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Abbreviations .................................................................................................................................................. i Acknowledgements ........................................................................................................................................ ii Executive Summary ....................................................................................................................................... iii CHAPTER 1: CONTEXT AND OVERVIEW .............................................................................................................. 1 Objectives and Scope of the Technical Note .................................................................................................. 1 Role and Economic Importance of State Owned Enterprises in Azerbaijan .................................................. 2 Overview of Legislative Framework ............................................................................................................... 7 CHAPTER 2: FUNCTION AND FORM OF STATE OWNERSHIP ............................................................................ 10 Rationale for State Ownership ..................................................................................................................... 10 State’s Role as an Owner .............................................................................................................................. 12 Models of SOE Ownership ............................................................................................................................ 14 SOE Institutional Arrangements in Azerbaijan ............................................................................................. 18 Areas for Consideration: State Ownership ................................................................................................... 24 CHAPTER 3: ROLE OF BOARDS AT STATE-OWNED ENTERPRISES ..................................................................... 25 Relationship of the State with SOE Boards and Management ..................................................................... 25 Board Role and Responsibilities ................................................................................................................... 28 Professional Board: Structure, Composition and Nomination ..................................................................... 30 Board Committees ....................................................................................................................................... 34 SOE Boards in Azerbaijan ............................................................................................................................. 35 Areas for Consideration: SOE Supervisory Boards ....................................................................................... 39 CHAPTER 4: PERFORMANCE MONITORING ..................................................................................................... 41 Key Objectives of Performance Monitoring ................................................................................................. 41 Management’s Role and Accountability ...................................................................................................... 42 Developing and Enforcing Performance Indicators and Targets ................................................................. 44 Managing Performance of State Owned Enterprises................................................................................... 46 SOE Performance Monitoring in Azerbaijan ................................................................................................ 47 Areas for Consideration: SOEs Performance Monitoring ............................................................................ 48 CHAPTER 5: FINANCIAL ACCOUNTABILITY, CONTROLS AND TRANSPARENCY ................................................. 50 SOE Financial Reporting ............................................................................................................................... 50 Audit Committees and External Auditors .................................................................................................... 51 Public Availability of Financial Statements and Aggregated Data on SOEs ................................................. 52 Financial accountability, Controls and Transparency in Azerbaijan............................................................. 52 Areas for Consideration: Financial Accountability, Controls and Transparency .......................................... 56 CHAPTER 6: AREAS FOR CONSIDERATION AND PRIORITY ACTIONS FOR SOE REFORM .................................. 58 Main Observations and Challenges of SOE Reform in Azerbaijan ............................................................... 58 Suggested Areas for Improvement and Consideration ................................................................................ 61 ANNEXES .......................................................................................................................................................... 69 Annex I: Details of Legislation Framework as to SOE Corporate Governance ............................................. 69 Annex II: Rationale for state ownership – examples .................................................................................... 76 Annex III: Overview of strategic SOEs and sectors of the economy among some of the world’s economies ...................................................................................................................................................................... 78 Annex IV: Types and Examples of Centralized SOE Ownership Arrangements ........................................... 81 Annex V: Role of SOE Boards. Strengthening Boards ................................................................................... 87 Annex VI: Examples of Board Members Nomination in SOEs ...................................................................... 92 Annex VII: SOEs Performance Monitoring. International Examples ............................................................ 94 CAERC Center for Analysis of Economic Reforms and Communication CFRR The World Bank Centre for Financial Reporting Reform CJSC Closed Joint Stock Company EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia Region EU European Union FIG Financial Institutions Group GLC Government Linked Company IFC International Finance Corporation IFRS International Financial Reporting Standards ISA International Standards on Auditing JSC Joint-Stock Company KPIs Key Performance Indicators LLC Limited Liability Company MOE Ministry of Economy MOF Ministry of Finance NAS National Accounting Standards OECD Organization for Economic Cooperation and Development OJSC Open Joint Stock Company PIE Public Interest Entity SAI Supreme Audit Institution SCPI State Committee on Property Issues SE State Enterprise SOE State Owned Enterprise WB World Bank i This technical note is the result of research and analysis undertaken by the World Bank Governance team, as part of the technical assistance on Promoting Transparency and Efficiency of SOEs in Azerbaijan (Project 162972). The World Bank Group team was led by Natalia Manuilova, Sr. Financial Management Specialist (Governance Global Practice/CFRR1), and included Tural Jamalov, Sr. Financial Management Specialist (Governance Global Practice/GGO21), Boris Janjalia, Corporate Governance Officer (IFC), and Irina Gordeladze, Consultant (Governance Global Practice/CFRR). The oversight of this task was performed by Henri Fortin, Lead Financial Management Specialist, Global Lead, Corporate Governance and Financial Reporting (Governance Global Practice/GGO21). The team wishes to thank peer reviewers for their guidance and contributions: Nadir Ramazanov, Country Economist (Macro Economics & Fiscal Management Global Practice/GMF11), Immanuel Steinhilper, Sr. Public Sector Specialist (Governance Global Practice/GGO18),