Document of The World Bank Group FOR OFFICIAL USE ONLY Report No. 195625-AZ INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION AND MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP FRAMEWORK FOR THE REPUBLIC OF AZERBAIJAN FOR THE PERIOD FY25-29 December 17, 2024 South Caucasus Country Management Unit Europe and Central Asia Region The International Finance Corporation Europe Region The Multilateral Investment Guarantee Agency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization. The last Country Partnership Framework was discussed by the Board on July 21, 2015, and the last Performance and Learning Review extending the CPF period was discussed by the Board on February 6, 2020. FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 30, 2024) US$1 = AZN 1.70 ABBREVIATIONS ACIP Agriculture Competitiveness FIMSA Financial Market Supervisory Improvement Project Authority ADB Asian Development Bank FSMP2 Second Financial Sector AF additional financing Modernization Project AI artificial intelligence FY fiscal year AIF Agrarian Insurance Fund GDP gross domestic product AICACP Azerbaijan Investment Climate and GHG greenhouse gas Agricultural Competitiveness Project HLO high level outcomes AIH Azerbaijan Investment Holding GW gigawatt AIIB Asian Infrastructure Investment IBRD International Bank for Bank Reconstruction and Development ASA advisory services and analytics IDA International Development ASWRA Azerbaijan State Water Resources Association Agency IDP internally displaced person AzRIP2 Second Azerbaijan Rural Investment IDP LSLP IDP Living Standards and Livelihoods Project Project AZTAF Azerbaijan Rapid Technical IFC International Finance Corporation Assistance Facility IEG Independent Evaluation Group AZURE Azerbaijan Scaling-Up Renewable JSSIP Judicial Services and Smart Energy Project Infrastructure Project CBAR Central Bank of Azerbaijan Republic IMF International Monetary Fund CCDR Country Climate and Development ISWMP Integrated Solid Waste Management Report Project CE citizen engagement IPF Investment Project Financing CEM Country Economic Memorandum MDDT Ministry of Digital Development and CLR Completion and Learning Review Transport CO2 carbon dioxide MIGA Multilateral Investment Guarantee COP Conference of the Parties Agency CPF Country Partnership Framework MPA Multiphase Programmatic Approach EBRD European Bank for Reconstruction MSMEs micro, small, and medium and Development enterprises EE energy efficiency MTEF Medium-Term Expenditure EIB European Investment Bank Framework ESG environmental, social, and corporate MTP Medium-Term Plan governance MW megawatt ESP Employment Support Project NDCs Nationally Determined EU European Union Contributions F4D Finance for Development NPL non-performing loan FDI foreign direct investment i NSDS National Statistical Development SECO Swiss Economic Cooperation Strategy Organization NSWMS National Solid Waste Management SEDS Socio-Economic Development Strategy Strategy 2022-2026 O&M operation and maintenance SGC CJSC Southern Gas Corridor Closed Joint PEFA Public Expenditure and Financial Stock Company Accountability SMEs small and medium-sized enterprises PFM public financial management SOCAR State Oil Company of Azerbaijan PIRLS Progress in International Reading SOEs state-owned enterprises Literacy Study SOFAZ State Oil Fund of Azerbaijan PISA Program for International Student SPF State and Peace Building Fund Assessment SSC State Statistical Committee PLR Performance and Learning Review TAP Trans-Adriatic Pipeline PPP public-private partnership TANAP Trans-Anatolian Natural Gas Pipeline RCDP Regional Connectivity and TF trust fund Development Project VRE variable renewable energy RE renewable energy WBG World Bank Group RF results framework WUA water user association SCD Systematic Country Diagnostic IBRD IFC MIGA Vice President Antonella Bassani Alfonso Garcia Mora Ethiopis Tafara Director Rolande Pryce Ines Rocha Sebnem E Madan Task Team Leader Stefanie Ivana Fernandes Gabisile Ndlovu Stallmeister/Saida Duarte/Olga Bagirli Vybornaia/Aliya Azimova ii FY25-29 COUNTRY PARTNERSHIP FRAMEWORK FOR AZERBAIJAN Table of Contents I. INTRODUCTION ..................................................................................................................1 II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA ..............................................................2 2.1 Social and Political Context .................................................................................................2 2.2 Recent Economic Developments and Outlook ......................................................................3 2.3 Poverty and Shared Prosperity ............................................................................................5 2.4 Development Agenda .........................................................................................................6 III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK ........................................................... 10 3.1 Government Program and Medium-term Strategy ............................................................. 10 3.2 Proposed World Bank Group Partnership Framework ........................................................ 10 3.3 Objectives supported by the WBG Program ....................................................................... 14 3.4 Implementing the FY25-29 Country Partnership Framework............................................... 19 IV. MANAGING RISKS TO THE CPF PROGRAM .......................................................................... 23 Annex 1: CPF Results Framework FY25-29 ......................................................................................... 24 Annex 2: Completion and Learning Review of the CPF FY16-FY21 for Azerbaijan ................................ 36 Annex 3: IBRD, IFC, and MIGA Planned Collaboration in Energy and Water ........................................ 86 Annex 4: Selected Indicators of Bank Portfolio Performance ............................................................. 88 Annex 5: Operations Portfolio (IBRD/IDA and Grants) ....................................................................... 89 Annex 6: Statement of IFC’s Held and Disbursed Portfolio ................................................................. 90 iii FY25-29 COUNTRY PARTNERSHIP FRAMEWORK FOR AZERBAIJAN I. INTRODUCTION 1. This Country Partnership Framework (CPF) presents the planned engagement of the World Bank Group (WBG) in Azerbaijan over the next five years (FY25-29). The CPF is guided by the government’s Strategy for Socio-Economic Development for 2022-26 (SEDS) and the World Bank Group’s most recent strategic analysis – including the 2022 Systematic Country Diagnostic (SCD) Update, the 2022 Country Economic Memorandum (CEM), and the 2023 Country Climate and Development Report (CCDR) – and has been aligned with the critical elements of the WBG Evolution Roadmap. The design also benefitted from lessons learnt from previous engagements and from consultations with key stakeholders, including government counterparts, civil society organizations, development partners, and the private sector. The CPF was delayed from starting when the previous CPF ended (FY21) due to a long dialogue with the authorities over the program and overlapping crises. The Government of Azerbaijan has now confirmed its desire to re-invigorate its WBG engagement for the coming years. 2. A new growth model is needed in Azerbaijan, as economic growth has slowed in recent years. Based on its hydrocarbon endowment, Azerbaijan grew by over 12.6 percent annually during 1996-2010, reaching upper middle-income status by 2009. However, since 2010 growth has decelerated and has averaged 1.7 percent annually due to fluctuating hydrocarbon prices and declining production. To resume a stronger growth path, Azerbaijan needs a more dynamic growth model. This includes diversifying sources of growth, reducing the state involvement in the economy, and developing a more dynamic and competitive private sector. In addition, the impact of climate change and the global shift to reducing reliance on hydrocarbons have deepened the need for Azerbaijan to make its economic growth greener. The push for a greener approach fits well with Azerbaijan’s need for a more dynamic and diversified growth model. Azerbaijan can offset declining hydrocarbon production with new renewable sources of energy (including for export) and strengthen economic sustainability by addressing the impact of climate change on agriculture, water, and other services. Furthermore, Azerbaijan can leverage these changes and its geographical position to play a growing role as a critical trade and green energy corridor. 3. A re-invigorated WBG program would provide timely support to Azerbaijan in reshaping its growth model. No new IBRD lending was extended in the previous three years in keeping with the government's policy to limit foreign borrowing following the 2015-16 financial and currency crisis and the more recent COVID-19 pandemic. Nevertheless, during this period, the WBG maintained an active portfolio and significant analytical support. In July 2022, the government approved the SEDS which lays out its priorities for shifting to a more diversified, dynamic, and green economy, and actions and targets to meet them. The government has committed to bringing down its greenhouse gas (GHG) emissions by 35 percent by 2030 (and by 40 percent by 2050) as well as increase renewable energy in its mix to 30 percent by 2030 and hosted the global Conference of the Parties (COP29) in November 2024. In 2023 the government signaled its readiness to re-start borrowing from international institutions by raising its debt- to-GDP limit. This CPF also comes at a time of important regional developments. The proposed Black Sea submarine cable between Georgia and Romania would provide an opportunity for Azerbaijan to export green electricity to Europe if renewable energy production is increased and transmission infrastructure is in place. A potential peace agreement with Armenia could enhance regional security and open up another opportunity to expand regional integration and trade. 1 4. The CPF is therefore tightly focused on helping support Azerbaijan’s paradigm shift to a more dynamic and greener growth model. To keep the program highly selective, the CPF will have two high level outcomes (HLOs): (i) increased resilience and sustainability, and (ii) increased productivity and better jobs. Within the first HLO, the WBG program will support two objectives: (1) enhancing the shift to renewable energy and (2) enhancing adaptation to climate change. To achieve the second HLO, the program will support two additional objectives: (3) improving the business environment and access to employment, and (4) strengthening transport and digital connectivity. These areas align well with the global challenges under the WBG Evolution Roadmap. They are also inherently intertwined, as improving sustainability will open up new avenues for growth and employment, while a more dynamic and innovative economy is better able to support the green transition. 5. To ensure its interventions will have a transformative impact, the WBG program will adhere to four principles that will govern “how” it operates. First, recognizing the importance of developing a more dynamic economy, operations will be designed to strengthen market-based competition. Second, in order to bring a broader range of instruments to bear in a coherent and synergistic manner, the IBRD, IFC and MIGA will deepen collaboration, particularly in energy and water, where working business plans have been prepared on how the different instruments and activities fit together in a phased and coordinated manner to support policy reforms and enable targeted investments (provided in annex 3). Third, recognizing that infrastructure improvements alone are insufficient, operations will be designed to strengthen relevant institutions and transparent rules-based governance. Third, this builds on the WBG track record of collaboration in the energy sector, which delivered the transformational Trans-Anatolian Natural Gas Pipeline (TANAP) project. Fourth, recognizing that after a period of limited engagement it may take time and a longer dialogue to produce concrete results, IBRD is discussing with the government the potential of framing projects within a longer-term program with several phased interventions. II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA 2.1 Social and Political Context 6. In the context of rising regional and global tensions, Azerbaijan has remained politically stable. President Aliyev was first elected in 2003 and since then has won four re-elections, most recently in 2024 for a term of seven years with little opposition. The government remains highly centralized under the President and institutions of the state, and media and civil society organizations continue to be tightly controlled. A new government was formed following the 2024 elections with all except two of the cabinet members re-appointed in their function. 7. A potential peace agreement with Armenia is being pursued, which could open up new opportunities for regional trade and cooperation. After more than three decades of conflict, resulting in up to one million displaced Azerbaijanis, Azerbaijan has regained control of territories. Reintegration and resettlement of these territories including with internally displaced people (IDPs) is a central element of Azerbaijan’s development strategy. The Governments of Azerbaijan and Armenia are in discussions on the future of their relations and a possible peace agreement, which would open up growth opportunities and foster regional integration for both countries and the South Caucasus as a whole. 8. At a global and regional level, Azerbaijan pursues a policy of pragmatic balance with the Russian Federation, the European Union (EU), the United States, Iran, and Türkiye. Azerbaijan occupies an important geopolitical position, both because of its oil and gas exports and the fact that it rests in a vital and strategic trade and energy corridor between east and west, and between north and south. It is 2 formally neutral, a member of the Non-Aligned Movement, and is not a party to any multilateral trade agreement. Azerbaijan and the EU have been negotiating a comprehensive cooperation agreement for several years, but the negotiation process continues to be delayed due to political and trade-related issues. 9. Azerbaijan plays an important and growing role in global energy and climate matters. Azerbaijan has recently increased gas supplies to Europe and the proposed Black Sea Submarine Cable project has the potential to expand Azerbaijan’s role in green/renewable energy export and transit. Azerbaijan is also seeking to contribute to the global climate agenda. The COP29 was hosted in Baku in November 2024, and presented a unique opportunity for the country to establish itself as a champion for shaping the global discourse on climate action and contributing to addressing global challenges. 2.2 Recent Economic Developments and Outlook 10. Following impressive growth in the late 1990s and 2000s, growth has slowed and become more volatile. Oil production has been in decline since 2010 and has dragged growth in recent years: the hydrocarbon sector on average shrunk by 19 percent in 2019-2023. On the other hand, the non-energy sector expanded by an average of 4.1 percent in 2019-23, driven by construction and public investment. Azerbaijan’s overreliance on hydrocarbon products as a dominant source of export and fiscal revenues remains its major vulnerability, given declining oil production, the perpetual volatility of commodities markets, and the global transition away from fossil fuels. This vulnerability was evident when in 2015-16 declining oil prices precipitated a major financial and currency crisis, resulting in an economic downturn. 11. Economic growth has been accompanied by widespread employment gains, albeit with low productivity and wages. The overall unemployment level averaged 5.8 percent in 2018-2022. However, while the hydrocarbon sector accounts for roughly 90 percent of export revenue and close to 80 percent of the total budget, it only accounts for about 1-2 percent of employment. By contrast, 36 percent of employment is in the agriculture sector, with relatively low productivity, wages, and benefits. Between 2018 and 2022, most of the new jobs have been created in administrative and support service activities, construction, and manufacturing sectors. 12. Both the budget and current account are in surplus due to the high level of oil and gas revenues. Driven by high levels of hydrocarbon revenues, the current account surplus is estimated at 14.9 percent of GDP and the budget surplus at about 4.1 percent of GDP on average over 2019-23. The tax revenue to GDP has been rising, from 14.5 percent in 2019 to 18 percent in 2023 supported by improvements in tax administration. Public expenditures averaged 33.2 percent of GDP in 2019-2023, including a substantial increase to cope with the impact of the COVID-19 pandemic. Expenditures have often been revised upwards from initial budget levels during the year, particularly when energy prices have been high, providing a strong procyclical thrust to fiscal policy. At the same time, high revenue collection from non- hydrocarbon sectors also allowed to reduce non-hydrocarbon primary balance predicated by the fiscal rule. Reserves of the Central Bank of Azerbaijan (CBAR) increased to US$11.8 billion by September 2024, which is sufficient to cover 5.7 months of total imports, compared to US$6.3 billion at end-2019. 3 Furthermore, the value of the state oil fund (SOFAZ) grew to US$58 billion by June 2024, providing a significant fiscal cushion against volatility. 13. Debt levels are low and sustainable. Government debt was just 21.8 percent of GDP in 2023. Until recently, debt levels were kept low in the wake of currency and financial sector instability. However, the financial sector has been restructured and the authorities now aim to gradually allow total public debt to rise to 30 percent of GDP to support priority investments. The most recent sovereign credit rating for Azerbaijan was BBB- by Fitch (July 2024), its minimum investment grade. 14. The financial system is stable, although it remains small and poorly diversified. The scars left by the 2015-2016 crisis had a profound impact on financial sector development. The plunge in oil prices triggered the first recession in the country’s modern history and a severe financial sector crisis. The authorities took important steps in response to the crisis, including restructuring the largest state-owned bank, ABB, the liquidation of smaller problematic financial institutions, and the tightening of prudential requirements. Credit growth has restarted, with credit organizations’ loan portfolio expanding by 22.9 percent in June 2024 (year-on-year), albeit from a low base, and overdue loans are at historic lows of 1.8 percent. In response to falling inflation, which reached 1.1 percent in June 2024 as external pressures subsided and the real exchange rate appreciated, the Central Bank of Azerbaijan cut its policy rate by 75 basis points to 7.25 percent (in three steps over six months). Despite the increase in administrative gasoline prices, annual inflation reached 3.5 percent in September 2024 and remained within the Central Bank of Azerbaijan target range (4±2 percent). 15. During the CPF period, growth is expected to remain modest, averaging around 2.3 percent (2025-29). Crude oil production is likely to continue to decline due to aging of the main oil field, while natural gas production is projected to stabilize after reaching its peak during 2024-2025. Growth in the non-energy sectors is expected to hover around 4 percent, largely supported by services and construction (which is expected to remain driven by strong public investment). In the medium term, growth could be accelerated if key structural constraints (large state footprint in the economy, lack of a level playing field for companies, shallow financial markets, and a weak human capital base) are addressed, including by implementing and complementing the recently enacted regulations such as the ones on competition and financial sector issues. The external and fiscal positions are expected to remain positive in the medium- term, albeit surpluses may decline as revenues from the hydrocarbon sector are projected to fall in line with production capacity. These projections are subject to external risks and uncertainties, including the evolution of regional conflicts, global economic shifts, and extreme climate. 4 Table 1: Selected Economic Indicators, 2020-29 2020 2021 2022 2023 e 2024 f 2025 f 2026 f 2027 f 2028 f 2029 f Real GDP growth (%), at constant -4.2 5.6 4.7 1.1 2.3 2.4 2.4 2.3 2.2 2.2 market prices Priv Consumption -8.7 3.6 4.5 3.5 3.8 3.7 3.6 3.4 3.2 2.8 Gov Consumption 3.4 4.0 0.8 -1.8 5.1 6.9 6.8 5.2 5.1 5.1 Gross Fixed Capital -7.1 -6.0 4.5 3.5 2.3 2.0 2.5 2.5 2.4 2.3 Formation Exports, G & S -11.5 13.8 13 -2.0 0.4 0.5 0.6 0.4 0.2 0.2 Imports, G & S -17.1 3.0 13.5 0.7 2.7 2.7 2.7 1.8 1.6 1.6 Real GDP growth (%), at constant -4.4 5.6 4.6 1.5 2.3 2.4 2.4 2.3 2.2 2.2 factor prices Agriculture 1.9 3.3 3.4 3.2 3.0 3.0 3.0 2.6 2.5 2.5 Industry -5.2 4.1 2.4 -0.9 0.2 0.2 0.2 0.1 0.1 0.1 Services -4.4 8.6 8.5 4.9 5.3 5.3 5.2 4.1 3.9 3.9 Inflation (CPI, %) 2.8 6.7 13.9 2.1 2.2 2.3 2.3 2.2 2.0 2.0 Current Account (% of GDP) -0.5 15.1 29.8 11.5 12.1 11.6 5.4 3.8 3.6 3.4 Net FDI Inflow (% of GDP) 1.2 3.1 -5.7 0.3 -1.0 -0.9 -0.9 -0.8 -0.7 -0.6 Fiscal Balance (% of GDP) -6.5 4.2 5.5 8.2 5.2 2.0 0.6 0.5 0.4 0.4 Revenues (% of GDP) 33.7 36.5 32.4 35.2 34.7 32.7 34.5 33.1 32.4 32.0 Debt (% of GDP) 23.4 18.2 11.6 21.8 22.4 22.8 23.1 23.2 23.3 23.3 GHG emissions growth -1.6 0.7 1.4 -0.6 0.5 1.1 1.3 1.3 1.3 1.3 Source: World Bank Country Economic Model; e: estimate, f: forecast 2.3 Poverty and Shared Prosperity 16. Azerbaijan’s rapid economic growth was accompanied by a remarkable fall in poverty, with the poverty rate stabilizing in recent years. The national poverty rate calculated by the State Statistical Committee declined in the years of rapid growth, from close to 49 percent in 2001 to 6 percent in 2012. After that, it stabilized at around 5 percent, with some temporary increases during the 2016 banking crisis and the COVID-19 crisis. With about 42 percent of the population living in rural areas, poverty rates there are about 2 percentage points higher than in urban areas, and disparities exist across economic regions. However, limitations in data availability restrict a detailed analysis. 17. Improving shared prosperity and reducing inequality remains an important goal. Although the level of absolute poverty is low, many Azerbaijanis in rural areas have low labor incomes that makes them highly vulnerable to shocks. Only about 1-2 percent of the workforce hold jobs in the high paying petroleum sector. A non-negligible share of the workforce is in the informal sector, including those who work in agriculture, and face challenges in benefiting from social insurance and other benefits. Enhancing productivity and creating quality jobs are crucial for strengthening economic resilience and reducing the risk of falling back into poverty. Strengthening the social protection system is also necessary, particularly given the aging population and a fertility rate of 1.5 percent in 2021. Despite improvements in digitalization and targeting, coverage remains insufficient, with many families in the poorest quintile still not receiving assistance.1 Azerbaijan also has a high concentration of IDPs, who make up about 6.5 percent 1Based on a sample 2023 survey and simulations, it is estimated that only about 6.2 percent of those in the poorest quintile are covered by the social assistance program. 5 of the population. As many IDPs are expected to return to their villages, ensuring they have access to safe areas free of land mines, access to services, and sustainable economic opportunities will be a significant undertaking. 18. Azerbaijan has made progress on human development, but more needs to be done to improve the quality of education and health and address selected gender issues. Between 2010 and 2020, Azerbaijan’s Human Capital Index improved from 0.50 to 0.58,2 slightly higher than the average for upper middle-income countries. Access to education has improved, with both boys and girls achieving close to universal secondary school completion. However, only 35 percent of Azerbaijan children benefited from pre-school in 2022, among the lowest in the region. Furthermore, measures of education quality and outcomes remain low. According to the 2022 Program for International Student Assessment (PISA) survey, over 60 percent of 15-year-olds had below minimum proficiency in math, reading, and science, and according to the 2021 Progress in International Reading Literacy Study (PIRLS) only 11 percent of students met the high international benchmark for reading (the international median is 36 percent). Similarly, access to health care has improved since the mandatory health insurance scheme was rolled out in 2021. However, the quality of care remains an issue and out-of-pocket costs are high. Azerbaijan ranks 70th out of 170 countries on the UNDP Gender Inequality Index. There is considerable disparity in the workforce. Female labor force participation is 62 percent (2022). However, women are concentrated in lower-paid sectors and, overall, earn 68 percent of what men earn.3 They are also underrepresented in the civil service and judiciary. Health related gender issues, including access to family planning, lag, and Azerbaijan is the third lowest-ranked country on gender parity at birth. 19. Azerbaijan has established important climate change targets but will need to take critical policy measures over the next few years to meet them. Azerbaijan’s economy remains heavily dependent on fossil fuels, which generates significant GHG emissions. It is noteworthy that about 30 percent of its GHG emissions come from non-productive methane fugitive emissions (such as gas flaring). As part of its Nationally Determined Contributions (NDC), Azerbaijan has set a target to bring its GHG emissions down by 35 percent by 2030 from 1990 levels. To meet this target, in addition to cutting back methane fugitive emissions, the government has indicated its intention to increase the share of renewable energy installed capacity from its current level of 20 percent to 30 percent by 2030.4 Azerbaijan has also joined Romania, Georgia and Hungary in seeking to establish a “green energy corridor”, enabling the export of electricity to Europe. As indicated in the CCDR, strong improvements in energy efficiency in areas such as transportation and housing are also needed and have the potential to deliver at least half of the targeted reductions. As regards adaptation, Azerbaijan’s agriculture and water are increasingly vulnerable to climate impacts, as up to 70 percent of its water comes from cross-border sources. It is also vulnerable to extreme events such as droughts, floods, earthquakes, and landslides. 2.4 Development Agenda 20. The overall development challenge facing Azerbaijan is that the economy remains overly dependent on the hydrocarbon sector and there is a significant presence of the state in the economy. The non-hydrocarbon sector, where most of the population works, represents 63 percent of the GDP in 2023 and is characterized by low productivity, low private investment, and weak global linkages. In 2 World Bank Group: Human Capital Index – 2020 Update. 3 International Labor Organization – ILOSTAT. 4 The CPF uses the government’s own formula for measuring the growth of renewable energy. The CCDR uses a different formulation of “share of electricity production,” which has a lower baseline of 7 percent. 6 addition, the large hydrocarbon sector (37 percent of GDP) employs a small share of the population as noted above. At the same time the state plays a significant role in the economy as a major investor accounting for 56 percent of total investment in 2023 while SOEs are present in several sectors that are traditionally dominated by the private sector in other countries, including manufacturing and banking. As the 2022 SCD, the 2022 CEM, and the 2023 CCDR all indicate, and consistent with Azerbaijan’s own development SEDS strategy, Azerbaijan needs a new growth model driven by the private sector and a diversified economy that is more integrated into the global economy beyond oil and gas. In turn, progress on economic diversification will require addressing the large state presence and reducing barriers to entry and competition, strengthening services and trade infrastructure and policies, developing human capital and skills, and improving confidence in the rule of law and access to information. 21. The core element of the new growth model is to create the conditions for a more competitive and market-driven economy that can create new and better jobs. Enabling the transition to a more diversified, innovative, dynamic, and private-sector-driven economy requires: (i) enforcing a level playing field by enabling market competition, adopting competitive neutrality toward SOEs, and removing price controls; (ii) strengthening the regulatory and governance climate for investment; (iii) ensuring that firms have access to skilled labor in line with changing skills needs; and (iv) improving access to finance, particularly for small and medium enterprises (SMEs). There are currently over 5,000 SOEs, and many of the larger ones enjoy a near monopoly in their sector. A key element in improving economic competitiveness would therefore be an SOE reform to improve performance, limit their scope and level the playing field. To this end, in 2020, the government established Azerbaijan Investment Holding (AIH). AIH does not own shares in SOEs but rather acts as a management body to improve corporate governance, accounting transparency and performance in SOEs. These efforts need to be accelerated, ownership, policy-making, and regulatory functions separated, and state subsidies or preferences reduced. In addition, the potential for privatization could be selectively explored. In 2023, the President established a shortlist of SOEs that could be candidates for private investments. A comprehensive legal and regulatory regime supporting public-private partnerships (PPPs) would help further to attract investments and improve services. 22. The energy sector remains central to the economy, and there is a need to embrace improved energy efficiency, pricing, transmission, and renewable energy production. The largest consumers of domestic energy are the residential sector and transportation, and growth in electricity demand is estimated at 2.9 percent per annum. To enhance the competitiveness of the energy sector, Azerbaijan has presented for initial public offering a small part of the main energy SOE (SOCAR) and is on track to functionally unbundle production, distribution, and transmission in the next few years. On renewable energy, the country established the Azerbaijan Renewable Energy Agency, enacted a series of laws incentivizing renewable energy, and has entered into power purchase agreements for two large wind and solar plants. However, as noted in the November 2023 CCDR, to meet the stated target of increasing the share of renewable energy to 30 percent, Azerbaijan will need to accelerate the transition by reducing fossil fuel subsidies, facilitating private investment in renewable energy, reducing emissions from fossil fuel production and transportation, and strengthening the ability of the electric grid to absorb renewable energy. Addressing oil subsidies will also be critical to provide incentives to spur renewable energy. This transition represents an important opportunity, as in the near term, Azerbaijan can use increased renewable energy generation for domestic use. In the medium term, the potential Black Sea submarine electricity cable could facilitate Azerbaijan to export renewable energy (a first step in the establishment of a “green energy corridor” with Romania, Hungary and Georgia), subject to the energy grid being strengthened and to the competitiveness of renewable energy production. 