There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them. This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal. In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF. Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.
This post considers the State Oil Fund of Azerbaijan Republic (SOFAR).
At the next stage of oil strategy, it was extremely important to efficiently manage accumulated oil revenues generated from the development of country’s oil fields jointly with foreign companies and to assign these assets to the development of advanced areas and implement projects of social-economic importance. To that end, State Oil Fund of the Republic of Azerbaijan was established by the Decree № 240 of Heydar Aliyev, dated 29 December, 1999. Statute of the Oil Fund was approved by the Presidential Decree № 434, dated December 29th, 2000.
In oil-rich countries establishment of the oil funds, sovereign wealth funds or other similar institutions creates an opportunity for the equal distribution of oil wealth among generations and its efficient and purposeful management. Currently, Oil Fund in parallel with its institutional development managed to become an organization recognized both nationally and internationally capable to share its experience on asset management, ensuring transparency. (SOFAR, History General Information).
The legal framework of SOFAR is derived from four sources.
Decree of the President of the Republic of Azerbaijan On establishment of the State Oil Fund of the Republic of Azerbaijan (1999, 2003, 2005);
Statute of the State Oil Fund of the Republic of Azerbaijan (2003 as amended through 2011);
Rules on Management of Currency Assets of the State Oil Fund of the Azerbaijan Republic (2001 through 2011);
Rules on the Preparation and Execution of the Annual Program of the Revenues and Expenditures (Budget) of the State Oil Fund of the Republic of of Azerbaijan (2003/2005);SOFAR has also produced a self-assessment that provides an excellent framework for examining the formal organization and operation of this SWF. (SOFAR Self-Assessment April 2013).
Long Term Strategy on the Management of Oil and Gas Revenues (2004).
SWF Organization. "The Fund is a legal entity and has a settlement account and other accounts at banking institutions. The Fund has a seal with the State Emblem and its name engraved on it, as well as an appropriate stamp and letterheads." (Statute of the State Oil Fund of the Republic of Azerbaijan (2003 as amended through 2011); § 1.3). Re-establishment and liquidation of the Fund can be carried out only by a decree of the President of the Republic of Azerbaijan (Ibid., § 8). SOFAR is formally autonomous but its objectives and operations are controlled through the office of the president. In this respect it suggests a different political arrangement from the usual organization, where the operation of the SWF is delegated to the bureaucracies of the Ministry of Finance. But it is not unique in this respect (e.g. Angola).
Objectives. It has operated as a futures and development fund since the middle of the first decade of the 21st century. "The cornerstone of the philosophy behind the Oil Fund is to ensure intergenerational equality with regard to the country's oil wealth. The main goal of establishment of the Oil Fund is to accumulate and efficiently manage oil revenues." (SOFAR, Mission, Goals and Philosophy).
"The Fund's assets may be used for solving the most important nation-wide problems, as well as for construction and reconstruction of strategically significant infrastructure facilities, for the purpose of the country's socioeconomic development" (Statute of the State Oil Fund of the Republic of Azerbaijan (2003 as amended through 2011); § 4.2).
Organization. "The Fund is accountable to the President of the Republic of Azerbaijan." (Statute of the State Oil Fund of the Republic of Azerbaijan (2003 as amended through 2011)§ 1.2). Beyond that, the organization of SOFAR is fairly conventional. Overall direction is undertaken by a supervisory board, "comprising representatives from relevant state bodies and public organizations, as well as of other persons" (Ibid., § 5.4) approved by the President (Ibid., §5.5).
The Supervisory Board reviews and gives its opinion on the main directions (program) of utilization of the Fund's assets, the Fund's annual report (together with the auditor's opinion) and balance sheet, as well as the Fund's draft annual cost estimates, approves the amount of wages on the classification and degree of the Fund's staff (not to include the Executive Director of the Fund) within salary fund provided for in the cost estimates on the Fund’s management presented by the Executive Director. (Ibid., §5.6).
Effective control of SOFAR is vested in an Executive Director (Ibid., § 5.1), who is appointed and dismissed by the President of the Republic of Azerbaijan (Ibid., §5.2). The Executive Director carries out operational management of SOFAR's activities, appoints and dismisses employees of SOFAR in a manner as determined by the legislation, ensures the management and investment of the Fund’s assets in accordance with the Guidelines approved by the President of the Republic of Azerbaijan (Ibid., § 5.3). SOFAR’s Executive Director prepares an annual program on the utilization of SOFAR’s assets and presents it to the President of the Republic of Azerbaijan for approval (Ibid).
