Legal Reform in Azerbaijan

Over the years, Azerbaijan has carried out extensive reforms of its legal framework but problems of implementation and enforcement remain. The legal environment is complex and uncertain. Although there have been significant improvements in the legislation relating to the establishment and licensing of businesses, the recent changes in law restricting access to information on ownership of the companies incorporated in Azerbaijan has created certain impediments for the EBRD’s activities in Azerbaijan. Similarly, in company law, the major shortcomings relate to the rules on disclosure and transparency. As a result a focus of the EBRD’s strategy in Azerbaijan is to assist with developing legislation on corporate governance that will play a crucial role in promoting market-driven diversification, while the laws and institutions pertaining to secured transactions, insolvency, contract enforcement and energy efficiency are relevant to the EBRD’s plans to develop a sustainable financial sector to support private sector development. Finally, the legislation relating to public-private partnerships (PPPs) is important in the context of IFI cooperation in the road development sector.

Access to Finance

Improving access to finance, especially for SMEs and MSMEs as well as to the rural sector is an important part of the current EBRD strategy for Azerbaijan. Improving the enforcement of secured creditors’ rights, removing ambiguities and limitations of the present secured transaction system (especially for pledge over movable property) and crating legal underpinning that could facilitate credit bureau operations would contribute to enhancement of the access to finance in Azerbaijan.

Security rights over movable and immovable assets in Azerbaijan are primarily governed by the Civil Code, which entered into force on 1 September 2001, and the Mortgage Law of 2005. The 1998 Pledge Law was repealed at the end of 2006 and its progressive features, such as the possibility to take a mortgage over the whole or part of a business’ enterprise and the possibility for the chargeholder in case of default of the chargor to take possession of the charged assets, have now disappeared.

The Civil Code makes a fundamental distinction between pledges and mortgages. According to the Code pledges can be of various kinds: the charged assets can (but need not) be given in possession to the creditor, and can cover intangible assets (e.g. account receivables). Pledges are mostly not registered. Mortgages must be registered in the relevant official registry. For movable assets, this refers to existing asset-based registries, such as motor vehicles registry, ship registry, etc.

Improving the enforcement of secured creditors’ rights, removing ambiguities and limitations of the present secured transaction system (especially for pledge over movable property) and creating legal underpinning that could facilitate credit bureau operations would contribute to enhancement of access to finance in Azerbaijan.

IFC is currently partnering with USAID and the Central Bank to work on a draft secured transaction law. A conference was organised in Baku in December 2012 to raise awareness of the current work and the importance of the secured transactions reform among the potential users and recipients.

Factoring and Leasing

Apart from the traditional finance based on secured transactions the market participants have access to others forms of asset based finance such as leasing and factoring as well. The Civil Code (Articles 655 – 657) contains provisions defining factoring contract, factoring services and eligible providers of factoring services. Factoring is defined as financing in return for assignment of claim for accounts. Under a factoring contract one of the parties (factor) provides or undertakes to provide to another party (client) financing in return to right of claim for accounts arising out of supply of goods, performance of works or rendering of services by the client to a third party (debtor), whereas factor assigns right of claim for accounts or undertakes to assign this right. Scope of obligations of factor under factoring agreement may include provision of accountancy for the client, as well as provision of other financial services associated with accounts being subject of assignment of claim. Factoring services can be provided by banks and other credit organisations, as well as other commercial enterprises having permission for carrying out of this type of operations according to the applicable legislation on non-banking credit institutions.

The Civil Code (art 747 – 751) also introduced definitions of the leasing, rights and obligations of the parties under leasing contract and some measures of supervision rights of lessors over the lessees during the term of leasing. However, these provisions differ a bit from a usual definition of (financial) leasing services since in Azerbaijan any legal or natural person can be in the capacity of lessor (financial leasing as a service is usually reserved for (regulated) companies). Parties to the leasing agreement are the lessor, the lessee and the seller (supplier of goods). In accordance with stated provisions under a leasing contract lessor shall be obliged to transfer certain property into use of lessee for an agreed certain fee, certain period and other conditions (including also the granting to the lessee the right to purchase the property at the end of the contract taking into account the amortisation of the property – financial leasing) determined by the contract.

