Document of The World Bank

Public Disclosure Authorized Report No: ICR00001414

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-37890)

ON A

Public Disclosure Authorized CREDIT

IN THE AMOUNT OF SDR 25.7 MILLION (US$ 35 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF AZERBAIJAN

FOR THE

IRRIGATION DISTRIBUTION SYSTEM AND MANAGEMENT Public Disclosure Authorized IMPROVEMENT PROJECT

March 4, 2011

Sustainable Development Department Public Disclosure Authorized Central Asia Country Unit Europe and Central Asia Region

CURRENCY EQUIVALENTS

(Exchange Rate Effective December 8, 2010)

Currency Unit = Azerbaijani New Manats (AZN) 1.00 AZN = US$ 1.25 US$ 1.00 = .80 AZN

FISCAL YEAR July 1 to June 30

ABBREVIATIONS AND ACRONYMS

ADCP Agricultural Development and Credit Project AIOJSC Amelioration and Irrigation Open Joint Stock Company (formerly SAIC) AM Aide Memoire AZN Azerbaijani New Manat (currency) BCR Borrower’s Completion Report CAS Country Assistance Strategy CIS Commonwealth of Independent States CM Cubic meter CMS Community Mobilization Specialist CoM Cabinet of Ministers CSU Central Support Unit EA Environmental Assessment EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EMMP Environmental Management and Monitoring Plan ENPV Economic Net Present Value ERR Economic Rate of Return FIRR Financial Internal Rate of Return FNPV Financial Net Present Value FPP Farm Privatization Project FSK Former sovkhoz or kolkhoz FSU Former Soviet Union GDP Gross Domestic Product GIS Geographic Information System GOA Government of Azerbaijan Ha Hectare I&D Irrigation and Drainage ICB International Competitive Bidding IDA International Development Association IDSMIP Irrigation Distribution System and Management Improvement Project IEG Independent Evaluation Group ILI Intensive Learning ICR

IMT Irrigation Management Transfer ISF Irrigation Service Fee ISR Implementation Status and Results Report KI Key Indicator LAI Law on Amelioration and Irrigation (1996) M&E Monitoring and Evaluation MENR Ministry of Ecology and Natural Resources MTR Mid-Term Review NCB National Competitive Bidding NEAP National Environmental Action Plan NGO Non-governmental Organization O&M Operation and Maintenance OMF Operations and Maintenance Fee OPCS Operations Policy and Country Services PAD Project Appraisal Document PDO Project Development Objectives PIM Participatory Irrigation Management PIU Project Implementation Plan RFS Regional Financial Specialist RID Raion Irrigation Department RIDIP Rehabilitation and Completion of Irrigation and Drainage Infrastructure Project RSU Raion Support Unit RVK Raivodkhoz (District Water Authority) SAIC State Amelioration and Irrigation Committee (now AIOJSC) SOE Statement of Expenditure SPPRED State Program on Poverty Reduction and Economic Development SSB State Supervisory Body SU Support Unit TA Technical Assistance TNA Training Needs Assessment WC Water Code WOP Without Project WP With Project WT Water Tariff WTP WUA Training Program WUA Water User Association WUG Water User Group

GLOSSARY

Amelioration Improvement, betterment, reclamation Hydroposts Water measuring structures Oblast Region or province On-farm system Irrigation system at level of former state and collective farms Raion District

Regional Vice President: Philippe Le Houerou Country Director: Asad Alam Sector Director: Peter Thomson Sector Manager: Dina Umali-Deininger Task Team Leader: Pieter David Meerbach ICR Lead Author: Douglas Vermillion

AZERBAIJAN IRRIGATION DISTRIBUTION SYSTEM AND MANAGEMENT IMPROVEMENT PROJECT CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. PROJECT CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN ...... 1 1.1 Context at Appraisal ...... 1 1.2 Original Project Development Objectives (PDO) and Key Indicators ...... 2 1.3 Revised PDO and Key Indicators and reasons/justification ...... 2 1.4 Main Beneficiaries ...... 2 1.5 Original Components ...... 3 1.6 Revised Components ...... 4 1.7 Other significant changes ...... 4 2. KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES ...... 5 2.1 Project Preparation, Design and Quality at Entry ...... 5 2.2 Implementation ...... 6 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization ...... 9 2.4 Safeguards and Fiduciary Compliance ...... 10 2.5 Post-completion Operation/Next Phase ...... 10 3. ASSESSMENT OF OUTCOMES ...... 12 3.1 Relevance of Objectives, Design and Implementation ...... 12 3.2 Achievement of Project Development Objectives ...... 13 3.3 Efficiency ...... 14 3.4 Justification of Overall Outcome Rating ...... 14 3.5 Overarching Themes, Other Outcomes and Impacts ...... 14 3.6 Summary of Findings of Beneficiary Survey and Stakeholder Workshop ...... 15 4. ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME ...... 16 5. ASSESSMENT OF BANK AND BORROWER PERFORMANCE ...... 16 5.1 Bank Performance ...... 16 5.2 Borrower Performance ...... 17 6. LESSONS LEARNED ...... 18 7. COMMENTS ON ISSUES RAISED BY BORROWER/IMPLEMENTING

AGENCIES/PARTNERS ...... 20 ANNEX 1. PROJECT COSTS AND FINANCING ...... 21 ANNEX 2. OUTPUTS BY COMPONENT ...... 22 General ...... 22 Component 1 ...... 22 Component 2 ...... 26 Component 3 ...... 36 ANNEX 3. ECONOMIC AND FINANCIAL ANALYSIS FOR IDSMIP ...... 37 Introduction ...... 37 Methodology ...... 38 Irrigation and Drainage Infrastructure Rehabilitation ...... 39 Bahramtepe Headwork Rehabilitation ...... 42 Overall Project ...... 43 Comparison of the appraisal and ICR analyses ...... 44 ANNEX 4. BANK LENDING AND IMPLEMENTATION SUPPORT ...... 46 ANNEX 5. BENEFICIARY SURVEY RESULTS ...... 48 Introduction ...... 48 Characteristics of the WUAs and farmers (HHs) Surveyed ...... 48 Perceived changes in agricultural performances ...... 51 Beneficiaries’ assessment of project interventions ...... 52 Unaddressed needs and recommendations for future interventions ...... 52 ANNEX 6. STAKEHOLDER WORKSHOP REPORT AND RESULTS ...... 54 ANNEX 7. SUMMARY OF BORROWER'S ICR AND/OR COMMENTS ON DRAFT ICR ...... 55 ANNEX 8. COMMENTS OF CO-FINANCIERS AND OTHER PARTNERS/STAKEHOLDERS .. 58 ANNEX 9. LIST OF SUPPORTING DOCUMENTS ...... 59 MAP