Revenue Sources.The organizing statute of SOFAR provides for sources of funds from:
3.1.1. Revenues generated from implementation of the agreements on exploration, development and production sharing of oil and gas fields in the territory of the Republic of Azerbaijan including the Azerbaijani sector of the Caspian Sea, as well as other agreements on oil and gas exploration, development and transportation entered into between the State Oil Company of the Republic of Azerbaijan or other authorized state bodies and investors:
126.96.36.199. Net revenues generated from the sale of the share of the Republic of Azerbaijan in hydrocarbons (excluding expenditures on transportation of hydrocarbons, customs clearance and banking costs, marketing, insurance and independent surveyor fees, as well as shareholder revenues of State Oil Company of the Republic of Azerbaijan from the investments in the projects where it is an investor, participant or a contracting party);
188.8.131.52. The bonuses paid by investors to the State Oil Company of the Republic of Azerbaijan or the other authorized state bodies for signing or executing the oil and gas agreements;
184.108.40.206. Acreage payments to the State Oil Company or an authorized state body of the Republic of Azerbaijan for the use of the area contracted for oil and gas exploration and development;
220.127.116.11. The share of the Republic of Azerbaijan from the dividends generated from the implementation of the oil and gas agreements; and revenues from profit sharing (excluding shareholder revenues of State Oil Company of the Republic of Azerbaijan from its investments in the
projects where it is an investor, participant or a contracting party);
18.104.22.168. Revenues generated from oil and gas transported over the territory of the Republic of Azerbaijan by means of the Baku-Supsa, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum export pipelines (excluding shareholder revenues of State Oil Company of the Republic of Azerbaijan from its investments in the projects where it is an investor, participant or a contracting party);
22.214.171.124. Revenues generated from the transfer of assets from investors to an authorized state body within the framework of oil and gas agreements;
3.1.2. Revenues generated from the placement, management, sale or other utilization of the Fund's assets (including financial assets and assets handed over by investors within the frames of oil and gas contracts), asset revaluation, etc; ((Statute of the State Oil Fund of the Republic of Azerbaijan (2003 as amended through 2011) § 3)).
Additional revenues may be realized from grants, and other deposits made by the government (Ibid).
Investment Policy. SOFAR's investment policy "is to be prepared by the Executive Director of the Oil Fund in a manner that complies with the program on the main directions of utilization of the assets of the State Oil Fund and submitted to the President of Republic of Azerbaijan for approval along with the opinion of the Supervisory Board." (Rules on Management of Currency Assets of the State Oil Fund of the Azerbaijan Republic (2001 through 2011), § 3.1.2).
A long-term strategy on management of oil and gas revenues, which covers the period 2005-2025, establishes the principles for the use of oil and gas revenues and medium term expenditures policy for this period. This strategy ensures the management of the revenues acquired from sale of natural gas and oil in conformity with the sources described below, accrued in the State Oil Fund of the Azerbaijan Republic, and in the state budget. (Long Term Strategy on the Management of Oil and Gas Revenues (2004) Introduction)SOFAR invests on the general principles for investment grounded in portfolio risk geared to the long term objectives of the fund. These are generated through finance staff and approved through the office of the President. Investment includes equities and other assets globally, including real estate holdings in Australia and Asia.
SOFAR's investment of its revenues is in part devoted to internal development of Azerbaijan. "Macroeconomic stability shall be ensured and priority expenditures from oil revenues shall be coordinated based on the medium term policy."(Long Term Strategy on the Management of Oil and Gas Revenues (2004) § 3). Development prjects may include the following: (1) developing the non-oil sector, regions, SMEs; (2) large-scale development of infrastructure; (3) fulfillment of poverty reduction measures and the solution of other social problems; (4) stimulating the improvement of the intellectual, material, and technical base of the economy; (5) development of “human capital” (training (including in foreign countries) highly qualified specialists and improving the professional capacity of employees); (6) consolidating the defense capabilities of the country; (7) executing projects relating to reconstruction activities in liberated territories and the return of internally displaced persons to their native lands. (Ibid., §4).
The Oil Fund shall coordinate with the President of the Republic of Azerbaijan the list of projects for consideration within the Oil Fund's asset utilization program not later than May 1 of each year, it shall carry out expert examination of the projects and include approved projects to draft budget of the Oil Fund for the next year. The Oil Fund shall establish criteria for project evaluation and the format for project submissions, including volume of investment, duration of the project and an assessment of the availability of co-financing or other investment sources. (Rules on the Preparation and Execution of the Annual Program of the Revenues and Expenditures (Budget) of the State Oil Fund of the Republic of of Azerbaijan (2003/2005); §3.3.3)SOFAR's budget must be approved by the President (Ibid., §4.2) but the approval shall take into account the comments of the Supervisory Board of the Oil Fund and the results of the audit carried out by a reputable international audit firm on the Oil Fund’s annual financial activity. (Ibid., §6.3). Income not spent on development projects are added to the investment portfolio of SOFAR (Ibid., §5.1.6).
SOFAR has been a key investor in the development of Azerbaijan petroleum related industries.
The State Oil Fund of Azerbaijan (SOFAZ) begins forming the capital of the state company on the management of the Southern Gas Corridor project.
SOFAZ executive director Shahmar Movsumov says that now the Fund’s Supervisory Board is considering a change in the SOFAZ budget for 2014 for payment of the capital of this company.
"$51 million to be financed for the gas project management company will be directed for the formation of its capital. These finances have not been envisaged in the Oil Fund’s budget, and will be directed as long-term investments," Movsumov said.
. . . . .
Under the Order, the State Oil Company of Azerbaijan (SOCAR) is to ensure effective management of these projects through the establishment of a special closed joint stock company with registered capital of $100 million, 51% of which is state-owned and 49% belongs to SOCAR.
The State Oil Fund of Azerbaijan (SOFAZ) will provide payment for the state-owned shares of the CJSC and long-term investment in the Company on a condition to return the funds required for financing the stakes in projects transferred to this CJSC. (Oil Fund: Southern Gas Corridor to demand from Azerbaijan $2.5 bn of annual investment until 2019, ABC.az, March 12, 2014)