EXTRACTIVE INDUSTRIES TRANSPARENCY COMISSION OF THE REPUBLIC OF AZERBAIJAN Extractive Industries Transparency Independent Auditor’s Report For the year ended December 31, 2017 AZERBAIJAN EIT REPORT FOR THE YEAR 2017 Page 1.OVERVIEW ......................................................................................................................................... 8 1.1. Introduction ..................................................................................................................................... 8 1.2. Scope of work ................................................................................................................................. 9 1.3. Confidentiality of data ..................................................................................................................... 9 1.4. Approach and Methodology ........................................................................................................... 9 1.5. Accounting policy ......................................................................................................................... 10 1.6. Compilation of EIT report and civil society participation .............................................................. 10 2. EXTRACTIVE INDUSTRY, LEGAL AND FISCAL REGIME ....................................................... 11 2.1 Exploration and extraction ............................................................................................................. 11 2.1.1 Overview of extractive industry .................................................................................................. 11 2.2 Legal and fiscal regime .................................................................................................................. 13 2.2.1 Legal regime ............................................................................................................................... 13 2.2.2 Fiscal regime ............................................................................................................................... 19 2.2.3 The structure of the state budget system.................................................................................... 21 2.2.4 Roles and responsibilities of the relevant Government agencies ............................................... 24 2.2.5 Main highlights of the extractive industry .................................................................................... 28 2.3 Allocation of licences .................................................................................................................... 31 2.4 Register of licenses in extractive industry .................................................................................... 31 2.5 Diclosure of Contracts .................................................................................................................. 32 2.6 Beneficial ownership .................................................................................................................... 33 2.7 State participation in extractive industry ....................................................................................... 33 2.7.1 General information ..................................................................................................................... 33 2.7.2 Relationship between state-owned enterpirses and Government agencies ............................... 35 2.7.3 Payments to the State Budget by state-owned enterpirses ........................................................ 37 2.7.4 Financial performance and production data of state-owned enterprises .................................... 40 2.7.5 Joint Ventures, associates and subsidiaries of state-owned enterpirses ................................... 43 2.7.6 Transactions related to State owned enterprises ....................................................................... 45 2.7.7 State -Owned Enterprise activities in foreign markets ................................................................ 46 2.7.8 Loans and guarantees received by state-owned enterprises ..................................................... 50 3. OVERVIEW OF THE MINING INDUSTRY ...................................................................................... 52 3.1. Summary of Mining Industry ......................................................................................................... 52 3.2. Production volume ........................................................................................................................ 61 3.3. The share of the export in the extractive industry ........................................................................ 62 3.4. Energy balance of Azerbaijan in 2017 ......................................................................................... 63 4. TAXES AND REVENUES TO BE COVERED IN THE EIT REPORT ............................................. 64 4.1. Significant payments .................................................................................................................... 64 4.2. The allocation and payments made to government and their description ................................... 65 4.3. Reconciliation results ................................................................................................................... 66 4.4 Payments made to Government according to PSA ....................................................................... 69 4.5. 4.5. Extractive industry companies ......................................................................................... 71 4.6. Sale of the state’s share of production other revenues in kind .................................................... 76 4.7. Infrastructure provisions and barter arrangements ...................................................................... 77 4.8. Transit revenues ........................................................................................................................... 78 4.9. Sub-national payments ................................................................................................................. 83 4.10. Individual accountability ............................................................................................................. 83 4.11. Data quality and assurance ....................................................................................................... 83 5. DISTRIBUTION OF EXTRACTIVE INDUSTRY REVENUES AND EXPENSES ............................ 84 5.1. Distribution of revenues and expenses of State budget and SOFAZ .......................................... 84 5.2. Revenue management and expenditures .................................................................................... 86 6. CONTRIBUTION OF THE EXTRACTIVE INDUSTRY TO THE ECONOMY OF AZERBAIJAN ... 87 6.1. Social expenditures ...................................................................................................................... 87 6.2. Quasi-fiscal expenditures ............................................................................................................. 89 6.3. Industry and Field structure of GDP ............................................................................................. 89 6.4. The state revenue from the extraction industry ............................................................................ 91 6.5. Employment in the extractive industry ......................................................................................... 95 6.6. Key regions (areas) where production is concentrated ................................................................ 96 6.7. Other information .......................................................................................................................... 97 6.7.1. Environmental protection and rational utilization of natural resources ...................................... 98 6.7.2 Alternative energy sources ........................................................................................................ 99 7. RECONCILIATION RESULTS ...................................................................................................... 102 7.1. Reconciliation by revenue stream (foreign companies) ............................................................. 102 7.2. Reconciliation by revenue stream (local companies) ................................................................. 103 7.3. Adjustments ................................................................................................................................ 104 7.3.1 Adjustments to cash transfers ................................................................................................. 104 7.3.2 Adjustmens to the transactions in kind ..................................................................................... 107 8. SPECIAL AUDIT PROCEDURES ............................................................................................. 108 9. RECOMMENDATIONS AND RESULTS ................................................................................... 110 9.1. Independent Auditor’s Recommendations on the preparation and compliation of EIT Report for the year ended December 31, 2017. .......................................................................................... 110 9.2. Implementation of relevant recommendations on the EIT report for 2016 ................................. 112 ANNEXES .........................................................................................................................................