STATEMENT by the EITI Coalition of civil society institutions on the (11th) the six-monthly Report (finished on 30 June 2009) of the Commission for the Extractive Industries Transparency Initiative in the Azerbaijan Republic and Independent Accountant’s Opinion

(Approved by the Council of the ITEI Coalition of civil society institutions at the meeting on 11th January, 2010) 

The six-monthly report (11th report) of the Commission on the Extractive Industries Transparency Initiative in the Azerbaijan Republic that was finalized on June 30, 2009 and Independent Accountant’s Opinion (“Moore Stephence”) was presented to the general public and parties of the Memorandum of Understanding at a joint meeting of MoU parties on 14th December, 2009. The ITEI Coalition of civil society institutions (hereinafter referred to as Coalition) supposes that the release of auditing findings for the next report is a crucial event for the public life of the country and perceives it as a further significant step towards enhancing transparency in the mining industry by the Azerbaijani government in tandem with oil and gas companies operational in the country. 

I. About specific aspects of the reporting period
The presentation of the 11th report coincides with the formation of the Multi-stakeholder Group and is more likely to be the last conventional form of presentation since the presentation and discussion of future reports will take place in a new format within the frame of Multi-stakeholder Group newly established.

It should also be noted that the reporting period (first half of 2009) witnessed the worst conjuncture in the world oil market over the last period (the oil prices went down from the previous $147 per barrel in the first half of 2008 to $37 per barrel in the spring of 2009) which resulted in drastic contraction of revenues from the sale of carbohydrates into the state budget.
II. About the content of report
The Coalition, as a part of the Memorandum of Understanding, thinks it necessary to draw the attention of the other parties of Memorandum and public to several key aspects regarding the 11th report, which includes the findings from an independent audit evaluation.

1. In the reporting period, a total of 11 types of payments were recorded from companies to the state, 8 of which originated from in-country foreign companies and 3 from domestic companies. It is interesting that there have been a sort of variance in 6 of these 8 types of inflows paid by foreign companies. Though in some cases, this variance, which is covered in the report, was due to objective reasons (such as, technical variance as a result of technical differences in the amounts of payments by foreign companies for gas exploitation in natural terms etc.), in a majority of cases, it was reported to be due to conventional negligence and was thus accompanied by statements like “this variance has been wrongly approved by the company”, or “this variance has been erroneously approved by the same company”. The fact that these mistakes have been reiterated by the same company serves to reinforce the assumption that it is done on purpose.

2. Despite the prior agreements, in the paragraph of gas production provided by the foreign companies to the government, natural gas was reported in the same line as side-gases. It is exactly because of the downright different economic nature of these two types of gases that pushed the coalition to stubbornly re-highlight this issue. That is, if the side-gas is provided for free by foreign companies to the government pursuant to Azeri-Chirag-Guneshli Production sharing contract, the natural gas transported from “Shah-Deniz” and other deposits to the government reflects the government’s share in the contracts and thus displays the R-factor proportional share of government relative to companies in accordance with the Production sharing agreements. The provision of natural gas in a separate item would have made it possible to evaluate the extent of compliance with conditions of contracts. According to the new agreement reached under ÇQ, it is reasonable to include this issue into the agenda of the first sitting of the newly established group with a hope to arrive at the most appropriate conclusion through the discussions.

3. There are still uncertainties around transportation tariffs as well. The variance in transportation fees covered in the report is associated with “the fees paid by the government to itself”. The preliminary discussions also revealed that the question is about the transportation realized through “Baku-Supsa” oil pipeline and also the fact that the transportation costs that were supposed to be paid by SOCAR in the realization of the oil transportation via this oil pipeline was actually compensated by the revenues the government made from the oil transportation through this pipeline. Of course, it would look a murky issue for an outside evaluator unless he is provided with relevant explanations. Moreover, other numerous special cases relating to the transportation (as “Baku-Novorossiysk” is in the balance of SOCAR, the tariff fees for the transportation through this pipeline are of commercial character and refer to the commercial operation of the company, whereas in the transportation through “Baku-Tbilisi-Ceyhan” oil pipeline, the government makes its profits not from the transit fees but from the dividends) further complicate the accountability in this realm.  Given all these considerations, the coalition considers it significantly important that Azerbaijan join the new initiative of “EITI-Transportation”. The expansion of EITI in a new direction as was raised by the CSO representatives from the regional countries (Kazakhstan, Azerbaijan, Georgia and Ukraine) seems to be as much reasonable for traditional EITI member states of Azerbaijan and Kazakhstan as it is for transition countries (Georgia and Ukraine). By joining “EITI-Transportation” initiative Azerbaijan would draft and implement a new reporting form of transportation and thus cover all the payments in this area.