7 23. A more dynamic private-sector-driven economy will also require improvements in infrastructure and services. Although improved business infrastructure and services are not likely, by themselves, to be sufficient to shift the trajectory of the economy, they will be necessary if Azerbaijan is to reap the full benefit of improved private sector-led reforms. Agriculture currently employs about 37 percent of the population but only accounts for 5.5 percent of GDP (2023). It holds significant potential to expand, which can be realized once the irrigation infrastructure is improved. Azerbaijan could also further leverage its geographic position to expand its role as a regional trade and transit hub, which implies improving transportation connectivity and logistics. Improved digital connectivity is also essential for growing the private sector, fostering innovation and productivity, attracting foreign investment, and facilitating access to public services. Improving digital connectivity is also important to developing agribusiness, early warning systems and GHG monitoring. However, wholesale connectivity and retail fixed broadband markets lack competition, markets are dominated by SOEs, and the sector’s legal and regulatory frameworks need to be strengthened. In 2021, the government announced the establishment of an independent telecom sector regulator as well as plans to reform the SOEs in the sector, but implementation of regulatory independence and competition is a work in progress. Azerbaijan also needs to develop approaches to emerging digital technologies such as artificial intelligence (AI) and digital risks including those related to data safety and fraud. Azerbaijan is in the process of rolling out a substantial fiber connectivity effort in rural areas which provides an opportunity to strengthen the delivery of services and to generate employment opportunities. 24. There is considerable room to develop the financial sector and deepen capital markets. There has been strong progress in improving the soundness of the financial system since the 2015-16 crisis. At the same time, the level of intermediation remains low at about 20 percent of GDP and access to finance remains a top business concern due to a high level of informality, strong collateral requirements, and high (although decreasing) levels of dollarization.5 On the regulatory side, there is a need to shift to risk-based supervision and promote digital financial services. There is also a need to deepen capital markets and diversify financial products and services to better serve the need of the real economy, especially micro, small, and medium sized enterprises (MSMEs) and the under-served population, as well as to set up the enabling framework to boost green finance. 25. There is urgency to integrate climate adaptation into the new growth model, particularly in water, agriculture and urban services. Azerbaijan is facing water security related challenges given increasing water scarcity, mainly due to a high (70 percent) dependence on transboundary water sources, increasing upstream demand, salinization, water pollution, and multi-year droughts. Water scarcity is expected to be further negatively impacted by climate change due to increasing temperatures and decreasing rainfall. This is likely to put further pressure on available surface and groundwater reserves for water supply and irrigation for agriculture. To address these challenges, the government needs to plan and prioritize investments to improve water infrastructure and strengthen the management and monitoring of water storage and reuse. At the same time, Azerbaijan’s agriculture has growth and adaptation potential if it can introduce climate-smart practices for key crops, strengthen extension services, modernize the irrigation network, and facilitate greater access to finance by rural SMEs. In addition, transforming urban areas to make them greener and more livable, including the development of high-quality integrated public transport systems, is a key development challenge and decarbonization 5According to the World Bank’s Fintech database, less than 50 percent of Azerbaijanis over 15 had formal financial accounts as of 2022, and just 39 percent for women over 15. 8 opportunity. To this end, Azerbaijan is preparing its first ever urbanization strategy in partnership with UN-Habitat. 26. Given its strategic geographic position, Azerbaijan has a competitive opportunity in growing its role in facilitating regional trade and transit. Azerbaijan has long played an important role in regional energy supply lines. Building on this, the development of international transport and transit corridors passing through Azerbaijan, particularly the Middle Corridor and including both rail and port upgrades, can enable Azerbaijani businesses to better access global markets. Improving transportation infrastructure, logistics, and regulations also represents an important opportunity for Azerbaijan to increase its role in regional trade and transit logistics. The recent introduction of e-declarations, green corridors, and electronic payment systems at the border have reduced transit clearance times. However, transit logistics remain a key bottleneck to Azerbaijan becoming a competitive transit hub. Azerbaijan’s ambition as a regional leader in areas such as energy and connectivity will also require progress on reforms to enable private sector participation in infrastructure sectors. 27. Azerbaijan needs to urgently invest more in and modernize its human capital to be able to capitalize on the above opportunities. The 2022 SCD emphasizes that while Azerbaijan has made important strides in improving basic access to health and education, it now needs to focus on improving the quality of services to provide citizens with the skills, including digital skills, needed for a modern innovative economy. Recent PIRLS and PISA surveys indicate worryingly low and declining primary and secondary education quality. Improvement in the quality of tertiary education is also needed to better equip students with the skills needed, including digital skills, to participate in a competitive global economy. Furthermore, enhancing the inclusion of vulnerable groups and women would improve equity and the productivity of labor and help the country achieve sustainable growth. Policy priority areas that need attention include improvement in the quality of basic education through modernization of the curricula and improving teacher competence; greater access and relevance in higher education in closer coordination with the labor market; addressing the dual burden of malnutrition among children and noncommunicable diseases among adults; and confronting the gaps in the access to health services, while reducing the risk of impoverishment because of service payments. 28. Finally, across development challenges, there is a need to strengthen governance and improve the reliability of data and statistics. The 2022 SCD recognizes that Azerbaijan has initiated improvements in areas such as government effectiveness and regulatory quality, although it has traditionally lagged in the control of corruption and rule of law. Acknowledging this, in 2022, the authorities approved the “2022- 2026 National Action Plan to Strengthen the Fight Against Corruption” to increase transparency and accountability in public institutions. An e-procurement system was put into place in 2020 and by 2022 covered more than half of competitive bids. Audits are now prepared for 37 percent of state budget expenditures. Progress is also being made on introducing medium-term and result-oriented budgeting practices, and expansion of these efforts is now needed. Enhanced public finance management coupled with greater citizen engagement can also improve the efficiency and transparency of service delivery. In addition, a critical element in improving the transparency and efficiency of decision-making and services is improving national statistics availability, reliability, and usage. Increased digitalization of data can strengthen its effectiveness and contribute to better and quicker decision making. To meet these challenges, Azerbaijan needs to adopt open data policies and improved data governance systems, which will in turn help to build trust in the growing digital ecosystem. 9 III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK 3.1 Government Program and Medium-term Strategy 29. The government’s development goals are centered around five National Priorities articulated in the “Strategy of Socio-Economic Development of the Republic of Azerbaijan for 2022-2026”: ➢ A sustainably growing competitive economy: This includes economic diversification, enterprise development and improvements (and gradual privatization) of SOEs. Public procurement should be improved, business regulations streamlined, the financial sector expanded including for MSMEs, public-private partnership arrangements increased, and technological and digital innovations spurred for both agriculture and manufacturing. ➢ A dynamic, inclusive and socially just society: This includes creating new private sector jobs and reducing the informal economy, improving social safety nets and pensions, enhancing women’s access to economic opportunities, and reducing urban and rural living standard disparities. ➢ Competitive human capital and space for modern innovations: This includes increasing the availability of pre-school education and strengthening the coverage and quality of secondary, higher, and vocational schooling; strengthening and commercializing technological innovation and improving digital skills; and improving the quality and access to health care. ➢ Territorial resettlement: This includes creating the conditions for sustainable resettlement with needed infrastructure, utilities, and services. It also includes re-integrating lands into the economy of Azerbaijan through building trade corridors, supporting businesses and investment and developing their potential for renewable energy production. ➢ Clean environment and “green growth”: This includes strengthening environmental monitoring and promoting biodiversity, protected areas, and forest management. It also includes improving water supply for drinking and irrigation, improving energy efficiency and use of renewables, and phasing out energy subsidies. 3.2 Proposed World Bank Group Partnership Framework Past WBG Program and Lessons Learned 30. The Completion and Learning Review (CLR) of the past CPF rated the development outcome as moderately satisfactory. The program helped to improve Azerbaijan's capacity to respond to emerging shocks through improved strategic planning, macroeconomic management, and crisis preparedness. A notable achievement was that the WBG cooperated closely in the energy sector and, along with the EIB, AIIB, and EBRD, mobilized more than US$1 billion for the sector. Other notable achievements include strengthening employment opportunities for the vulnerable groups, modernizing road infrastructure and maintenance systems, improving the enabling environment and access to finance for small and medium businesses, and increasing agribusiness productivity. The program showed slower but steady progress on improving the budget execution and public financial management (PFM) processes. While the program did not achieve the intended results associated with railway connectivity, it yielded substantial positive institutional changes in the sector. Although lending declined over the CPF period due to the government’s policy of limiting foreign borrowings, the WBG maintained a robust level of analytical and capacity building support. 10 31. The CLR highlighted several lessons learned, which will help strengthen the program going forward. The proposed WBG partnership framework has been developed taking into account these lessons: (i) Increasing the selectivity and strategic relevance of advisory services and analytics (ASA): In a limited lending environment, a broad analytical program enabled the WBG to remain engaged and responsive to the government. Going forward, this extensive analytical base will be leveraged by the WBG and supplemented as needed by more targeted just-in-time pieces in areas where investment opportunities are being developed and can drive transformative change. (ii) Focusing the lending program on longer-term programmatic engagements: While the program produced significant results, many operations were one-off activities given the past limited lending. There was limited long term engagement in key sectors such as energy and water which jeopardized sustainability of results. Longer-term programmatic engagements, particularly in areas where the WBG has built up expertise, would help strengthen the sustainability of results and provide more predictability to the WBG program. (iii) Measuring outcomes with a more realistic results framework: The previous CPF used indicators to measure results with a multidimensional nature, which should have been simpler and better defined. The new CPF sets fewer and more attainable targets aligned more with instruments employed and the new Corporate Scorecard where feasible. 32. Past activities have also shown that synergy between WBG institutions can produce transformational change, but only if it is supported by a sound commercial environment. Much of IFC’s anticipated lending in utilities did not materialize due to insufficient commercialization and private participation. On the other hand, in the highly successful TANAP project, the IBRD, IFC, and MIGA worked together to build a market-based policy environment, which was able to attract considerable investments and deliver transformational change. Going forward, it will be important to build a strong commercial environment in the relevant sectors (for example in renewable energy or water supply), which would then enable the WBG to work in synergy to attract transformational investments. 33. The CPF has also been shaped by consultations with key stakeholders. Consultations were held in February to September 2024 and included two rounds of discussions with government officials and meetings with the private sector, development partners and civil society/academia. Participants were very supportive of the WBG re-invigorating its support to Azerbaijan through both advisory and investment operations. They confirmed the importance of helping Azerbaijan transition to a new more dynamic growth model as well as supporting the green energy transformation and climate adaptation. The WBG was encouraged to remain involved in the area of improving human capital even if the government was not yet requesting investment in these areas. The private sector emphasized the importance of improving the business environment, including opening up space for the private sector and improving digital and transport connectivity. Approach to Selectivity 34. The program will be highly selective, focusing on assisting Azerbaijan in making progress on two interlinked high-level outcomes (HLOs): (i) increased resilience and sustainability and (ii) increased productivity and better jobs. These pillars have been identified using the following three selectivity filters: (a) government priorities as defined in the SEDS, (b) priorities identified by the WBG in the SCD, CEM, and 11 CCDR, and (c) WBG comparative advantages, given its experience in Azerbaijan and globally. The government SEDS and WBG core diagnostics all emphasize the need for Azerbaijan to build a new more dynamic private sector driven growth model and a greener economy more resilient to the impact of climate change. Hence the two HLOs. Then, within these two pillars, the CPF will focus closely on areas where the WBG has ongoing or recently closed operations or global or regional expertise. Under the first HLO, this means continuing to help facilitate the green transition in the area of energy, where the WBG has considerable country and global experience, and helping Azerbaijan to address issues of climate adaptation, building on the WBG global knowledge and country experience particularly in water, agriculture and urban adaptation. Under the second HLO, this means a focus on the financial and private sector to strengthen competition and access to employment and finance. The WBG will also help to strengthen transport and digital connectivity, building on recent operations and ongoing diagnostic work. The WBG will maintain analytic and advisory support in a few areas – notably public sector management, Caspian Sea pollution and biodiversity, regional and international trade, and education – where it has built expertise and there are strong reform needs, although lending is not expected in the near term. Figure 1: Selectivity Filters 35. These priorities show continuity with the previous program, but with a greater emphasis on addressing climate change. The focus of the previous CPF was on (i) public sector management and services and (ii) economic competitiveness. These areas remain important and the WBG will continue to emphasize the transition to a more competitive economy to create more productive and inclusive jobs. However, since the time of the last CPF, environmental and climate related challenges have grown in importance in both the government’s and the WBG’s agenda. As a result, the challenge of addressing the impact of climate change and strengthening sustainability has become a key high-level outcome. Improved public sector management, including strengthening institutions and data access, will continue to be supported within each of these two areas. 36. There are also certain areas which are national priorities, but where the government has not requested WBG support as other donors or the government itself will take the lead. The WBG will not engage in areas where other partners have taken the lead with a strong comparative country level advantage, such as the ADB on health or the UN and EU on most environmental issues (apart from regional Caspian Sea issues). There are also a few priority areas including territorial reintegration and resettlement that the government has pursued primarily through its own institutions with limited external involvement, 12 although circumstances could change with the signing of a peace agreement. The government is also currently committed to addressing methane reduction related to gas flaring through its own resources, although the WBG would stand ready to support this effort if requested. While the WBG has not been requested to pursue lending in most areas of human capital, the WBG will remain engaged in an “advocacy” role, particularly in education which can hold the country back in terms of competitiveness if not adequately addressed. One potential opening is the proposed digital program, which will seek to strengthen digital skills. 37. In addition to identifying the main areas of focus, the CPF establishes four principals which will guide “how” the WBG will operate within them. (i) First, recognizing the importance of developing a more dynamic economy, operations will be designed to strengthen market-based competition. This includes facilitating the use of the private sector and PPPs in the delivery of services and infrastructure. (ii) Second, in order to bring a broader range of instruments to bear in a coherent and synergistic manner, the IBRD, IFC, and MIGA will deepen collaboration, particularly in the energy and water sectors, aiming to support policy reforms and enable targeted investments. This builds on the WBG track record of collaboration in the energy sector. (iii) Third, recognizing that infrastructure improvements alone are insufficient, operations will be designed to strengthen relevant institutions. This includes helping Azerbaijan developing appropriate laws, regulations, and pricing mechanisms that promote transparent rule-based governance. (iv) Fourth, recognizing that after a period of limited engagement it may take time and a longer dialogue to produce concrete results, the World Bank is discussing with the government the potential of framing projects within a longer-term program with several phased interventions. WBG High Level Outcomes and Objectives 38. The overarching goal of the CPF is to help Azerbaijan accelerate its transformation to a greener, more competitive, and inclusive economy. To achieve this, the CPF will focus on a limited set of activities under two high level outcomes – (i) increased resilience and sustainability and (ii) increased productivity and better job opportunities. These areas will be mutually reinforcing, as the challenge is to create new and sustainable sources of growth beyond hydrocarbons. 13 Table 2: Proposed Azerbaijan CPF Program (FY2025-2029) Accelerating Azerbaijan’s transformation to a greener, more competitive, and inclusive economy 3.3 Objectives supported by the WBG Program Higher Level Outcome 1: Increased Resilience and Sustainability 39. The WBG will help Azerbaijan accelerate its transition from a hydrocarbon-based economy to a greener and more climate resilient one. Azerbaijan’s economy remains heavily dependent on fossil fuels. The government recognizes the limits of the hydrocarbon-fueled growth model and has set a goal to diversify the economy and shift away from hydrocarbons. This will require investing in renewable energy and green technologies across industries, buildings, and transportation to reduce emissions. It will also require accelerating adaptation to climate change, including improving the resilience of water and other urban services and reducing the vulnerability of agriculture production to water shortages and other climate shocks. These efforts will contribute to a more sustainable economic model aligned with global efforts to combat climate change, as well as opening new markets and creating jobs. Overall progress will be measured against Azerbaijan’s own goal of reducing GHG emissions substantially against its 1990 levels. 40. Objective 1: Enhancing the Shift to Renewable Energy: The WBG will operate in a phased and coordinated manner to support the government’s efforts to transform its energy mix. The focus of the program will be to support improvements in energy transmission policies and infrastructure, as well as investments in renewable energy. The IBRD will continue its technical assistance to help Azerbaijan optimize tariff methodology and cost recovery, and strengthen policies related to facilitating the integration of electric vehicle charging into the energy grid. IFC will participate in these discussions and provide a private sector perspective on sectoral strategies and regulatory reforms. WBG analytic support would include an assessment of priority investments and a review of the potential of geothermal, hydrogen, distributed renewable energy, and energy efficiency models. This policy effort would help to ensure that appropriate incentives are in place to attract investors to renewable energy. They would also help to protect the most vulnerable, including using lifelines to the poorest in electricity tariff policy. Based on this policy dialogue, the planned IBRD-financed Azerbaijan Scaling-Up Renewable Energy Project (AZURE) will support investments to enable the evacuation of 240 megawatt (MW) of wind power and improve overall grid performance to manage the integration of 1.8 gigawatt (GW) of variable renewable energy (VRE), while strengthening the system and capacity for subsequent capacity increases. This project would be part of a larger regional Europe and Central Asia Renewable Energy Scale-up Multiphase Programmatic Approach (MPA) program to boost renewable energy and establish a green energy corridor, enabling Azerbaijan to showcase its experiences and learn from those of other countries (see box 1). 14 Box 1: Sharing Knowledge to Scale Up Activities in Renewable Energy The planned Azerbaijan Scaling-Up Renewable Energy Project is being prepared as part of the Europe and Central Asia Renewable Energy Scale-up MPA which aims to contribute to the goal of tripling renewable energy capacity in the ECA region by 2030. The MPA currently includes projects in nine countries in the Europe and Central Asia Region, which will be implemented over a ten-year period beginning in 2024. Each project focuses on priority aspects of scaling up renewable energy use in their respective countries - including improving the electric grid uptake of renewable energy, increasing solar and wind power generation, improving battery storage, and strengthening market-based renewable energy regulations, institutions, and risk sharing arrangements. The MPA will act as a platform under which participating countries can share knowledge and leapfrog by learning from one another, including through inter-ministerial roundtables, regional conferences and knowledge events, and study tours. The MPA platform will also help to expedite World Bank project design and approval processes through a harmonized approach. The MPA platform may also help to mobilize market- based and concessional funds to accelerate and scale-up renewable energy deployment. 41. Supported by these institutional, policy and grid strengthening efforts, IBRD, IFC and MIGA will work together to support mobilization of commercial financing for renewable energy (RE) projects. IBRD and IFC will explore private sector investments in RE and battery storage, potentially supported by MIGA credit guarantees for international investors, as well as support to financial intermediaries operating in Azerbaijan, engaged in financing and de-risking climate finance. This includes convening a workshop on offshore wind (building on the IBRD/IFC Azerbaijan Offshore Wind Roadmap). However, IFC investments would require a commitment to open competitive tenders to the private sector. The WBG will also use its convening power to bring together public and private stakeholders to help position the country as a green energy exporter, in close alignment with the development of a wider green energy corridor with neighboring countries. The WBG also stands ready to support methane reduction in gas flaring if requested by the government. The energy program will aim to increase renewables in the energy mix and increase the capacity of the transmission lines to integrate renewable energy. To facilitate coordination, IBRD, IFC and MIGA have developed a working business plan on how their different instruments and activities fit together in a phased manner (see annex 3). 42. Objective 2: Enhancing Adaptation to Climate Change: While access to services such as water supply, sanitation, public transport, and other urban services has improved, there is a need to address pollution legacy issues, retrofit services to withstand climate change and other shocks and reduce their carbon footprint. Strengthening resilience requires coordinated interventions across multiple sectors. The WBG will support the development of a climate-resilient and clean urban ecosystem through the multiphase Green and Resilient Cities Program with engagement on: (i) green and resilient urban infrastructure and public space (including cleanup of oil polluted areas), disaster and climate change resilient housing and public buildings; (ii) climate resilient and efficient water supply and wastewater management services; and (iii) clean, accessible, and smart urban mobility, including potentially low- carbon e-mobility networks and the Baku metro.6 IFC will coordinate closely to explore ways to support urban services such as energy-efficient housing and water treatment, including through PPPs, green buildings (e.g., with EDGE certification) and attracting private investments in manufacturing related to the green transition, e-mobility, and public transport. IFC will also increase availability of green and 6It is planned that this long-term program would consist of several separate operations, including an initial project focusing on green and resilient urban infrastructure, possibly followed by projects on urban mobility and water, to simplify implementation. 15 sustainable finance for private sector via its client financial institutions, providing financing for on-lending for climate projects. In addition, MIGA, in coordination with IBRD and IFC, will seek to support projects in the urban transport sector and de-risk investment in water infrastructure. This objective will be measured by an increase in urban areas with improved livability, an increase in climate-resilient public and private buildings, and the number of people with improved water supply and sanitation services. 43. The WBG will jointly explore analytical and investment support for water security and adaptation. Increasing water scarcity, salinization and pollution make water security a key priority. The Government of Azerbaijan has recently established the Azerbaijan State Water Resources Agency (ASWRA), consolidating fragmented and overlapping functions under a single dedicated institution. Over the past three years, IBRD has provided a wide range of analytical studies and advisory services on water issues. During the CPF period, the WBG will build on this experience and provide institutional capacity support for ASWRA, including the preparation of a national water strategy, improved regulatory processes and more sustainable tariff pricing. Based on this framework, depending on government demand, the WBG will explore potential interventions such as mobilizing private financing for PPP in wastewater and water supply, storage, and reuse. IBRD will continue to engage through its Non-Revenue Water Reduction Program and IFC aims to facilitate private sector investments in Baku desalination. The issue of water pollution, overfishing, and shrinking water levels in the Caspian Sea is another water sector priority, but one that needs to be addressed in a regional manner. The WBG will therefore support Azerbaijan in participating in a regional forum for “Blueing the Caspian Sea” (see box 2). Box 2: Blueing the Caspian Sea The Caspian Sea is the largest enclosed water body on earth. Over time, the Caspian Sea’s ecosystem resilience has been diminished due to a significant drop in water levels, overfishing, damming of tributary rivers and pollutants from agriculture runoff and oil and gas exploration. The decline in water levels and quality poses great challenges to the wellbeing of coastal populations and the region’s overall economic development, including its impact on fishing and shipping. Developing shared solutions and harmonized policies is essential given that one countr y’s actions affect all the other countries. The issue is particularly important to Azerbaijan as it seeks to diversify its economy, increase fishery exports, and strengthen its role in trade routes. In alignment with the Framework Convention for the Protection of the Marine Environment of the Caspian Sea, the World Bank is preparing a US$12 million GEF grant “Blueing the Caspian Sea”. The project would support three participating riparians – Azerbaijan, Kazakhstan, and Turkmenistan – in strengthening knowledge, monitoring, and planning capacities to improve pollution management and biodiversity conservation. The grant is expected to help develop state-of-the-art technologies and best practices for addressing pollution and protecting biodiversity in the Caspian Sea, which could be replicated to additional transboundary systems. In doing so, the program will explore harmonized nature-based solutions as well as potential engagement with the private sector in the development of environmentally sound technologies. 44. Climate adaptation is also needed in agriculture and irrigation. The agriculture sector, which is critical to Azerbaijan’s non-hydrocarbon economy, is already affected by the effects of temperature and precipitation changes, which may cause yield reductions in major agricultural regions in the absence of adaptation measures. The country’s irrigation systems are characterized by inadequate water delivery, high water losses and salinization. The planned Agriculture and Irrigation Program would seek to strengthen agriculture and irrigation development through mainstreaming climate-smart agriculture technologies and adaptation measures as well as incentivizing sustainable water usage. The program may also support integrated climate smart food safety, storage, and distribution systems beyond the farm. In 16 close coordination, IFC will explore ways to support private farmers and agribusinesses, including by helping financial institutions better tailor financial products to farmers’ needs including with climate focused solutions. The main indicator will be an increase in yields of key crops. To facilitate coordination across the water and irrigation sectors, IBRD, IFC and MIGA have developed a working business plan on how their different instruments and activities fit together in a phased manner (see annex 3). Higher Level Outcome 2: Increased Productivity and Better Jobs 45. The World Bank will assist Azerbaijan in its efforts to increase productivity and provide access to better jobs. The economy is highly concentrated in oil and gas, but these areas do not generate significant high-wage employment. The ongoing growth slowdown further underlines the urgency of boosting the productivity of the non-hydrocarbon sector to create quality jobs. While the government has requested the World Bank's support to create more employment opportunities and ensure the sustainability and growth of private businesses, this will require ambitious reforms that may face headwinds from vested interests in key sectors. The transition to a more dynamic economy will require a combination of a well-managed public sector to ensure a regulatory environment conducive to business development, strengthening transportation and digital infrastructure, fostering innovative technology, and improving access to finance. A more dynamic economy and private sector will in turn help to support the development of green jobs in areas supported under HLO 1. The high-level outcome indicators of progress will be an increase in the share of non-agricultural jobs and improved productivity measured by value added per worker in MSMEs. 