Credit Bureau

There is currently no operational credit bureau in Azerbaijan apart from the Central Credit Register run by the Central Bank which serves more as a statistical tool, appears not to allow for credit scoring and is not built in accordance with the modern credit bureau standards. Creation of a modern credit bureau is currently supported through IFC-realized project of Azerbaijan-Central Asia Financial Markets Infrastructure (ACAFI) with financial support of the Swiss State Secretariat for Economic Affairs (SECO). According to the recent press release (30 April 2013) the Memorandum of Understanding for participation in the establishment and in the equity stakes in the national credit bureau has been signed by 10 banks - AccessBank, AG Bank, DemirBank, PASHA Bank, ASB Bank, Mugan Bank, TuranBank, Bank Respublika, YapiKredi Bank Azerbaijan, and UniBank. By signing the MoU, they undertook a commitment to establish a bureau after the national legislation allows it.

In 2014 the EBRD conducted an assessment on secured transactions which examined the availability of collateralising different types of assets regardless of the underlying legal instruments used to achieve the establishment of secured creditor’s rights. In addition to the classic security interests (pledges and mortgages the assessment also covered usual types of quasi security, such as sale and lease back transactions. The assessment also covered related issues such as enforcement and syndicated lending. The links below take you to the assessment results for Azerbaijan.
 
 
 
 
 

Capital Markets

In Azerbaijan, the basic legislation on the securities markets is contained in Chapter 54 of the Civil Code, which contains provisions on types, issuance and circulation of securities, prospectus and disclosure requirements, the role and functions of the stock exchange and other participants in the securities markets. Other important laws are the Law on Protection of Rights of Investors in the Securities Market and the Law on Investment Funds.

The securities markets regulator is the State Securities Committee (SSC), while the banking and insurance sectors are supervised respectively by the National Bank of Azerbaijan and the Ministry of Finance. The SSC has the authority to adopt regulations setting out mechanism and detailed rules and guidance on relevant matters in accordance with the provisions of the Civil Code.

The capital market in Azerbaijan is acutely underdeveloped, with equity and debt market capitalization of 0.4 percent and 1.6 percent of non-oil GDP, respectively. The main activity of the Baku Stock Exchange (BSE) is the primary issuance of Government Securities, however, secondary trading of these securities does not exist. Only two companies have listed their shares on the BSE to date, one of which is closely-held and does not trade. According to the World Bank Market Assessment Report of mid-2010, the development has been constrained, inter alia, by several factors: (i) fragmented regulatory environment, largely not aligned with international standards; (ii) outdated market infrastructure; and (iii) low awareness of capital markets instruments and reluctance of corporate to disclose for listing requirements.

To help speed up reforms and address some of the challenges facing Azerbaijan, the EBRD’s activities there focus on three main areas: industry, commerce and agribusiness, finance and energy and infrastructure.

 

 

Corporate Governance

Azerbaijan has undertaken substantial legal and regulatory change that has led to a number of improvements in the corporate governance framework. The framework however could be further improved, especially with regards to disclosure and the role of supervisory boards. Furthermore, shareholders and investors continue to report problems in accessing company information. While all companies are required to produce audited financial statements that include balance sheet and income statement, many do not seem to do so. The Azerbaijani Corporate Governance Standards are voluntary and do not provide much impact on the practices by companies. However, they offer good guidance to those companies willing to improve their structure.

Authorities should consider strengthening the capacity of authorities (i.e., courts, State Committee for Securities and Central Bank of Azerbaijan) for the monitoring and implementation of sound corporate governance practices, especially by public interest companies. A tightening of the implementation of the Azerbaijani Corporate Governance Standards should be coupled with appropriate and qualified resources able to monitor disclosure and practices. In general, disclosure practices should be enhanced.

Azerbaijan: Amendments to the Foreign Investment Protection Law

The EBRD assisted a working group to prepare a new draft law based on internationally recognised guidelines for foreign investment laws. The draft provided solutions to key omissions and shortcomings in the existing legal framework and proposed additional measures to be taken to ensure the effectiveness of the law. This project was funded by the German government and was completed in January 1999.

 

Debt Restructuring and Bankruptcy

The Law on insolvency and bankruptcy of 1997 (the Bankruptcy Law) only applies to the insolvency of non-bank companies and private entrepreneurs; the insolvency of banks is regulated by the law on banks of 2004. The EBRD’s 2009 insolvency sector assessment concluded that the Bankruptcy Law did not meet international standards of insolvency law and that the legislation was problematic in many areas.

Azerbaijan’s Bankruptcy Law would benefit from whole-scale revision. While the liquidation provisions appear to be relatively adequate, the law offers limited scope for reorganisation in bankruptcy. It contains an out of court bankruptcy option for exceptional cases, but this does not appear to function properly and may not in any event be appropriate for cases involving a number of creditors where court supervision would be beneficial. The role of the key players within the law, particularly the insolvency administrator, would also benefit from examination and improvement.