A. Basic Information Irrigation Distribution Country: Azerbaijan Project Name: System & Management Improvement Project Project ID: P008286 L/C/TF Number(s): IDA-37890 ICR Date: 03/07/2011 ICR Type: Intensive Learning ICR GOVERNMENT OF Lending Instrument: SIL Borrower: AZERBAIJAN Original Total XDR 25.7M Disbursed Amount: XDR 25.7M Commitment: Revised Amount: XDR 25.7M Environmental Category: B Implementing Agencies: Amelioration and Irrigation Open Joint Stock Company Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 04/03/2002 Effectiveness: 12/19/2003 12/19/2003 Appraisal: 03/26/2003 Restructuring(s): 03/28/2010 Approval: 06/17/2003 Mid-term Review: 12/03/2007 11/17/2007 Closing: 03/31/2010 09/30/2010

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance:

i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any Quality of No Satisfactory time (Yes/No): Supervision (QSA): DO rating before Satisfactory Closing/Inactive status:

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) General public administration sector 20 30 Irrigation and drainage 80 70

Theme Code (as % of total Bank financing) Decentralization 17 17 Rural policies and institutions 33 33 Rural services and infrastructure 33 33 Water resource management 17 17

E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Johannes F. Linn Country Director: Asad Alam D-M Dowsett-Coirolo Sector Manager: Dina Umali-Deininger Joseph R. Goldberg Project Team Leader: Pieter David Meerbach Joop Stoutjesdijk ICR Team Leader: Pieter David Meerbach ICR Primary Author: Douglas Lynn Vermillion

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) To improve the effectiveness and financial viability of irrigation water distribution and management on 56,000 ha, through provision of support to Water Users Associations (WUA) and the Amelioration and Irrigation Open Joint Stock Company.

Revised Project Development Objectives (as approved by original approving authority) The Project Development Objectives were not formally revised.

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(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Collection percentage of Irrigation Service Fee, both for SAIA (now AIOJSC) in Indicator 1 : 11 project raions and for 22 project-WUAs that have benefited from rehabilitation. Collection rate of ISF for SAIA and 100% collection WUAs above 90 rate of ISF for 90 percent of very low percent. ISF is SAIA, for SAIA fee (between 10 Value expected to be rehabilitated WUAs and 20 percent of that quantitative or much higher than - 81% in average. needed) and less than 10 Qualitative) current levels, to ISF rates increased percent of needed fees at be set at level 3-5 times in WUA level. needed for a comparison with particular 2006 hydrologic unit. Date achieved 12/31/2003 12/31/2009 01/01/2010 Comments (incl. % WUA-ISF increase are in the range of AZN 5 to 10 per ha per year. achievement) Amount of maintenance of irrigation and drainage systems executed under the Indicator 2 : management of WUAs, as percentage of the annual O&M plan. 45 project WUAs In 22 project that have benefited WUAs that have from rehabilitation benefited from Value No maintenance carried and modernization rehabilitation and quantitative or out by WUAs. carry out 90 modernization, Qualitative) percent of the 91% of the planned necessary O&M, O&M has been as per O&M plan. carried out. Date achieved 12/31/2003 12/31/2009 04/01/2010 Comments The number of benefitting WUAs is lower, but with a similar overall area, since (incl. % after restructuring, WUAs were larger than at appraisal. achievement) Percentage of water users satisfied with WUA managerial and operational Indicator 3 : performance. 75 percent of all users in 45 project Ten percent of users of all WUAs that have Value 78% of all water WUAs satisfied, benefited from quantitative or users in each of 22 especially those at the rehabilitation and Qualitative) rehabilitated WUAs head of the systems. modernization satisfied with WUA managerial

iii and operational performance. Date achieved 12/31/2003 12/31/2009 01/01/2010 Comments (incl. % achievement) Volumes of water distributed to farm plots, measured as number of irrigations for Indicator 4 : main crops (orchards, wheat, cotton). An average of four irrigations has been At least four Under-irrigation applied, applied according irrigations applied Value with typically two to crop water norms for main crops by quantitative or irrigations per farmer for summer crops 80% of water users Qualitative) leading to depressed by 82% of water in rehabilitated yields. users in schemes. rehabilitated schemes Date achieved 12/31/2003 12/31/2009 01/01/2010 Comments (incl. % achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Willingness of WUAs within project area to work with WUA Support Units. About 160 WUAs in project area are Value WUAs have not started expected to 213 WUAs (quantitative interacting with Support receive formal and received formal or Qualitative) Units (SU). informal training training and support from Support Units. Date achieved 12/31/2003 12/31/2009 01/01/2010 Comments (incl. % achievement) Number of re-registered WUAs that have taken over the management of I&D Indicator 2 : infrastructure in the 11 project areas. Value 208 out of 213 A total of 198 (quantitative Zero WUAs. WUAs (98%) in WUAs expected. or Qualitative) Project area Date achieved 12/31/2003 12/31/2009 09/30/2010 Comments The number of WUAs in the Project area that were restructured was 213 rather (incl. % than the 198 estimated at project appraisal. achievement)

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G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/23/2003 Satisfactory Satisfactory 0.00 2 12/03/2003 Satisfactory Satisfactory 0.00 3 05/19/2004 Satisfactory Satisfactory 0.50 4 08/18/2004 Satisfactory Satisfactory 0.73 5 11/04/2004 Satisfactory Satisfactory 0.73 6 03/17/2005 Satisfactory Satisfactory 0.85 7 09/23/2005 Satisfactory Moderately Satisfactory 1.28 8 11/22/2005 Satisfactory Moderately Satisfactory 1.49 9 04/14/2006 Satisfactory Satisfactory 1.82 10 10/04/2006 Satisfactory Satisfactory 2.70 11 08/23/2007 Moderately Satisfactory Moderately Satisfactory 6.78 12 01/16/2008 Satisfactory Satisfactory 10.83 13 10/24/2008 Satisfactory Satisfactory 21.17 14 07/10/2009 Satisfactory Satisfactory 32.13 15 03/02/2010 Satisfactory Satisfactory 38.70

H. Restructuring (if any)

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions Second-order restructuring for: (i) extension of the project closing date to September 30, 03/28/2010 S S 38.70 2010; and (ii) reallocation of credit proceeds across disbursement categories.