46. Objective 3: Improving the Business Environment and Access to Employment: The WBG will continue to provide advisory services to inform policy making, enhance public awareness, and help build support and consensus around needed economic reforms to strengthen the business environment. This includes following up on the private sector survey, helping to identify additional ways of improving the business environment, preparing a paper on “new drivers of growth and jobs” and assisting Azerbaijan in joining the new Business-Ready index in FY25. IFC will support job creation and MSME development through private investments in manufacturing, agribusiness (both upstream and downstream of farms), and retail. Growing the economy and jobs also depends on a sound, transparent and efficient public sector that recognizes the important role of the private sector. IBRD will continue to engage with the government through technical assistance on improving medium-term and result oriented budgeting practices, the efficiency of public investment, improvements in social assistance, debt management, and the management of reserves. This includes assisting the government in taking climate impacts into consideration in public investment management. IFC will launch a PPP capacity building program with the newly created PPP unit in the Ministry of Economy and help to identify (and potentially fund) potential projects such as in green housing, port development, e-mobility, roads, rail and water and wastewater management. The WBG will also provide assistance to help Azerbaijan prepare and follow up on the COP29 conference. Analytic work could also include support to commercialization and initial privatization agenda for selected SOEs if requested by the government. 47. A central element in creating a more dynamic economy and better jobs is to help strengthen the financial sector. After restructuring, the financial sector is stable but still small and poorly diversified, and MSMEs continue to have difficulty accessing funds.7 IBRD will continue to provide advisory support through the Azerbaijan Financial Sector Modernization Project-3 funded through the Swiss Economic 7The World Bank 2019 Enterprise Survey found that the two biggest business environment constraints were access to finance and practices of the informal sector. 17 Cooperation (SECO) trust funded Finance for Development (F4D) Program. This program will help CBAR transition toward risk-based supervision, strengthen CBAR’s regulatory capacity and oversight (including AML/CFT), develop regulatory frameworks for financial consumer protection and venture financing, improve MSMEs access to finance, and expand digital financial services, including by strengthening payments system supervision and oversight. In tandem, IFC will continue engaging with the financial sector and CBAR, including on embedded and asset-based finance, supporting women entrepreneurs to access finance through ongoing investments in Bank Respublika, implementing the Digilab advisory program, and helping to roll out open banking. IFC will also explore the potential for venture/risk capital and improving incentives for foreign direct investments (FDI). Under a regional ASA, the WBG is supporting the CBAR in developing Azerbaijan’s national green taxonomy and advises on green bond policies and guidelines. Based on these standards, IFC will work with banks and other corporates to facilitate green bonds and loans as well as strengthening banks’ ability to provide climate finance for MSMEs. IFC will also explore opportunities to strengthen environmental, social, and corporate governance (ESG) practices of financial institutions and MSMEs through its Regional ESG Accelerator Advisory Program (under development). The main results indicators would be improvement in financial sector policies and institutions and an increase in lending MSMEs, including to women-led businesses. 48. It is equally important to ensure that vulnerable groups, women, and youth have access to participate in a more dynamic economy. Through the additional finance (AF) under the ongoing Employment Support Project (ESP), IBRD will scale up employment and training programs for vulnerable groups, women, and youth. The program will expand mentoring and matching grants for entrepreneurs, sponsor apprenticeship programs and improve sustainability of launched micro-enterprises. It will also pilot a certification framework for vocational training programs and improvement in labor market information systems and monitoring. The main goal would be to scale up new and better jobs created to 70,000, including 28,000 for women. IBRD will also continue to provide support for the training and service needs of IDPs through the ongoing State and Peacebuilding Fund (SPF) financing, although it is expected that this support will be integrated into regular investment programs over time. While the government has not requested support in other areas of human development, strengthening human capital is a necessary element in providing both better employment as well as improving human resilience to climate change and other shocks. Therefore, the WBG will maintain an advocacy engagement through analytic work and policy dialogue in education, social protection, and skills. 49. Objective 4: Strengthening Transport and Digital Connectivity: Developing the country’s transport and digital connectivity is a strategic priority which will contribute to sustainable economic growth, diversification, productivity, and improved quality of life for the population. The ongoing Regional Connectivity Development Project is helping to strengthen safe, efficient, and climate resilient connectivity along a 70 km road corridor south of Baku. IBRD may continue efforts to improve regional road connectivity and the financial sustainability of the road sector and implementing appropriate user fees, as well as advisory support on the rationalization and electrification of the rail network. IBRD is also preparing to engage on clean and accessible urban mobility (see objective 2). Furthermore, the WBG will follow up on analytical and advisory efforts to help unlock the potential of the Middle Corridor for trade and transit.8 This could include helping to improve and digitalize cross-border processes and logistics and further modernizing transit infrastructure such as railways and the port of Baku. IFC will explore investment and advisory services opportunities to mobilize private capital in the transport sector, 8See “The Middle Trade and Transit Corridor: Policies and Investments to Triple Freight Volumes and Halve Travel Time by 2030” (World Bank, 2023). 18 including through PPPs, in areas such as port development, roads, logistics, warehousing and e-mobility. MIGA, through the WBG Guarantee platform, stands ready to support these efforts and help mobilize foreign capital needed for imported equipment and services, as well as for the development of infrastructure projects related to the Middle Corridor. The main transportation results indicator would be the number of people with access to improved transport infrastructure. 50. The WBG will also explore supporting Azerbaijan in developing its digital connectivity . Improved access to and use of digital connectivity is essential for growing the private sector, fostering innovation and productivity, attracting foreign investment, and enabling inclusive access to essential public and private services. The government has recently focused on reforms to stimulate the digital economy, with the Ministry of Digital Development and Transport (MDDT) responsible for organizing, coordinating, and implementing digital transformation initiatives. Azerbaijan also seeks to position itself as a significant node in regional digital connectivity, including through the Black Sea submarine cable which may include a fiber optic line. Building on past analytical work, IBRD will continue to provide advisory support to the MDDT and the newly established telecom regulatory agency to improve the institutional and regulatory environment and develop government datacenters. This may lead to a digital development project in the second half of the CPF period, focusing on strengthening digital connectivity, data centers and cloud infrastructure, strengthening standards and safeguards, improving digitalization across government and public services, improving digital skills, including for women, and appropriate implementation of emerging technologies such as AI. In this effort, the WBG will work with other international and private partners to attract investments in digital infrastructure. In particular, IFC will explore opportunities for private sector participation in fiberoptic rollout and data centers, as well as potential restructuring and eventual privatization of the telecommunications sector. Progress toward digital connectivity will be measured by an increase in the number of people with access to broadband internet. 51. There is a significant overlap and synergy between activities supported under HLO1 and HLO2. Most activities will be structured to both support economic growth and address climate impacts. Improving the electric grid and strengthening agriculture efforts under HLO1 will contribute significantly to economic diversification and improved productivity. At the same time, under HLO2, improving public transportation solutions will contribute significantly to reducing carbon emissions. Digital solutions will be particularly important in both energy and agriculture reforms. Strengthening the financial sector will help to increase investments in both climate finance and agriculture. And in a more general way, improving employment opportunities will help increase resilience among the population. 3.4 Implementing the FY25-29 Country Partnership Framework 52. The IBRD program is expected to gradually expand. As of early December 2024, there were only two ongoing IBRD operations– in employment and transport - totaling US$176.1 million in undisbursed funds. Over the next two years, the indicative IBRD pipeline includes 4-5 new operations requested by the government, averaging about US$250-400 million per year, about half in FY25 and half in FY26. Beyond this, the WBG will seek to identify further interventions with the government through longer-term multi- phase engagement plans. During this initial period, the WBG will engage in complementary analytic support focusing on the low carbon transition and connectivity, water, finance, and digital development, 19 which may lead to additional investment operations in the second half of the CPF. If lending proceeds at a steady pace, IBRD lending for the five-year CPF period could amount to US$1.0-1.5 billion.9 Table 3: Indicative IBRD Pipeline for FY25-26 10 Amount Project (US$ million) Employment Support Project – Additional Financing 150 Azerbaijan Scaling-up Renewable Energy Project 225 (as part of the regional MPA) Competitive, Resilient Agriculture and Irrigation Project 400 Livable Baku 100-300 53. IFC and MIGA expect to expand their engagement. Currently there are seven IFC lending and equity investment operations totaling US$47 million in two banks – Access Bank and Bank Respublika. In close collaboration with IBRD and MIGA, IFC will continue to look for investment and advisory opportunities in renewable energy, transport, and the financial sector, and potentially deepen its engagement in water (including desalination), the digital economy, agriculture, e-mobility, and developing the Middle Corridor. As these areas develop, the IFC will consider extending investment support, potentially up to US$200-500 million during the CPF period. In addition, IFC has also been cooperating with the State Oil Fund which committed US$350 million in three funds managed by IFC’s Asset Management Company and new commitments will be explored. MIGA’s efforts, through the WBG Guarantee platform, will seek opportunities to support the government of Azerbaijan and SOEs in the areas of energy, water, urban transport, and Middle Corridor infrastructure development needs. 54. During the CPF period, IBRD, IFC, and MIGA will continue fostering synergies, working closely together to coordinate efforts, catalyzing funding, and leveraging the impact of the One WBG approach. This would initially focus on building joint programs in energy and water with coordinated, phased, joint or linked investments. In these areas, IBRD will support the government in improving sector laws, guidelines, and processes, as well as public investments efficiency, while the IFC and MIGA will engage with the private sector to empower them to make best use of these reforms through finance, PPPs, FDI, and other support. Other areas where close cooperation between WBG members would be pursued include the areas of sustainable finance, cross-border connectivity and logistics, agribusiness, and the digital economy. IFC operations will be enabled by WBG policy dialogue in these areas, e.g., adoption of green taxonomy for sustainable finance, and open banking initiatives for digital financial services. Through the WBG Guarantee Platform, the suite of guarantee instruments available from IBRD, IFC and MIGA to support investments will be coordinated and processes streamlined. The WBG Guarantee Platform will aim to support investments in renewable energy and energy efficiency as well as foreign investments that enhance competitiveness and stimulate job creation. 9 These base case amounts are tentative. Lending levels may be lower if demand and reform momentum weaken. At the same time, there is a possibility that demand could be even higher. Given that no Development Policy Operations are envisaged, in a high case the five-year lending envelope could reach up to about US$2.3 billion. Actual IBRD lending will depend on various factors including country and program performance, global economic developments which could affect IBRD or a country’s financial capacity, and demand by other IBRD borrowers. 10 Employment Support AF was approved in July 2024. Separate urban mobility and/or water projects may also be prepared rather than as part of the Green and Resilient Cities Program to reduce project complexity. 20 55. Over time, the WBG will try to move toward a multi-phase programmatic approach in key areas. While the nature of WBG engagement will depend on discussions with the government and may vary from sector to sector, the idea is to move toward a situation where WBG engagement is planned and phased over a long period, including through analytical work and investment operations. In energy, this would mean a comprehensive and phased approach to supporting energy policy reforms, distribution infrastructure, and renewable energy investments, all within a wider regional program. In urban development, this would mean taking a sector-wide view encompassing all the various elements of a sustainable approach, including planning, addressing legacy pollution, housing, water, and transport. As regards to instrument types, most operations are expected to continue to be extended as investment loans. However, where fiduciary systems and data availability allows, IBRD will explore extending results- based operations. 56. The WBG will aim to deepen its operational capacity support. The portfolio performance and procurement track record has been healthy with no IBRD problem projects and the disbursement ratio exceeding 20 percent over the past two years. However, with a relatively new and growing portfolio, it is expected that the disbursement ratio may decline in the first few years as new programs are launched, with institutions unfamiliar with IBRD rules and procedures. The WBG will continue to use the established system of monitoring the lending and ASA program through joint portfolio reviews and deep dive exercises. New IBRD loans are expected to include technical assistance components to strengthen capacity. IFC advisory services will have an increasing link to potential investment operations to enhance impact for private investment in the economy. 57. Analytic work will be consolidated under fewer focus areas, and will be more targeted and connected to ongoing or potential investments. In recent years, the WBG has invested in both broad country analytics, e.g., the SCD, the CEM, and the CCDR – as well as a large set of applied but somewhat fragmented work including on offshore wind, public finance management, domestic resource mobilization, financial sector, energy, water security, and smart villages. These have been critical to help set the stage for scaling up our engagement. Going forward, it will be important to build on broad foundational analytic reports to dig deeper in the understanding of particular challenges and how to operationalize the needed transition, linking findings to investments when possible. Where feasible, analytic work will be consolidated into programmatic, multi-sectoral programs, for example through a low carbon transition and connectivity Programmatic ASA. Analytic and advisory services will continue to be supplemented by trust funds, notably through the EU-funded Azerbaijan Rapid Technical Assistance Facility Trust Fund and the SECO-funded Azerbaijan Financial Sector Modernization Project 3. The WBG will continue to explore the potential to supplement these efforts through Reimbursable Advisory Service programs. 58. Contributions to Global Challenges. The proposed CPF program would make important contributions to, and benefit from, at least three global challenges under the Evolution Roadmap. The proposed program provides a strong emphasis on facilitating energy transition, efficiency, and access by improving Azerbaijan’s energy efficiency and transmission of renewable energy. Importantly, this is part of a regional MPA to share renewable energy solutions and would be a key element in creating a green energy corridor to Europe. The program provides a strong emphasis on strengthening water security and climate adaptation including improving irrigation in agriculture and access to finance by famers, as well as strengthening urban/water resilience and more effective water policies and institutions. The program would also make an important contribution to decarbonizing transportation. On accelerating digitalization, the WBG will explore helping Azerbaijan to build out its fiber optic network, establish in- country data centers and servers and support digital training and data safety. As the Azerbaijan digital 21 program is still under design, it is expected to benefit and be shaped significantly by knowledge exchange under the global program. 59. Gender. Given the highly selective nature of the proposed engagement, gender disparities will be addressed primarily within sectoral operations where there is potential for progress. The ongoing IBRD projects include specific features to increase women and youth labor force participation. The ongoing Employment Support Project specifically targets unemployed women and youth as priority beneficiaries. The ongoing Regional Connectivity Project includes supporting roadside facilities and markets designed to facilitate economic opportunities for women and requires that at least half of the business and training beneficiaries are women. The ongoing IFC investment in Bank Respublika specifically supports women entrepreneurs’ access to finance. Looking forward, new IBRD and IFC investments will continue to engage youth and support women’s empowerment, including specific indicators related to gender inclusion and strengthening women’s labor participation. Gender issues will also be included in relevant analytic and capacity support. 60. Institutional Strengthening. The WBG program will aim to strengthen institutions and policies within all the identified objectives. In energy, we will work closely with Azerenerji to strengthen tariff policy and institutional capacity to utilize renewable energy. In water, we will work closely with AZWRA to develop a national strategy for the water sector as well as improve the regulatory and tariff framework. In the financial sector, the WBG will be working closely with CBAR to improve risk-based supervision and regulatory oversight, as well as expand digital financial services and payment systems. The WBG will also work closely with commercial banks and corporates to strengthen their approach to climate finance. In transportation, the WBG will help strengthen the financial sustainability and decarbonization of the road sector as well as the rationalization of the rail sector. In digital development, the WBG will continue to provide advisory support to the Ministry of Digital Development and Transport (MDDT) and the newly established telecom regulatory agency to improve the institutional and regulatory environment. The WBG will also continue to provide advisory support to the government on public financial management. Within all these areas, the WBG will assist the government to strengthen competition and the role of the private sector, including through the use of PPPs. 61. Partnerships with other financial institutions. The CPF will be implemented in close collaboration with other bilateral and multilateral partners to maximize development impact. In the energy sector, the assistance under the proposed Azerbaijan Scaling-Up Renewable Energy Project will be coordinated with other multilateral development banks active in the energy sector, including the EBRD, the EU, and the ADB. To this end, the WBG will explore establishing a working group of donors in the energy sector. The program will pay particular attention to how it can help support and catalyze investments across partners and mobilize capacity (for example, by improving energy transmission infrastructure and policies, which will enable renewable energy investments to be more viable). The possible engagement in water provides further collaboration opportunities. If there is government interest for WBG support, the WBG will seek to establish a National Water Platform, which would bring together government, development partners, and the private sector around a shared vision. The pilot vocational training certification supported under the AF Employment Support Project will be coordinated with the ADB, which is active in vocational support. The WBG’s urban work builds on the urban strategy supported by UN-Habitat. The urban mobility work would be prepared jointly with other donors involved such as EIB and EBRD. The CPF will seek to complement the engagement of other partners including the International Monetary Fund (IMF) on the financial sector and several multilateral and bilateral partners on digital development. 22 IV. MANAGING RISKS TO THE CPF PROGRAM 62. Table 4 assigns risk ratings to the CPF program using the World Bank’s Systematic Operations Risk-Rating Tool. The overall risk is Moderate, after mitigation. Table 4: Risk Rating for CPF FY25–29 Risk Categories Rating (H, S, M, or L) Political and governance M Macroeconomic M Sector strategies and policies S Technical design of project or program M Institutional capacity for implementation and sustainability M Fiduciary M Environment and Social M Stakeholders M Overall M Note: H = High; S = Substantial; M = Moderate; and L = Low. These levels are after mitigation. 63. The risk related to sector strategies and policies is rated substantial. Although the government has indicated its intention to move to a new and greener growth model, there are likely to be substantial and unpredictable headwinds in moving specific sector plans to proposed investments and proposed investments to approval and implementation due to vested interests in the continuation of the current oil-driven state-centric model. The main mitigation measure is to maintain close dialogue with the government to identify sectors where there is a shared vision, and provide analytical work on improving the efficient and transparent functioning of sector policies, institutions, and data. The IBRD and IFC will carefully assess the institutional and regulatory environment before launching new operations. Where applicable, the WBG may discuss with the government the potential to establish longer-term programmatic support to provide more stability to the program. Where traction is not forthcoming, the WBG will retain a high level of flexibility to shift its engagement to more promising areas. 23 Annex 1: CPF Results Framework FY25-29 Higher Level Outcome 1 (HLO1) - Increased Resilience and Sustainability Continuation from Previous CPF: This HLO continues the achievements of the previous CPF focus area 1 objectives on service delivery. While most of the same sectors are covered (e.g., energy, water, agriculture), this HLO places a stronger focus within them on the emerging priorities of climate change, the transition to a green economy and increased private sector participation. HLO 1 Indicator: Reduced impact of climate change on people and the economy as measured by: Net GHG emissions (carbon dioxide [CO2] emissions, including land use, land use change, and forestry). Baseline: 54.033 million tCO2eq (2016) Source: Azerbaijan’s communication to UNFCC [Note: The CPF did not identify a high level and measurable indicator of progress on climate adaptation, but will explore adding this during the CPF if such a measure can be identified.] Rationale: Azerbaijan’s economy remains heavily dependent on fossil fuels, with oil and gas accounting for about 80 percent of Azerbaijan’s fiscal revenue, over 90 percent of exports, and one-third of GDP. Hydrocarbon resources helped Azerbaijan accumulate significant wealth and ensure economic growth. However, the economy has been impacted by external shocks due to volatile energy prices which has led to accelerating the green transition as the global community moves toward greener energy sources. The government recognizes the limits of the hydrocarbon-fueled growth model and has set ambitious goals to diversify the economy and shift away from hydrocarbons. Investing in renewable energy and green technologies will open new markets and create jobs, contributing to a more sustainable economic model that aligns with global efforts to combat climate change. At both mitigation and adaptation levels, Azerbaijan plans to take steps to address climate change and transition toward a more sustainable future. To help mitigate the impact of climate change, the country is developing its energy transmission and distribution infrastructure to facilitate the development of solar, wind, and hydroelectric power as well as implementing energy efficiency measures across industries, buildings, and transportation to reduce emissions. At the adaptation level, the country will need to improve the resilience of water and other urban services, as well as agriculture production, to climate shocks including potential water shortages. WBG engagement: The WBG will support Azerbaijan in its transition to a green economy through a coordinated, comprehensive, and phased program of technical assistance and investment operations with a strong focus on renewable energy, energy efficiency, and climate resilience. This includes technical assistance and investment in improving the ability of the grid to absorb renewable energy, followed by advisory and investment opportunities in renewable investment. On adaptation, the WBG will support a comprehensive approach to livable cities to help reduce carbon 24 emissions and enhance the resilience of the capital city Baku, and potentially other urban areas, to climate change. This would encompass a multi- sector approach to improving urban infrastructure and management of related utilities (e.g., transport, water, power, waste). The program will also support adaptation measures in agriculture and irrigation to make the systems more resilient to climatic stresses. The WBG will seek to engage in longer-term programmatic operations in energy and urban development sectors, which may potentially lead to follow-on investments in clean energy, energy efficiency, and water security in a broader term, including IFC investments and advisory as well as MIGA guarantees in renewables, energy efficiency, and transmission infrastructure. IFC will also explore support for green buildings program, eco-industrial zones, and solid waste PPPs. MIGA will seek to support water, urban transport and modernization of port and rail infrastructure. Associated Sustainable Development Goals (SDGs): SDG 6 Ensure availability and sustainable management of water and sanitation for all SDG 7 Ensure access to affordable, reliable, sustainable, and modern energy for all SDG 11 Make cities and human settlements inclusive, safe, resilient, and sustainable SDG 13 Take urgent action to combat climate change and its impacts Alignment with the WBG Global Challenge Programs: Energy Transition, Efficiency, and Access Fast-track Water Security and Climate Adaptation CPF Objective 1: Enhancing the shift to renewable energy Rationale: Azerbaijan plans to accelerate the development of renewable energy as a key strategy to achieve its commitments of greenhouse gas (GHG) emissions reductions of 35 percent by 2030 and 40 percent by 2050 (compared to 1990) under its Nationally Determined Contribution (NDC). Two key laws – on the Use of Renewable Energy Resources in Electricity Production and Efficient Use of Energy Resources and Energy Efficiency – were approved in 2021 to support a shift away from fossil fuels. To meet its targets, the government has indicated its intention to increase the share of renewable energy installed capacity from its current level of 20 percent (including hydropower) to 30 percent by 2030. Azerbaijan’s power system expansion plan includes adding 2,847 MW of renewable energy capacity by 2030. This includes 44 percent solar, 18 percent rooftop solar, 21 percent hydropower, and 17 percent wind. However, a key bottleneck is that the transmission grid needs to be modernized and expanded to absorb substantial amounts of renewables. Consequently, the government has requested the WBG to support their efforts on a major transformation of the energy matrix which requires the necessary transmission infrastructure, storage system as well as system operation and control enhancement for variable renewable energy integration. This in turn will enable international organizations like the WBG, working with the private sector, to attract the needed investments in renewable energy. WBG engagement: The WBG will continue technical assistance in the energy sector, building on past analytic support, on energy efficiency, variable renewable energy integration, geothermal direct use potential, distributed renewable energy, green hydrogen potential, and strengthening the 25 distribution grid for electric vehicles integration. Based on this, the, WBG will support the government with a major program to improve the ability of Azerbaijan’s electricity grid to integrate renewable energy. The proposed operation on scaling up renewable energy (AZURE, P505208), which is part of the regional Renewable Energy Multiphase Programmatic Approach, will finance infrastructure to enable the evacuation of 240 MW of wind power and improve the overall grid performance to integrate 1.8 GW of VRE. To help accelerate the adoption of renewable energy. The WBG will work in a coordinated manner across the institution on advisory, convening workshops, and potential investments in renewables, including a potential joint WBG offshore wind operation in second half of the CPF period. The program will lead to an increase in renewables in the energy mix, an increase in the capacity of grid to integrate renewable energy, and an improvement in the enabling environment for renewable energy private sector operators. Lessons learned and knowledge gaps: The WBG has been supporting Azerbaijan’s energy goals by providing technical assistance to inform the country’s plans on variable renewable energy, energy efficiency, and climate finance. The WBG informed the government’s strategy on electricity market reform (2023), operationalization of an energy efficiency fund (2024), and offshore wind development (2022) by delivering technical assessments and roadmaps. The CCDR provides a comprehensive knowledge foundation on the energy mix, renewables, and energy priorities. However, continued technical analytic work would be helpful on regulations and pricing of renewables to best incentivize their development. Adequate local capacity should also be in place for the environmental and social risk assessment and management, which is critical for the timely preparation and delivery of complex multiple stakeholder investment operations. Another lesson learned is that coordination between different implementing bodies (including potential private