 
 

Dispute Resolution

The EBRD 2012 Judicial Decisions Assessment found that the quality of court judgments in commercial law matters in Azerbaijan was very uneven. The case law is often inconsistent; similar cases give rise to different outcomes. The country’s commercial legal framework is still developing, and gaps, such as in the areas of company operations and shareholder rights, contribute to the inconsistency. Issuance of guidance by the Supreme Court on various legal matters is a factor promoting more uniform application of commercial law. Judges’ lack of experience with commercial law and practice is believed to be a major factor affecting the quality of judgments.

Judicial training is provided by the Training Section of the Judicial Legal Council. Continuing professional training is voluntary and courses are given based on judges’ wishes; initial training for newly appointed judges is more extensive and has recently become mandatory. Speed of justice is another area of concern, with postponement of proceedings a common practice and judges’ very large caseload adversely affecting the quality and speed of proceedings.

Enforcement of court judgments remains a key challenge for the country’s judicial sector, as is the case in other countries in the region. Recent measures to improve the situation include introduction of specific timeframes for enforcement procedures as well as increased penalties for defendants for failure to comply with court judgments.

The effects of these improvements on the enforcement system are yet to be seen. A key factor of the inefficient enforcement system appears to be the lack of motivation on part of bailiffs who are public officials.

The country has made progress in developing a modern functioning judicial system, particularly in terms of physical infrastructure, however much remains to be done. One key priority is to bolster the impartiality of the judiciary, particularly in relation to matters where the state is a party or has a substantial interest. In this connection, greater access to court decisions and case materials would be a useful measure.

Another is to strengthen the training curriculum, with a greater focus on commercial and administrative laws areas. Enhancing capacity of enforcement agents is another recommended area for reform efforts, with a particular focus on setting up appropriate incentives for agents to carry out the enforcement process in an efficient manner. Introduction of private agents, possibly along with public officials, should be considered.

 

Electronic Communications

The electronic communications sector is governed by the Law on Telecommunication (the “2005 Law. A Decree “on Licensing” sets out an individual licensing regime for much of the sector, and the Administrative Penalties Code includes a separate section addressing violations in the sector and rights of consumers. The 2005 Law provides for tariffs for interconnection to be based on benchmarks, and the Law on Anti-Monopoly Activities holds that an entity in excess of 35 per cent market share is dominant.

The legal framework for the sector current supports a market that is both largely dominated by state-owned or controlled operators, as well as being absent many of the competitive safeguards seen in more developed markets. On the institutional side, there is very limited separation of policy, regulation and operations, with the Ministry of Communications and Information Technology (MCIT) being responsible for policy, regulatory implementation and aspects of operations. As a result the EBRD Electronic Communications Assessment conducted in 2012 concluded that Azerbaijan needs to improve the independence of the regulator, and move towards the creation of a separate and independent body.

Though formally liberalised, market entry opportunities remain limited or cumbersome with no general authorisation framework and new entrants requiring specific licences for specific services. Further barriers include basic fixed-line retail rental tariffs which are significantly below cost, fixed incumbent operators which have yet to publish interconnection or unbundling offers; absence of carrier selection (though there is carrier pre-selection); and, no fixed number portability. In the mobile market, since the competitive market for 3G services started in late 2011, demand has been very high, with mobile broadband overtaking fixed broadband connections very quickly. Similar to the fixed market, there are no published interconnection offers, though MCIT does regulate call termination on the mobile networks for calls between mobile operators. Although MCIT regulations permit the entry of Mobile Virtual Network Operators (MVNOs) into the market, none have yet sought licences and, while all three operators signed a protocol in early 2013 on introduction of mobile number portability it is unclear when the service will become fully operational.

With the market for fixed services dominated by state-owned operators and a relatively low fixed penetration rate, the main growth in modern broadband services will come from the competitive mobile service providers.

Indeed, since the granting of 3G licences to all three mobile operators, the growth of mobile broadband has easily outstripped fixed broadband. While MCIT’s policy for the information society, coupled with its action plan to align electronic communications regulation with the EU framework, should facilitate the improvement of market conditions in the next few years, substantive steps to overhaul the legal and institutional structure of the sector need to be taken urgently to ensure these improvements are both meaningful and sustainable. Key to sustaining sector growth and development will be the attraction of private investment to the sector. Although overhaul of the legal, regulatory and institutional framework should go some way to attracting such investment, the removal of the state from operational aspects of the sector would significantly contribute to attraction of further investment into the sector.

