Public money passes through double filter in Absheron

The Executive Authority of Absheron District spent a total of 12.7 million manats from the state budget in 2011-2017 on the substantial renovation of apartment buildings in Absheron District. One of the companies benefitting from these funds, winning a contract for 1,499,500 manats ($882,000) in early 2017, is ƏLAİ İnşaat LLC, an Azerbaijani construction company. Since its founding in 2014, ƏLAİ İnşaat has had two directors, Nazim Abiyev and later his 24-year-old son, Mirza Abiyev, and the company's legal address is Nazim Abiyev's apartment in the sixth micro-district of Sumgayit. The founder is unkown, but another company run by Nazim Abiyev, RRV-İnşaat LLC, established in 2005, used to regularly win tenders and signed several contracts with the same Absheron District Executive Authority. The thing is, RRV-İnşaat never carried out any of the work for those tenders itself.

We got the money but somebody else did the work.

The many years of experience of RRV-İnşaat show that even with only four staff members a company can repair miles of roads. No, it has not made any breakthrough in road construction, and repair and construction works continue to be done the old traditional way. Rather, the company's job was to obtain millions of manats from the Absheron District Executive Authority through tenders and transfer them to others. Agencies that manage state funds never inquired even once whether the company had anything but a stamp. As result of such an indifferent approach to public money, when RRV-İnşaat closed its doors, its place was immediately taken by other similar businesses.

Money allocated for roads went through a double filter

Court documents show that in 2014 alone, RRV-İnşaat "transferred" 12.6 million manats worth of contracts (over $21 million before the 2015 manat devaluation) that it had obtained from the Absheron Executive Authority to Abşeron-RX LLC through subcontractor agreements. In 2016 an investigation by Radio Liberty's Azerbaijani service revealed that a family called the Aghazamanovs owned about 40 companies which served as "money filters" for state-owned organizations, including RRV's subcontractor, Abşeron-RX, which was involved in renovation, construction, and road works in Absheron. Within a short period of time, Baku Metro, Azərpoçt LLC, the Military Hospital of the State Border Service, the Baku International Sea Trade Port, the Sumgayit City Cleaning Department LLC of the Production Unit of the Housing and Utilities Department of the Sumgayit City Executive Authority, and the printing house of the Ministry of Internal Affairs consumed public money to the tune of 1.5 million manats ($2.5 million) on 68 purchases, running the funds through Abşeron-RX. Documents that have surfaced now confirm that, in addition to the official tenders it won, this company was used to carry out additional subcontractor work worth of millions of manats. In the first six months of 2016, Abşeron-RX, as well as the Aghazamanov's other 39 that specialized in the family's tender-related frauds, were mysteriously shut down and disappeared without a trace.

How to do work worth 11 million and make 4,999 manats

The Tax Ministry lost legal proceedings, which ended in March last year, to RRV-İnşaat. Both the Court of First Instance and the Sumgayit Court of Appeal ruled in favor of RRV-İnşaat, which had filed against the Tax Ministry's Baku City Local Revenues Department with the demand that it repeal its 7 December 2015 decision "On prosecuting a taxpayer for breaching tax legislation." The ministry had charged the company additional taxes to the tune of 660,184.76 manats ($388,000 after the 2015 devaluation of the manat) and imposed financial sanctions on it to the tune of 341,562.81 manats ($200,900).

During a tax audit of RRV-İnşaat, inspectors were presented with a declaration that said that, in the audit period, the total revenue of the company was 11,475,605.11 manats (approximately $19,508,500 million at the time), while its expenses were 11,470,605.98 manats ($19,500,000). With a turnover of millions of manats, the company said that it had only made a profit of 4,999.13 manats ($8,500) and paid 999.83 manats ($1,700) in profit tax. However, according to documents drawn up by the ministry, in the course of the tax audit of RRV-İnşaat, documents confirming expenditures on raw materials and other expenses shown in the declaration were concealed from the tax inspectors. Moreover, it turned out that the company had not even kept track of its expenses as Nahid Taghiyev, representing the Tax Ministry, told the court. However, the company was eventually acquitted. The court arrived at the conclusion that the Tax Ministry had failed to prove that RRV-İnşaat had actually carried out the construction of roads and streets and other repair and construction works by order of the Absheron District Executive Authority.

The executive authorities transferred the money to our bank account, and we received a 'forma-2' from the subcontractor. (Elkhan Suleymanov)

Elkhan Suleymanov, representative of RRV-İnşaat, testified in court that the money received from the Absheron District Executive Authority accounted for the company's entire income, and all of the company's expenses were listed in tax forms ("forma-2") submitted by the subcontractor - Abşeron-RX - upon completion of the work. In other words, all RRV-İnşaat ever did was to take public money from the Absheron district government and hand it over to a subcontractor.