developers) is critical in complex energy operations. The WBG program will help the government enhance relevant capacity and strengthen the coordination role of the Ministry of Energy and/or a steering committee to ensure smooth preparation and implementation of potential investment operations. CPF Objective Indicators Supplementary Progress Indicators (SPI) WBG Program Indicator 1.1: GW of renewable energy capacity SPI 1.1: Projected annual emissions Ongoing engagements enabled (WBG Corporate Scorecard 2024-2030) reductions in net greenhouse gas (GHG) ➢ Promoting Regional Energy Transition and emissions reductions (tCO2eq/year) Transport Connectivity for a Sustainable Baseline: 0 (2024) South Caucasus (P505225) Result Target: 0.24 (2029) Baseline: 0 (2024) ➢ Energy analytic work Source: AZURE (P505208) Results Target: -327,000 tCO2eq/year (2027) Source: AZURE (P505208) Potential engagements Indicator 1.2: Increase in the share of ➢ Azerbaijan Scaling-up Renewable Energy renewable energy sources in total installed SP1.2: Transformer capacity added to the Project AZURE (P505208) energy capacity transmission system (Kilovolt-Ampere ➢ Potential IFC investments and advisory in (KVA)) renewable energy Baseline: 20% (2024) ➢ Potential guarantees in renewable energy Results Target: 34% (2029) Baseline: 0 (2024) through the WBG Guarantee Platform Source: Ministry of Energy, AZURE (P505208) Target: 1,000,000 (2027) Source: AZURE (P505208) 26 CPF Objective 2: Enhancing adaptation to climate change Rationale: While access to critical services such as water supply and sanitation, energy, and public transport has improved in Azerbaijan over the past decades, there is a need to retrofit them to withstand climate change and other hazardous shocks like flooding and coastal erosion and reduce their carbon footprint. Increasing water scarcity, salinization, and pollution makes water security a key priority for Azerbaijan to be addressed immediately and in a holistic way. Urban services are particularly vulnerable to climate change. The development of a green, resilient, and livable city requires coordinated interventions across multiple sectors, including improved urban planning, improved public spaces and more resilient housing, efficient and sustainable water supply and wastewater management, and improved green urban mobility. It is also increasingly important to ensure that the shared resources of the Caspian Sea are managed in an ecologically friendly manner. The agriculture sector, which is critical to Azerbaijan’s non-hydrocarbon economy, is already affected by the effects of temperature and precipitation changes which may cause yield reductions in major agricultural regions in the absence of adaptation measures. The country’s irrigation systems are characte rized by inadequate water delivery, high water losses, and salinization. Agriculture has vast adaptation potential that needs to be urgently unleashed to support vulnerable rural households and ensure food security and economic stability. Promoting agricultural practices that are resilient to climate variability, such as drought-resistant crops, climate technology, and improved irrigation techniques will help enhance resilience and adapt to the changing environment. The government has requested the WBG support for developing green and resilient cities and climate-smart agriculture, contributing to their ongoing adaptation measures. WBG engagement: The WBG will support the development of a climate-resilient and clean urban ecosystem through the proposed Livable Cities Program designed to help realize the government’s vision of a livable city and the proposed Competitive, Resilient Agriculture and Irrigation Program which would seek to strengthen agriculture and irrigation development through mainstreaming climate-smart agriculture technologies and adaptation measures as well as incentivizing sustainable water usage. The proposed multi-pillar engagement for green and resilient cities will comprise components on (i) green and resilient urban infrastructure and public space (including cleanup of oil polluted areas) as well as disaster and climate change resilient housing and public buildings; (ii) climate resilient and efficient water supply and wastewater management services; and (iii) clean, accessible & smart urban mobility. In close coordination, the IFC will explore ways to support private farmers and agribusinesses as well as urban services such as energy-efficient housing, including through PPPs, and reducing GHG emissions by enhancing public transport. Additionally, IFC will undertake climate financing for private sector, working with its banking sector clients. WBG will also jointly explore analytic and investment support in the area of water security and adaptation, including advisory support to ASWRA on a national water strategy and potential interventions such as mobilizing private financing for PPP in wastewater and water supply. MIGA will seek to deploy the instruments of the WBG Guarantee Platform to support climate adaptation interventions. The WBG will continue to support improving the environmentally friendly management of the Caspian Sea and jointly explore analytic and investment support. This objective will be measured by better access to disaster and climate- resilient public buildings, affordable housing, green and resilient urban infrastructure and public spaces, more efficient water supply and sanitation services, and better-managed public and non-motorized urban transport. Increased yields and areas with improved irrigation and drainage services would measure interventions in agriculture. 27 Lessons learned and knowledge gaps: Capacity for local-level climate-informed urban and rural planning and investment needs to be enhanced. The use of digital tools for smart urban management and service provision, including citizen feedback, will facilitate the achievement of the objective. All operations will be embedded with technical assistance to improve policies and institutions and capacity support. CPF Objective Indicators Supplementary Progress Indicators (SPI) WBG Program Indicator 2.1: Increased size of rehabilitated SPI 2.1: Strategy prepared for Water Supply Ongoing engagements: public spaces and Wastewater Management Program for ➢ Blueing the Caspian Sea GEF Project Azerbaijan (2027) (P181526) ASA Baseline: 0 (2024) ➢ Green, Resilient, and Clean South Caucasus Target: 2,000 Ha (2029) SPI 2.2: Number of digitally enabled urban (P500688) ASA Source: Livable Cities Program management systems ➢ South Caucasus Climate Action Support (P180447) ASA Indicator 2.2: Number of disaster and climate- Baseline: 0 (2024) ➢ IFC Transaction Advisory to government on resilient public buildings Target: 2 (building inventory and desalination plant PPP (609177) management and emission MVR) (2027) ➢ IFC support to Bank Respublika on climate Baseline: 0 (2024) Source: Livable Cities Program finance Target: 15 public buildings retrofitted for energy efficiency and seismic strengthening SPI 2.3: Landowners with access to improved Potential engagements: (2029) irrigation and drainage services ➢ Green and Resilient Cities Program Source: Livable Cities Program (Livable Baku) (disaggregated by gender) (including water and urban mobility) ➢ Competitive, Resilient Agriculture and Indicator 2.3: Number of people provided with Baseline: 0 (2024) Irrigation Project Investment Project improved water supply services of which (%) is Target: 146,000 of which at least 15% Financing (IPF) safely managed women (2028) ➢ Joint WB/IFC analytic and investment Source: Agriculture Competitiveness and support on water security and adaptation Baseline: 0 (2025) Irrigation Project ➢ IFC support on water desalination Target: 1.5 million people in Baku and ➢ IFC support for green buildings program, one peri-urban area (2029), of which 90% is SPI 2.4: Number of housing/water PPP eco-industrial zones, solid waste, and non- safely managed. mandates signed with clients revenue water reduction PPPs Source: Green and Resilient Cities Program ➢ Possible IFC engagement in e-mobility Baseline: 0 (2024) ➢ MIGA possible mobilization of private Target: 1 (2027) capital into public transport and other Source: IFC resilient infrastructure 28 Indicator 2.4: Increase in yields of key crops in farms benefited from improved irrigation SPI 2.5: Value of climate financing via services (%) financial intermediaries Baseline: 0 (2024) Baseline: 0 (2024) Target: US$60 million (2029) Target: 20% (2029) Source: IFC Source: Agriculture Competitiveness and Irrigation Project Indicator 2.5: Volume of water treated by a greenfield desalination facility supported by IFC (million m3) Baseline: 0 (2024) Target 100 million m3 (2029) Higher Level Outcome 2: Increased Productivity and Better Jobs Continuation from previous CPF: This HLO builds on the results achieved under focus area 2 of the previous CPF and highlights continuity in supporting growth and competitiveness through improved connectivity, private sector development, and job creation. HLO 2 Indicators: (1) New and better jobs, as measured by: Number of jobs in sectors outside of agriculture Baseline: 3,186,000 (2023) Source: State Statistical Committee (2) Productivity as measured by: Value added per worker for micro, small and medium enterprises (nominal) Baseline: 46,394 Manats (2022) Source: State Statistical Committee 29 Rationale: Supporting productivity and firm growth is essential to allow for quality job creation on the demand side while, on the supply side, it is key to have a workforce with the appropriate skills. Increasing productivity in turn requires a combination of policy reforms to strengthen competition as well as improvements in areas such as access to finance, technology adoption, and innovation and smart infrastructure. The government is taking measures to improve the business environment to stimulate private sector participation and job creation and provides financial and technical assistance to small and medium businesses through several mechanisms. The self-employment program provides access to employment for the most vulnerable people. In addition, strengthening transport and digital connectivity both to support inclusive growth within Azerbaijan and to take advantage of increased trade and services potential is paramount. Another potential source of inclusive growth and higher- quality jobs is agriculture, which, while employing most of the population, remains at low-value production. A well-managed public sector should ensure a regulatory environment conducive to business development to attract investment, encourage entrepreneurship, and lead to job creation. WBG engagement: Engagement with the authorities in the areas of growth, productivity, and private sector development has been limited in recent years. Thus, proposed interventions are selective, driven by counterpart demand in areas in which there is traction at the moment as well as advocacy efforts to tackle more ambitious changes. The WBG will continue and deepen past and ongoing activities to support self- and formal employment, including in the private sector, as well as to enhance access to finance, a key constraint for the private sector. The WBG will also consider the potential for regional development, including through analytic support on policies and procedures for facilitating cross-border trade, and transport connectivity. The WBG will continue to provide analytic and advisory support on strengthening digital development, potentially leading to an operation in the second half of the CPF. The program will continue to assist the government in ensuring public sector management is business friendly with a focus on, inter alia, improving revenue mobilization and the efficiency of public spending, both in government and SOEs. Support for agriculture will continue to be provided under HLO1. Associated SDGs SDG8 Promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all SDG9 Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation SDG10 Reduce inequality within and among countries Alignment with the WBG Global Challenge Programs: Accelerating Digitalization Food and Nutrition Security 30 CPF Objective 3: Improving the business environment and access to employment Rationale: The government aims at moving individuals from social assistance to the labor market, enhancing workforce skills, and improving the efficiency of the active labor market measures through greater private sector involvement and social programs for the most vulnerable groups of the population. A central element in creating a more dynamic economy and better jobs is to help strengthen the financial and private sectors. After restructuring following the crisis of 2015-2016, the financial sector is stable but remains small and insufficiently diversified, and MSMEs continue to have difficulty accessing funds. While the number of accounts and the use of cards has surged in recent years, the cost of financing and collateral requirements because of risk aversion remains a challenge for both individuals and firms. It is also important that the public sector is functioning efficiently and transparently in a manner that helps to empower and not hold back the private sector. Beyond improving the conditions for more dynamic growth, it is equally important to ensure that access to employment opportunities is widespread. Unemployment is low (5.6 percent in 2022), but is concentrated in low-wage areas and labor market outcomes are particularly challenging for women, youth, and IDPs. The labor market challenges that need to be urgently addressed include inadequate skills among the labor force, a relatively high share of low-wage agricultural employment (currently 36 percent of total employment), a high informality rate, and high unemployment among women. It is also important that the public sector is functioning efficiently and transparently in a manner that helps to empower and not hold back the private sector. The government has requested the World Bank's financial support to create more employment opportunities and ensure the sustainability and growth of private businesses. WBG engagement: The WBG will continue to support improvements in the business environment including follow-up to the SME survey and support for the launch of the new Business Ready Index in FY25. New analytical work on sources of growth and private sector development is envisaged to help inform authorities as they pursue the diversification agenda. If and when the government is ready, the WBG stands ready to scale up its support on PFM, PPPs, and SOE reform. Given that the financial sector continues to be relatively small and MSMEs continue to have difficulty accessing funds, the IBRD and IFC will continue to provide analytic and advisory support in the financial sector, including on payment systems and digital finance, to foster competition and innovation. IFC will also explore opportunities to strengthen ESG practices of financial institutions and corporates to reduce risks and increase their attractiveness to investors. The potential to mobilize foreign investments through MIGA and the WBG Guarantee Platform’s de-risking instruments into the financial sector will be explored. The WBG will also seek to ensure access to employment generation for the most vulnerable population and target groups through the ongoing ESP and additional financing thereto. In coordination, IFC has an ongoing operation to provide funding support for women entrepreneurs and will explore other opportunities to increase access to finance by MSMEs. The IBRD and IFC will also explore follow-on operations focused on expanding access to entrepreneurial finance and training. Progress against this objective will be measured by contributions toward increased employment and access to finance, particularly by women and other vulnerable groups. Lessons learned and knowledge gaps: The WB has prepared a Country Private Sector Development Report as well as a Financial Sector Assessment Program. As follow-up, a new programmatic engagement on the sources of growth will be leveraged to both tackle specific questions by the 31 authorities regarding opportunities for diversification and conductive policies as well as to promote needed business environment reforms (including through advocacy). The IBRD will also provide hands-on support for improving public sector management, including through its convening power and practical just-in-time notes. There is also a need to improve reliable country and firm level data which is critical to ensure effective decision making and structure the labor market effectively to serve a wider population. CPF Objective Indicators Supplementary Progress Indicators (SPI) WBG Program Indicator 3.1: Number of new or better jobs SPI 3.1: Number of vocational training Ongoing engagement: created attributable to WBG operations (WBG program beneficiaries who are certified ➢ Employment Support Project and AF Corporate Scorecard 2024-2030) (P171250) Baseline: 0 (2024) ➢ SPF: Improved Livelihoods for Internally Baseline: 0 (2021) Target: 1,300 (2027) of which 40% Displaced Persons in Azerbaijan (P178125), Target: 100,000 cumulative (2029) of (520) would be women recipient executed trust fund which 40,000 for women Source: Employment Support Project and AF ➢ SPF: Support for Recovery and Source: Employment Support Project (P171250) Peacebuilding in Azerbaijan (P178124) ASA (P171250) and other WB and IFC investments ➢ Advancing Governance Reforms in South (Employment project alone aims to deliver SPI 3.2: Vocational training certification Caucasus (P506706) ASA 70,000 jobs of which 28,000 women) mechanism developed and piloted ➢ F4D Azerbaijan Financial Sector Modernization Project 3 (P500383) ASA Indicator 3.2 Value of outstanding loans to Baseline: No (2024) ➢ IFC support to Bank Respublika, including MSMEs Target: Yes (2027) with gender focus Source: Employment Support Project and AF ➢ Partnership for market readiness grant Target: US$800 million (2029) (P171250) Of which: Potential engagement: SPI 3.3: Improved financial/banking policies ➢ Programmatic engagement on new sources Value of outstanding loans to women-led and institutions of growth SMEs supported by Bank Respublika ➢ Analytical work on public sector excellence Baseline: 0 for economic diversification Baseline: US$14.9 million (2021) Target: 2 improved financial/banking ➢ Support for financial sector, enterprises, Target US$67 million (2029) policies and procedures (2027) innovation Source: AIMM (ifc.org) IFC Source: Azerbaijan Financial Sector ➢ IFC/MIGA support for FDI attraction, PPPs, Modernization Program under F4D SOE privatization MSME lending support ➢ IFC climate finance investment to financial sector to be further channeled to local 32 enterprises and individuals, supported by advisory services ➢ IFC green buildings and green assets advisory work with banks ➢ IFC embedded finance, digital financial services ➢ IFC asset-based finance ➢ IFC Regional ESG Accelerator Advisory Program CPF Objective 4: Strengthening transport and digital connectivity Rationale: Developing the country’s transport and digital connectivity is a strategic priority for Azerbaijan which will contribute to sustainable economic growth, diversification, productivity, and improved quality of life of the population, as highlighted in the SCD Update. Firstly, enhanced transport infrastructure can significantly improve trade efficiency, help reduce spatial disparities, improve access to services, and increase labor mobility. Further, Azerbaijan aspires to become a key transit hub between Europe and Asia, using the country's strategic location along the Silk Road. The development of international transport and transit corridors passing through Azerbaijan is the country’s competitive advantage, which will enable Azerbaijani businesses to access global markets and help the country to enhance its export and transit capacity. Secondly, improved digital connectivity is essential for growing the private sector, fostering innovation and productivity, attracting foreign investment, and supporting the growth of the digital economy. It facilitates access to public services, which are increasingly moving online. The government has recently focused on reforms to stimulate digital economy development with the MDDT responsible for coordinating digital transformation initiatives and the creation of a digital technology regulatory agency. The government has requested WBG support on transport connectivity and digitalization, which will also contribute to Azerbaijan's commitments to reducing greenhouse gas emissions and combating climate change. WBG engagement: The WBG program currently supports transport connectivity through the IBRD funded Regional Connectivity Development Project (P174379) which aims to provide safe, efficient, and climate-resilient transport connectivity and improve market accessibility along the Salyan-Bilasuvar road corridor. Looking forward, the program will potentially include the WBG support to clean, accessible, and smart urban mobility. This would cover bus sector reform, expansion of Baku metro and improved NMT infrastructure. Furthermore, the WBG work program will build on the previous ASA on regional connectivity infrastructure development (submarine connectivity to Europe and Central Asia via the Black and Caspian Seas and terrestrial connectivity between neighboring South Caucasus countries) to help unlock the potential of the Middle Corridor for trade and transit. To this end, the WBG program could include helping to improve cross-border processes and logistics, including potentially helping Azerbaijan expand the port of Baku. IFC and MIGA will explore supporting e-mobility as well as mobilizing private capital and PPPs for ports, road, rail, and logistics. On digital connectivity, the WB will build on past analytic work and provide advisory support to MDDT and the newly established regulatory agency on improving the digital institutional framework. This may lead to a potential digital development project in the second half of the CPF 33 period, focusing on strengthening digital connectivity, data centers and cloud infrastructure, strengthening standards and safeguards, improving digitalization across government and public services, improving digital skills, and appropriate implementation of emerging technologies such as artificial intelligence. In coordination, IFC will explore opportunities for private sector participation in fiberoptic rollout and data centers, as well as potential restructuring and eventual privatization of the telecommunications sector. Progress toward digital connectivity will be measured by an increase in the number of people with access to the internet. Lessons learned and knowledge gaps: The WB’s major cross-regional study on the Middle Trade and Transport Corridor (P180322, 2023) provides an analytic basis for an engagement. However, the development of the Middle Corridor is a major geopolitical initiative and, as such, requires strong coordination with public and private sector stakeholders in the region and beyond, which has been a challenge so far. Based on the past successful experience (TANAP), the WBG will take an active role in convening international stakeholders and potential investors in regional and international transport and digital infrastructure to help the countries align activities and procedures across the whole region. Furthermore, attracting private sector investment into digital connectivity and data infrastructure will require strengthening of the digital legal and regulatory environment, including strengthening of the newly established telecom sector regulatory body. CPF Objective Indicators Supplementary Progress Indicators (SPI) WBG Program Indicator 4.1: Number of people that benefit SPI 4.1: km of roads improved with Ongoing engagement: from improved access to sustainable transport additional climate resistance measures ➢ Regional Connectivity Development Project infrastructure and services (WBG Corporate addressing flooding risk (P174379) IPF Scorecard 2024-2030) ➢ Enabling Digitization in the South Caucasus Baseline: 0 (2021) (P506865) ASA Baseline: 0 (2021) Target: 56 km (2026) ➢ Promoting Regional Energy Transition and Target: 100,000 (2027) Source: RDCP (P174379) Transport Connectivity for a Sustainable Source: RDCP (P174379) South Caucasus (PRESTO) (P505225) Indicator 4.2: Millions of people using Potential engagement: broadband internet (WBG Corporate Scorecard ➢ Green and Resilient Cities Program (urban 2024-2030) mobility) ➢ Port Baku Expansion Project Baseline): 8.8 million, of which women ➢ IFC support for electric mobility 4.2 million (2023) ➢ IFC private mobilization in transport sector Target: 9.4 million, of which women (logistics, rail, roads, port) 4.6 million (2029) ➢ IFC digital financial services program Source: International Telecommunications ➢ MIGA possible guarantee for private sector Union financing of the connectivity, including Middle Corridor projects 34 Annex 2: Completion and Learning Review of the CPF FY16-FY21 for Azerbaijan Country Partnership Framework CPF FY25-FY29 Board discussion: January 23, 2025 CPF FY15-FY20 Board discussion: July 21, 2015 (Report No. 95860) CPF Performance and Learning Review: February 6, 2020 Period covered by the Completion Learning Review: CLR covers the period of FY16-FY21. I. INTRODUCTION 1. This Completion and Learning Review (CLR) assesses the implementation of the World Bank Group’s (WBG) Country Partnership Framework FY 2016-2021 (CPF) for the Republic of Azerbaijan discussed by the Board of Executive Directors on July 21, 2015 (Report No. 95860). The CPF results framework (RF) was updated at the Performance and Learning Review (PLR) of March 5, 2020 (Report No. 135627-AZ). This update reaffirmed the priority areas of the CPF, adjusted the program to reflect changes in the country context and the CPF program, and extended the CPF by one year until FY21. The extension continued through FY22 aligning with the waiver on the WBG’s prolonged country engagement cycle due to the COVID-19 pandemic. A new CPF was deferred until the potential new WBG country program began to take shape in 2023 after the government revised the debt-to-GDP ratio and opened space for increased foreign borrowing. The CLR additionally reflects on outcomes yielded by the continued implementation of the program beyond the formal CPF period, through FY24. 2. The CPF has supported Azerbaijan on its path to sustainable, inclusive, private-sector-led growth. It was formulated when the country faced slow growth caused by an undiversified economy, large footprint of the state and low private sector participation as well as limited accumulation of human capital. Informed by the 2015 Systematic Country Diagnostic (SCD), the CPF supported the WBG's twin goals under two focus areas, that is, Public Sector Management and Service Delivery and Economic Competitiveness. It aligned with Azerbaijan's Vision 2020 and the Strategic Roadmap11 for reducing oil dependence and increasing resilience to external shocks and stayed consistent with the National Priorities for 203012 and the 2022-2026 Socio-Economic Development Strategy13 (SEDS, 2022) that targeted sustainable high growth, climate action, and a low carbon transition. The CPF emphasized gender equality, climate change, citizen engagement, and private capital mobilization, with governance and gender equality as cross-cutting themes promoting women's empowerment, transparency, accountability, rule of law, financial inclusion, and an improved business environment. 3. The economy faced several shocks since the start of the CPF in FY16, resulting in a shift in government policies. The 2015 oil price drop led to a recession in 2016, shrinking GDP by 3.1 percent, and thereafter, to currency devaluation, inflation, a credit crunch in the financial sector, and an ensuing banking crisis. The government shifted its focus from long-term growth to immediate macroeconomic stability, tightening fiscal policy, adopting fiscal rules to reduce volatility, and addressing financial vulnerabilities. The government limited external borrowing, and a debt management strategy was adopted in 2018 to mitigate foreign debt exchange rate risks. After the recession, growth recovered but slowed down and was further hit by the COVID-19 pandemic, resulting in a 4.2 percent GDP decline in 2020. The economy recovered in 2021 and 2022, but the commodity price volatility and the 11 The Strategic Roadmap on National Economy and Key Sectors of the Economy of Azerbaijan (January 2017) aimed to help reduce Azerbaijan’s dependence on oil and gas and strengthen its resilience to external shocks through investments in human capital, physical infrastructure, and stronger institutions. 12 Azerbaijan 2030: National Priorities for Socio-Economic Development (February 2021) include a steadily growing, competitive economy; a dynamic, inclusive society based on social justice; areas of modern innovations and competitive human capital; clean environment and green growth. 13 Strategy of Socio-Economic Development of the Republic of Azerbaijan for 2022-2026, July 22, 2022 36 pandemic are likely to have negatively affected poverty reduction, undermining the country's previous achievements on the twin goals. However, due to the lack of data, it was not possible to estimate the scale of the impact. 4. The CPF remained responsive to the government’s demands and priorities in a volatile environment. The program was adjusted to help the government develop and implement measures to address emerging challenges and build resilience to shocks. As the government’s borrowing policy changed, several originally proposed projects were dropped, and the new Trans-Anatolian Natural Gas Pipeline (TANAP) project14 (P157416, 2016), a major regional initiative, was added to the program in 2018. The portfolio was adapted to offset the negative impacts of COVID-19 pandemic. Specifically, Investment Project Financing (IPF) approved in March 2020 - additional financing for the Judicial Services and Smart Infrastructure Project (JSSIP, P144700) and Employment Support Project (ESP, P171250) - placed a strong focus on digitalization and job development. All new activities, including the Regional Connectivity and Development Project (RCDP, P174379) approved in May 2021, adhered to the WBG's "Saving Lives, Scaling-up Impact, and Getting Back on Track" approach paper. 5. In an environment of limited lending, the CPF placed a stronger focus on an advisory services and analytics (ASA) program. It was expanded to help the government address emerging needs, support policy and strategy formulation, and allow the WBG to maintain policy dialogue in priority sectors and explore new areas for potential investments. The ASA program has contributed to the achievement of the CPF objectives, although some activities have yet to lead to major reforms or a lending operation. 6. The overall CPF development outcome is rated as Moderately Satisfactory, with Moderately Satisfactory performance under both focus areas. The program was strong on enhancing Azerbaijan’s capacity in strategic planning, macroeconomic management, and crisis preparedness, resulting from institutional changes and policy measures implemented in line with WBG recommendations. Budget execution processes have slowly but steadily improved under the Public Finance Management (PFM) action plan supported by the CPF, as did service delivery. The program also helped improve connectivity with modernized roads and maintenance systems, expand access to energy markets, ease regulatory burden and enhance access to finance for small and medium enterprises (SMEs). Agricultural productivity increased between 2015 and 2020 due to support to agribusinesses, value chain development, and productive partnerships. More jobs were created for the vulnerable population. While the program did not achieve the intended results associated with railway connectivity, it yielded substantial positive institutional changes in the sector. 7. The overall WBG performance is rated Good, based on the design of the CPF and program implementation. The flexible design of the CPF enabled the WBG to respond to the government’s emerging needs and priorities. As the IBRD lending declined due to the government’s reduced borrowing, the program placed a stronger focus on ASA to maintain the CPF relevance and effective client engagement. Close monitoring of the portfolio that comprised eleven inherited IBRD projects as of FY16 and six new IBRD projects, ensured smooth implementation and good performance. Some project implementation delays stemming from COVID-19 lockdowns had no long-term impact on the achievement of project development objectives as the use of digital procurement technologies ensured smooth procurement flows and timely disbursements in all projects. IFC’s indicative baseline investment program of long-term finance (US$100-150 million) did not materialize as planned due to the market conditions and lack of projects meeting IFC investment criteria. Consequently, the IFC’s committed portfolio declined, dropping from US$73 million in FY16 to US$36 million in FY21. In this environment, IFC provided advisory services that helped improve investment climate, agricultural competitiveness, and access to finance for farmers and MSMEs, develop and roll out electronic and digital financial services, improve corporate governance and operations of commercial banks. In the financial sector, IFC supported selected private banks with capital, currency hedge instruments, and 14 TANAP, which, along with the South Caucasus Pipeline Expansion and TAP form the Southern Gas Corridor (SGC), supported Azerbaijan’s gas export market diversification and improved security of Türkiye's and South-East Europe's energy supply. 