חומר רקע
1
MANAGEMENT OF OIL REVENUES:
AZERBAIJAN CASE
Baku
December, 2020
STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN
Content
• National Oil Strategy
• Introduction to Sovereign Wealth Funds
• Case of Azerbaijan: SOFAZ
– Governance and Budgeting
– Social and Infrastructure Projects
– Asset Management
– Transparency
2
3
OIL REVENUE MANAGEMENT AS AN INTEGRAL
PART OF NATIONAL OIL STRATEGY
Three Pillars of National Oil Strategy
Development of oil
and gas resources
with foreign capital
and technologies
Development of
multiple export
routes
Establishment of
prudent oil revenue
management
framework in
anticipation of
substantial oil revenues
Contract of the
century” is signed
1994
1996
Baku-Novorossiysk
Oil Pipeline
1999
Baku-Supsa
Oil Pipeline
2006
-BTC oil pipeline
-Baku-Tbilisi-Erzurum
Gas Pipeline
1999
SOFAZ is founded
4
Government Share in Profit Oil
1998-2008
I quarter 2008 - II quarter 2008 II quarter 2008 - 2050
25%
50%
75%
75%
50%
25%
Government
Companies
STATE OIL FUND OF AZERBAIJAN
5
6
SOVEREIGN WEALTH FUNDS AS A TOOL FOR OIL
REVENUE MANAGEMENT
Sovereign Fund Types
Official Reserves/
Central Bank
• External assets for
directly financing
international
payment
imbalances
• Highly liquid,
often government
bonds
Stabilization
Funds
• Funds to insulate
budget &
economy from
excess volatility,
inflation, Dutch
disease, & other
macro economic
threats
• Low-risk, liquid
assets: cash,
government
bonds
Pension Funds
•Investment
vehicles to meet
government’s
future pension
obligations
•Funded and
denominated in
local currency
Sovereign Wealth
Funds
• Investment
vehicles by
foreign exchange
assets
• Managed
separately from
official reserves
• Typically have a
higher tolerance
for risk
Increasing investment horizon and investment risk
7
What is a Sovereign Wealth Fund?
Directly owned by a sovereign
government
Independently managed by a state
institution
Does not have explicit current pension
obligations
Invests in a diverse set of financial
assets in pursuit of commercial returns
Mainly invests internationally
Generally funded by:
•
Revenues from extractive industries.
•
Transfers of budgetary surpluses.
Main objectives:
•
Macro stabilization.
•
Prevent “Dutch disease”.
•
Savings for future generations.
8
SWF AuM, 2008-2018 (trillion USD)
Santiago Principles
October 11, 2008 - The International Working Group of Sovereign Wealth Funds (IWG) publishes GAPP
(Generally Accepted Principles and Practices) in Santiago.
April 6, 2009 - The International Forum of Sovereign Wealth Funds (IFSWF) as a voluntary group of SWFs is
established in Kuwait
October 8-9, 2009 - IFSWF holds its inaugural meeting in Baku on October 8-9, 2009
May 7, 2011 – SOFAZ publishes its first self-assessment report on application of the Santiago principles
March 1-2, 2016 – SOFAZ hosted an IFSWF workshop on Santiago Principles in Baku
September 18-21, 2018 Morocco - IFSWF board member election has been held and SOFAZ has been
elected to the board
Objectives of Santiago Principles are:
Transparent and sound
governance structure
Transparent and sound
governance structure
Adequate operational
controls
Adequate operational
controls
Risk management and
accountability
Risk management and
accountability
Compliance with
applicable regulatory
and disclosure
requirements
Compliance with
applicable regulatory
and disclosure
requirements
Invest on the basis of
economic and financial
considerations
Invest on the basis of
economic and financial
considerations
Maintain a stable global
financial system and
free flow of capital and
investment
Maintain a stable global
financial system and
free flow of capital and
investment
9
10
CASE OF AZERBAIJAN: SOFAZ
GOVERNANCE AND BUDGETING
Preservation of
macroeconomic
stability
1