v I. Disbursement Profile

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1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. Azerbaijan has made significant progress in reducing poverty. Driven by the oil and gas boom in Azerbaijan, per capita income rose from US $470 in 1995 to US$1,240 in 2005 and during 2002-05 poverty fell 22 percent in urban areas outside Baku, and 17 percent in rural areas. The Government of Azerbaijan (GOA) is using its oil revenues to subsidize development in non- oil sectors, including agriculture, water resources development, health and education, but since 2000 has initiated reforms to move from state-driven development towards market-driven development, and to develop the competitiveness of the non-oil economic sectors. Agriculture is an important component of this development strategy, and a top priority is to develop agricultural regions and secondary cities and provide basic infrastructure services across the country, including rehabilitation of irrigation and drainage systems. 2. In 2002, agriculture contributed 17 percent of Gross Domestic Product (GDP) in Azerbaijan and employment for 40 percent of the population. Ninety six percent of agricultural output was produced by small-scale farmers on private landholdings. Since most agricultural land receives only 200 to 400 mm of rainfall, irrigation is essential. However, by 2003, 80 percent of irrigation infrastructure in Azerbaijan was deteriorated and much was near collapse. Pumps were old and inefficient. Water delivery per ha was high, between 8,000 and 12,000 m3 per ha. The State Program on Poverty Reduction and Economic Development (SPPRED) of 2003 stated that Government’s two highest priorities were to generate productive employment and reverse dilapidation of infrastructure. Since most of the irrigation and drainage infrastructure became seriously deteriorated after the collapse of the Soviet Union and is in need of rehabilitation and modernization of management, the SPPRED emphasized the importance of irrigation, investment and cost recovery to rehabilitate and maintain irrigation schemes. It was also recognized that development of Water Users Associations (WUAs) into effective, sustainable organizations accountable to members would be a long-term effort. Support services from the government for WUAs would be needed. 3. The main emphasis of the Country Assistance Strategy (CAS) for the period 2000-02 was on establishing an appropriate institutional and policy framework, as well as on focusing on infrastructure development. This was achieved through reform of public sector institutions to enable them to manage the country's water and other natural resources efficiently and to ensure that economic growth leads to accelerated poverty reduction. The World Bank’s CAS for 2003- 04 emphasized further institutional reforms, capacity building, and infrastructure development for employment creation and poverty alleviation. The Bank’s Rural Development Strategy (RDS) and Water Resources Management Strategy of 2003, gave priority to improving productivity and sustainability of water through local management of irrigation. This included increased participation and empowerment of water users in irrigation, developing WUAs, investment in rehabilitation, institutional reforms and capacity building. The Irrigation Distribution System and Management Support Project (IDSMIP) was designed to meet the objectives of the CAS’s and the Water Resources Management Strategy, by strengthening the performance of irrigation and drainage in order to improve the productivity of agriculture and generate higher employment and income for poor rural populations.

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4. IDSMIP was a high priority at that time for the Government of Azerbaijan, since a number of significant reforms in the irrigation and drainage (I&D) sector were on-going and in the process of being adopted. These included: (i) establishment of WUAs at on-farm level after State and collective farms had been dismantled, (ii) giving WUAs hydraulic instead of administrative boundaries, (iii) converting WUAs into non-profit entities, independent from local government and focused only on governance, management and financing irrigation and drainage at the on-farm level, (iv) setting up an irrigation service fee to cover needs-based budgets at the WUA level, (v) participatory rehabilitation, and (vi) development of new support services.

1.2 Original Project Development Objectives (PDO) and Key Indicators 5. IDSMIP’s development objective was to improve the effectiveness and financial viability of water distribution and management on 56,000 ha through development of WUAs and the Amelioration and Irrigation Joint Stock Company (AIOJSC)2. To achieve this, IDSMIP would support the development of AIOJSC’s institutional capacity to enable WUAs to take over operation and maintenance (O&M) of on-farm irrigation and drainage (I&D) systems, and for rehabilitating on-farm I&D systems in selected off-farm systems. Given its relatively small area of intervention and considerable amount of innovation, it should be considered as a pilot project. 6. Progress was measured against the following key indicators: (i) Collection percentage of Irrigation Service Fees (ISFs) for WUAs and AIOJSC-managed off-farm O&M activities; (ii) Amount of maintenance of I&D systems executed by WUAs, as percentage of annual O&M plans; (iii) Percentage of potential water users who receive irrigation water; (iv) Volume of water distributed to farm plots, measured as number of irrigations; and (v) Percentage of water users satisfied with WUA managerial performance, measured with user satisfaction surveys.

1.3 Revised PDO and Key Indicators and reasons/justification 7. There were no formal revisions of the PDO or key indicators for IDSMIP.

1.4 Main Beneficiaries 8. The primary IDSMIP beneficiaries were small farmers in 11 project raions: Aghjabedik, Babek, Beylagan, Geranboy, Guba, Imishli, Khachmaz, Saatli, Sabirabad, Sharur and Zardab. Most of these raions had poverty levels of at least 15 percent. Average landholdings are 2 ha. Farmers who benefitted the most from IDSMIP improvements in irrigation management were those whose landholdings are small or are at the tail end or margins of schemes. Farmers on 140,000 ha served by the rehabilitated Bahramtape headworks benefitted because rehabilitation prevented the potential collapse of the headworks, ensured adequate water abstraction and produced a 20 percent reduction in sediment load flowing onto these lands. Local governments were secondary beneficiaries, since WUAs and more productive agriculture will raise the tax base due to higher income and land values. More equitable water distribution to tail and marginal areas is likely to reduce water conflicts. Other beneficiaries were WUA officers and staff of the CSU and 11 Raion Support Units, who were trained to perform their responsibilities effectively. There are three types of WUAs which benefitted from IDSMIP: (i) rehabilitated WUAs in

2 The original Project Appraisal Document refers to the State Amelioration and Irrigation Committee (SAIC). During project implementation SAIC was restructured into AIOJSC.

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project raions; (ii) non-rehabilitated WUAs in project raions which received intensive training; and (iii) WUAs in non-project raions that were organized and given basic training.