37 strategy formulation. MIGA issued its first non-honoring guarantee in Azerbaijan in June 2018 to support the Southern Gas Corridor Closed Joint Stock Company (SGC CJSC) of Azerbaijan, raising commercial debt for the TANAP transaction. Given the successful implementation of the project (ahead of schedule and within budget), the commercial debt facilities were terminated, and the MIGA’s coverage was cancelled in September 2019. II. PROGRESS TOWARD CPF DEVELOPMENT OUTCOMES 8. The overall CPF performance is rated Moderately Satisfactory based on an assessment of nine objectives and 31 outcome indicators laid out in the PLR RF.15 Two objectives were fully achieved, five mostly achieved, and two partially achieved (Table 1). At the PLR, the RF was refined to add one new objective (Objective 2.2), introduce 15 new and drop seven indicators, and modify others to, among other things, emphasize gender as related to the community‐level micro projects, legal aid, and mediation services. For FY20 projects, intermediate indicators were introduced with end targets extending beyond the CPF period. The CLR acknowledges that the end target dates for some indicators were not changed in PLR from FY20 to FY21, which would have aligned them with the extended CPF period. In those instances, the outcomes are assessed based on the status of those indicators reported as of the end of the CPF period (FY21) and the original PLR target date (FY2020).16 Detailed evaluation of progress against each target is provided in annex 2. Table 1: Overall rating of CPF Focus Areas and Objectives CPF Objective Rating Focus Area 1: Public Sector Management and Service Delivery – Moderately Satisfactory Strengthen economic resilience and medium-term strategic planning Mostly Achieved Support access to, and satisfaction with, public services Mostly Achieved Improve access to water, sanitation, and communal services Mostly Achieved Improve management of environmental assets Partially Achieved Focus Area 2: Economic Competitiveness – Moderately Satisfactory 2.1 Improve connectivity through development of transport networks Partially Achieved 2.2 Diversify Azerbaijan’s access to energy markets Achieved 2.3 Enhance access to finance for micro, small, and medium enterprises (MSMEs) Mostly Achieved 2.4 Reduce regulatory burden for small and medium enterprises (SMEs) Achieved 2.5 Enhance competitiveness of agriculture and rural development Mostly Achieved Overall Development Outcome Rating: Moderately Satisfactory FOCUS AREA 1: PUBLIC SECTOR MANAGEMENT AND SERVICE DELIVERY – Moderately Satisfactory Objective 1.1: Strengthen economic resilience and medium-term strategic planning – Mostly Achieved 9. The program helped enhance government’s capacity to respond to external shocks through institutional development and boosting strategic planning and macroeconomic management. The government established a Financial Stability Board in 201617 and capitalized the Azerbaijan Deposit Insurance Fund in early 2017 to strengthen crisis management and respond to threats to financial stability. In 2020, the Financial Stability Board was succeeded by the Economic Council that had a 15 From here on, RF refers to the one laid out in the PLR. 16 The same approach applies to the new indicators introduced at PLR stage with end target dates set for 2020. 17 President’s Decree on Creation of Financial Stability Board/Council chaired by the Prime Minister and comprising the Minister of Finance, CBAR Governor, FIMSA Board Chairman, State Oil Fund of Azerbaijan (SOFAZ) Chairman, Advisor to the President, and Minister of Economy – July 15, 2016. 38 broader mandate for strengthening macro and financial stability and formulating a development strategy. The program informed the PFM action plan approved in 2015 and partially implemented until expiration in 2018 (P156792). It led to improvements in budget execution processes and alignment of the budget classification with international standards. Audit coverage slightly improved and in 202018 accounted for 37 percent of the executed state budget expenditures, falling short of the originally defined target. Internal audit at the Ministry of Finance was not implemented, which, however, did not affect the coverage of expenditure scrutiny. 10. Public procurement has been bolstered through the operationalization of an e-procurement system. The Public Procurement Law amended in December 2018 allowed using e-procurement through a single web portal launched in March 2019. The e-procurement system for public procurement was put into operation in 2020. By 2022, the system had covered more than half of all competitive bids. The new Public Procurement Law enacted in February 2024 continues to support the e-procurement system. 11. Azerbaijan's banking sector resilience and financial stability improved significantly since the 2016-2018 banking crisis. The WBG support for the post-crisis stabilization process covered bank resolution, resolution of non-performing loans (NPLs), insolvency and debtor rehabilitation (P156337, P160238) with full compliance achieved as of 2020. 29 banks were operating in the market in 2020, down to 26 in 2022, compared to 45 in 2016. The NPLs were below the target of 10 percent, declining from 21 percent in 2015 to 6.2 percent in 2020, down to 4.5 percent in 2021, and 3.8 percent in 2022. In 2021, capital buffers were adequate and capital adequacy ratio of 19.1 percent was relatively high.19 IFC has supported a long-standing banking client with several instruments, including a loan for MSME onlending with a 4-year local currency financing (not readily available on the market since the pandemic started), a risk management swap and a trade finance line, as well as capacity building via advisory services (Bank Respublika, project IDs: 42638, 47054, 47622, 25773). 12. Budgeting processes and public debt management improved due to WBG support on strategic planning in public spending. The MOF established the Medium-Term Expenditure Framework (MTEF) Center (2019) and rolled out medium-term and program-based budgeting in three sectors:20 agriculture, education, and environment, planning to expand to sectors of healthcare, social protection, culture, youth, and sport (P168015).21 The government approved the regulations on preparations of MTEF22 in 2018, amendments to the regulation specifying the first three sectors in 2019, and an MTEF action plan in 2020. In 2018, the government adopted and made publicly accessible the medium-term debt management strategy for 2018-2022. A baseline report utilizing Public Expenditure and Financial Accountability (PEFA) (2022) served as the foundation for the MTEF Capacity Building Program, which has gained traction, enhancing the quality of the macro-fiscal framework and fiscal risks documentation. Objective 1.2: Support access to, and satisfaction with, public services – Mostly Achieved 13. Access, transparency, and efficiency of selected justice services have improved, achieving all key targets as sought by the program through the justice sector project (JSSIP). User satisfaction was measured along the dimensions of access, efficiency, and transparency, and beyond project-specific scope.23 It stood at 55 percent in 2017, 57 in 2020, 61 in 2022 and 67.2 in 2023, achieving the end target of 60 percent satisfaction across target stakeholders ahead of time. The number of beneficiaries of legal services stood at 34,388 in 2021, slightly falling short of the CPF intermediary target of 35,000. The number stood at 40,061 in 2022, 64,266 in 2023 and around 70,000 by June 30, 2024, showing an 18 Confirmed by the Chamber of Accounts (the supreme audit institution) through e-mail communication. 19 According to the reported Financial Soundness Indicators. 20 “Sector” also covers budget organizations that are not directly reporting to a line ministry. 21 Strengthening Medium-Term Budget Planning in Azerbaijan TA funded by SECO 22 Presidential Decree # 235 23 A series of surveys were conducted in 2017/18, 2019/20, 2022, and 2023. 39 increase from the baseline of 10,432 across all six court jurisdictions and overachieving the CPF target ahead of time. The share of women (48.1 percent) was slightly below the target during the CPF formal period, despite the impressive increase in the total number of females benefitting from these services. The new Law on Mediation passed in July 2021 mandated the use of mediation for economic, family, and labor disputes. As of December 2021, the share of disputes processed via mediation stood at 3.65 percent, which then rose to 10.43 percent by December 2023. 14. Access to and quality of infrastructure, services, utilities, and housing conditions improved for a targeted group of Internally Displaced Persons (IDPs). Building on successful past engagements, the program helped improve IDP living conditions in an integrated, sustainable, and community-driven way (IDP LSLP, P122943). It boosted the economic self-reliance of more than 288,000 direct beneficiaries with almost half (49.7 percent) being women. Surveys conducted for years 2016 and 2020 showed that in 2016, 92.7 percent of IDPs were satisfied with improved access to services, utilities, and infrastructure. The same indicator reached 94 percent by 2020. 15. The State Statistical Committee of Azerbaijan (SSC) enhanced its capacity for developing a National Statistical Development Strategy (NSDS) with WBG support. In 2019, the SSC developed the NSDS and a medium-term plan to support statistical system development in 2019–2030. Even though it had not yet been adopted as a formal instrument by 2021, the NSDS was a critical input for the formulation of the SSC projects for the development of official statistics outlined in the State Program for Improvement of Official Statistics 2018-2025. Based on the expected outcomes of the NSDS, SSC prepared a multi-year action plan with costed activities. The capacity of the statistical agency staff was enhanced to ensure successful implementation of the NSDS. These interventions through the recipient executed trust fund (TF) on formulation of a national strategy for the development of statistics for 2018-2030 (P161307)24 contributed to an improved Statistical Performance Indicator for Azerbaijan, which was at 86.4 percent in 2019, up from 53.8 percent in 2016.25 Considering all these aspects, CLR qualifies this CPF indicator as Mostly Achieved. 16. More employment opportunities were created for vulnerable populations, such as IDPs and women. Lending activities and value chains built under the Agricultural Competitiveness Improvement Project (ACIP, P122812) generated jobs for both direct and indirect beneficiaries. Value chain subprojects created 1,366 jobs, 78.5 percent of which were occupied by women. As a result of micro projects funded under the IDP project (P122943), a total of 8,556 IDPs, 58 percent of whom are women, were employed, accounting for 89 percent of the intermediate target of 9,600. Average income and value of assets among beneficiaries of economic livelihood programs funded through the program increased beyond the established targets. Positive externalities were yielded in short-term employment under the Bank-funded Azerbaijan Highway 3 project (P118023) as civil works on the highways generated around 25,000 person-months of employment. The contribution of the WBG program to job creation has continued beyond the CPF period. Notably, 1,481 person-month jobs out of a target of 4,000 have been created for local people by September 2023 under the ongoing RCDP. More jobs are being created for the most vulnerable groups through the ESP. 17. The CPF program enhanced the quality and efficiency of service delivery in the health sector. The ASA E-Health Strategy and Claims Management System Development (P175634), added to the program in the post-PLR period (hence having no formal outcome indicators in RF), helped strengthen the digital data exchange among healthcare institutions and improve the healthcare claims management system, shifting from manual processing to an electronic system.26 The State Agency for Mandatory Health Insurance followed WB recommendations throughout the implementation and 24 P161307 “Republic of Azerbaijan: National Strategy for the Development of Statistics for 2018-2030, including Detailed Institution, Human and Information, and Communication Technology Capacity Building Plans for 2018-2022” 25 Statistical Performance Index for 2013, the baseline year, is not available for Azerbaijan because the target was expressed in WB’s Statistical Capacity Index, which was in use since the 2000s until it was replaced by new statistical performance indicators introduced in the 2020s to better measure a country's statistical performance. 26 Also acknowledged by State Agency for Mandatory Health Insurance in correspondence with the Bank. 40 expansion of the agency’s integrated Picture Archiving and Communication System. The TAs also facilitated dialogue among government stakeholders on an implementation roadmap for the mandatory national health insurance scheme. Objective 1.3: Improve access to water, sanitation, and communal services – Mostly Achieved 18. Access to water and sanitation services has improved, as has operation and maintenance (O&M) capacity, mostly achieving the CPF objective and related targets. Through large-scale investments in water supply and sanitation (P096213 and P109961), a total of 67,000 new households received access to potable water, surpassing the CPF’s combined target of 60,000 households accessing water and sanitation services in 2018. Out of those, 52,000 households received both water and sanitary services, narrowly missing the target. By the end of 2018, water supply services had been commissioned in twelve rayons and sanitation services in ten rayons. Despite the overall positive outcomes, sanitation systems were not installed in two rayons due to a financial gap that was not closed by the government.27 Access to regular waste collection services has improved for 800,000 residents of five underserved districts of Baku through World Bank investments in solid waste management (P110679), increasing waste collection coverage to 79 percent of the metropolitan population of Baku in 2018, up from 60 percent in 2008, and bringing the number of served beneficiaries to 2,774,416 in the greater Baku area. 19. The program helped strengthen the O&M capacity of local water authority Azersu offices as well as solid waste disposal. Baku’s major landfill in Balakhani district was fully rehabilitated and extended, which ensured its sustainable operation in line with the EU Directive on the landfill of waste.28 While 132 dump sites (199 hectares) were closed, 9.7 million tons of landfill capacity was created, as targeted. The National Solid Waste Management Strategy (NSWMS) developed under the ARP/II-Integrated Solid Waste Management (P110679) was approved via a Presidential Decree in 2018. The O&M capacity for the management of water and sewage systems was enhanced in all 12 rayons through the provision of new O&M equipment and trained personnel. While the targets defined in the RF were mostly achieved, the sustainability of results yielded under the water and sanitation projects was hindered in the post-CPF period due to a lack of performance regulation and monitoring mechanisms that would ensure accountability of the water authority and its local subsidiaries. Staff turnover in the field and inadequate O&M budgeting have negatively affected the lifetime of new assets built under the project. To improve water resources management, the government established a new water resource agency in March 2023, which is currently developing new regulations and performance-based accountability mechanisms following recommendations of the WBG ASA on improving water security in Azerbaijan (P178906). 20. Access to basic services and key communal facilities was improved for rural communities through demand-driven and cofinanced investments. Through the Second Azerbaijan Rural Investment Project (AzRIP2, P144107), 1.7 million rural residents were provided with improved roads, water supply, irrigation, schools, and health services. Thus, 1.2 million people benefitted from improved access to markets and social services, 150,000 people from drinking water supply, and more than 50,000 children from rehabilitated primary schools. Access to critical infrastructure and services was enhanced by reduced travel time.29 The program helped enhance the capacity of communities for identifying investment needs and managing projects, mobilize local resources, and increase engagement in improving their living conditions. A digital platform that mapped all target communities and their conditions enhanced transparency of infrastructure and service provision. The World Bank program has contributed to the development and operationalization of “smart villages”, including 27 The financial gap resulted from Azersu’s decision to expand the coverage of water supply networks in all four project rayons and to increase the cost of sanitation systems in two rayons outside the project, which resulted in higher costs than estimated. 28 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:31999L0031 29 By endline survey, the average travel time to destinations was reduced to 12.6 minutes in 2018 from a baseline of 21.4 minutes. These average travel times were then weighted, based on the frequency of access to each location. Specifically, reductions occurred in travel to pre-schools (68.7 percent), secondary schools (55.7 percent), and community water supply points (58 percent), markets (37.55 percent), and district hospitals (24.5 percent). 41 through the recent ASA Azerbaijan Smart Villages Program: Inclusive and Innovative Approaches to Rural and Local Development (P179107), leveraging the community-driven model and expanding new broadband internet access to increase rural incomes, improve service delivery, and for digital services, and catalyzing broad discussion on sustainable, community driven, and climate-smart rural development among various stakeholders.30 31 Objective 1.4: Improve management of environmental assets – Partially Achieved 21. The government has developed national strategies and programs that include activities contributing to improved environmental management. The NSWMS developed under the Integrated Solid Waste Management Project (ISWMP) informed the Socio-Economic Development Strategy for 2022-2026 (SEDS), which included interventions on clean environment and green growth. Under the CPF, 132 informal dump sites (199 hectares) were closed to minimize the environmental impacts associated with non-sanitary waste disposal in Greater Baku. The Balakhani landfill was fully rehabilitated, extended, and operates in line with EU waste management and landfilling directives.32 The Tamiz Shahar state-owned Open Joint Stock Company established under the program operates the waste collection and disposal in the Greater Baku area. The NSWMS also guides the planned actions on preservation and recovery, through the restoration of sewage network, flood protection, and rehabilitation of pastures and farmlands. It also informs policy and investment decisions on improving solid waste management services across the country. The ISWMP facilitated private sector development in the recycling sector in the Industrial EcoPark, which, in 2019, hosted 14 companies near the Balakhani landfill. Following the WB recommendations, remediation, and rehabilitation activities, including redevelopment of several Absheron lakes (P166058) (Khojasan Lake), have been included in the Greater Baku Master Plan,33 promoting economic and employment opportunities, integrated urban planning, and improving quality of life. In 2020, out of AZN 273,3 million, about AZN 228 million, or 83.4 percent, was spent on cleaning of polluted lands, wastewater collection and treatment. The CLR acknowledges the discrepancy between the outcome and the targets under this objective as the latter go beyond the outcome definition, and considers the outcome as partially achieved based on its definition and the evidence on the program contribution toward achieving the objective. IFC supported IBRD on the development of the Offshore Wind Roadmap,34 which was adopted by the government in 2022.35 The CLR considers this as additional evidence of a result achieved beyond the CPF period, contributing to a clean environment. 22. TANAP positively contributed to the biodiversity agenda and culture. Twelve new species (nine fauna and three flora) were discovered, ten during the Environmental and Social Impact Assessment, and two during the biodiversity monitoring studies (2019), which concluded that one of the new species was endemic to Northeastern Anatolia and another belongs to an entirely new genus.36 During the Environmental and Social Impact Assessment, 154 archeological or cultural heritage sites were found, and over 1,000 archeological objects were unearthed during construction. All cultural finds are in museums for display and research. Three books have been published on archeological finds.37 30 https://www.worldbank.org/en/news/video/2023/11/06/applying-a-smart-village-approach-in-azerbaijan 31 https://mincom.gov.az/en/media-en/news/international-conference-on-innovative-approaches-to-urban-and-rural- development-smart-cities-and-villages-held1692 32 Report No: ICR00004491. A value engineering review confirmed the cost-effective approach for creating the required additional landfill capacity and comply with the related EU standards. 33 https://arxkom.gov.az/en/bakinin-bas-plani?plan=etraf-muhit. 34 P175716 Support to Azerbaijan Energy Sector Market Reforms and Offshore Wind Development ASA was implemented between FY20 and FY23 with financial support from the Energy Sector Management Assistance Program. 35 https://www.worldbank.org/en/news/press-release/2022/06/03/new-roadmap-to-help-unlock-7GW-of-offshore-wind- potential-in-azerbaijan-by-2040. 36 https://worldbankgroup.sharepoint.com/sites/news/pages/From-Acronym-to-Genus-How-a-World-Bank-Project- Introduced-a-New-Species-to-the-World-24092020-174155.aspx and https://www.proquest.com/openview/8adf3eafbd54c7e963847402542a461c/1?pq-origsite=gscholar&cbl=166139 37 https://books.google.com.tr/books/about/Anadolu_medeniyetlerinin_sakl%C4%B1_tan%C4%B1kla.html?id=Boyx0AEACA AJ&redir_esc=y and https://kutuphane.enerji.gov.tr/cgi-bin/koha/opac-ISBDdetail.pl?biblionumber=2043 42 FOCUS AREA 2: ECONOMIC COMPETITIVENESS - Moderately Satisfactory Objective 2.1: Improve connectivity through development of transport networks - Partially Achieved 23. The upgraded highways and modernized road maintenance systems have enhanced connectivity, reduced road user costs, and improved road safety. Road user costs were reduced beyond the target because of upgraded roads on the M4 Baku-Shamakhi highway (94 km) and M3 Yenikend-Shorsulu (48 km) under the Third Highway Project. For these roads, road user costs dropped to 70 percent and 77 percent of the baseline (100 percent), respectively, against the target of 90 percent. The road maintenance systems along the east-west corridor (M2) and M4 were modernized through the creation of three regional maintenance units and road maintenance facilities, institutional changes in the structure of road maintenance, and introduction of performance-based service-level contracts. The East-West transit time for trains decreased from 23 hours in 2014 (baseline) to 18 hours in 2020 but fell short of the target of 12 hours partially due to the delays in modernization of the signalizing and power conversion systems supported by the Rail, Trade, and Transport Facilitation Project (P083108). Objective 2.2: Diversify Azerbaijan’s access to energy markets – Achieved 24. The WBG investment in infrastructure supported Azerbaijan in expanding access to energy markets and strengthening connectivity and transit role. TANAP helped diversify the country’s gas exports markets, which was critical for the country’s macroeconomic recovery and fostering closer ties with Europe. Azerbaijan, along with other partners, entered into international agreements for the supply of gas to Europe.38 Gas deliveries to Europe started in December 2020, reaching a level of 6.2 billion cubic meters (bcm) per annum (p.a.) in January 2021. The target of 4 bcm per year of gas exports to European markets was surpassed with a slight delay in the completion of the Trans-Adriatic Pipeline (TAP), which was beyond the control of TANAP. As of September 30, 2021, annualized gas deliveries to Europe reached 7.4 bcm and stood at 8.2 bcm in 2022. Diversification of access to energy markets is usually a lengthy process and the fact that it occurred during the CPF cycle is regarded as a remarkable achievement. Notably, Independent Evaluation Group (IEG) assessed the relevance of the project objective to the CPF as Substantial and its achievement as High.39 Objective 2.3: Enhance access to finance for MSMEs – Mostly Achieved 25. Azerbaijan improved financial inclusion and enhanced the enabling environment for access to finance for MSMEs. Actions implemented under the IFC program included passing the Secured Transactions Law (2017) and security transaction regulations, launching the online registry of security interests in movable assets by the Financial Market Supervisory Authority (FIMSA)40 in 2018. This resulted in 53,263 secure interest notices published as of 2020, and 82,605 of 2021, exceeding the CPF target of 5,000 (2020). With IFC support (601347, 2016), the Central Bank of Azerbaijan (CBAR) launched the Instant Payment System in October 2020 with no formal users in 2020 due to the testing period, which affected the achievement of the target set for 2020. However, the number of users increased to 140,200 by December 2021, 242,022 in 2022, and reached 310,557 by November 2023. This result was reported with a delay due to the necessity of constructing infrastructure for the reliable execution of trusted protocols. However, the implementation of the envisaged activities commenced within the CPF period. The number of payment cards in the market increased from 5.3 million in 2016 to 9.6 million in 2020, and 16 million in October 2023, bolstering non-cash transactions, which in 2023 surged by 2.2 times compared to 2022. Domestic non-cash payments by cards stood at AZN 5 billion, 38 The Southern Corridor Summit Declaration (May 2009) signed by the Presidents of the European Council and the European Commission for the EU, the Presidents of Azerbaijan, Georgia, and Türkiye, and the Energy Minister of Egypt, in the presence of the representatives of Kazakhstan, Turkmenistan, and Uzbekistan. 39 IEG Implementation Completion Report (ICR) Review Report Number ICRR0022933 40 Established in February 2016 by President’s Decree No 760, FIMSA was a financial regulatory authority in Azerbaijan until November 2019 when it was suspended, and the registry was moved to the Central Bank of Azerbaijan. 43 with AZN 4.1 billion attributed to electronic commerce. This aligns with the expanding usage of credit cards by more individuals. In 2022, 2.99 million people over the age of 15 owned at least one card as compared to 2.1 million in 201741. Domestic card transactions constituted 54.7 percent of total non- cash transactions since the beginning of 2023. The adoption of the Law on Payment Systems and Services in August 2023 will positively impact the development of payment system providers and the introduction of new products to the market. 26. The Law on Agricultural Insurance developed with IFC support (600339, 2017) and adopted in 2019, allowed the Agrarian Insurance Fund (AIF) to provide insurance to agricultural producers. In 2021, AIF paid AZN 1.2 million and in 2022 – AZN 2.4 million42 to the producers due to the insured events43. The IFC’s Azerbaijan Investment Climate and Agribusiness Competitiveness Project (AICACP, 600496), new financial products and value chain financing were introduced as a direct mechanism for enhancing MSME financing. Notably, in 2017 local financial institutions introduced the value chain financing in their operations, and with 18 new financial products introduced, the value of facilitated finance was US$127,862,000 as of December 31, 2020, and US$330,371,000 as of December 31, 2021, increasing access to finance for MSMEs through local banks (further enhanced by a post-CPF period investment in Bank Respublika, project: BOP Respublika, 47054, in FY23). 27. The postal service authority AzerPost became a provider of financial services, enhancing access to finance across the country. Based on the new brand book and a marketing strategy produced under the IBRD Financial Services Modernization Program (FSMP, P125462), AzerPost rebranded seven branches in 2016 and intended to expand the process under a new IBRD project. The project did not materialize. However, AzerPost continued reforms guided by the FSMP-2 recommendations, which accounts for retaining this outcome indicator in the RF at PLR. The PLR confirmed its relevance given the impact of the WBG long-term program that supported AzerPost’s transformation and the government’s commitment to the reform. Licensed by the CBAR in 2010 under the WB’s previous engagement,44 AzerPost provides financial services which has led to major expansion of activities and increase in revenues. Financial services accounted for 57.8 percent in 2021, and 66 percent in 2023 of AzerPost's revenues. In 2021, 1,176 post offices delivered financial services and functioned as service agents45 for various partners, surpassing the target of 720 new agents. As the transportation network developed, easing access to post offices, the government opted to reduce the number of access points to optimize AzerPost’s operations, which was also part of the WB-supported rebranding process. Due to the change in the system, the original target of 150 rebranded access points became irrelevant and only ten access points were rebranded as new model offices under the original concept of universal service centers. However, because all post offices were unified and AzerPost was branded as a financial service provider, the CPF objective was not negatively affected. With IFC support, Azerbaijan further improved its legislative and regulatory framework, which enabled AzerPost to sign an agreement with Access Bank CJSC to provide bank services to SMEs in the regions of Azerbaijan under the new agent banking model launched in 2022 in cooperation with CBAR and in partnership with the Swiss Economic Cooperation Organization (SECO) (601347). To date, 1,053 post offices may provide financial services outside Baku’s main city. The CLR confirms its attribution to the WBG longer term engagement and CPF program and evaluates the outcome as achieved, based on its contribution to service delivery, broader impact on the financial sector development, and sustainability of results. Objective 2.4: Reduce regulatory burden for SMEs – Achieved 28. The business environment for SMEs improved, including through reduced regulatory burden. With support of IFC AICACP (600496), a new law on licenses and permits was approved and enacted in 41 Findex data at https://www.worldbank.org/en/publication/globalfindex/Data; https://stat.gov.az/source/demoqraphy/ 42 Data received from AIF and https://www.xprimm.com/AZERBAIJAN-Agricultural-Insurance-Fund-payments-to-farmers- increase-annually-articol-39-21008.htm 43 Insured events include natural disasters, weather conditions, pests and diseases, and other risks that can cause loss or damage to crops, livestock, and farming infrastructure. 44 Financial Services Development Project (IDA-40300, TF091639) 45 Data communicated by AzerPost via email. 