State Oil Fund of Azerbaijan

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) is Azerbaijan's sovereign wealth fund, whereby energy-related earnings are accumulated and efficiently managed for future generations.

The State Oil Fund of the Republic of Azerbaijan
FoundedDecember 29, 1999
HeadquartersBaku, Azerbaijan
Key people
Israfil Mammadov (Executive Director)
Websitewww.oilfund.az

History

SOFAZ was established in accordance with the Decree of National Leader Heydar Aliyev No. 240 on December 29, 1999. Statute of SOFAZ was approved by the Decree of the President of the Republic of Azerbaijan No. 434 dated December 29, 2000. SOFAZ began operating after the approval of the Decree on "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan" by the President of the Republic of Azerbaijan dated June 19, 2001. The establishment of SOFAZ plays a key role in the oil strategy founded by Azerbaijan's National Leader Heydar Aliyev.

Mission

SOFAZ's mission is to transform depletable hydrocarbon reserves into financial assets generating perpetual income for current and future generations.

Goals and objectives

The cornerstone of Sofaz's is to ensure intergenerational equality with regard to the country's oil wealth. SOFAZ was founded in order to manage the oil and gas incomes efficiently as well as to invest them in the development of socio-economically important projects and advance spheres.

SOFAZ's activity is directed to the achievement of the following objectives:

1.Supporting macroeconomic stability, participating in ensuring fiscal-tax discipline and decreasing dependence on oil revenues while stimulating development of the non-oil sector;

2.Funding major national scale projects to support socio-economic progress;

3.Ensuring intergenerational equality with regard to the country's oil wealth, accumulating and preserving oil revenues for future generations.

Management

The Supervisory Board, consisting of representatives of the state authorities and public organizations, carries out general oversight of SOFAZ's operations. The Board reviews and evaluates SOFAZ's draft annual budget, annual report and financial statements, along with audit report. Members of the Supervisory Board are approved by the President of the Republic of Azerbaijan. The board members act entirely on a voluntary basis.

SOFAZ's day-to-day activities are managed by the Executive Director appointed by the President of the Republic of Azerbaijan.

The Executive Director represents the Fund, appoints and dismisses employees of SOFAZ in a manner determined by the legislation, carries out operational management of SOFAZ's activities, ensures the management and investment of SOFAZ's assets in accordance with the Guidelines approved by the President of the Republic of Azerbaijan. Execution of SOFAZ's budget is implemented on the basis of comments provided by the Supervisory Board in accordance with the SOFAZ budget approved by the proper Ordinances of the President of the Republic of Azerbaijan. SOFAZ assets are managed in accordance with the "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan" and Investment Policy.

SOFAZ’s revenues

The sources of income for SOFAZ are:

  1. Proceeds generated under production sharing agreements from sales of the Republic of Azerbaijan's share of hydrocarbons;
  2. Bonuses paid under the terms of production sharing agreements;
  3. Acreage fees paid by foreign investors for use of the contract areas in connection with the development of hydrocarbon resources;
  4. Dividends paid under the terms of production sharing agreements;
  5. Revenues generated from the transit of oil and gas over the territory of the Republic of Azerbaijan;
  6. Revenues generated from the transfer of assets from investors;
  7. Revenues from management of SOFAZ assets;
  8. Grants;
  9. Other incomes according to the legislation.

SOFAZ’s expenditures

In compliance with regulations relating to SOFAZ, the Fund's assets may be used for solving major problems affecting the nation, and for construction and reconstruction of strategically important infrastructure to support socio-economic progress.

Transfers to the state budget also constitute a significant component of the Fund's outflow. A very small portion of the Fund's assets is utilized to cover operational costs.

As per the Law "About Budget System" of the Republic of Azerbaijan, all SOFAZ expenditures, except operating expenditures, are incorporated as part of an annual consolidated government budget presented to the Parliament for approval. In compliance with this Law, SOFAZ can only execute expenditures envisaged by its budget.

Projects financed by SOFAZ

SOFAZ is funding projects of national scale. They are:

1.Azerbaijan's equity share in the Baku-Tbilisi-Ceyhan Baku-Tbilisi-Ceyhan (BTC) oil pipeline project (completed);

2.Building of housing and improvement of socio-economic conditions of refugees and internally displaced persons who were forced to flee their native lands as a result of Armenian-Azerbaijan conflict;

3.Oguz-Qabala-Baku water supply system (completed);

4.Reconstruction of the Samur-Absheron irrigation system;

5.Formation of the statutory capital of the State Investment Company (completed);

6.Financing Baku-Tibilisi-Kars railway;

7.Financing “The state program on the education of Azerbaijan youth abroad in the years 2007-2015” (completed);

8.Financing of the share of Azerbaijan Republic in the construction of the STAR oil refinery project in Turkey;

9.Financing the share of the Republic of Azerbaijan in “South Gas Corridor” CJSC statutory capital;

10.Financing the share of Azerbaijan Republic in the “Construction of New Semi-submersible Drilling rig Project” (completed).