1.5 Original Components 9. IDSMIP had three components: (i) Development of Water Users Associations; (ii) Irrigation and Drainage Infrastructure Rehabilitation; and (iii) Project Management. 10. Component 1 -Development of Water Users Associations (US$ 7 million appraisal estimate, US$ 3.8 million actual) contributed to the project objective of improving the effectiveness and financial viability of water distribution and management on 56,000 ha through development of the capacity of WUAs to do effective O&M and to develop the ability of the Amelioration and Irrigation Joint Stock Company (AIOJSC) to build its capacity to provide needed support services to WUAs. This was done through two activities. 11. Activity 1 was to develop the capacity of AIOJSC to train and strengthen WUAs. Activity 2 was to strengthen WUAs. To support both of these activities, in 2003 a Central Support Unit (CSU) was established in Baku and in Nakhchivan, and 11 Raion Support Units (RSUs) in the project raions. Under Activity 1, office and training equipment, monthly compensation allowances and operational funds were provided and national and international consultants recruited to train and build capacity in CSUs and RSUs to establish, train, support and strengthen WUAs. The CSU was assisted in developing a long-term strategy for WUA development nation- wide. Skills developed among the initial 7 CSU staff members included: WUA development and strengthening, public awareness and promotion, training WUA officers and staff, financial management and setting of Irrigation Service Fee (ISF), monitoring WUA performance and database/information technology. The CSU in Nakhchivan had 3 staff to coordinate WUA development in Nakhchivan, in coordination with the CSU in Baku. The RSUs were to have an engineer, water management specialist and WUA support specialist. Monitoring of WUA performance required data collection from WUAs and transmission of it to the RSU and CSU. Activity 1 also included revising the Law on Amelioration and Irrigation which changed WUAs from for-profit limited liability companies to non-profit associations with limited tax liability and voluntary membership. 12. Under Activity 2, training programs for WUAs were done in two parts: first, information dissemination and public awareness to sensitize water users and win support for development of WUAs, and second, local governments and staff of relevant ministries were made aware of WUA development. This was done in the early phase of IDSMIP, as was the mapping and identification of WUA hydraulic boundaries. Training modules were prepared for IDSMIP on WUA formation and registration; hydraulic boundaries of WUA; WUA organization, governance and farmer participation; roles and procedures for the WUA Council and Assembly; WUA administration and roles of staff; preparation of the Irrigation Service Plan, WUA budget and ISF; collecting and using ISF funds; water distribution; maintenance and repairs; construction supervision; monitoring and evaluation and preparation of annual reports. 13. The emphasis here is on irrigation management transfer (IMT) to the WUAs with AIOJSC as the WUA’s counterpart. In Azerbaijan, IMT means the transfer of management responsibility and authority for irrigation systems, at the on-farm system level. It does not mean transfer of ownership of irrigation infrastructure. IMT builds optimal self-reliance but within a long-lasting partnership with the government for sector regulation, capacity building and support services

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and, in the future, with private sector support service providers. Component 1 also included provision of supplies and equipment to WUAs, but not heavy equipment. 14. Component 2 Irrigation and Drainage Infrastructure Rehabilitation (US$ 30 million appraisal estimate, US$ 37.4 million actual) supported achievement of the PDO to improve the effectiveness and financial viability of water distribution and management on 56,000 ha through participatory rehabilitation for on-farm schemes with 45 WUA. Diagnostic surveys were done in nine Project raions. They determined that on-farm systems were in very poor condition with high water losses. Canals had heavy silt loads due to lack of desiltation at headworks. There was little water regulation or measurement due to lack of hydraulic structures and hydroposts. There was a lack of incentives for farmers and scheme managers to use water efficiently. Many areas were salinized and waterlogged. Therefore IDSMIP provided funds for selective rehabilitation of I&D systems. IDSMIP targeted 280 WUAs in 11 raions, and it was originally estimated that 45 WUAs that reached maturity would benefit from rehabilitation. While the objective of 56,000 ha remained the same during most of the Project, the number of WUAs selected for rehabilitation was only 22. Rehabilitation would be mainly at on-farm level with some limited works on off- farm systems in case these systems hampered on-farm performance. Funding was provided for: i) rehabilitation of on-farm infrastructure for 56,000 ha (later reduced to 52,000 ha); ii) rehabilitation of the Bahramtape headworks, which served 140,000 ha in the Imishli, Saatli and Sabirabad raions that had stability problems requiring urgent attention; and iii) rehabilitation of important off-farm works. Off-farm rehabilitation and installation of 1,000 hydroposts would use 35 percent of rehabilitation funds. Most investment was done at the on-farm level. 15. Component 3 Project Management (US$ 2.2 million appraisal estimate, US$ 2.9 million actual). Given the experience of the PIU in managing the Rehabilitation and Completion of Irrigation and Drainage Infrastructure Project (RIDIP), it was decided that this PIU should also be the PIU for IDSMIP. It was responsible for daily management, administration and coordination of IDSMIP. IDSMIP covered staff costs, goods and equipment, operational costs, costs of M&E, annual audit and the implementation of the Environmental Management and Monitoring Plan (EMMP).

1.6 Revised Components 16. The components were not revised.

1.7 Other significant changes 17. The State Amelioration and Irrigation Committee (SAIC) changed its’ name and structure to the Amelioration and Irrigation Open Joint Stock Committee, which took over all tasks and legal responsibilities for IDSMIP from SAIC. No changes were made in IDSMIP’s development objectives or intended outcomes, design or scope and there were no formal revisions of the PDO or key indicators for IDSMIP. However, instead of 56,000 ha estimated at appraisal, only 52,000 ha could be rehabilitated, as a result o steep price increases in the unit cost of construction materials. In order to cover short-falls in the rehabilitation budget, it was decided not to purchase heavy equipment for WUAs, and this was documented in a restructuring paper in March 2010. Changes made under the restructuring included: (i) extension of IDSMIP closing date from March 31, 2010 to September 30, 2010; to allow the PIU to finalize and evaluate IDSMIP, identify lessons learned and incorporate lessons into planning and implementation of future investments; (ii) exclusion of funding for heavy equipment for WUA; and (iii) adjustment

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of credit categories of $2,583,593.25 from goods, training and operations to civil works and consultancy services. These changes did not affect IDSMIP’s objectives, components, indicators or safeguard rating, nor did they trigger a new safeguard policy.