44 2016. The process of business permits issuance was simplified. The number of days to receive construction permits reduced from 212 days in 2014 to 116 days in 2020, surpassing the CPF target of 170 days or less. This reduction contributes directly to an improved business environment for both local and foreign investors. The business activity inspections were suspended in Azerbaijan since 2015, which reduced compliance costs. However, the originally planned implementation of reducing SMEs’ administrative and compliance burden of business inspections (JSSIP) will start after the moratorium ends. IFC also supported the development of new legislation positively affecting the business environment, such as SME law, investment law, tourism law, food safety law, amendments to the inspections law. Objective 2.5: Enhance competitiveness of agriculture and rural development – Mostly Achieved 29. The WBG program contributed to improvements in agricultural productivity . Between 2015 and 2020, 118 agribusinesses and value chain subprojects received subloans and grants, and 17 productive partnerships got investment funding. More than 60 percent of them achieved a 40 percent or higher growth in marketed output. Between 2015 and 2021, 115 agribusinesses got investment lending from the ACIP credit line, while another 94 obtained reflow financing. As of December 2021, more than US$32 million was disbursed to value chains and agri-businesses from both credit and grant lines as well as reflows in new subloans, surpassing the CPF targets. ISO certification and growing export activity of some value chains and partnerships are also attributed to the program. Through the AzRIP2 rural project investments, by August 2018, farmers had increased the price paid for their products by 20 percent, and crop productivity increased by 46 percent for potato and by 31 percent for wheat due to irrigation investments. Contracts to local firms for rural investment projects generated approximately US$6.5 million in rural income from labor. Between 2012-2019, a total of 3.6 million people representing the rural poor, out of which 56 percent were women, benefited (directly and indirectly) from the community level economic activities supported by AZRIP-2, exceeding the end target of 3.5 million.46 More than 1,500 livelihoods microprojects directly benefitted 4,648 people as of project closure in 2019. In addition, under the program, fourteen Women’s Development and Enterprise Groups were mobilized to set and run women owned businesses in rural areas. The gender target was met with 330,873 female water users benefiting from improved irrigation and drainage services (WUAP P107617). Through AICACP, IFC provided advisory services to seven value chains, which helped them to obtain additional financing, based on improved financial management, as well as to improve export product quality and expand storage capacity. III. WORLD BANK GROUP PERFORMANCE 30. The overall WBG performance in the design and implementation of the CPF was Good. This assessment is substantiated with, inter alia: (i) the WBG program remaining relevant and supporting the country’s development agenda in the context of the global and regional crisis and shocks, (ii) the WBG’s program contribution to the attainment of most CPF objectives, and (iii) close monitoring contributing to smooth implementation of WBG program through early detection of potential and emerging shortcomings and their proactive tackling. Design and relevance 31. The CPF incorporated key operational and strategic lessons from the Country Partnership Strategy FY11-14 and PLR. 32. Firstly, the CPF was flexibly designed to adjust to the changing environment and remain aligned with the country’s strategic priorities throughout the CPF period. Anticipating uncertainties around the government’s borrowing plans, the CPF proposed an indicative program for the first two 46Data on total number of beneficiaries under AZRIP-2 was gathered for the geographic information system; AZRIP-2 Report ICR00004560 45 years with the intention to revise it at the PLR stage. Some projects that were envisioned for the early phase and did not materialize were dropped without compromising the CPF key objectives. Adding the new large-scale TANAP to the program in response to the government’s urgent demand was possible with minimal adjustment to the RF. 33. Secondly, the CPF sought to implement a One WBG approach by a close cooperation between IFC, MIGA, and IBRD to enhance the impact of the program outcomes. IFC, MIGA, and IBRD have established strong partnerships in financial and energy sector programs. Successful collaboration between the IBRD’s ACIP and IFC’s AICACP promoted a financing approach developed for a value chain in Azerbaijan’s region of Jalilabad. While ACIP provided loans to entrepreneurs enhancing food product quality and safety standards, developing new products, and establishing market linkages, AICACP helped them build capacity in post-harvest practices. After ACIP closed (2021), IFC continued delivering advisory to the target value chain. Another successful IFC-IBRD collaboration was in digital financial services development, whereby collaborative efforts led to the adoption of the Law on Payment Systems and the development of an open banking roadmap. IFC’s support to engage AzerPost in the agent banking model complemented the IBRD’s previous investment, enhancing the impact of the WBG program. In the energy sector, MIGA and IBRD collaborated on TANAP. The CPF shows that successful collaboration can spill over to sectors with a potential for WBG’s large-scale programmatic engagement, for example in the water sector, if efforts are joined and coordinated at the outset of a dialogue in those areas. 34. Thirdly, embedding gender in design and implementation of program activities boosted their impact. The Women’s Development and Enterprise Groups WDEGs set under the AZRIP2 stimulated unprecedented economic activity among rural women, mobilizing them to develop and run small businesses. A 2018 Justice Sector Gender Strategy and Action Plan47 (JSSIP) led to increased participation of women in the sector. In June 2021, the share of female staff in the justice sector was at 32 percent. Following the recommendations under the Lifting Legal Barriers to Women’s Employment ASA, the country’s Labor Code was amended in December 2022 to remove job restrictions on women’s employment, opening more than 700 job positions available to them. IFC’s loan to a banking client has supported women entrepreneurs and women-owned MSMEs (Bank Respublika, 2023). Program implementation 35. The CPF program was delivered through a mix of inherited and new investment operations and a high value programmatic and rapid response ASA. The portfolio comprised eleven inherited projects totaling US$1.98 billion and six new loans totaling US$821.7 million. Only two (Highways 3 AF, and IDPs LSLP AF) out of six delivered projects were originally planned. TANAP, formally mapped to the Türkiye portfolio, was delivered in FY17, and two new loans (ESP, JSSIP AF) were added to the program in FY20. Another project (RCDP) entered the portfolio in FY21, building on the principles of the originally planned but later dropped Regional Roads Project. Seven projects planned originally at the CPF inception48 did not materialize due to the government’s external borrowing limits. IFC’s investment portfolio has been negatively affected by the weak performance of financial institutions due to the financial sector crisis, as well as the prolonged judicial process of security foreclosure on a large private non‐oil, non‐financial sector investment. During the CPF period, IFC committed US$36.1 million of long- term finance as of end FY21, with the financial sector accounting for 100 percent of the total program, versus the indicative baseline investment program of US$100-150 million. The IFC program included an investment climate and agricultural competitiveness program, electronic and digital financial services, and agri-finance activities to improve access to finance for farmers. In the financial sector, IFC supported selected private banks with capital, currency hedge instruments, and advice on strategy 47Published on the Unified Judicial Portal of the Republic of Azerbaijan. 48P159962 AZRIP‐3, P153968 National Water Supply and Sanitation Project I AF, P155983 Azerbaijan Power Distribution Modernization, P157091 Absheron Lake Clean-Up and Rehabilitation Project, P149996 State Agency on Service to Citizens and Social Innovation, P167007 National Solid Waste Management Project, and P122200 Regional Roads Development Project. 46 formulation. IFC has been engaged in dialogue with the government on developing Public-Private Partnerships (PPPs) to encourage more active private sector participation in infrastructure, particularly in affordable housing, energy/power, and transport/logistics. IFC’s engagement in solid waste and utilities did not materialize as planned due to insufficient commercialization and private participation in the sectors. 36. The broad ASA program remained relevant, supporting key policy reforms, and informing potential lending operations. It addressed a wide range of issues, including macro-fiscal management, financial sector stability, social protection, health financing, rural development, agricultural competitiveness, digital development, women’s employment, improved state-owned enterprise (SOE) governance, and energy efficiency. ASA activities added in the post-PLR period led to close engagement with the government on new themes, such as smart villages, climate smart agriculture, innovative digital solutions in public service delivery, and e-health. The enhanced ASA program included policy notes that informed the government’s SEDS and has evolved to cover middle corridor connectivity and green growth. The World Bank partnered with the United Nations and the European Union (EU) to launch a Joint Recovery Needs Assessment, and with EU and SECO to support reforms and policy development (Azerbaijan Rapid Technical Assistance Facility, AZTAF49, TF085442) and PFM. The high- level policy forums50 organized during the CPF period catalyzed broad discussions on human capital development, economic diversification, and sustainable development. Just-in-time support was delivered through the Azerbaijan Higher Education and Business Incubators (P164923), Azerbaijan Industrial Estates TA (P158794), Baku Urban Mobility Policy Note (P166449) or Azerbaijan Housing Needs and Demand Assessment (P172767). The program helped fill the knowledge gaps identified by the SCD and contributed to the achievement of the CPF objectives. However, not all ASA activities have had traction among key decision makers and thus have yet to lead to reforms or to lending operations. 37. MIGA issued its first non-honoring guarantee in the country for US$1.1 billion to support the TANAP transaction in June 2018. Guarantee coverage was provided to SGC CJSC of Azerbaijan on the commercial debt that had been raised as part of the funding package for TANAP in Türkiye. Coverage was offered against the risk of nonpayment of a sovereign financial obligation for up to 15 years. The financing enabled the project company to complete the construction of the pipeline ahead of schedule and within budget. As a result, the commercial debt facilities were no longer needed and terminated, and MIGA’s coverage was cancelled in September 2019. Going forward, in coordination with IBRD and IFC, MIGA will continue to seek opportunities to encourage cross-border foreign investments that support the decarbonization and diversification of the economy away from the oil and gas industry, leveraging the full suite of de-risking instruments from the WBG Guarantee Platform. 38. The WBG has closely collaborated with other development partners to leverage synergies . The WBG coordinated their work with the Asian Development Bank (ADB) in the road and water supply and sanitation sectors, with European Bank for Reconstruction and Development (EBRD) and German Development Bank (KfW) in the infrastructure sector, with EBRD, EU, and SECO in the private and financial sector and PFM, and with EU on judicial and agriculture sector reforms. WB and Asian Infrastructure Investment Bank (AIIB)51 jointly cofinanced TANAP where the WB facilitated subsequent support from other partners, notably ADB, EBRD, and European Investment Bank (EIB). Partnerships with EU and SECO have expanded on ASA support through the AZTAF and SECO-funded ASA on MTEF and FSMP2. The Bank continued to be a reliable partner in producing and providing top-tier knowledge and expertise. In partnership with the EU, the Bank employed a novel method in the design and implementation of the bespoke AZTAF, which was established to provide the government with strategic 49 AZTAF is a single-donor program approved in December 2021 in the amount of EUR 5.25 million and comprises nine TA activities. 50 Azerbaijan Human Capital Forum, December 19-21, 2018, Baku; Azerbaijan High-Level Forum on Economic Diversification, March 6, 2019, Baku. 51 AIIB cofinanced the World Bank loans with a US$600 million sovereign loan (2016, P00001) to SGC and US$7.2 billion were financed by commercial and international financial institutions. 47 technical assistance in the areas of governance, social inclusion, gender, business skills, connectivity, water security, energy efficiency and smart villages. 39. The implementation of the IFC ECA Agri-Finance (600339) crowded in funding from the Austrian government (Federal Ministry of Finance) and the Hungarian government (Hungary EXIM Bank), while another IFC project - AICAC - was supported by the Government of Switzerland through SECO and Austria’s Ministry of Finance. SECO was also the partner to the Electronic & Digital Financial Services project in Azerbaijan and Central Asia (601347). Portfolio performance (IBRD) 40. Portfolio performance was largely satisfactory with a disbursement ratio averaging 25 percent in FY16‐FY20. IEG’s Satisfactory outcome for the available post-PLR reviewed years stood at 100 percent. The overall implementation risk of projects in the portfolio was rated as Moderate in 2021. The number of projects decreased from 14 (US$2.3 billion) in FY16 to 4 (US$ 350 million) by the end of FY21, and then 3 (US$315 million) in FY23. During the CPF implementation, two projects – the Rail, Trade, and Transport Facilitation Project and the IDP LSLSP were in problem status at various points in time. The former closed in 2017 as Unsatisfactory due to delays in the implementation of key contracts on signaling and power conversion despite yielding important institutional development in the railway sector. The latter was severely affected by the government's delayed and insufficient allocation of counterpart funding. It was canceled at the request of the government and later closed in 2019 as Moderately Unsatisfactory, despite some positive progress in creating economic opportunities for IDPs. The Azerbaijan CPF was assessed by IEG in 201752 as adequately focusing on improved governance, reflecting gender gaps, and properly aligning with SCD priorities. The IEG assessment was also positive on the organization of the CPF RF that distinguished the inherited and new operations and their link to the CPF objectives. Recommendations for a stronger focus on data gaps, improved indicators on gender impact, and private sector participation were considered at PLR through new indicators on gender (judicial, community level micro-projects), improved business environment (regulatory reform, expanded access to finance and inclusion, facilitation of agriculture value chains), and improvement of the country’s statistical system. 41. The overall risk to the program remained Moderate with macroeconomic stability and institutional and governance as two main threats to the program. CLR confirms that these factors affected the program's scope, scale, and implementation, as anticipated at the CPF inception. The flexibility of the CPF helped mitigate the risks by adjusting the program to ensure its relevance and to deliver results in key areas. The achievement of CPF outcomes has not been severely affected. 42. Overall, the quality of the portfolio remained good throughout the CPF period, ensured by regular internal deep-dives and joint WBG-government reviews. Regular contract management exercises to monitor and track high-value contracts ensured compliance with the WB’s fiduciary standards. The annual disbursement improved from 24 percent in 2018 to 29 percent in FY20 but declined to 7.4 percent in FY21 because of three new loans and increased to 21 percent in FY22 and 32 percent in FY23. Continuous capacity-building sessions for project implementation units enhanced their knowledge in fiduciary procedures. IV. ALIGNMENT WITH CORPORATE GOALS 43. The CPF was fully aligned with the WBG’s goals to end poverty and boost shared prosperity . It prioritized enhanced access to public services, improved connectivity, and conducive business climate to reduce disparities and create more jobs. Targeted interventions supported, among others, rural connectivity, water, sanitation, and roads, promoted self-employment, and improved justice 52World Bank Group Country Engagement: An Early-Stage Assessment of the Systematic Country Diagnostic and Country Partnership Framework Process and Implementation - an Independent Evaluation (2017) 48 services through transparent and digitalized court and case management systems. Strengthened public finance and institutional development helped the country withstand shocks. The agricultural value chains and productive partnerships supported by the program led to increased productivity, directly benefiting small and medium producers and processors. 44. The CPF supported corporate commitments on governance, gender, climate change, and citizen engagement, positioning the WBG well to align the next CPF to the Evolution Roadmap and the new mission of the WBG to eliminate extreme poverty and boost shared prosperity on a livable planet. This CPF already addressed the aspects of the new mission of the WBG. Climate change impacts were addressed through infrastructure projects and ASAs that supported Azerbaijan’s commitments under the Paris Climate Agreement.53 The TA activities covered, inter alia, carbon dioxide (CO2) emissions reduction, water resource management, energy efficiency, green connectivity in transport, and lake redevelopment.54 ASAs undertaken in FY22-FY23 analyzed the opportunities and challenges of green growth and explored solutions for Azerbaijan to face and adapt to the global decarbonization trends. Gender was addressed through targeted activities to enhance women’s economic activity and participation in decision-making and improve access to services (see also in paragraph 32). Governance was addressed through enhanced transparency and accountability in public sector management (PFM action plan, e-procurement), improved service delivery and strengthened rule of law (judicial sector engagement), increased financial inclusion, and better environment for businesses (digital finance). The geographic information system map developed under AzRIP2 to track community activities enhanced transparency and civic engagement in project areas. 45. The CPF program helped, to some extent, mobilize financing for development and stimulate private sector participation. TANAP applied the principle of Maximizing Finance for Development (MfD) and was designed to mobilize private capital. The successful collaboration with commercial financiers and development partners mobilized US$1,159 million in commercial financing (18.4 percent of project financing) and EIB, EBRD, and AIIB investment. MIGA’s guarantee as a credit enhancement instrument allowed one of the project’s shareholders to leverage commercial financing on improved terms. IFC did not provide financing for TANAP – although initially considered that – due to the sovereign borrowing of the state-owned operating company SGC CJSC. In addition, investments under the ISWMP2 had an effect on private sector engagement, encouraging new residents of the Industrial EcoPark near Balakhani landfill to buy recyclables to manufacture products. Moreover, the development of the Offshore Wind Roadmap helped put Azerbaijan on the map of leading private investors in renewables and hydrogen. As a result, the Government of Azerbaijan signed several agreements and memorandums of understanding with private investors, such as Masdar (2GW offshore wind and green hydrogen), ACWA (1.5 GW offshore wind with storage), Fortescue Future Industries (green hydrogen from offshore, onshore wind and solar for a total of 10 GW). 46. The quality of citizen engagement (CE) in the WBG’s Azerbaijan portfolio has consistently grown over the CPF period. The trend has been particularly visible after FY16 when the citizen engagement corporate requirements were introduced, and an Azerbaijan Citizen Engagement Country Roadmap was adopted in 2020. The quality of CE mechanisms in WB financed projects were strengthened with more robust design of CE approaches and training for project implementation units. Between FY19 and FY21, the portfolio reached 100 percent compliance in incorporating beneficiary feedback in all IPFs, ranking Azerbaijan as the first country in the South Caucasus region for CE quality. In-depth support, constant follow-up with the task teams and guidance on CE monitoring ensured full 53 These include GHG emission reduction by 35 percent by 2030 (compared to 1990 base year) as well as climate change mitigation actions in the energy, residential and commercial, transport, forestry, agricultural, and waste sectors, including regulatory changes and public awareness measures. 54 The case study of Khojasan Lake assessed annual CO2 emission as well as anticipated removal of GHG emissions and concluded that annual removal of 207.87 tons of CO2 equivalent will contribute an additional 0.03 percent to Azerbaijan’s annual GHG removals. 49 portfolio compliance on reporting the credible progress of all projects in their third year of implementation. V. LESSONS LEARNED 47. The WBG advisory services should be more selective and better connected to investment operations, with a focus on areas where they could drive transformative change. In the reduced lending environment, the ASA program expanded and covered a broad range of topics and multiple sectors. It was a justified approach as, in overall, the ASA program helped the government manage the financial crisis, develop strategies, maintain a dialogue, and pave the way for potential investment projects. However, some ASAs were fragmented with little or no traction. Going forward, the CPF program should provide a more balanced mix of ASAs and investment operations while ensuring the WBG footprint in areas outside its financial support. In this context, the program should aim at fewer, transformational ASAs to address complex development challenges with strong ownership by key decision makers and potential contribution to policy formulation and WBG program development. For IFC, advisory services play a key role in continuing engagement in the country when the private investment environment is uneven. Focusing advisory services on areas which would lay the ground for potential future investments, complemented by interventions, which at the same time respond to the country’s development needs, may require more time to bring results but help IFC to position and maintain reform dialogue with the government, donors, and the private sector. 48. The CPF lending program should focus on long-term, holistic engagements with high impact. The CPF program was a combination of inherited and a few new projects, which produced results on improved access to and delivery of services as well as transport and energy connectivity. In general, there were limited long-term, programmatic engagements in key sectors, such as water and energy, which, along with jeopardizing the long-term sustainability of achieved results, limited opportunities for One WBG engagement. However, in some cases (e.g., regional TANAP), engagement in a large-scale, highly visible project of national importance helped develop unprecedented partnerships and stimulated crowding-in private capital. Going forward, the WBG should consider larger scale programmatic engagements, in key sectors where WB, IFC, and MIGA could leverage and complement their respective instruments and comparative advantages and foster productive partnerships, including to better mobilize private capital. 49. The new CPF should aim to design more realistic RF with effective tools for measuring outcomes. The previous CPF RF used indicators to measure results of multidimensional nature (for example access to and satisfaction with services) supported by multiple projects. That presented a challenge for measuring a cumulative result in some cases. Given the emphasis on long-term programmatic engagement, as well as the complexity of program structures and interlinked challenges, the new CPF should set attainable targets and timelines along with employing instruments that would accurately measure the outcomes of the proposed program. The RF should also align with the new Corporate Scorecard indicators, with targets disaggregated for inclusiveness where applicable. 50 CLR Annex 1: Status of Azerbaijan FY16–FY21 CPF Results Matrix (summary table) Description Status at CLR Overall rating Focus Area 1: Public Sector Management and Service Delivery – Moderately Satisfactory Objective 1.1 Strengthen economic resilience and medium-term strategic planning Partially Indicator 1: PEFA demonstrates improvement in external and internal audit Achieved Indicator 2: Improving Public Procurement system Achieved Mostly Achieved Indicator 3: Recovery and stabilization of undercapitalized banks Achieved Indicator 4: Strengthening strategic planning in public spending Achieved Indicator 5: Strengthening public debt management Achieved Objective 1.2: Support access to, and satisfaction with, public services Indicator 1: Increase in users satisfied with access, transparency, and efficiency of selected justice services Achieved Indicator 2: Increase in percentage of vulnerable groups among legal aid beneficiaries (including 20% of women) Achieved Indicator 3: Increase in citizens benefitting from legal aid and counselling services across all six court jurisdictions Mostly (of which 50 % are women) Achieved Indicator 4: Increase in percentage of cases submitted for mediation that successfully reached a ‘settlement Achieved agreement’, using the new mediation system (including 25% of women) Mostly Achieved Indicator 5: Increased number of IDPs (in WBG program affected areas) satisfied with improved access to services, Achieved utilities, infrastructure as goods Indicator 6: The National Statistical Development Strategy (NSDS) and a medium-term plan (MTP) for institutional Mostly development of the country’s statistical system are adopted Achieved Indicator 7: Improved World Bank’s Statistical Capacity Indicator for Azerbaijan (covering methodology, source Achieved data, periodicity of statistics) Indicator 8: Employment rate among vulnerable jobseekers registered with State Employment Service (SES) Not rated55 55 CLR considers this indicator as not valid for assessment (see annex 2). 51 Description Status at CLR Overall rating Objective 1.3: Improve access to water, sanitation, and communal services Indicator 1: Increased number of households in WBG program areas receiving potable water and sanitation Mostly services Achieved Indicator 2: Number of rayons in WBG program areas with adequate O&M capacity Achieved Mostly Achieved Indicator 3: Waste management in Greater Baku (landfilling) is in line with EU waste management and landfilling Achieved directives. Indicator 4: Improved access to key facilities as measured by reduced time spent by beneficiaries in supported Achieved communities to reach the market, hospital, school, safe water source, etc. Objective 1.4: Improve management of environmental assets Partially Achieved Indicator 1: National strategic plans include measures to address legacy pollution, redevelop contaminated areas, Partially and improve waste management systems Achieved Focus Area 2: Economic Competitiveness – Moderately Satisfactory Objective 2.1: Improve connectivity through development of transport networks Indicator 1: Road user costs on M4 Baku-Shamakhi and M3 Yenikend-Shorsulu highways reduced. Achieved Partially achieved Partially Indicator 2: Train East-West transit time reduced achieved Additional Evidence: Along with the benefits of reduced transportation costs, diversification of the economy, increased transit, improved access from rural areas to key markets, and development of tourism, the road projects have generated around 25,000 person-months of employment, with a substantial portion of workforce drawn from local towns and villages. Moreover, the program helped enhance technical capacity of workers in modern and safe road construction and maintenance, contributing to job creation, and the development of the domestic construction industry. Objective 2.2: Diversify Azerbaijan’s access to energy markets Achieved Indicator 1: Enhanced access to gas export markets Achieved Objective 2.3: Enhance access to finance for micro, small and medium enterprises (MSMEs) Indicator 1: Number of security interest notices created in the registry Achieved Mostly Achieved Indicator 2: Increased number of rebranded AzerPost points to facilitate access to financial services in rural areas Achieved 52 Description Status at CLR Overall rating Partially Indicator 3: Increased financial inclusion of population into the formal financial system through e-services. Achieved Indicator 4: Increased number of financial services agents Achieved Objective 2.4: Reduce regulatory burden for small and medium enterprises (SMEs) Indicator 1: Simplified process of business permits issuance as measured by the decreased number of days to Achieved Achieved receive construction permits Objective 2.5: Enhance competitiveness of agriculture and rural development Indicator 1: Increase in marketed output of the targeted value chains and agribusinesses Achieved Indicator 2: Increase in agricultural productivity (15%) in at least 80% of rehabilitated water users associations Achieved (WUAs) Indicator 3: Number of rural poor, including women, benefiting the WBG program supported economic activities Achieved at community level. Mostly Achieved Indicator 4: Coverage of the digital cadaster map to allow more citizens and businesses benefit from online Achieved services increased. Indicator 5: Increase in number of agribusinesses –borrowers of investment financing in ACIP participating banks Achieved Indicator 6: Value of financing facilitated to value chains and agribusinesses Achieved Partially Indicator 7: New financial products sold in the market as evidence of expanded access to finance Achieved Additional evidence: Non-quantified benefits yielded by the program include job creation in agribusinesses, strengthened veterinary services, including privatization of field veterinarians, improved animal health due to the project animal disease control program, support to veterinary education, improved phytosanitary services, and improved capacity for monitoring food safety and seed testing and certification. 53 CLR Annex 2: Azerbaijan FY16–FY21 CPF Results Matrix Evaluation Focus Area 1: Public Sector Management and Service Delivery Objective 1.1: Strengthen economic resilience and medium-term strategic planning Overall Rating: Mostly Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: PEFA Baseline: PEFA PI-26(i) =D in Partially Achieved -The PEFA framework changed in Ongoing program demonstrates 2014 2016 and the original baseline indicator PI26 (i) - D (< ASA improvement in 50 percent) is covered under the PI-30.156 of the new external and internal Target: PEFA PI-26(i) =B in framework. Under the new framework the scoring B o Support to SOE and audit 2020 refers to 75 percent or more (by value). Audit coverage Procurement Reform has slightly improved and in 2020 57 accounted for 37 (P178882) Source: Chamber of Actual: PI-30.1 =B (75%) percent of the executed state budget expenditures, Accounts (2020) falling short of the original target. Internal audit at the Completed Ministry of Finance was not implemented, which, ASA Milestone 1: however, did not affect the coverage of expenditure Financial Stability Board for scrutiny. o Azerbaijan Tax Reform crisis preparedness and support TA (P166912) response coordination and In line with World Bank recommendations, the o Strengthening Medium decision making is established Financial Stability Board was established by Term Budget Planning in and operational (2016) Presidential Decree on July 15, 2016, and transformed Azerbaijan TA (P168015) into the Economic Council by Presidential Decree on o Promoting Transparency Milestone 2: September 9, 2020. The Council chaired by Prime and Efficiency of SOEs in An Action Plan on PEFA follow‐ Minister has a broader mandate to: (i) formulate a Azerbaijan (P162972) up approved and under socio-economic development strategy, (ii) strengthen implementation (2016) macro & financial stability, (iii) increase economic o Phase II - Promoting growth and social welfare, and (iv) achieve effective Transparency and Efficiency Milestone 3: regulatory and law enforcement practices. The PFM of SOEs in Azerbaijan The coverage of the central action plan approved in 2015 was partially (P165149) government expenditure by implemented until its expiration in 2018 and led to external audit reached 50% of improvements in budget execution processes and 56 This dimension assesses key elements of external audit in terms of the scope and coverage of audit, as well as adherence to auditing standards. 