assets.

SOFAZ is closely involved in the Extractive Industries Transparency Initiative (EITI). Azerbaijan joined EITI in 2003.

The Executive Director of the State Oil Fund is the Chairman of the National Committee on EITI. The EITI Implementation mechanism was established by EITI Committee and according to this mechanism Azerbaijan regularly discloses EITI reports.

Being a first country in implementation of EITI Azerbaijan was selected as EITI Board member at the 3rd EITI conference held in October 2006 in Oslo, Norway. The multi-stakeholder Board was established to manage EITI at the international level and to oversee the future operation of EITI.

State Oil Fund won the 2007 UN Public Service Award for Improving Transparency, Accountability and Responsiveness in Public Service for EITI.

Address of the Fund

The Republic of Azerbaijan, Baku Az 1014, 20 BulBul Ave
Tel: (+ 99412) 498-77-53, internal number 132
Fax: (+ 99412) 498-76-53
E-mail: office@oilfund.az
Web site: http://www.oilfund.az

top