2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 18. IDSMIP’s lending instrument was a Specific Investment Loan. Standard economic, financial, technical, institutional, environmental, and social assessments were completed during project preparation, as part of the appraisal process. Preparation took about one year. No Quality at Entry review was conducted for IDSMIP. General important project preparation factors that determined implementation performance and achievement of objectives were as follows: 19. Soundness of background analysis: The background analysis during preparation of the PAD included review of previous Bank experience as well as interviews with key stakeholders, including farmers. The analysis correctly stated the importance of irrigation and drainage for agriculture, employment, rural income and needs for development of WUAs for governance, management and financing irrigation. It rightly identified the need to build capacity in Government to provide support services and the importance of participatory rehabilitation. The PAD correctly noted the following key challenges: need for legislative reform for WUAs, ineffective WUAs, lack of O&M at on-farm level, insufficient funds for O&M, need for a new ISF based on needs basis, need for better collection rates, inequitable and unreliable access to water by farmers. Each of these led to development of WUAs that are capable of performing their essential functions and Government that is capable of providing needed support services to the WUA. Measured improvements in all of the above challenges have been made where all aspects of IDSMIP have been implemented. However, the need for close linkages between irrigation and agriculture sectors, as stated in the PAD, has not yet been achieved. Confidence expressed in the PAD about adequacy of economic, financial, institutional, social (including gender), environmental and stakeholder aspects to permit development of functional WUAs proved to be well grounded during implementation. 20. Assessment of project design: IDSMIP was kept simple by: (i) having a limited scope that focused on improving O&M and financial viability of irrigation; (ii) having only two main components, institutional development and rehabilitation; and (iii) intervening mainly at the on- farm level. This facilitated focus on key challenges and lessons learned. IDSMIP was committed to enabling new WUAs to handle all essential roles of on-farm system governance, management of O&M, financing WUA costs and participatory rehabilitation. This comprehensive treatment of WUA development is often not done in other countries. IDSMIP promoted changing WUAs boundaries to hydraulic ones that take on non-profit status with a focus on I&D scheme management, providing a sound basis for focussed management. IDSMIP was a follow-on from the Farm Privatization Project (FPP) and RIDIP project. WUA support for rehabilitation was piloted under FPP. Rehabilitation of main and inter-farm I&D structures was supported under RIDIP. These experiences developed capacity of consultants, contractors and the PIU to implement IDSMIP satisfactorily. It was recognized by the Government that rehabilitation would be a non-sustainable investment if it were not followed by adequate maintenance. IDSMIP played an important role in creating awareness among farmers that O&M is the responsibility of water users and that the central and local governments should not interfere with the internal business of the WUA. All these aspects of project design were based on lessons from experience

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inside and outside of Azerbaijan and they were emphasized in implementation and led to favourable project outcomes. 21. Adequacy of government commitment: The Government, primarily through the Cabinet of Ministers (COM) and AIOJSC, showed strong and sustained commitment to reforms carried out before and during IDSMIP. These have been dramatic and extensive. (See section 1.1 for a summary.) The PIU had prior experience from RIDIP and was able to quickly take over responsibility for daily IDSMIP management, administration and coordination. IDSMIP enabled the CSU and RSU to begin a long-term, multi-faceted program of capacity building and support services for WUAs. This included management consultations between RSU and WUA. 22. Assessment of risks: The PAD identified the risk of failure of WUAs to raise sufficient funds to cover full O&M through an irrigation service fee. This concern is still relevant but project implementation has shown that where all interventions are made, including rehabilitation, both the ISF and the collection rate rise substantially, especially where agriculture is more profitable. It is still not clear to what extent the Government will adequately fund O&M at the main scheme level. Implementation has shown no occurrence of interference with the WUA by central, regional or local governments. Cost overruns during the Project did occur in the form of hyper inflation in the cost of construction materials, but this was dealt with by reducing the area for rehabilitation by a modest amount (from 56,000 to 52,000 ha). Risks of shortage of competent staff proved unfounded, as did the risk of inability of finding competent contractors for rehabilitation. There was no assessment of Quality at Entry but this proved not to be a problem. 23. IDSMIP consisted of several innovations that were essential for achievement of positive results. This is the case with the amended Law on Amelioration and Irrigation within its requirements for re-registration of WUAs as a non-profit legal entity with hydraulic boundaries. This, together with extensive capacity building of AIOJSC and WUAs, and the continuing support from the Government for all these reforms, initially delayed the onset of rehabilitation but enabled genuine participatory rehabilitation and approvals to occur, which created a sense of ownership for the schemes and project amongst farmers. 24. A number of I&D rehabilitation features formulated during project preparation were important factors for subsequent performance and results attained. These were: (i) eligibility criteria and selection of WUAs for rehabilitation aimed to ensure future sustainability; (ii) allocation of up to 35% of rehabilitation funding for off-farm works; (iii) an investment level of $300 USD per ha for on-farm rehabilitation; (iv) participatory rehabilitation and 10% repayment by farmers of rehabilitation costs; (v) re-introduction of volumetric water measurement; and (vi) design and construction supervision services through consulting engineers. In addition, the PIU consisted primarily of staff who were already experienced from working with the RIDIP and were able to implement IDSMIP effectively according to World Bank procedures, such as Bank procurement. 2.2 Implementation 25. More detailed information about implementation and outcomes can be found in Annex 2. The core factor during implementation was the focus on WUA capacity building before investments in rehabilitation. Although the early focus on WUA development caused delays in on-farm rehabilitation, early attention to WUA formation provided the basis for effective participatory rehabilitation and successful achievement of the PDO.