Objectives of the State Oil Fund of Azerbaijan
Republic
2
Transformation of
depletable
hydrocarbon reserves
into financial assets
ensuring perpetual
income for current and
future generations
Implementation
of the strategic
projects for the
development of
the country
Implementation
of the strategic
projects for the
development of
the country
3
Sovereign
fund
Extra budgetary
government
institution
Financial
Institution
Main features
11
SOFAZ’s Legal Framework and
Governance Structure
President of the Republic of Azerbaijan
Supervisory Board
Executive Director
Legal Framework
Governance Structure
Statute of SOFAZ
Budget Guidelines
Investment Policy and
Investment Guideline
Other Laws
12
National Economy and SOFAZ
Inflows
Asset
Managemen
t
SOFAZ
Economic
Developme
nt
Strategic
Projects
State Budget
(transfert)
13
SOFAZ Budget
Oil Recepits
Includes:
•
Revenues from sales of oil and gas
•
Bonus payments
•
Royalties (acreage fees)
•
Transit fees
Revenues
Asset management revenues
Expenditure
Operation Expenditures
Directly financed strategic projects
Transfers to the State Budget
SOFAZ’s total assets
USD 43.1 bln (as of 30.11.2020)
Surplus
14
Total AuM:
43.1
Total
Outflows:
121.4
• Transfers to the State
Budget, 106.2
• Extra-budgetary Expenses
(FX difference), 3.1
• Financing of Projects, 11.8
• Operational Expenses,
0.37
Total
Inflows:
164.5
• Oil and Gas Inflows 156.4
• Asset Management
Revenues 8.0
15
SOFAZ’s Budget and Economic Impact
(USD bln, 30.11.2020)
SOFAZ Assets Growth 2001-30.11.2020
(USD billion)
16
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 44165
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
0.5
0.7
0.8
1.0
1.4
1.5
2.5
11.2
14.9
22.8
29.8
34.1 35.9 37.1
33.6 33.1
35.8
38.5
43.3 43.1
SOFAZ’S ROLE IN MACROECONOMIC STABILITY
17
Transfers to the State Budget (AZN bln)
18
Share of SOFAZ transfer in state budget revenues
0.0
5.0
10.0
15.0
0.1
0.1
0.2
0.6
0.6
3.8
4.9
5.9
9.0
9.9
11.4
9.3
8.1
7.6
6.1
11.0
11.4
11.1
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020 (approved)
8.2%
8.6%
7.3%
15.1%
9.7%
35.3%
47.6%
51.9%
57.3%
57.3%
58.2%
50.7%
46.5%
43.5%
36.9%
48.7%
46.6%
50.6%
19
2011
2012
2013
2014
2015
2016
2017
2018
2019
45.0%
48.9%
48.4%
49.3%
63.4%
87.6%
87.9%
82.1%
90,0%
SOFAZ's assets to GDP
Strategic foreign exchange reserves (in billions of US dollars)
2011
2012
2013
2014
2015
2016
2017
2018
2019
30/11/2020
10.5
11.7
14.2
13.8
5.0
4.0
5.3
5.6
6.3
6.4
29.8
34.1
35.9
37.1
33.6
33.2
35.8
38.5
43.3
43.1
40.3
45.8
50
50.9
38.6
37.1
41.1
44.1
49.6
49.5
Central Bank
SOFAZ
Strategic currency reserves
Projects Financed by SOFAZ
(USD mln, 30.11.2020)
State Program on education of
Azerbaijani youth abroad
2007-2015
Reconstruction of the Samur-
Absheron irrigation system
South Gas Corridor
221.1
1,664.6
1,232.1
Improving social conditions of
refugees and IDPs
Baku-Tbilisi-Kars (railway)
“STAR” Oil Refinery complex
in Turkey
(completed)
2,784.7
745.7
1,392.8
BTC pipeline (completed)
312.6
Construction of a water pipeline
from Oghuz-Gabala region to
Baku (completed)
950.5
Formation of the statutory of
Azerbaijan Investment Company
(completed)
102.7
20
Improving social conditions of refugees and IDPs:
Districts 75, Buildings 288, Houses 37 397, Administrative buildings 71, Schools 86, Kindergartens, Hospitals 5, Primary Health Care
units 23 (as of 30.09.2020).
State Program on
Raising
Competitivenes of
Higher Education in
Azerbaijan in 2019-
2023 0.4
SOFAZ ASSET MANAGEMENT
21
Fixe
d
In-
com
e
[PE
RCE
NTA
GE]
$2.5 bn.
22
2007
2012
2014
2016
2017
30.11.2020
Fix
ed
In-
co
me
[P
ER
CE
NT
AG
E]
Eq
uiti
es
[P
ER
CE
NT
AG
E]
Real
Es-
tate;
1%
Gol
d
[P
ER
CE
NT
AG
E]
Fix
ed
In-
co
me
[P
ER
CE
NT
AG
E]
Eq
uiti
es
7%
Re
al
Es-
tat
e
[P
ER
CE
NT
AG
E]
Gol
d
[P
ER
CE
NT
AG
E]
$34.1 bn.
$37.1 bn.
$33.6 bn.