57 Confirmed by the Chamber of Accounts (supreme audit institution) through e-mail communication. 54 expenditures (2020) alignment of the budget classification with o Support for PFM Action international standards. Plan (P156792) Indicator 2: Improving Baseline: no E-procurement Achieved – The Public Procurement Law amended on o TA on Roadmap for Public Procurement system in place (2018) December 28, 2018, endorsed the application of e‐ Strengthening Medium- system procurement through the single web portal launched Term Planning in Azerbaijan Target: Operational e- in March 2019. As of 2022, more than 50 percent of all (P165230) Source: e- Procurement system for public competitive bidding were covered under the e- procurement portal procurement has been piloted procurement system. The new law effective since o Azerbaijan Macroeconomic maintained by the (2020) February 2024 continues to support the use of e- Model TA (P162239) State Service for procurement system. antimonopoly and Actual: E-procurement system o Azerbaijan Macro Fiscal TA consumer market launched and operational (P156732) control under the (2020) Ministry of Economy o Azerbaijan Public https://etender.gov.az Expenditure Review Milestone 4: Amendment to Public o Azerbaijan Financial Procurement Law (PPL) Advisory TA (P156337, approved by government 2017) (2018) Indicator 3: Recovery Baseline: 15 undercapitalized Achieved – Full compliance achieved as of 2020. o Azerbaijan FSAP (P173740) and stabilization of banks operating in the market - A banking crisis response and mitigation action plan undercapitalized and the level of NPLs exceeds was developed and implemented with inputs from the o Program for Economic banks 35% of loans (regulatory WB proposed Matrix of Reforms in 2016. Between Recovery (P165076) definition of substandard, 2016 and 2017, 12 banks were put into liquidation and, o Azerbaijan Policy Dialogue Source: CBAR Financial doubtful and loss loans) (2016) in 2020, another four banks had their licenses revoked TA Stability Report 2022 and the largest state-owned bank was capitalized by Target: 80% of the government. Out of 45 banks in 2016, 29 banks o Targeted Social Assistance undercapitalized banks remained operating in the market in 2020, further Program recovered or resolved, with down to 26 in 2022. NPL at the end of the reporting - The Banking Act amended in April 2017 increased the period (2020) not exceeding powers of financial regulator (FIMSA, succeeded by 10% of the banks’ loan CBAR)/supervision and established a more 55 portfolio (regulatory comprehensive framework for bank resolution. During o Social Protection Policy definition) (2020) 2016-2019, the financial regulator fully upgraded Dialogue and TA regulatory and supervisory framework for bank (and Actual: 12 undercapitalized non-bank, including insurance, capital market) o Job Diagnostics and banks (80%) liquidated, NPLs financial regulation and supervision. Advisory Services in the stand at 6.2 % (2020) South Caucasus NPLs stood at 4.5 percent in 2021, and 3.8 percent in 2022.58 The banking sector’s capital adequacy ratio o Assisting Chamber of Milestone 5: stood at a relatively high 19.1 percent at end-2021. Accounts on development Medium Term of effective procurement Macroeconomic and Financial audit system ASA (P169841) Stability Action Plan approved by Financial Stability Board o Azerbaijan Financial Sector (2016) Modernization Project 2 Indicator 4: Baseline: No MTEF regulation Achieved – The roll-out of budgeting processes and the (FY17-FY23) funded by Strengthening in place (2017) pilot projects of implementing program and medium- SECO TF (P160238) strategic planning in term budgeting started in three sectors (agriculture, o Azerbaijan Pensions ASA public spending Target: At least one line education and science, and environment) in 2019 (P161552) ministry adopts budgeting following the approval of MTEF guidelines with rules Source: Ministry of processes and schedule as per under the new budgeting framework by Presidential o Azerbaijan Financial Finance new MTEF regulations on a decree # 235 in 2018 and #513 in 2019.59 Each pilot Advisory TA (P165514, pilot basis (2020) project is coordinated by a respective leading line 2021) ministry – Ministry of Agriculture, Ministry of Ecology Actual: The medium-term and Natural Resources, and Ministry of Science and o Strategic Roadmap M&E budgeting processes rolled out Education. The outcome was achieved within the CPF Support (P164897) in three line ministries (2021) period. Other actions that led to achieving the target include: Milestone 6: 58 CBAR Financial Stability Report, 2022 https://uploads.cbar.az/assets/FSR_2022%20annual_eng.pdf 59 Point 1.2.2. of Presidential Decree #513 amending Presidential decree #235, February 4, 2019. Further information on the MTEF and the three pilot sectors is published on the website of Ministry of Finance (https://maliyye.gov.az/static/304/2024-2027, https://maliyye.gov.az/static/282/monitorinq-hesabati). 56 Medium Term Expenditure -establishment of the MTEF Center under the Ministry o Azerbaijan Government Framework (MTEF) of Finance as a central entity leading and coordinating Debt and Risk Management guidelines are approved medium term and program budgeting in 2019; (P150604) (2018) -approval of the MTEF Action Plan in 2020. Because most of the actions in the 2020 Action Plan expired o South Caucasus Social Milestone 7: within the following 12 months, amendments to the Protection and Jobs ASA Action Plan for MTEF decree 235 have been prepared with an additional set implementation is approved of reforms60 and expanding the MTEF to more sectors. o IFC Asset Management (2019) Company asset Currently, there are different legislative frameworks to management services for Milestone 8: follow: MTEF guidelines, law on the budget system of SOFAZ MTEF Secretariat is Azerbaijan and “Rules on implementation and established (2019) preparation of the Budget” by Cabinet of Ministers. -A baseline report utilizing PEFA conducted in 2022 served as the foundation for the MTEF Capacity Building Program. So far, the program has gained traction as seen by gradually enhancing quality of macro fiscal framework documentation and fiscal risks. Indicator 5: Baseline: No public debt Achieved – The medium-term debt management Strengthening public management strategy in place strategy covers existing and projected government debt management (2017) debt and is publicly available. The strategy indicates at least the preferred evolution of risk indicators such as Source: P150604 Target: Medium Term Public interest rates and refinancing, and foreign currency Debt Management Strategy risks. This work was supported by the Azerbaijan approved & published (2018) Government Debt and Risk Management ASA. Actual: The medium-term debt management strategy for 2018 - 2025 adopted (2018) 60 Includes aligning the calendar for preparation of MTEF with the annual budget calendar, introducing centralized expenditure baseline projection, clearly articulating separation of baseline expenditure, and new policy initiatives 57 Lessons learned: o Reforms that require multi-stakeholder engagement, such as the introduction of medium-term budgeting and program budgeting, as well as public investment management, have progressed slower than expected due to weaknesses in coordination and collaboration among involved parties. Addressing this weakness requires governance bodies such as focal points or central coordination units placed next to the key decision-making bodies. Future support to such reforms should be accompanied by activities aimed at building capacity of such governance bodies and tools to changes behaviors (e.g., reduce mentality of working in silos, collaborative platforms, etc.). o There have been several occasions when the impact and sustainability of ASA has been minimized by a lack of organizational capacity and limited knowledge management (e.g., knowledge lost due to staff turnover). To create lasting capacity at the level of recipient institutions, a more comprehensive change management strategy needs to be rolled out along with the provision of technical advice. The change management strategy should cover institutional, behavioral, communication, and capacity building aspects. For example, training efforts should be accompanied by the creation of permanent training modules as well as transferring and building the training capacity to national training institutions Focus Area 1: Public Sector Management and Service Delivery Objective 1.2: Support access to, and satisfaction with, public services Overall Rating: Mostly Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Increase in Baseline: 0 % (2014) Achieved – as per a country-wide user Ongoing users satisfied with satisfaction surveys conducted within JSSIP, Lending access, transparency, Intermediate Target: 55 % (2021) P144700, 57 percent of users (citizens, and efficiency of business, judges, lawyers) were satisfied with o Employment Support Project selected justice Actual: 57% (2020) justice services as of end 2020. The end target (ESP, P171250) services at PLR set beyond CPF formal period was Target: 60 % (2024) * achieved ahead of time in 2020. ASA Source: P144700 o South Caucasus Improving Actual: 57% (2024) Outcomes beyond CPF formal period: the Financial Protection, Quality, number rose to 61 percent in 2022 and 67.2 and Efficiency in the Health Milestone 1: percent in 2023, exceeding the ultimate end Sector ASA (P500774) Justice Sector Gender Strategy and target of 60 percent satisfaction across target Action Plan prepared and publicly stakeholders. Completed disclosed (2019) Lending The survey data shows satisfaction rate per target group increased for: 58 * Target to be achieved in 2024 as supported Judges – from 80 percent to 92.5 percent in o JSSIP (P144700) by JSSIP AF approved in FY2020 2020, 93 percent in 2022, 94.8 percent in 2023 and 96.5 percent in 2024 (end target: 95 o IDPs Living Standards and percent). Livelihoods Project Citizens – from 40 percent to 50 percent in (P122943) 2020, 56 percent in 2022, 60 percent in 2023 and 69.3 percent in 2024 (end target: 60 ASA percent); Businesses – from 65 percent to 67 o Azerbaijan Tax Reform percent in 2020, 65 percent in 2022, 70 support TA (P166912) percent in 2023 and 77.5 percent 2024 (end target: 75 percent); o Strengthening Medium Term Lawyers – from 50 percent to 55 percent in Budget Planning in 2020, 63 percent in 2022, 71 percent in 2023, Azerbaijan TA (P168015) and 77 percent in 2024 (end target: 75 percent). o Supporting Azerbaijan for Indicator 2: Increase in Baseline: 0% (2015) Achieved – under JSSIP parent loan (IBRD- Implementing Mandatory percentage of 84070) 10,432 people had benefitted from Health Insurance Nationwide vulnerable groups Target: 25% (2018) legal aid services by 2018. The share of (P172268) among legal aid females among these beneficiaries beneficiaries Actual: 35% (2018) constituted 50.7 percent, the one of IDP and o Azerbaijan Early Childhood (including 20% of share of women 50.7 % and IDPs 13.6 refugees to 13.6 percent (JSSIP, P144700 ISR Education Activity (P164921) women) % June 2024). All beneficiaries are considered vulnerable as, by Azerbaijan law, only citizens o Azerbaijan Higher Education Source: P144700 Milestone 2: that are considered vulnerable per definition, and Business Incubators Increase in women representation in i.e., live either on a below-threshold income, (P164923) the justice sector (from current 5% to on social welfare, are handicapped, or alike, 10% by end-2021, to 15% by mid-2024) are eligible to receive pro bono legal aid o Supporting Azerbaijan services. The program followed Azerbaijan’s Progress toward Universal Milestone 3: legislative framework. Health Coverage (P161235) Legal aid procedures are streamlined o Poverty and Social Impact (including e-access through legal aid Analysis (ASAN and Justice) portal, 2019) Indicator 3: Increase in Baseline: 10,432, of which 51% are Mostly Achieved – The end target for this citizens benefitting women (2018) indicator set beyond the CPF formal period in 59 from legal aid and PLR was achieved as planned in FY24. In FY21, o TF Statistical Capacity counselling services Intermediate Target: 35,000 34, 388 citizens (of which 48.10 percent were Building Grant: across all six court (number), of which 50% are women women) benefited from legal aid and Establishment of Meta- jurisdictions (of which (2021) counselling services under JSSIP AF loan Information System Project 50 % are women) (IBRD-90580), falling slightly short of the (FY16) Actual: 34,388, of which 48.1% women intermediate target. Source: P144700 (2021) o E-Health Strategy and Claims Outcomes beyond CPF formal period: In FY Management System End Target: 60, 000, of which 50% are 22, the share of women in the total number (P175634) women (2024) * of beneficiaries (40,061 people) was 49 percent. By December 2023, out of 64,266 o Strengthening social Actual: 64,266 of which 56.4% women beneficiaries of legal aid and counselling protection systems in (2023) services, 56.43 percent or 36,265 Caucasus (P177449) beneficiaries were women, therewith * Target to be achieved in 2024 as supported by achieving the indicator’s end target. o RETF Republic of Azerbaijan: JSSIP AF approved in FY2020 National Strategy for the Indicator 4: Increase in Baseline: 0% (2018) Achieved – The Law on Mediation entered Development of Statistics for percentage of cases into force on July 1, 2021. By December 2021, 2018-2030, Including submitted for Intermediate Target: 0.5% (2021) the share of disputes processed using Detailed Institution, Human mediation that mediation mechanisms reached 3.65 percent. and Information and successfully reached a Actual: 3.65% (December 2021) Communication Technology ‘settlement Outcomes beyond CPF formal period: the Capacity Building Plans for agreement’, using the End Target: 3% (2024) * share of disputes processed using mediation 2018-2022 (FY21 P161307) new mediation system mechanisms stood at 3.28 percent in o Lifting Legal Restrictions of (including 25% of Actual: 10.43% (2023) December 2022, and steadily increased to Women’s Employment in women) 10.43 percent by December 2023 (JSSIP, Azerbaijan (P173245) Milestone 4: P144700, ISRs). Of these, around 2/3 are Source: P144700 The Law on Mediation enacted (2019) family disputes. Most disputes are settled during the initial mediation session. *Target to be achieved in 2024 as supported by JSSIP AF approved in FY2020 Indicator 5: Increased Baseline: 6% (2014) Achieved – The indicator reflects aggregated number of IDPs (in data covering beneficiaries across various WBG program Target: 90% (2018) components and calculated for years 2016 60 affected areas) and 2020 under the supporting parent project satisfied with Actual: 92.7 % (2018) and AF (IDP LSLP, P122943), based on face-to- improved access to face surveys conducted with sampled services, utilities, Milestone 5: members of the target communities that infrastructure as good Number of IDPs directly benefiting benefited from project activities. from WBG program exceed 30 % of Source: P122943 total number of IDPs including 50 % In 2016, 92.7 percent of IDPs were satisfied women (185000 out of 595,000) with improved access to services, utilities, (2017) and infrastructure. 72.8 percent of households reported increased access to basic rural infrastructure against the baseline of 55.1 percent revised at the AF stage, raising the indicator to 94 percent by the closure of the project (December 31, 2019). For 2016, the aggregated value comprises two indicators: “Increase in beneficiaries rating access to service/infrastructure as good or excellent” and “Increase in targeted households rating housing conditions as good or excellent”. Both indicators reflect aggregated data on improved access to services and utilities such as water, electricity, roads, and energy efficiency. For 2020, the value was uniquely calculated based for “percentage of households with increased access to basic rural infrastructure,” covering both components of the AF. This indicator reflects satisfaction with water and electricity supply, as well as the condition of roads. Indicator 6: The Baseline: No NSDS and MTP (2014) Mostly Achieved – NSDS and MTP for the National Statistical national statistical system were developed in Development Strategy 2019 for the years 2019–2030 (supported 61 (NSDS) and a medium- Target: A NSDS and MTP adopted by through P161307). Even though it had not yet term plan (MTP) for SSC RA (2020) been adopted as a legal document by 2021, institutional the NSDS served as a crucial input for SSC development of the Actual: NSDS and MTP developed projects outlined in the state program for the country’s statistical (2019) and used to implement the development of the official statistics. system are adopted State Program for Improvement of Considering all this, this target is largely Official Statistics 2018–2025.61 achieved. Source: State Statistical Committee; Milestone 6: Azerbaijan subscribed to IMF’s SDDS, In IMF Azerbaijan subscribes to IMF’s Special February 2019 Azerbaijan implemented the Data Dissemination Standards (SDDS) recommendations of the IMF’s Enhanced (2019) General Data Dissemination System by publishing essential data through the IMF National Summary Data Page62 but data is limited in the open access. Indicator 7: Improved Baseline: Statistical capacity score is Achieved – Statistical Performance Indicator World Bank’s 74.33 (2013) (SPI) for 2019 was 86.4 which shows Statistical Capacity improvement in comparison to 2016 (53.8). Indicator for Target: Statistical capacity score is 77 Azerbaijan (covering (2019) (Note: SPI for 2013 is unavailable, see methodology, source footnote 14) data, periodicity of Actual: 86.4 (2019) statistics) Source: WBG SPI Indicator 8: Baseline: 35% (2020) Not rated. This indicator is not valid as it was Employment rate not adequately defined at the time of the among vulnerable Intermediate Target: 36% (2021) respective project development. The baseline jobseekers registered and targets will be revised in the new CPF. with State End Target: 40% (2025) * 61 Presidential decree 3672, 14 February 2018 62 https://www.imf.org/en/News/Articles/2019/02/22/pr1956-republic-of-azerbaijan-implements-imf-enhanced-general-data-dissemination-system 62 Employment Service * Target to be achieved in 2025 as supported by (SES) new project (ESP) approved in FY2020 Source: P171250 Lessons Learned: o Social assistance and employment programs that seek to include IDPs among those whom they target could employ some of the pro ject’s outreach and community mobilization methods that were successful in ensuring broad-based participation, especially of women. Focus Area 1: Public Sector Management and Service Delivery Objective 1.3: Improve access to water, sanitation, and communal services Overall Rating: Mostly Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Baseline: 40000 (2014) Mostly Achieved – This outcome is measured based on Completed Increased number of the combined baseline and target covering both water Lending households in WBG Target: 60000 (2018) supply and sanitation services provided to the same program areas households. Total number of new households receiving o National Water Supply and receiving potable Actual: 67000 (2018) potable water and sanitation services financed under Sanitation Project (NWSSP) water and sanitation NWSSP and SNWSSP exceeded 67000 households for (P096213) services Milestone 1: water out of which 52000 households received both Water supply and sanitation water and sanitation. Water supply services were o AzRIP2 (P144107) Source: P096213, services system commissioned commissioned in 12 rayons while sanitation only in 10 P109961 in 12 rayons in project areas rayons by end of 2018. After project’s closure, the o Integrated Solid Waste (2018) government continued expanding the water supply and Management Project and sanitation networks/services in a few of 12 regions (e.g., AF (P110679) Shamakhi, Gabala, Ismayilli etc.) building up on project’s o Second National Water outcomes. Supply and Sanitation Project and AF (P109961) In addition, more than 150,000 people in 71 rural communities received rehabilitated potable water systems under the AzRIP2 project. Indicator 2: Number Baseline: 5 (2014) Achieved – O&M capacity of local Azersu offices has ASAs of rayons in WBG been strengthened in all 12 rayons that benefited from program areas with Target: 12 (2017) investments under NWSSP and SNWSSP. O&M 63 adequate O&M Actual: 12 (2018) personnel in all project areas have been trained and o Solid Waste Management capacity equipped in 2018. TA (P164729) Milestone 2: Source: P096213, O&M personnel in water and o Azerbaijan Housing Strategy P109961 sewerage project areas trained Guidance (P168435) and maintenance equipment in place (2018) o Azerbaijan Housing Needs and Demand Assessment Indicator 3: Waste Baseline: Not in line with EU Achieved – The Balakhani landfill was fully rehabilitated management directives (2015) in and extended. Waste collection and disposal in Greater Greater Baku Baku area is operated by Tamiz Shahar established IFC Target: Fully in line with EU under the WB project. The NSWMS and feasibility and o Engagement of IFC Energy (landfilling) is in line with EU directives (2020) waste safeguards studies for regional waste sheds prepared Infrastructure Advisory management and under the WB program guide government’s policy and (599545) Actual: In line with EU waste investment decisions on improving solid waste landfilling directives. management and landfilling management services across the country. The National o IFC PPP transaction advisory Source: P110679 directives (2019) 63 Solid Waste Management Strategy developed under the Report No: ARP/II-Integrated Solid Waste Management (P110679) ICR00004491 Milestone 3: was approved via a Presidential Decree in 2018. Industrial and municipal waste disposal capacity created under the project (2017) Milestone 4: Gas and leachate collection systems are operational at Balakhani landfill (2017) Milestone 5: National Solid Waste Management Strategy and 63Report No: ICR00004491. A value engineering review confirmed the cost-effective approach for creating the required additional landfill capacity and comply with the related EU standards. 64 Legal framework are prepared, and implementation started (2018) Indicator 4: Baseline: 15% on average Achieved - By endline survey conducted under the Improved access to (2014) AzRIP2, P144107, the average travel time to destinations key facilities as was reduced to 12.6 minutes in 2018 from a baseline of measured by Target: 48% on average 21.4 minutes. Specifically, reductions occurred in travel reduced time spent (2018) to pre-schools (68.7 percent), secondary schools (55.69 by beneficiaries in percent), and community water supply point (57.97 supported Actual: 53.7% reduction in percent), markets (37.55 percent), and district hospitals communities to travel time to market, (24.50 percent) Overall, 1.2 million rural residents reach the market, hospital, school, safe water benefited from improvement in 1,300 kilometers of hospital, school, safe source (2018) rural roads. More than 1500 livelihoods microprojects water source, etc. helped 8,6979 people as of April 2018. Milestone 6: Source: P144107 1,270 community micro‐ projects completed successfully (2018) Lessons learned: o Regular IPFs should be accompanied by sector specific legal covenants or accompanied by activities that enforce the key policy decisions. The Bank could consider using different financing instruments where infrastructure financing is legally attached to service performance indicators or key policy actions that ensure the sustainability of assets created under projects. Soft components planned under NWSSPs have not been completed at full and along with a lack of regulation and monitoring mechanisms by the central government over Azersu and its local subsidiaries has undermined sustainability of all new assets. 65 Focus Area 1: Public Sector Management and Service Delivery Objective 1.4: Improve Management of Environmental Assets Overall Rating: Partially Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: National Baseline: No investments are Partially Achieved – in 2018 the government adopted Completed strategic plans allocated for implementation the National Waste Management Strategy developed include measures to of the national solid waste under the CPF program (P110679), which informed Lending address legacy strategy (2019) the national Socio-Economic Development Strategy o Assistance to SOCAR on pollution, redevelop for 2022-2026 (SEDS). SEDS includes targeted further improvement of gas contaminated areas Target: The Public Investment interventions addressing National Priority #5 “Clean flaring and venting reduction and improve waste Plan allocates resources for environment and green growth country”, such as activities (GGFR Phase 4, management implementation of the improved waste management system, creation of P152189) systems national solid waste strategy hazardous waste management infrastructure, (2020) restoration of sewage network, flood protection and ASA Source: P110679; rehabilitation of pastures and farmlands. The new P166058; Actual: AZN 273.3 million Greater Baku Master Plan included redevelopment of o Policy Note and Cost-Benefit Greater Baku Master allocated for environmental several Absheron Lakes, (incl. the Khojasan Lake), Analysis of Green Remediation Plan protection, out of which AZN over the time span of 20 years.64 These interventions and Development Options of 228 million, or 83.4%, was are informed by the findings of the World Bank Selected Contaminated Sites spent for cleaning of polluted supported study on economically viable on Absheron (P165664) lands, wastewater collection environmental rehabilitation of Khojasan Lake and treatment. (2020) (P166058). Environmental redevelopment of sites has o Rapid Assessment of Chemical not started yet, falling short of the second target. Contamination and Baseline: Clean-up and Remediation Measures in the redevelopment of There is discrepancy between the outcome and the Absheron Lakes and Selected degraded/polluted sites which targets under this objective as the latter go beyond Areas (P162504) are fragmented and not the outcome definition. However, the outcome is o Absheron Lakes Clean Up and economically sustainable considered as partially achieved based on its Rehabilitation (P166058) Target: Environmental definition and the evidence on the program redevelopment of at least one contribution toward achieving the objective. o Country Environmental site is initiated and Assessment Azerbaijan: 64 https://arxkom.gov.az/en/bakinin-bas-plani?plan=etraf-muhit 66 incorporates Bank program Towards Green Growth recommendations on (P177227) economic viability (2020) Actual: 0 site redevelopment initiated (2020) Milestone 1: Clean-up of polluted lands in Absheron initiated; Public Investment Plan supports continuation of clean- up of two lakes (Boyukshor and Zykh) (2021) Milestone 2: National Waste Management Strategy adopted (2018) 67 Focus Area 2: Economic Competitiveness Objective 2.1: Improve connectivity through development of transport networks Overall Rating: Partially Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Road user Baseline: 100% (2014) Achieved – The targets for reduction of the road Ongoing costs on M4 Baku- user costs on corridors covered by the Bank Shamakhi and M3 Target: 90% (2020) program were overachieved under P118023. Lending Yenikend-Shorsulu Regional Connectivity and highways reduced. Actual: 70% on M4, 77% on M3 The upgraded M4 Baku – Shamakhi highway (94 Development Project (P174379) (2020) km) linked Baku with central Azerbaijan, and M3 Source: P118023 Yenikend-Shorsulu highway (48 km) linked the Completed country’s northern central and central regions Milestone 1: with the south. The existing bridge over the river Lending 75 km upgraded for M4 Baku – Kur was rehabilitated to maintain accessibility o Rail, Trade and Transport Shamakhi highway (2017) and 45 for local and non-motorway traffic. Facilitation Project with AF km upgraded for M3 Yenikend- (P083108) Shorsulu highway (2018) The highway maintenance system along several road corridors were modernized and the o Highway III and AF Project Milestone 2: institutional structure of road maintenance (P118023) Modern road maintenance reformed. The program focused on the system established in one-two establishment of modern road maintenance ASA selected highways corridors system along two road corridors (M2 and M4). (2018) As a result, three regional maintenance units o Azerbaijan Trade and were established with substantial assistance on Transport Logistics Policy Milestone 3: planning, capacity building, introduction of Note (P163180) Rail infrastructure at East-West performance-based service-level contracts, o Baku Urban Mobility Policy fully rehabilitated, including procurement of modern equipment, and Note (P166449) signaling, power supply and construction of road maintenance facilities. track (2020) Overall and nationwide, the reforms removed o Social-economic costs of motorway road maintenance from numerous road accidents in Azerbaijan Milestone 4: local units and transferred to seven newly (P171632) Computerized IFRS accounting established regional motorway maintenance system of Railways fully units, reporting to a central motorway operational (2018) management unit. 68 o Development of Non- Milestone 5: Motorized Transportation in Business Plan on ADY operations Baku city (P168836) developed, approved and under implementation (2017) IFC o IFC PPP transaction advisory Indicator 2: Baseline: 23 hrs. (2014) Partially Achieved - Train East-West (E-W) Train East-West transit time decreased but fell short of the target transit time reduced Target: 12 hrs. (2020) of 12 hours partially due to the delays in modernization of the signalizing and power Source: P163180 Actual: 18 hrs. (2020) conversion systems supported through the Rail, Trade, and Transport Facilitation Project (P163180). The decreased is accounted for by replaced rail track infrastructure financed by the counterpart as part of the project, which makes it attributable to the program. The program contributed to institutional development in the railways sector through improvement of its operational performance and enhanced technical and financial capacity. ADY was implementing the Business Plan and Asset management strategy prepared under the Bank program in 2017. The financial model prepared in 2016 supported successful financial restructuring of ADY and cleaning the company’s “bad debts”. The computerized IFRS (Oracle based) has been in operation since 2018. Additional evidence: Along with the benefits of reduced transportation costs, diversification of the economy, increased transit, improved access from rural areas to key markets, and development of tourism, the road projects generate many jobs. The seven main civil works contracts for the Baku-Shamakhi and Yenikend-Shorsulu roads have generated around 25,000 person-months of employment, with a substantial portion of the workforce being drawn from local towns and villages. Moreover, the workers were trained in modern and safe road construction and maintenance 69 techniques and the use of specialist equipment, which fostered the creation of new jobs and the development of the domestic construction industry. Lessons learned: o The benefits of safe design are realized very quickly after the completion of road construction. o Actions to strengthen and reform institutions must be taken in the context of the institution’s capacity for change. The implemented motorway maintenance reforms represented a significant advance in modernizing public sector service delivery. At the same time, the model provided a platform for the introduction of private sector engagement in road maintenance in due time. Focus Area 2: Economic Competitiveness Objective 2.2: Diversify Azerbaijan’s access to energy markets Overall Rating: Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Enhanced Baseline: 0 cubic meters/year Achieved – Under the WBG program, major enabling Completed access to Gas Export exported to Europe (2016) infrastructure was constructed to enable the supply Markets of gas from Azerbaijan to European markets. Gas Lending Target: 4 billion cubic meters deliveries to Europe commenced on December 31, o TANAP (P157416) Source: P157416 per year of gas exported to 2020, with a slight delay in the completion of the European markets (2020) TAP, which was beyond the control of TANAP. They MIGA reached a level of 6.2 bcm p.a. in January 2021, Completed Actual: 6.2 bcm p.a. (January surpassing the target of 4.0 bcm p.a. This indicated 2021) that the diversification of access to the energy o TANAP (Project ID markets actually took place. 