The company only had four staff members

However, the most striking thing revealed by the hearing was information about the staff at RRV-İnşaat LLC and their monthly salaries. It turned out that the company, which had received millions in state funds, had just four staff, including its director Nazim Abiyev, and employees Sevinj Abiyeva, Khayala Guliyeva, and Hafiz Mamishov. Their monthly salaries averaged 268.10 manats each ($455 in 2012-2014). The small team won 12 tenders to the tune of 25,679,393.91 manats ($43,655,000) in 2012-2014. Obtaining bank guarantees to participate in the tenders and drafting and submitting tender proposals and reports... Four people succeeded in doing things that many large companies would not be able to. How? That could be the topic of another investigation. One thing that cannot be ignored is the fact that there was one customer in all the tenders - the Absheron District Executive Authority.

List, open to the public, of works "done" by RRV-İnşaat LLC by order of Absheron District Executive Authority

 Year  Contract work  Amount (AZN)
 2012  Construction of Saray-Novkhani-Mehdiabad-Fatmayi-Goradil road in Absheron District  3,998,699.27
 2013  Asphalt pavement in the town of Khirdalan  74,991.75
 2013  Asphalt pavement in the town of Khirdalan  83,845.20
 2013  Reconstruction works in the town of Khirdalan  269,937.41
 2013  Asphalt works on roads connecting Hokmali-Gobu-Lokbatan-Guzdak-Puta population centers in Absheron District  2,986,968.00
 2013  Asphalt works in area covered by Housing and Utilities Office № 5 in the town and village of Khirdalan in Absheron District  1,099,985.56
 2013  Asphalt works on roads connecting Hokmali-Gobu-Lokbatan-Guzdak-Puta population centers in Absheron District  1,985,350.23
 2013  Asphalt works on roads connecting Saray-Novkhani-Mehdiabad population centers  3,597,453.77
 2013  Reconstruction works  34,928.00
 2014  Substantial repair works on roads in Absheron District  996,965.14
 2014  Works to continue the construction of the Hokmali-Gobu-Lokbatan-Guzdak-Puta road  7,573,937.79
 2014  Road construction works  2,976,331.79
Total:  25,679,393.91 ($43,655,000)

Source: tender.gov.az website of the Ministry of Economy

The Absheron District Executive Authority did not respond to Meydan TV's request for information about whether the Abiyevs' ƏLAİ İnşaat honored its contractual obligations itself or had subcontractors do the work, or about whether the companies doing the work had the right qualifications (personnel, technical capacities, financial status). There are serious doubts that they possessed those qualities.

"The company (ƏLAİ İnşaat) has sufficient construction equipment and personnel. Documents about this were submitted to the commission when submitting tender proposals," director Nazim Abiyev told Meydan TV. Abiyev could not give a convincing explanation as to why the company has transferred every contract from the Absheron District Executive Authority to another company. The companies managed by the Abiyev family were registered in private apartments, but Abiyev refused to disclose the locations of the companies' actual offices.

The entrance to house #6 in Sumgayit's 6th micro-district, where RRV-İnşaat LLC is registered
The entrance to house #6 in Sumgayit's 6th micro-district, where RRV-İnşaat LLC is registered.

That is a serious violation of the law. (Expert Vugar Huseynov)

Vugar Huseynov, a procurement expert, said it was illegal to transfer the contracts in their entirety to another company. Speaking to Meydan TV, he explained that the Cabinet of Ministers' 28 February 2003 resolution says the total cost of subcontracts related to the performance of works or rendering of services cannot exceed 50 per cent of the contract.

"On the other hand, subcontracts required for the execution of a contract may be signed if they are envisaged in a tender's terms and references. If an applicant intends to have other companies execute the contract that it seeks to sign, it must write about it in detail in its tender proposal. The suitability of the specialization of those companies is one of the conditions as well," said Vugar Huseynov. He added that the signing of subcontracts and any amendments to them were only possible with the written consent of the customer.

"The use of the so-called 'services' of phony companies is an old technique in the post-Soviet space. Through those companies, money is transferred from hand to hand, while the work is normally carried out by some other company for a small remuneration. To prevent those kinds of situations happening, the government must use pre-emptive mechanisms. After all, reports released by the Audit Chamber show that numerous violations occur in the course of many state purchases and the same thing happens again in subsequent years. For example, an organization that makes a purchase and relevant state agencies that provide the funding should both pay attention to 100-per-cent subcontractor agreements signed as a result of tenders. I think there is a need for serious prosecution action to be taken," said expert Vugar Huseynov.

MeydanTV approached the State Treasury Agency and the Ministry of Finance to ask whether subcontractor agreements are monitored and requested information on measures taken to eliminate circumstances such as the ones described here. "Treasury agencies transfer funds to the bank account of suppliers who win purchases on the basis of orders placed by public-sector organizations. Payments arising from subcontractor agreements concluded by suppliers who win purchases are not carried out through the treasury agencies," says a response letter sent in by Mais Piriyev, chief of the public relations unit at the Ministry of Finance.