 
 
Communications Regulatory Development

In early 2010, the EBRD and Azerbaijan’s Ministry for Communications and Information Technology (MCIT) agreed to implement a training programme comprising an assessment of the specific training needs of the regulatory authority and sector policymaking authority; the development of a comprehensive individual training programme for the selected country covering all key aspects of regulation, with the goal of meeting the specific needs for development of regulatory staff skills; implementation of the individual training programme over the course of an 8 – 10 week period; and, an evaluation of the individual training programme upon its completion.

Energy Regulation

The State Programme for the Development of Fuel and Energy Sector for 2005–2015 is the centrepiece of the country’s policy framework in the energy efficiency (EE) sector, targeting the reduction of losses and prevention of theft and inefficient use of energy in order to cover the electric power and natural gas demands. It is stated that full payment of the cost of electricity and natural gas consumed is one of the factors that would ensure efficient use of these resources.

In the energy efficiency sector, the government should make a stable policy commitment to decrease energy intensity in the economy and introduce sufficient incentives for efficient use of energy resources. The government should look at developing a legal and regulatory framework enabling effective implementation of the EE measures across the sector reflective of internationally proven practices. Project implementation mechanisms, including setting up proper incentives for investors and financing institutions, should be carefully considered. Appropriate institutional capacity has to be strengthened and educational programmes for market players and households have to be rolled out.

 
 

PPPs/Concessions

Azerbaijan does not have any specific Law dealing with PPPs or concessions. The Civil Code and the Law on Protection of Foreign Investments do recognise concessions yet neither of the two refer to the modern understanding of PPP/Concession. The Law on Protection of Foreign Investments contains only one article related to concessions. However this law is limited to concessions in the natural resources sector and is restricted in its application to foreign investors.

Furthermore, concessions are understood as permits or licenses, refer to administrative procedures largely in mining and have nothing to do with the common understanding of modern concessions of public works or services. Sector-specific laws and other acts that cover privatisation do not regulate concessions either. The 2001 Law on State Purchase sets the basis for public procurement, organisation and rules for public procurement procedures as well as selection of the contractor and complaints procedures. Yet, this law is silent on PPP.

The 1996 Regulations dealing with the transfer of state enterprises (objects) into management on a contractual basis regulate the transfer of the right of use of certain public enterprises (infrastructure), based on management contracts, as a preparation for future privatisation. Such contracts are awarded on a competitive basis.

Current laws still seem to focus on production sharing agreements as a form of foreign investment, are discriminating to domestic investors, are in fact out of date and do not any longer serve the needs of the dynamically growing economy of the republic.

To sum up, Azerbaijan remains one of the very few countries in the EBRD region that still has no legal framework for PPP or modern day concessions.

 
 

Public Procurement

In Azerbaijan an executive public procurement authority has been established (“Procurement Authority”), which is responsible for developing PP policy. This body is not independent and the Chairman of the Procurement Authority reports to the Ministry of Finance

Public procurement (PP) in Azerbaijan is regulated by a separate body of law. However, PPL and related regulations are not well coordinated. PPL covers national and local government procedure and provides for a decentralized procurement function. However, PPL does not include rules for utilities and public law institutions and there is no Central Purchasing Body. Concessions are not regulated by Azerbaijan law.

In the EBRD 2010 legislation, the Azerbaijan PPL scored low compliance in the region. The scores have been calculated on the basis of a legislation questionnaire, based on the EBRD Core Principles for an Efficient Public Procurement Framework.

In the 2010 assessment, the Azerbaijan PPL did not demonstrate any specific strengths; the highest compliance rate is 60 per cent for competition indicators. Average scores are well below 50 per cent of the benchmark.

PPL in Azerbaijan has several major weaknesses; significant regulatory gaps were identified in almost every indicator. PPL is lacking several integrity safeguards and has not adopted efficiency instruments either.

The Public Procurement Policy Workshop in Baku, Azerbaijan was organized by the European Bank for Reconstruction and Development and the United Nations Commission on International Trade Law in cooperation with the Ministry of Finance of Azerbaijan, Ministry of Economic Development of Azerbaijan, State Procurement Agency of Azerbaijan, the Office of the Co-ordinator of OSCE Economic and Environmental Activities and the Anti-Corruption Network for Eastern Europe and Central Asia, OECD.