13520) As of September 30, 2021, annualized gas deliveries to Europe reached 7.4 bcm and stood at 8.2 bcm in 2022. Lessons learned: o The use of shareholder finance instead of project finance allows complex and large-scale projects like TANAP to be implemented on schedule by reducing complexity and the associated risk of delays. 70 o Maintaining direct channels of communication with all key stakeholders throughout implementation—including national governments, borrowers, the implementing agency, IFIs, private-sector interests—is critical for the smooth implementation of the project. o Continuity in oversight is a major success factor, especially having experienced environmental and social task team members involved from appraisal to completion. o Occupational health and safety and adequate working conditions must be prioritized in the appraisal of large infrastructure projects. o The focused application of the World Bank’s safeguards policies to the TANAP facilities allowed the World Bank to focus its E&S oversight and implementation support and impact the quality of E&S risk management through its recommendations. o Gas leakage and venting must be considered with conservative assumptions in the climate appraisal of gas pipeline projects. o The application of TANAP’s procurement procedures facilitated cost-effective procurement under the project, and both procurement and contract management benefited from the parallel engagement of a highly skilled external EPCM consultancy to complement TANAP’s internal technical and commercial teams’ implementation. 71 Focus Area 2: Economic Competitiveness Objective 2.3: Enhance access to finance for MSMEs Overall Rating: Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Baseline: 0 (2014) Achieved – The new Secured Transactions Law and Completed Number of security regulation on security transactions were enacted in interest notices created Target: 5000 (2020) June 2017. The on‐line registry of security interests ASA in the registry was established and launched by FIMSA in early o Azerbaijan Financial 2018. At the end of July 2019, nine legal acts Actual: 53,263 secure interest Advisory Project Source: IFC Azerbaijan notices (February 2020) harmonizing the ST regulatory frameworks, together (P156337) and Central Asia with amendments to the Civil Code, were Financial Markets completed. In 2020, the collateral registry was o FSAP (P173740) Infrastructure Advisory Milestone 1: integrated into the electronic court system. Judges Project (569388) New legislation on secured can now conduct searches and identify security o Financial Sector transactions enacted (2017) interests in the registry linked to movables belonging Modernization Project to individuals and legal entities. The FIMSA (P125462) Milestone 2: regulations introduced did not include the required On-line registry of security responsible lending provisions though, which o Financial Sector interests in movable assets however, has not affected the target. Modernization Project – 2 established (2018) (P160238) Milestone 3: IFC FIMSA regulations for o IFC (ECA) SME Banking responsible lending and advisory program information disclosure issued (2018) 72 Baseline: 5 rebranded access Achieved – Prompted by the changed transportation o IFC Azerbaijan and Indicator 2: Increased points (2014) network and increased accessibility, the government Central Asia Financial number of rebranded opted to reduce the number of access points to Markets Infrastructure AzerPost points to Target: 150 rebranded access optimize AzerPost's operations, the original target Advisory Project (569388) facilitate access to points (2021) became irrelevant. Only ten access points were financial services in rebranded as originally defined under the program. o IFC ECA Corporate rural areas Actual: 1,176 AzerPost offices However, because all post offices were unified and Governance Program branded as financial service AzerPost was branded as a financial service provider, (586209) Source: P125462; AzerPost providers (2021) this had no influence on the achievement of the CPF Milestone 4: objective. To date, 1053 post offices outside Baku o IFC ECA Agri-Finance AzerPost pilot rebranding provide financial services to the population. The CLR Project 2 (600339) program is under evaluates the outcome as achieved, based on its implementation with a new attribution to the WBG program and continuity of o IFC Electronic and Digital marketing strategy for financial the action initiated under the long-term Financial Services services delivery approved engagement, as well as its broader impact and Advisory Project, (2018) contribution to service delivery. (601347) Indicator 3: Increased Baseline: 0 (2016) Partially Achieved – The Instant Payment System o IFC investments in the financial inclusion of was launched by the CBAR in October 2020 with the financial sector (3 population into the Target: 250,000 active users of support of IFC (601347, 2016). Due to the testing projects to support MSME formal financial system e-digital services (2020) period, the system had no formal users in 2020. This finance through local through e-services. result was reported with a delay due to the necessity banks) Actual: 0 users (PLR target date of constructing a robust infrastructure for the Source: CBAR 2020) reliable execution of trusted protocols, but the 140,200 users (CPF end date implementation of the envisaged activities 2021) commenced within the CPF period. However, within 242, 022 (2022) one year, the number of users increased to 140,200 in 2021; 242, 022 in 2022 and reached 310,557 by Milestone 5: November 2023.65 The Law on Payment Systems and Services adopted (2020). - The number of payment cards in the market surged from 5.3 million in 2016 to 9.6 million in 2020 and 65 Data on the number of users of the Instant Payment System is not publicly available and was provided by CBAR upon request. 73 reached 16 million in October 2023. In 2022, 2.99 million people over the age of 15 owned at least one card reached compared to 2.1 in 2017. This upward trend underscores the increased financial inclusion of the population through the widespread use of digital payment methods. - The open banking roadmap developed in 2021 identifies steps for sharing of Application Programming Interface by financial institutions. - Law on Payment Systems was adopted beyond the CPF period (August 2023) and enacts broad reforms aimed at electronic payment development, open banking, regulatory sandbox, financial inclusion, development of payment system providers as well as the introduction of new products to the market. Indicator 4: Increased Baseline: 0 (2019) Achieved – Surpassing the target, in 2021, 1,176 post number of financial offices provided financial services across the country services agents Target: 720 (2022) under the license received by AzerPost in 2010 with support from WB previous program (IDA-40300, Source: P125462; Actual: 1,176 (2021) TF091639). Financial services accounted for 57.8 AzerPost percent in 2021, and 66 percent in 2023 of AzerPost's revenues, which, compared to 2016, increased by 17 percent in 2021, and 118.2 percent in 2023. Lessons learned: o Country reforms and resulting transformations may take longer than advisory project timelines. Legislative change and reform processes are impacted by various factors, which affect timing, as well as the need for continuous engagement at various stages. Therefore, IFC should be able to have more flexibility to plan for strategic longer-term engagement, while being able to provide ad-hoc and urgent support along the way. Failure to provide agile and targeted advice may impact overall reform implementation and project results. 74 Focus Area 2: Economic Competitiveness Objective 2.4: Reduce regulatory burden for SMEs Overall Rating: Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Simplified Construction permits Achieved - The Law on Licenses and Permits was process of business Baseline: 212 day (Doing adopted in 2016. Completed permits issuance as Business, 2014) measured by the The application of an e-government information Lending decreased number of Target: 170 days or less, 25% system in specific cases was enabled by the Rules for o JSSIP (P144700) days to receive less (Doing Business, 2020) issuing construction permits that were further construction permits amended67 in June 2023. ASA Actual: 116 days (2020)66 Source: IFC Investment o Industrial Estates TA Climate and (P158794) Agribusiness Milestone 1: Competitiveness New Law on permits o Phase II - Promoting Project (600496) approved and enacted Transparency and (2016) Efficiency of SOEs in Azerbaijan (P165149) o Doing Business Reform Advisory (through IFC 600496) IFC Completed o IFC Investment Climate and Agribusiness 66Doing Business 2020 report 67Law of the Republic of Azerbaijan “On Licenses and Permits” No. 176-VQ dated March 15, 2016; Rules for issuing permits for the construction of certain construction objects and the procedure for issuing permits for the operation of a construction object 75 Competitiveness Project (600496) o Business Competitiveness Project (600496) o IFC ECA Corporate Governance Advisory Program (586209) Focus Area 2: Economic Competitiveness Objective 2.5: Enhance competitiveness of agriculture and rural development Overall Rating: Achieved Indicator Baseline/Target/Milestones Status at CLR World Bank Group Program Indicator 1: Baseline: N/A68 (2014) Achieved – Beneficiary agribusinesses and targeted Completed Increase in marketed value chains were reporting higher growth in marketed output of the targeted Target: 20% increase in output than originally estimated. In 2021, activities of Lending value chains and marketed output in 60% of additional 14 enterprises had just started embarked on agribusinesses the targeted value chains full production/operation and not yet marketed their o Real Estate Registration and agri- businesses (2020) output. An assessment showed a positive trend Project (P100582) Source: P122812 whereby most of them were likely to achieve at least 40 Actual: 44.4 (PLR target percent growth in their second or third year of o AZRIP 2 (P144107) date) operation. Moreover, the sales growth trend in the 118 enterprises showed an increase of over 40 percent o Water Users Association 49.67% increase in marketed growth over time. Development Support output in 61% (CPF end Project (P107617) period FY21) By 2020, 17 productive partnerships were established surpassing the target of 15 set under the supporting o Agriculture Milestone 1: ACIP project. Competitiveness Productive partnerships established as planned, 30 68This indicator is measured by percentage and for that purpose the baseline was set as n/a standing for ‘zero’ (as it should b e while measuring the progress through percentage increase). 76 agribusinesses received Prices paid to farmers areas supported through AzRIP2 Improvement Project investment financing (2017) increased by 20 percent compared to non-project areas (P122812) by August 2018. Crop productivity in communities benefiting from small-scale irrigation increased by 46 percent for potatoes and by 31 percent for wheat. By ASA June 2018, 23 out of a sample of 20 WUAs achieved a 15 o Agriculture Sector Risk percent increase in agricultural output associated with Assessment TA (P160470) corresponding increases in yield of agricultural products covering a total irrigated service area of 71,681 hectares o Azerbaijan Rural (target in hectares 59,200, baseline 0, exceeded target). Livelihoods Analysis Indicator 2: Baseline: US$408 per ha Achieved - Targets for increase in agricultural (P161847) Increase in (2012) productivity in the rehabilitated WUA areas were agricultural surpassed - 23 out of 25 rehabilitated WUAs showed productivity (15%) in Target: US$730 per ha increase in agricultural output (gross margin) which was IFC at least 80% of (2016) equivalent to the total irrigated service area of 71,681 Completed rehabilitated water managed by these WUAs. The increase in agricultural o IFC ECA Agri Finance users associations Actual: 15 % productivity output (gross margin) resulted in an increase in yield, Project (600339) (WUAs) increase in 92% cropping intensity, and share of higher-value crops. rehabilitated WUAs (2018) o IFC Investment Climate and Source: P107617 The overall farmers’ satisfaction rate was 73.4 percent Agribusiness and exceeded the target which was set at 60 percent. As Competitiveness Project Milestone 2: of June 30, 2018, 118,510 on-farm Irrigation and (600496) Rehabilitation works on Drainage infrastructure were brought back to project irrigation schemes operational condition, surpassing the project target of completed (2019) 85,000.00. (Report No: ICR00004533) Indicator 3: Baseline: 0 (2014) Achieved - The beneficiaries represented rural poor Number of rural poor, engaged in program-supported economic activities at including women, Target: 250,000, including the community level during 2012-2018 (AZRIP-2, benefiting the WBG 50% women (2018) P144107). program supported In 2019, the number of beneficiaries reached 3.6 million people, out of which 56 percent were women.70 As of 70 Data on total number of beneficiaries under AZRIP-2 was gathered for the geographic information system; AZRIP-2 Report ICR00004560 77 economic activities at Actual: 2,089,085, including September 2019, 4648 people directly benefited from community level. indirect beneficiaries, out of more than 1500 livelihoods microprojects. In addition, which 1.065.438 were the program mobilized 14 Women’s Development and Source: P144107; women (2018) Enterprise Groups to set and run women owned P107617 businesses in rural areas. The gender target was Milestone 3: favorably met with 330, 873 female water users 330,000 female water users benefiting from improved irrigation and drainage provided with improved services, meeting Milestone 3. (WUAP, P107617) Irrigation and Drainage service (2021)69 Milestone 4: Implementation of community livelihood micro projects underway (2017) Indicator 4: Baseline: None (2015) Achieved - This target was revised on October 1, 2015, Coverage of the digital to reflect the verified actual size of area covered by the cadaster map to allow Target: 1.5 mln ha (2020) WB program through the Real Estate Registration more citizens and project and set at 1.5 million ha. At the time of the PLR businesses benefit Actual: 1.53 mln ha (2020) that target was achieved. A total of 1,528,032 hectares from online services (251,585 ha with full cadastral data, 107,746 ha with increased. Milestone 5: light cadastral data, and 1,168,428 ha with SLCC 71 data Technical works for conversion) were created, slightly exceeding the end Source: P100582 expanding coverage and target. The milestone of expanding coverage and quality quality of data completed in of data the area covered by digital cadaster map was the area covered by digital achieved. cadaster maps. (2018) Indicator 5: Baseline: 0 (as of end of Achieved – 118 agribusinesses and value chain sub- Increase in number of 2014) projects received sub-loans and grants investment agribusinesses – lending from ACIP credit line in 2015-2020 and 17 borrowers of productive partnerships got investment funding. 69 This milestone was introduced at PLR stage; the target year was omitted, hence 2021 added at CLR stage. 71 SLCC (The State Land and Cartography Committee) was dissolved in 2015 and functions were transferred to the State Committee to Property Issues 78 investment financing Target: 100 agribusiness Another 94 agribusinesses were financed from reflows. in ACIP participating received investment lending In addition, 14 enterprises, including nine banks (2019) agribusinesses funded by the project credit line and five value chain support activities received sub-loans and Source: P122812 Actual: 118 agribusinesses grants in 2021. and value chain subprojects received funding (2021) Capacity building was provided to a total of 121 bank specialists who were trained on value chain financing Milestone 6: products, specifics of agricultural lending and appraisal Implementation of capacity of investment proposals. building program in appraisal of agribusiness investment proposals underway (2018) Milestone 7: Agribusinesses received financing (2020) Indicator 6: Baseline: N/A (2018) Achieved – As of December 2021, a total US$27.16 Value of financing million was disbursed for 209 sub-loans to value chains facilitated to value Target: US$30 million (2020) and agri-businesses from both planned ACIP credit line chains and and reflows (US$9.08 million) in new subloans. In agribusinesses Actual: US$32.1 million addition, US$5 million was provided in grants, disbursed to value chains surpassing the CPF target. None of the subloans made Source: P122812; IFC and agri-businesses under were reported as in default. As of December 2020, a Investment Climate IBRD program (December total US$127,862,000, and as of December 2021, a total and Agribusiness 2021) US$330,371,000 was disbursed to value chains and agri- Competitiveness businesses by the local financial institutions facilitated Project (600496) through the advisory support of IFC Azerbaijan Investment Climate and Agribusiness Competitiveness Project. 79 Indicator 7: Baseline: N/A (2018) Partially Achieved - Under the IFC AICACP, 18 Financial New financial Product Concept notes were developed by December products sold in the Target: 7 new financial 2021 and delivered to Rabita Bank and the International market as evidence of products (2020) Bank of Azerbaijan. Total 57 new financial products expanded access to were designed. Only one product - Strawberry VC - was finance Actual: 1 new financial launched by Rabita Bank while the rest were postponed product launched; 57 new until the banks complete the introduction of internal Source: IFC ECA Agri financial products designed strategy changes. Finance Project (2021) (600339); Rabita Bank Milestone 8: New financial products available in the market (2020). Additional evidence: Non-quantified benefits yielded by the program include job creation in agribusinesses, strengthened veterinary services, including privatization of field veterinarians, improved animal health due to the project animal disease control program, support to veterinary education, improved phytosanitary services, and improved capacity for monitoring food safety and seed testing and certification. 80 CLR Annex 3: IBRD Lending program FY 16-FY21: Planned vs Actual Actual Appr. Project name Planned/New Status Closing Date (US$ million) FY Regional Roads/Highway IV 250 Planned Dropped ASAN Public Service Delivery 25 Planned Dropped National Water Supply and Sanitation Project I AF 130 Planned Dropped Power Distribution 300 Planned Dropped Lake Clean-up program 85 Planned Dropped National Solid Waste Management Project 117 Planned Dropped Third Rural Investment Project 100 Planned Dropped Third Highway Project III AF 140 Planned (delivered) Closed 2016 31-Mar-21 IDP Living Standards and Livelihoods Project AF 66.7 Planned (delivered) Closed 2016 31-Dec-19 TANAP 400 New Closed 2017 31-Jul-21 AF Judicial Services and Smart Infrastructure Project 50 New Active 2020 30-Jun-24 Azerbaijan Employment Support Project 100 New Active 2020 31-Dec-2025 Regional Connectivity and Development Project 65 New Active 2021 31-Mar-2026 Total delivered: 821.7 6 loans 81 IBRD Lending program inherited by CPF FY16-21 Project Project Approval Revised Net Comm. Amt. - ID Project Name Loan # Financier FY Closing Date Total P083108 Rail Trade and Transport Facilitation 2 IBRD Only 2008 31-Dec-2017 $670,000,000.00 P096213 National Water Supply and Sanitation 1 IBRD Only 2007 31-Dec-2016 $207,500,000.00 P100582 Real Estate Registration 1 IBRD Only 2007 01-Oct-2015 $29,100,000.00 Water Users Association Development P107617 Support Project 1 Blend 2011 30-Jun-2018 $80,000,000.00 Second National Water Supply and Sanitation P109961 INHERITED* Project 2 Blend 2008 30-Jun-2019 $410,000,000.00 P110679 ARP/II-Integrated Solid Waste Management 2 IBRD Only 2008 31-Aug-2018 $76,600,000.00 P118023 Third Highway Project 1 Blend 2010 31-Mar-2021 $241,600,000.00 Agricultural Competitiveness Improvement P122812 Project 1 IBRD Only 2014 31-Dec-2021 $34,500,000.00 P122943 IDP Living Standards and Livelihoods Project 1 IBRD Only 2012 31-Dec-2019 $50,000,000.00 P110679 Second Rural Investment Project 2 IBRD Only 2013 30-Sep-2019 $80,000,000.00 Judicial Services and Smart Infrastructure P144700 Project 1 IBRD Only 2015 30-Jun-2024 $100,000,000.00 Total inherited 15 $1,979,300,000.00 *List of inherited projects excludes P102117, P105116, and P115396 which were technically part of the active FY 16 portfolio but were not included as CPF FY16-21 projects 82 CLR Annex 4: World Bank Portfolio Indicators over the CPF formal period and gap years Data as of August 12, 2024 Portfolio and Disbursements (FY16-24) Fiscal year 2016 2017 2018 2019 2020 2021 2022 2023 2024 # of Projects 14 11 9 7 6 5 4 3 3 IBRD Net Commitments (USD million) 2,009.3 1,992.1 1,524.5 1,099.4 677.6 597.1 349.5 315.0 315.0 IDA Net Commitments (USD million) 230.4 176.8 176.8 100.0 70.0 69.8 0.0 0.0 0.0 Total Disbursements (USD million) 1,301.2 1,476.6 1,424.9 1,018.0 584.5 450.7 183.8 201.4 262.2 Total Undisbursed Balance (USD million) 924.0 679.6 265.0 174.2 158.0 211.1 165.7 113.6 52.8 Disbursements in FY (USD million) 286.5 242.4 167.7 90.8 50.0 11.7 44.4 52.1 60.8 Disbursement Ratio (%) 28.5 26.3 24.6 34.3 28.9 7.4 21.1 31.5 53.5 Commitments IP/DO Prob (USD million) 0.0 670.0 538.6 116.7 65.5 0.0 0.0 0.0 0.0 Slow Disbursing projects (#) 1 0 1 1 0 0 0 0 0 Cancellations in FY (USD million) 1.1 0.0 248.1 0.0 115.2 0.2 0.0 0.0 0.0 # of Problem Projects 0 1 2 1 1 0 0 0 0 # of Projects at Risk 0 1 3 2 1 0 0 0 0 Commitments at Risk (USD million) 0.0 670.0 638.6 526.7 65.5 0.0 0.0 0.0 0.0 IEG Ratings (FY16-24) Exit FY FY16 FY17 FY18 FY19 FY20 FY21 FY22 # of Projects 4 2 2 2 2 1 1 Outcome % Satisfactory 75.0 50.0 50.0 100.0 100.0 100.0 100.0 ICR Quality % Satisfactory 50.0 100.0 100.0 0.0 100.0 100.0 100.0 Net Disconnect 25.0 50.0 0.0 0.0 -50.0 0.0 0.0 Bank Performance at Entry % Satisfactory 25.0 50.0 50.0 50.0 100.0 100.0 100.0 Bank Performance at Supervision % Satisfactory 75.0 100.0 100.0 50.0 100.0 100.0 100.0 Bank Overall Performance % Satisfactory 75.0 50.0 50.0 50.0 100.0 100.0 100.0 % Substantial or Better M&E Quality 0.0 50.0 100.0 0.0 100.0 100.0 100.0 83 CLR Annex 5: IFC Investment Program Commitments FY16-FY21 FY16- FY16 FY17 FY18 FY19 FY20 FY21 FY21 Long Term Finance (LTF) 25 10 - - 1.1 - 36.1 of which IFC Own Account 25 10 - - 1.1 - 36.1 of which Core Mobilization - - - - - - - Short Term Finance (STF) 1.9 - - - - - 1.8 of which IFC Own Account 1.9 - - - - - 1.8 of which Core Mobilization - - - - - - - Azerbaijan Investment Portfolio by Committed Exposure and Portfolio Outstanding FY16-FY21 FY16 FY17 FY18 FY19 FY20 FY21 Committed Exposure 73.1 68.5 48.8 41.8 35.7 36 Portfolio Outstanding 66.8 58.6 48.8 41.8 35.2 35.5 of which Loan Outstanding 57 44.8 31.9 7 0.5 0.7 of which Equity Outstanding 9.8 13.8 16.9 34.8 34.8 34.8 Undisbursed 6.4 9.9 - - 0.5 0.5 Non-Performing Loans (NPLs) 18.8 16.9 28.8 5.5 - - IFC Advisory Portfolio FY16-FY21 Project Primary Business Line FY Total Funds Project Name Total Project Size ID Name Approval Managed by IFC Azerbaijan Investment Climate and Agribusiness 600496 Country Advisory 2015 2,644,215 2,600,465 Competitiveness Project Economics & Private 604919 CPSD – Azerbaijan 2020 400,000 400,000 Sector Development Azerbaijan assessment of power and transport sectors 605035 Infrastructure 2020 140,817 140,817 and Cities engagement 605501 Azerbaijan Offshore Wind Infrastructure 2021 90,546 90,546 606120 Renewable Energy Engagement in Azerbaijan Infrastructure 2021 70,279 70,279 84 CLR Annex 6: MIGA exposure during the CPF period Project Effective Expiry Project Business FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 ID Date Date Name Sector 13520 06/29/2018 07/29/2033 TANAP Infrastructure -- -- 1,113 1,097 -- -- -- -- 85 Annex 3: IBRD, IFC, and MIGA Planned Collaboration in Energy and Water Energy Transition The World Bank Group program will seek to accelerate the energy transition in phases across three pillars: (i) power sector reform and tariff policy; (ii) green energy transmission and distribution strengthening; and (iii) renewable energy development, energy efficiency, and innovations. WBG engagement will be underpinned by a programmatic ASA and IFC advisory working together to deliver policy support including a cost-of-service study, a roadmap toward cost-effective electricity tariffs, an assessment of priority investments, and a review of the potential of geothermal, hydrogen, distributed renewable energy, and energy efficiency models. A key instrument will be the AZURE project which will strengthen the grid for the integration of 1.8 GW of VRE. IBRD, IFC, and MIGA, through the WBG Guarantee Platform, will then work together to support mobilization of commercial financing for renewable energy projects, including through PPPs. The WBG will also use its convening power to bring together public and private stakeholders to help position the country as a green energy exporter, in close alignment with the development of a wider green energy corridor with neighboring countries. WBG value proposi on for Energy Transi on Proposed WBG value proposi on AREAS OF ENGAGEMENT IBRD IFC MIGA Foster enabling environment for Sector reform and tari Advisory services/TA to op mize tari private investments through IFC s regula on methodology and provide inputs to Upstream and Advisory Units Cross sectoral path towards cost‐recovery in Contribute private sector perspec ve electricity sector to sectoral strategies and legal and areas Capacity building for stronger regulatory reforms ins tu ons through AZURE project and Project development and capacity Capacity building PASA building (through Upstream and Advisory) Strengthen collabora on between ESPIRE program and the four‐country Financing to support ‐at program In coordina on with IFC, contribute to Green energy corridor green energy corridor JV. enabling framework and prepara on level‐ private sector investments in Convene o shore wind workshop to relevant programs of plans (for instance on o shore wind, support Government strategy. Contribute to enabling framework and energy e ciency, etc.). Advisory services/TA under PASA to prepara on of plans (for instance on Programs and E EE, ethane reduc ons and assess (i) geothermal direct use o shore wind, building up on the Inputs on nancial mechanisms to innova ons for energy transi on poten al, (ii) op ons for distributed ESMAP‐IFC OW roadmap, green scale up resources to encourage frameworks renewable energy, (iii) green hydrogen, energy e ciency) foreign private sector investments to hydrogen poten al, (iv) Innova ve EE Structure PPP schemes complement IBRD and IFC support business models, and (v) strengthen Financial support to local nancial to green transi on. distribu on grid for EV integra on. intermediaries (climate nance) Transmission and distribu on Advisory services/TA for T D under Financial support for private rms AZURE project. Through the WGB Guarantee Pla orm enewable energy Finance transmission and distribu on Credit enhancement to SOEs for grid infrastructure to enable RE grid investments in gas distribu on grid to Finance RE projects integra on. reduce methane emissions strengthen Support mobiliza on of commercial Finance rehabilita on of public transmission and distribu on grid Enabling projects Energy e ciency buildings for energy e ciency (EE) nancing for RE projects Guarantees to mobilize foreign capital for Provide transac on advisory support savings and opera onaliza on of EE RE genera on and PPPs in the energy sector for projects (e.g., projects aimed at fund. complemen ng IBRD IFC support T D electricity grid strengthening greening industrial parks) Finance innova ve distributed solar PV Payment Guarantee to provide liquidity projects and EV grid integra on. support for public sector o ‐ taker/counterparty 86 Water Transition The World Bank Group program will seek to strengthen the policy and regulatory framework and build ASWRA’s institutional capacity that will be implemented through three priority investment programs: (i) Non-Revenue Water Reduction Program, (ii) Water Supply Services and Wastewater Treatment Improvement Program, and (iii) Irrigation Modernization. The institutional development program for ASWRA will include: preparation of a national strategy for the WSS sector, establishing a modern regulatory framework and revised tariff structures, introducing performance- based financing to improve efficiency and financial sustainability, and establishing a Water Sector Platform to engage with key stakeholders. The different arms of the World Bank Group, IBRD, IFC and MIGA (through the Guarantee Platform), will see to jointly support these institutional and regulatory reforms by helping to mobilize private sector investments including through PPPs. WBG value proposi on for Water Sector Proposed WBG value proposi on AREAS OF ENGAGEMENT IBRD IFC MIGA Leadership on private sector dialogue, improvement of enabling Capacity building Leadership on sector dialogue and reforms environment (service providers, Cross sectoral T D funding, access, credit enhancement nancing mobiliza on) mechanism Transac on advisory on structuring areas PPP and implementa on of private sector ini a ves (incl. PPPs) Establishing a Water Sector Pla orm for engaging with stakeholders on‐revenue water Prepara on of a na onal strategy for the WSS Iden ca on of private sector Se ng up of a modern regulatory framework, investment opportuni es in WSS including revised tari structure and Water supply services and Preliminary assessment of projects Working together with methodologies wastewater treatment and ini a ves WB, IFC, and private sector Introducing performance‐based nancing and Programs and incen ves for the WSS Public En ty for For Baku Desalina on, water reuse to support blended nance and subsequent PPPs,IFC for water projects frameworks improving e ciency transac on advice to GoAZ on Irriga on Development of water accoun ng and structuring and implementa on of modeling tools for irriga on investment the projects priori za on, and assessment of impacts from Desalina on and climate change, andmanagement/policy wastewater reuse ac ons. Water supply and sanita on IBRD policy and ins tu onal development to sector program support path to nancial sustainability of the IFC direct nancing ofPPPs (incl. De‐risking commercial debt water sector and access to commercial Baku Desal) and equity investments Enabling projects on‐revenue water nancing NRW Reduc on Program Mobiliza on of capital and through MIGA Poli cal Risk climate/blended nance (where Insurance Water supply service improvement program appropriate) Irriga on Wastewater management andreuse program Agriculture and Irriga on Moderniza on Project 87 Annex 4: Selected Indicators of Bank Portfolio Performance As of Date 12/09/2024 FY22 FY23 FY24 FY25 Indicator Portfolio Assessment Number of Projects Under Implementation ᵃ 3.0 3.0 3.0 2.0 Average Implementation Period (years) ᵇ 3.8 4.8 4.5 4.2 Percent of Problem Projects by Number ᵃ˒ ͨ 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount ᵃ˒ ͨ 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number ᵃ˒ ͩ 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Amount ᵃ˒ ͩ 0.0 0.0 0.0 0.0 Disbursement Ratio (%) ͤ 21.1 31.5 53.5 50.6 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Since FY80 Last Five FYs Memorandum Item Proj Eval by IEG by Number 46 2 Proj Eval by IEG by Amt (US$ millions) 3,321.4 345.8 % of IEG Projects Rated U or HU by Number 23.9 0.0 % of IEG Projects Rated U or HU by Amt 26.7 0.0 a. As show n in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, w ith the exception of Disbursement Ratio, w hich includes all active projects as w ell as projects w hich exited during the fiscal year. 88 Annex 5: Operations Portfolio (IBRD/IDA and Grants) As of 12/09/2024 Closed Projects 61 IBRD/IDA* Total Disbursed (Active) 135.06 of which has been repaid(1) 3.63 Total Disbursed (Closed) 3,871.79 of which has been repaid 2,757.48 Total Disbursed (Active + Closed) 4,006.84 of which has been repaid 2,761.11 Total Undisbursed (Active) 176.06 Total Undisbursed (Closed) Total Undisbursed (Active + Closed) 176.06 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements ͣ ̷ Develop Implementation Fiscal Project ID Project Name ment IBRD IDA Grants Cancel. Undisb. Orig. Frm Rev'd Progress Year Objectiv P171250 Employment Support Project S S 2020 250.0 0.0 0.0 166.0 16.0 3.0 P174379 Regional Connectivity & Development Proj S MS 2021 65.0 0.0 0.0 10.1 5.3 0.0 Overall Result 315.0 0.0 0.0 176.1 21.3 3.0 * Disbursement data is updated at the end of the first w eek of the month. a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. 89 Annex 6: Statement of IFC’s Held and Disbursed Portfolio 90