Funds "thrown" onto Absheron roads

The cooperation between RRV-İnşaat LLC the Absheron District Executive Authority began in 2012. In May 2012, President Ilham Aliyev signed a decree allocating an initial 4 million manats ($6.8 million at the time) to the Absheron District Executive Authority from the state budget for the construction of the Saray-Novkhani-Mehdiabad-Fatmayi-Goradil road. The executive authorities conducted a tender and signed a contract with the winning company - RRV-İnşaat. In March 2013, another tender was conducted for the continuation of the construction work and the same company was the winner again. This time around, the district's executive authority paid RRV-İnşaat 3,597,453.77 manats ($6.1 million) for the work. In other words, a total of 7.6 million manats ($12.9 million) were spent on the construction of the road.

But on 15 May, 2017, President Ilham Aliyev allocated another 1.8 million manats ($1 million after the 2015 devaluation) from the budget for construction work on the Mehdiabad-Fatmayi-Goradil road. This time round, the money was entrusted not to the Absheron Executive Authority but the Azəravtoyol open joint-stock company. The Absheron District Executive Authority released a statement in August 2017 regarding the repeat construction of the road which reads:

"The Mehdiabad-Fatmayi-Goradil road had not been substantially repaired in a long time. As a result, parts of the roadway became bumpy or deformed. In addition, the lack of pedestrian sidewalks along the road made it difficult for people to walk, especially in autumn and winter. This problem is no more now." As can be seen, the Absheron Executive Authority conceded that the 7.6 million manats allocated from the state budget in 2012-2013 was not enough for a sidewalk.

However, this is not the only example of funds being allocated from the state budget for the same road over and over again. In 2013-2014, the Absheron District Executive Authority signed three contracts with RRV-İnşaat totaling 12,545,200 manats ($21 million at the time) for the construction of the Hokmali-Gobu-Lokbatan-Guzdak-Puta road. Initially, President Ilham Aliyev allocated 2 million manats for the construction of the road in April 2013, and then an additional 7.6 million manats in June 2014. The Absheron District Executive Authority eventually received another 3 million manats from the state budget for the construction of the road. Tenders were conducted as well, of course.

Purchasing organization: The Executive Authority of Absheron District

ANNOUNCEMENT

The Executive Authority of the Absheron District of the Azerbaijan Republic is soliciting proposals to carry out asphalt work on roads connecting the population centers Hоkmali-Gobu-Lokbatan-Guzdak-Puta.

Interested organizations may call the phone number 342-40-00.

Deadline for the submission of documents to have a proposal considered is 23 April 2013.

7 Rasulzadeh Street, town of Khirdalan

Source: tender.gov.az website of the Ministry of Economy

Hokmali-Gobu-Guzdak road works
Hokmali-Gobu-Guzdak road works.

However, the money allocated to Absheron District had barely run out when in July 2016 President Ilham Aliyev allocated to the Azəravtoyol open joint-stock company 2 million manats ($1.2 million) for the construction of a part (Lokbatan-Gobu; 7.2 km) of the Hokmali-Gobu-Lokbatan-Guzdak-Puta road.

In addition, the Azəravtoyol open joint-stock company says it repaired another 11-km section of the road connecting Hokmali-Gobu-Guzdak in July 2016. It carried out substantial repairs on a 1.5-km-long section of this road starting from the village of Hokmali and rebuilt the rest of the road in accordance with average repair standards.

More money is appropriated (Economist Gubad Ibadoghlu)

Gubad Ibadoghlu, economist and chairman of the Democracy and Prosperity Movement, believes that corruption is at the root of Azerbaijan's poor economic management. He believes that in the best-case scenario only a third of state funds are spent on real work in Azerbaijan.

"Before funds reach the executor, they are split between and appropriated by those who place orders and phony contractors. Part of the funds is converted to cash and laundered. Previously, the amount used for that purpose was 10 per cent of the total funds, but it increased to 15 per cent after the 'Law on non-cash payments' was adopted in 2016. The amount that goes to the public-sector organization placing the order is 30 per cent, while the remaining 55 per cent is divided between the contractor and the subcontractor with a ratio of 30 to 25 per cent. The shortage of funds results in poor quality material being used and workers being paid less. The work required to reinforce the land and apply the asphalt are never done." This is how Gubad Ibadoghlu describes the scheme that is used to appropriate state funds that has been taking shape and "improving" over the years.

Ibadoghlu, an expert on national public procurement, commented on the fact that roads deteriorate quickly. He said there is a lack of state financial monitoring and a lack of public monitoring over this matter. He believes that those deficiencies result in abuses and poor economic management in that field. "Acceptance and quality control commissions carry out pro forma work. Once their interests are satisfied they accept poor quality and cheap work. That is why those roads fall apart quickly. In this way, further corruption opportunities arise for officials," the expert said.