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26. The following are key achievements in implementing Component 1.  IDSMIP funded a public information campaign and WUA promotion meetings. These created understandings about the approach for WUA development. A key message was that irrigation problems are farmers’ problems and farmers must be part of the solutions. The campaign used awareness meetings, radio broadcasts, newspaper articles, posters, brochures, and a newsletter. (See Annex 2 for details.) Sensitizing meetings were held at neighborhood level and WUA Awareness workshops were held about the WUA statute, organizational structure and re-registration. These were highly effective in generating support for WUA development and the independence of WUAs from local government.  As a result of project support for implementing the LAI, 470 WUAs have been re-registered and over 50 more are ready for registration. This constitutes an irrigated area of 1,240,303 ha, which is 94% of total irrigated area in Azerbaijan. Within IDSMIP raions 207 WUAs have been established and re-registered. Under IDSMIP CSU staff were trained, prepared training material, provided training to RSU, monitored work of RSU and gave them on-the-job training. RSU staff were trained to provide training to WUAs and assist them with restructuring WUAs and re-registration. Four Community Mobilization Specialists helped WUAs re-register under the amended LAI, to restructure, change their boundaries and membership and become more participatory. These were effective and were appreciated by the RSU. Over the life of IDSMIP, WUAs were formed, developed and supported by RSUs. Provision of support by the RSUs was halted from March 2010 onwards, leaving WUAs with still under-developed technical, financial and organizational abilities. WUAs still need support from the RSU. Although project WUAs are not yet fully managed and financed, especially non-rehabilitated ones, they are on a path toward sustainable financing and management, especially rehabilitated WUAs.  During implementation it was realized that a long-term, multi-faceted program of capacity building for WUA, which included management consultations between RSUs and WUAs, was essential. The emphasis on capacity building enabled the RSU to become capable and oriented toward identifying and providing support services for WUA. However, it is not clear whether the Government will provide sufficient, long-term funding for this. During implementation it was decided that, to be effective, RSUs in project raions needed offices with a training room, computer, printer, furniture, telephone/fax machine, photocopier, overhead projector and small generator.  It was recommended by review missions that the CSU should enhance its support to RSUs and WUAs through more regular field visits and a more hands-on management style. A training needs assessment identified the need for the following courses under IDSMIP: establishment of WUA, promotion and training, O&M plan, financial management, rehabilitation, governance and administration, and M&E. Training modules were prepared and training was provided for CSU, RSU, and WUA officers, staff and members. RSU staff implemented WUA Training Programs in each raion. By 2008 all training was completed. Due to the strong desire of the client to observe positive experiences with irrigation in other countries, in 2007 three study tours went to Egypt and Turkey with staff of the AIOJSC, CSU, RSU and WUA. They observed irrigation management transfer, WUA federations, development of ISF and irrigation sector reform. This brought about a substantial boost in enthusiasm and support for reforms.

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27. The following are key achievements of implementation of Component 2.  Eligibility criteria to select WUAs included WUA development status, technical readiness, past performance and commitment. A minimum economic rate of return of 12% was specified. This ensured that only WUAs capable of maintain the rehabilitated system were targeted for rehabilitation. The main focus was on-farm improvement but 35% of funds were used for off-farm works. The condition of off-farm works was mostly sound. The average rehabilitation cost average of USD 300 per ha was set to benefit the greatest possible number of WUAs. Farmer participation continued through planning, design and construction. At IDSMIP completion the large majority of farmers were satisfied with results.  The Bahramtape rehabilitation used a larger-than-planned portion of rehabilitation funds due to cost inflation, insufficient pre-project assessment and late inclusion into IDSMIP. However, Bahramtape structures withstood a major flood in June 2010 that probably would have caused its collapse had it not been rehabilitated.  Engineering firms were used for Project design and construction supervision, one for on-farm rehabilitation and one for the Bahramtape headworks rehabilitation. Designs were found appropriate and cost effective; construction supervision ensured quality construction; and final drawings and documentation were at a high standard. Due to previous experience and contract supervision, most contractors have been capable and have performed well. The few exceptions were limited by judicious project management and supportive interventions.  Regarding rehabilitation, after the designs were completed and reviewed by the May 2007 IDA review mission, several opportunities for rehabilitation cost savings were identified which reduced the per hectare costs. The Mid-Term Review Mission expressed concern over the variable quality of construction work in the field and the quality of contract management and supervision. The following items were recommended: adequate staffing among supervising consultants must be ensured, more proper procedures for contract management and site supervision were needed, a more rigid review of contractors’ inputs and outputs should be done, more suitable equipment for the excavation of canals would be used by contractors, more appropriate canal lining jointing techniques would be employed and hydraulic structures would be constructed fully in accordance with specifications and proper construction techniques. The PIU agreed to review staffing and capacities of supervising consultants and request changes as necessary to ensure appropriate supervision and training of site supervisors.  It was indicated in the IDSMIP PAD that, as a conditionality for financing on-farm rehabilitation, volumetric water measurement was to be reintroduced. 1,000 water measurement structures (hydroposts) were installed at key WUA/RID interface locations around the country. 28. Component 3 was the work of the Project Implementation Unit (PIU). The PIU Director had responsibility for overall implementation of IDSMIP and was assisted by the Project Manager who supervised IDSMIP staff and reported to the PIU director. The Engineering Team guided and supervised engineering works, including contract management and construction supervision. The Environmental Specialist coordinated implementation of the Environmental Management and Monitoring Plan (EMMP). Procurement, financial management and accounting staff worked together. The M&E Specialist oversaw M&E and prepared baseline, benchmark and final reports that were reviewed and discussed by IDSMIP leadership. The PIU did financial management, recruited consultants, purchased supplies, goods and equipment, paid for some

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operating costs, financed and oversaw M&E, managed the environmental monitoring plan and financed and made contracts with auditing firms. Auditing was done by certified audit firms, and all audits found satisfactory accounts and financial statements. 29. Key factors affecting implementation included the following. The most important factor affecting successful project implementation has been the support of the Government for the reform program and capacity building of the AIOJSC and WUAs. It should be noted that prior experience of PIU members, consultants and contractors with Bank irrigation sector projects in Azerbaijan was an important factor in successful implementation of rehabilitation that started late but caught up before the end of the project. 30. Review missions found several ways to improve the efficiency and quality of rehabilitation. However, volatile inflation led to a reduced rehabilitated area, increased development costs, and cancellation of WUA heavy equipment. Despite this IDSMIP targets were still largely met. Project fund reallocations for the last 6 months of IDSMIP forced cancellation of heavy equipment for WUAs. But WUAs have indicated that in the absence of excavators and/or a backhoe they are unable to clean canals of vegetative growth and sediment. There was no Supervision Assessment in addition to review missions but this did not appear to affect the Project unfavourably. 31. Successful implementation of IDSMIP depended on issuance of the revised LAI in 2004 and issuances of 7 subsequent supporting regulations over the following 2 years. Although this delayed start-up of rehabilitation, it greatly facilitated participatory rehabilitation that pursued in a timely fashion thereafter.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 32. M&E under IDSMIP had two purposes: i) develop and use a database on WUA inventories and performance and ii) assess progress toward achievement of the PDO. 33. M&E Design: M&E was designed mainly as information gathering from individual and group interviews in the baseline and end-of-project survey. A total of 27 indicators were used which provided data on implementation, immediate outcomes and ultimate impacts, including all indicators for the PDO, output and outcome indicators shown in the Results Framework Analysis. Indicators of implementation included establishment of WUA, capacity building, planning and implementation of O&M, setting, collecting and using the irrigation service fee, holding of awareness meetings, and participatory rehabilitation. These all affected the outcome indicators. Outcome indicators included the quality of the irrigation service according to farmers, including water distribution equity, timeliness and reliability, collection of the ISF, and approval of WUAs with rehabilitation. It also included reasons for any dissatisfaction. Impact indicators included crop yields and livestock productivity (related to production of fodder crops). M&E had three main weaknesses: 1) It started rather late, with a baseline survey done only at the end of 2006, 2) It relied only on interviews and no collection of data through water measurement or observations and 3) There has been too little time to assess impacts. 34. M&E Implementation: Data was collected from individual farmers mainly by the RSUs and was assembled in the CSU. Group interviews were done mainly by the M&E Specialist of the PMU. M&E was done as a baseline survey in 2006/2007 through a specialized company. (More information on baseline and end-of-project surveys can be found in Annex 5.)

