State-owned enterprises (SOEs) play a significant role in the economy of Azerbaijan, with their aggregate revenues estimated to account for 40% of gross domestic product (GDP). SOEs are present in critical sectors of the economy including in energy, infrastructure and utilities, as well as in competitive and liberalised markets (e.g. finance and insurance, manufacturing, retail, tourism/hospitality, and real estate). The State Oil Company of Azerbaijan Republic (SOCAR), which is the country’s largest SOE, is the main contributor to the Azerbaijani state budget whose financing is mainly reliant on oil and gas revenues.

While ownership of SOEs is largely decentralised, the establishment of the Azerbaijan Investment Holding (AIH) in 2020 has brought the most strategically important SOEs under its coordinated oversight with the goal of improving their corporate governance and performance. AIH is currently mandated to improve corporate governance in 12 SOEs, namely SOCAR, AzerGold, Azerbaijan Airlines, Azerbaijan Railways, Azerbaijan Caspian Shipping Company, Port of Baku, Baku Metro, Baku Bus, Tamiz Shahar, International Bank of Azerbaijan, Azer-Turk Bank and Azersigorta (the latter of which was sent into liquidation in January 2024). AIH operates as a management body tasked with the oversight and monitoring of the portfolio companies, but it does not own any shares in these companies. Rather, AIH is authorised to represent the state as a shareholder of the portfolio companies.

Reforms led by AIH have resulted in a number of corporate governance achievements and notable performance improvements across the portfolio. Achievements include the establishment of supervisory boards and board committees for the first time, and the introduction of financial and non-financial reporting and independent external audit in line with internationally recognised standards (IFRS) across all 12 SOEs. These reforms, along with detailed corporate transformation plans, have driven an increase in aggregate portfolio performance.

To better align with the OECD Guidelines on Corporate Governance of State-Owned Enterprises, AIH and the government of Azerbaijan are encouraged to design a holistic ownership policy, level the playing field where SOEs compete in the marketplace, introduce independent board members, and further improve transparency and disclosure practices. To ensure an enduring reform, Azerbaijan should introduce a holistic SOE ownership policy, outlining ownership rationales and expectations as well as ownership and governance arrangements. To level the playing field between SOEs and private companies, separation of ownership from policy and regulatory functions is necessary. The delegation of shareholding functions to AIH is a step in this direction, however the continued presence of high-level ministerial representation on boards blurs these boundaries and opens doors to potential conflicts of interest. Moreover, AIH’s portfolio companies do not yet have independent directors, and while they are not required by applicable corporate governance frameworks, the government has identified the introduction of independent directors as a reform objective. AIH could also play a role in coordinating SOE board appointments grounded in structured, competitive, merit-based and transparent processes. To further improve transparency and accountability, AIH should publish annual aggregate reports on its portfolio and make these publicly available.

Addressing these recommendations can support effective performance, accountability, and transparency of AIH’s portfolio companies and the broader economy, as well as help to bring outside capital and investment into the SOE sector, in line with the government’s privatisation objectives.