Asset management

SOFAZ's assets are managed in accordance with the "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan" approved by Presidential Decree No. 511 dated June 19.2001 and “Investment Policy of the State Oil Fund of the Republic of Azerbaijan” approved by Presidential decrees on an annual basis. According to Investment Policy currency composition of the investment portfolio is as follows, subject to the requirement of at least 90% allocation to currencies of countries with credit ratings of no less than “A” (by Standard and Poor's, Fitch) and “A2” (by Moody's):

1. 65% invested in assets denominated in USD;

2. 20% invested in assets denominated in EUR;

3. 5% invested in assets denominated in GBP.

4. 10% of the investment portfolio can be invested in assets denominated in other currencies.

Investment portfolio of SOFAZ consists of the following sub-portfolios:

1. Debt obligations and money market instruments Portfolio – 55% of the investment portfolio along with maximum lower deviation of 5% (up to 5% can be invested in non-rated fixed income debt funds);

2. Equity Portfolio – up to 25% of the investment portfolio (up to 5% can be invested in private equity and non-rated fixed income debt funds);

3. Real estate Portfolio – up to 10% of the investment portfolio along with maximum upper deviation of 2% (real estate and non-rated real estate debt funds ) ;

4. Gold Portfolio – up to 10% of the investment portfolio along with maximum upper deviation of 3%.

Assets

The assets of SOFAZ as of April 1, 2020 constituted US$41 349.5 mln.

SOFAZ's budget revenues for the period of January–June, 2019 reached 10 698.3 million manats, while budget expenditures constituted 4 499.4 million manats.

SOFAZ and transparency

SOFAZ always pays attention to transparency in its activities. A key measure to promote transparency within SOFAZ's reporting system and operation is a regular audit of the Fund's financial activities by a reputable firm of international auditors.

Information and press releases, and both quarterly and annual statements, in Azerbaijani and English, about the Fund's revenues and expenditures are regularly published in the local press, posted on SOFAZ's official web-site (www.oilfund.az) and on social media pages (Facebook, Twitter) to reflect developments in varying areas of SOFAZ's activities, and also to promote transparency in the utilization of revenues from oil.

SOFAZ won the 2007 UN Public Service Award for Improving Transparency, Accountability and Responsiveness in Public Service. The United Nations Public Service Awards is the most prestigious international recognition of excellence in public service. Established in 2003, it rewards creative achievements and contributions of public service institutions to more effective and responsive public administration in countries worldwide. SOFAZ is the first governmental agency that is awarded the UN Public Service Award among the governmental institutions of the Eastern Europe and CIS countries.

Taking into account that Azerbaijan is the first country to complete validation- the EITI's quality assurance process, which verifies compliance with EITI principles and criteria,“EITI Award 2009” was awarded to Azerbaijan, at the 4th EITI International Conference held in February 2009 in Doha, Qatar.

SOFAZ - Sovereign Wealth Fund

A Sovereign Wealth Fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments that is formed from revenues from natural resources. The term sovereign wealth fund was first used in 2005. The International Working Group of Sovereign Wealth Funds (IWG) announced its establishment in April 2009 in the city-capital of Kuwait.

SOFAZ cooperates with other SWF's within the framework of International Forum of Sovereign Wealth Funds (IFSWF). IFSWF is a voluntary group of SWFs, which meets, exchanges views on issues of common interest, and facilitates an understanding of the Santiago Principles and SWF activities. The inaugural meeting of IFSWF was held in Baku on October 8–9, 2009 and it was hosted by SOFAZ and the Government of the Republic of Azerbaijan. According to the Principle 24 of SP , SOFAZ has prepared its first self-assessment report on the implementation of SP and intends to review it on an annual basis.

The general appearance of SOFAZ's logo portrays a man holding something dear and valuable in his hands, symbolizing SOFAZ's main activity to preserve Azerbaijan's wealth for future generations.

Hands of the figure are described as two butas giving the logo an inimitable national flavour.

Area between the hands is described as the eye of the Omniscience directed to the future of the country and the nation in which SOFAZ plays a crucial role. The sphere between the hands can also be described as the heart of SOFAZ, symbolizing the Fund's transparency.

Contacts

Heydar Aliyev avenue 165, AZ 1029, Baku, the Republic of Azerbaijan

Web site: SOFAZ website

References
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