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35. M&E Utilization: Results from the M&E surveys were reported in a timely manner and discussed in meetings with the AIOJSC, PMU and Bank. Findings provided support for such actions as adding WUA Community Mobilization Specialists, identifying needs for WUAs and RSU capacity building, and needs to enhance participatory rehabilitation. It is expected that in the future findings from the M&E will be used by the State Supervisory Body (SSB) after it becomes operational.

2.4 Safeguards and Fiduciary Compliance 36. Social safeguards: No social safeguard procedures were identified during appraisal. However, social analyses and appraisal identified five key social issues that were determined to be potentially benefitted by IDSMIP. These were poverty, empowerment, equity, gender and social inclusion. It was expected that poverty would be reduced through intensification of agriculture, expansion of irrigated land and more employment. IDSMIP was expected to create more income for the poor through more equitable water distribution to tail-end areas. It was decided at appraisal to ensure that women were to be involved in information campaigns and WUA assemblies. The gender study found that respondents perceive that women have better skills than men in conflict resolution, awareness raising, accounting and communication. No adverse social impacts were identified during project implementation. The objective for IDSMIP to improve the effectiveness and financial viability of irrigation water distribution and management was achieved through strengthening WUAs and rehabilitation of on-farm schemes. 37. Environmental safeguards: Environmental impact assessments were done for rehabilitation works for IDSMIP and for works done under RIDIP. Under RIPDI the Main Mil-Mughan collector was extended to the Upper Garabagh collector via crossing the Araz River, which would stop water flow from the south and southwest to Sarisu Lake and Aghgol Lake. The river was broadened, the river bank was consolidated, silt was removed from the headwork settling basin, the fish ladder was rehabilitated and electric and mechanical parts of the headwork were repaired. Quality of surface and ground water was monitored and no negative results were found. Environmental monitoring of the Aghgol and Sarisu Lakes found that construction / extension of the Main Mil-Mughan Collector did not disrupt the environmental integrity of the lakes nor did it cause negative impacts. Reconstruction of this collector-drainage network affected 36,500 ha and led to improving the conditions of soils, including lowering of groundwater and mineralization. Monitoring at the Bahramtepe Headwork and related WUAs showed that rehabilitation did not cause negative environmental impact, nor was the mineralization ratio affected. Rehabilitation improved water supply and soil productivity. Assessments found that groundwater levels and mineralization went down in several areas after off-farm rehabilitation. Drainage system improvements reduced waterlogging and salinity.

2.5 Post-completion Operation/Next Phase 38. The following are key factors expected to affect post-project attainment of benefits and formulation of a successor project, based on lessons learned from IDSMIP.  Investments in on-farm irrigation and drainage are now largely sustained by the WUAs. These WUAs have made great advances in management and financial capacity, but will need continued support.  Because of the importance of capacity building and support services provided by the CSU and RSUs, it is expected that the CSU and RSUs will become long-term entities. Budgets

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need to be provided by AIOJSC for supplemental income to RSU for their extra work. Continuing support by RSUs to WUAs is needed for sustainability of on-farm I&D systems and attainment of high agricultural output.  RID and WUAs enter into water supply contracts annually. For WUAs that had rehabilitation, provision of agreed services and payment of ISFs are generally occurring satisfactorily. However, long-term contracts for water supply (10 years) and extended use agreements for on-farm infrastructure (20 years) have not yet been adopted for WUAs other than rehabilitated WUAs. Agreements between the government and WUAs should define water supply services and payments, O&M responsibilities and obligations, and financing and support arrangements.  WUAs with rehabilitated on-farm systems are collecting increased fees from members. Amounts cover bulk water supplies (currently standardized at 0.5 AZN (=0.63 USD) per 1,000 m3) and provide for WUA fixed costs (salaries and expenses) and on-farm system maintenance. There is a high variation in amounts charged by WUAs. The beneficiary survey highlighted that charges vary between 5 AZN/ha (in low value agricultural areas, especially in the south) and 50 AZN/ha, with the higher WUA ISF occurring in areas with high value orchards and vegetables in the north. The amount collected ranges from about 25% of actual needs for O&M to nearly 100% of requirement (the latter being achieved mainly in the more agriculturally profitable north). The rate paid to the RID for bulk water supply equates to a small fraction of actual cost of water delivery and main system O&M. But until the present, the Government has been reluctant to raise this charge. 3  The agreed WUA contribution to rehabilitation is 10% of total cost, with a low fixed interest rate and five-year grace period. WUAs have agreed to repay the 10%, on top of the ISF. Farmers have the view that the easy terms of repayment mean that: (i) rehabilitation was mostly a gift, (ii) system ownership will remain with government, and (iii) government will assist with large-scale on-farm system maintenance. Repayment has not yet begun but it would be helpful for the Government to clarify to farmers its commitment to repayment. It should also be clarified to farmers that RIDs will not provide on-farm system maintenance for irrigation canals, but it will for drainage networks.  After rehabilitation the net margins were $1,549/ha in the Northern Region, $1,140/ha in the Central Region, and $1533/ha in the Nakchivan Region. It has been estimated that the average level needed for the WUA ISF to cover all O&M, fixed costs and a repayment rate for rehabilitation of 10% would be approximately $45.66 per ha. This would constitute only 3% of the net margin per ha in the Northern and Nakchivan regions and 4% in the Central Region. By international standards, these are on the low to medium side of average cost of irrigation relative to net margins.  All WUAs and RIDs in IDSMIP areas agree that each WUA needs one excavator and/or backhoe. Provision of such equipment under a future project should be considered4. WUAs have expressed willingness to pay a share of costs for this on the same basis as for works. It is suggested that because these equipment are moveable and depreciable assets, an effort

3 “ISF” refers to the charge by RID for bulk water supply. “WUA ISF” refers to the charge to the farmers by the WUA that includes payment for both the water supply and WUA fixed and variable costs. 4 The requested basic small excavator/backhoe equipment would probably be appropriate for those WUA systems with predominantly earth irrigation canals and small section open drains. A prior system-by-system assessment of equipment needs and suitability is warranted.