4. Another important issue regarding the transportation is concerned with BTC dividends. Dividend columns are explicitly left empty in the reports. No dividend inflows are recorded in the payments of either foreign companies or domestic companies. Yet, as per the Oil Fund explanations, in the first six months of 2009 dividend inflows to the Fund from BTC.Co accounted for 75.5 million AZN. The overall sum of dividend inflows from this source to the Fund comprised USD 314.8 million in 2009. The coalition deems that there must be provided additional clarification and explanation on why dividends from BTC.Co Company are not reflected in the EITI report.
5. The variance in the profit section of inflows from the foreign companies caused by translation mistakes is not properly understood. That is, in the original English version, this variance was extracted and explained though the difference in the actual amounts of tax payments, whereas in Azerbaijani version the statement “caused as a result of adding the total profit taxes into its table” does not produce clear understanding or meaning.
6. In spite of the fact that the total amount of other taxes in the report is 20% more than the taxes paid to the government and at the same time more than the separate royalties, details are not provided on the inflows from this source. To our opinion, it is important to make a separate item in the report for the type of tax that holds the biggest share amid the inflows from this source.

III. About the procedural aspects

1. The extended deadline for the submission of reports causes a concern too.That it, according to paragraph (f) of Article 5 in the Memorandum of Understanding signed by the parties of EITI (24 November, 2004), the final “independent accountants report” is to be submitted to all parties within 30 days after its submittal to the auditing company or after the inconsistency is completely removed provided that there is a prior common agreement about the inconsistency to be negligible and possible to be eliminated. Paragraph (c) of Article 5 of the Memorandum states that bi-annual reports are to be submitted to an auditing company on August 15. As previously, the 11th report was submitted in mid-December, in other words, 3 months later than is stated in the memorandum. The report does not contain any information about whether EITI reports of the government and domestic and foreign companies have been duly submitted to the Auditor within the time-frame specified in the memorandum (i.e. bi-annual reports due on August 15th) or delayed. Such being the case, it is difficult to understand why such a long time extension (two or three months) was assigned for the purpose of eradicating the “insignificant” inconsistencies, covered in this report. We propose that auditor should reduce the extended time-frame for doing away with so-called “insignificant” inconsistencies and ensure that the final reports are duly submitted in a timely fashion.
2. This report also contains those repeated mistakes previously made by the companies. The coalition supposes that ÇQ should take decisions to halt the every-year reiteration of the mistakes which companies repeatedly make in filling out reporting forms and names of company (or companies) should be unveiled to group members. 
3. An independent auditor opinion on the cross-check of the reports and government’s reports are posted on the websites of State Oil Fund, EITI International Secretariat and NGO Coalition, which limits the chances for the public to learn sufficient information about these reports. Because not the whole society have an access to these websites. Also, since the reports on websites are presented in a professional language, they are not comprehensible for the ordinary citizens. NGO Coalition proposes that along with their coverage in official media, these reports should also be reformulated in understandable language for the presentation to the society through explanatory brochures or booklets.

Below are recommendations and suggestions of EITI Coalition of civil society institutions for better reporting standards that were developed through the experience with the 11th report of Independent Accountants and previous reports:

1. The independent accountants’ reports should contain information about whether government and domestic and foreign companies submits their reports within the time- frame specified in the memorandum or delay them beyond that period providing also justifications for late submissions, if any. The Coalition proposes that auditors should immediately inform parties of memorandum when they receive government’s and companies’ reports (from each source of reports).  We deem also necessary that the independent auditors should cut down the extended time-frame for eliminating discrepancies and ensure that final reports are submitted in time. There should be certain limitations for the preparation and submission periods of auditor views in the Memorandum. Therefore, the memorandum should be amended appropriately and discussions should take a start about it among the parties in the first sitting of ÇQ;
2. As per the requirements of the memorandum of understanding and also for the purposes of improving the current reporting system, discussions should be initiated first with oil and gas companies and auditing companies and secondly with all parties of ÇQ;
3. The Coalition also deems that government commission and EITI Coalition initiatives should be extended in joint formats to disclose companies’, especially SOCAR’s individual reports and this issue be included into the action plan of 2010;
4. The Coalition also recommends to establish  a Group of Companies consistent of company representatives to extend and intensify the relationship and cooperation with companies since the number of companies joining EITI is increasing form year to year in the country and also there is such a practice in other EITI-applied countries;
5. The Coalition also considers it reasonable to design TV and radio programs and publish explanatory brochures and booklets to communicate the country EITI reports and auditors opinions to the broader public in an understandable language.

The Coalition also expects the government commission and companies will adopt these recommendations aimed at improving EITI practice in Azerbaijan and take practical measures towards their implementation so as to finally increase the trust and reliance of civil society in EITI process and its accountability system.

Last correction date of the file: 27/1/2010 - 0:7:15

Other language version of the file: /az/