Fixed In-
come 0.8
Equities
0.12
Real Estate
0.04
Gold 0.03
$33.1 bn.
$33.1
bn.
- Allocation to equities
increased from 10% to
15%; allocation to real
estate increased from
5% to 10%; and
allocation to fixed
income decreased from
80% to 70%;
- SOFAZ was awarded
with UN Public Service
Award;
- Assets reached USD 2
billion.
- SOFAZ commenced
investing into public
and private equity, gold
and real estate;
- New currencies were
included in FI portfolio
Australian Dollar,
Turkish Lira, and
Russian Ruble.
- Allocation to equities
increased from 5% to
10%, while allocation to
fixed income decreased
from 85% to 80%;
- SOFAZ started in-house
management of public
equity indexes.
- Allocation to equities
increased from 15% to
25% and allocation to
fixed income decreased
from 70% to 60%;
- Increased the share of
allocations to real
estate and equities.
Fixed income;
76%
Equities; 15%
Real Estate;
5%
Gold; 4%
$35.8 bn.
- Korean direct real
estate investment Pine
Avenue Tower A has
been sold with total
annual return of 5.5%
- Increased the share of
allocations in gold since
2018 from 51 tons to
102 tons.
SOFAZ’s Investment Portfolio
$37.1 bn.
$43.2 bn.
Fixed Income
65%
Equities 16%
Real Estate 6%
Gold 13%
$43.
0
bn.
SOFAZ Investment Policy
Currency Allocation
65%
USD
20%
EUR
5%
GBP
Up to 10%
Other
Asset allocation
55%
Fixed income
Up to 25%
Equity, Private Equity
Up to 10%
Real Estate
Up to 10%
Gold
23
SOFAZ Portfolio Breakdown
Fixed Income;
65%
Equities; 16%
Real Estate;
6%
Gold; 13%
Asset class
USD; 68%
EUR; 21%
GBP; 5%
Other; 6%
Currencies
SOFAZ’s Investment Portfolio Return
24
Since Inception Cumulative Returns
Annualized Returns
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 201944136
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
65.13%
Last 3 years
Last 5 years
Last 10 years
2.6%
2.3%
1.9%
SOFAZ’s Investment Portfolio Breakdown
by Geographic Regions (by 30.11.2020)
26.8%
0.04%
28.5%
1.1%
36.6%
1.2%
North
America
South
America
Europe
Asia and Pasific
Middle East
Australia/ New
Zealand
International financial institutions
5.9%
25
Classification of the Bonds in SOFAZ’s Investment
Portfolio by Their Credit Ratings (as of 30.11.2020)
54.2%
14.6%
7.5%
1,3%
22.5%
Non-investment grade
26
Real Estate (30.11.20)
Total Value of Real Estate
Portfolio (USD, 2.75 bln)
Direct Investments
38%
62%
Indirect investments
27
St. James St 78,
London
£ 217 MLN
December,
2012
16 Tverskaya,
Moscow
RUB 5,810 MLN
December,
2012
S8 Place
Vendom ,
Paris
€ 165 MLN
March, 2013
2015
Kirarito Ginza,
Tokyo,
¥ 51,548 MLN
August, 2015
2013
2012
SOFAZ’s Investment Portfolio- Gold
2012
2013
2014
2015
2016
2017
2018
2019
Nov 20
0
20
40
60
80
100
120
14.93
30.17
30.17
30.17
30.17
30.17
50.95
101.24
101.8
Gold holdings in tonnes (LHS)
SOFAZ TRANSPARENCY AND ACCOUNTABILITY
29
Transparency in Extractive Industries
5 april 2017 - The first meeting of Extractive Industries Transparency Commission (EITC) established
in accordance with the Decree of the President of the Republic of Azerbaijan.
Establishment of Commission (7 members) on Extractive İndustries Transparency
Year 2018 – First EITC report was published
History
Azerbaijan has published 20 reports during on
EITI during 15 years
2003
2005
2008
2009
2017
Azerbaijan joined
to EITI as the first
country
The resolution
proposed by
Azerbaijan was
accepted by UN
Azerbaijan
become the first
full member of
EITI
-Azerbaijan left EITI
-EITC was established
Azerbaijan has
published first EITI
report in the world
30
AWARDS and Rankings
UN Public Service Award in the
category of “Improving transparency,
accountability and responsiveness in
the Public Service”
2007
EITI Award
2009
31
AWARDS AND RANKINGS
SWF’s evolution table by E.Truman (first 20 SWFs) and Progress on SWF Linaburgh-Maduell Trasparency
Index
32
QUESTIONS AND ANSWERS
33