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should be made to obtain a higher cost recovery than that for rehabilitation. This could be higher recovery (50%), down payment of 10%, and shorter repayment schedule. It may be necessary to provide a pilot number of WUAs with excavators to see whether they will maintain and repay them.  Continuing support by RSUs to WUAs for on-the-job training and management consultations is essential for the long-term in order to ensure sustainability of on-farm I&D systems and attainment of high agricultural output. But it is not clear that there is sufficient support in the government to ensure budgets for the CSU and RSUs.  In addition to support services, WUAs will also only become strong and sustainable if the economic productivity of agriculture increases through changes in crops, better cultivation practices, value-added crop processing and access to good markets. This will require a significant role for the MOA. Without improvements in the value and stability of irrigated agriculture and more open, democratic decision-making, WUAs will be weak. 39. The Government of Azerbaijan has requested additional support from the World Bank for a nation-wide project for I&D development, referred to as the Water Users Association Development Support Project (WUAP). It will be based on the IDSMIP approach. WUAP will have the same objectives and components as IDSMIP, with an emphasis on achieving on-farm system financial viability and improved management. It is expected that WUAP will expand the capacity building to approximately 27 raions and 379 WUAs, for an irrigated area of about 950,000 ha, and will target around 85,000 ha for rehabilitation. The WUAP will be supervised and implemented by the same PIU that was responsible for IDSMIP. The CSU and RSUs will be needed in 27 raions. To meet the expanded coverage, 4 regional support centers will be established with staff paid by the WUAP. 40. The AIOJSC will coordinate this national irrigation and drainage program. The State Supervisory Board will regulate the sector. The AIOJSC, through the RID, will continue to manage O&M of main and large secondary canals (the off-farm canal systems). WUAs will manage on-farm schemes but in the future they are expected to federate along secondary canals. Support services will be provided to WUAs through the RSUs and future regional support centers. Given the experience obtained through IDSMIP, local capacity to implement WUAP will be much greater than at the beginning of IDSMIP and improvements under IDSMIP provide a vision and motivation for others. 41. It will be necessary to revise the organization of M&E and the set of indicators used to enable more comprehensive and timely availability of findings. M&E should be done less through large numbers of farmers and more through a smaller group of selected informants, through water measurement and observations. It should include assessment of inputs, implementation, outcomes and impacts and these should be related, through monitoring to utilization, in the form of tracking identification of problems and making improvements during implementation.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation 42. The original objectives of IDSMIP to achieve effective management and financial viability of I&D systems through development of effective WUA, SAIC/AIOJSC and CSU/RSU is still

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highly relevant, as the results of IDSMIP demonstrate. Project experience and assessment of outcomes confirms that the project design was appropriately focused on building the capacity of WUAs to function effectively and building the capacity of AIOJSC through the CSU and RSU to provide support services to WUAs will enable a long-term functioning of capacity building. The emphasis of project design on on-farm rehabilitation for new WUAs that met selection criteria provided substantial benefits to these WUAs in terms of irrigation management performance and crop yields. This will provide incentives for future WUAs to qualify for rehabilitation. The draft World Bank Strategy Note for the Irrigation Sector indicated that there are around 900,000 ha in Azerbaijan which still require rehabilitation. The relevance of effective WUAs in managing irrigation systems effectively was confirmed by IDSMIPs experience in organizing WUAs and achieving improvements in management performance.

3.2 Achievement of Project Development Objectives 43. The PDO were aimed at improving the effectiveness and financial viability of irrigation distribution and management on 56,000 ha, for both WUA development and on-farm rehabilitation. Project interventions extended beyond this. Interventions were completed on 52,000 ha (93% of target area) and institutional and infrastructure development ensured that irrigation management effectiveness and financial viability substantially improved. This is a satisfactory achievement of the PDO. There was an increase in the total amount of water supplied, better planning of water delivery, and reduced water losses. While the amount of water supplied to non-rehabilitated WUAs remained relatively constant over 2006-09, beneficiary WUAs witnessed an increase in water supplied by over 40 percent. Capacity building of AIOJSC and WUAs resulted in satisfactory achievement of all expected outcomes—although it is apparent that capacity building needs to continue for the long term. 44. WUAs benefitting from completed I&D rehabilitation are performing well: 82% of water users have increased their number of irrigations and 78% of all water users are satisfied with the performance of WUA. These WUAs increased their ISF by 3 to 5 times, with a collection rate of around 80%, thus enabling them to conduct most of the planned O&M of rehabilitated systems. Farmers are willing to pay higher ISFs as water supply services improve. There is more confidence that higher agricultural production can be achieved with a guaranteed water supply and better water distribution. There are productivity gains resulting from increased numbers of irrigations and more timely water supply. Farmer incomes have increased as a result of switching to more lucrative crops and bringing fallow land under production. These results are encouraging, and since most rehabilitated schemes were finalized in 2009, the 2010 cropping season is expected to show significant improvement after rehabilitation is completed. 45. Key results for Project Development Objectives are summarized with the following: (i) ISF and collection rates increased significantly in rehabilitated schemes; (ii) budgets of rehabilitated WUAs increased four-fold; (iii) rehabilitation of 53,000 ha in 22 WUAs in 11 raions with an average cost for on-farm rehabilitation of $450 USD/ha5; (iv) 101 km off-farm irrigation canals, 1,112 km on-farm irrigation canals, 5 km off-farm drains and 537 km of on-farm drains were rehabilitated, which was 90% of the target (shortfall due to inflation); (v) 23% average increases in crop yields; (vi) increases in area irrigated and reduction of uncultivated land from

5 The $450 USD per ha is only for on-farm irrigation rehabilitation and does not include rehabilitation of the Bahramtepe Headworks.

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approximately 10,500 ha in 2006 to 2,300 ha in 2009-2010; and (vii) changes in cropping patterns to more lucrative crops like vegetables and orchards. Although 2010 was only the third season after rehabilitation, results so far suggest that IDSMIP will reach its development objectives. The main role the PIU played in ensuring satisfactory outcomes was through timely and effective mobilization and disbursement of funds for awareness and training events, goods, equipment and technical experts.

3.3 Efficiency 46. IDSMIP obtained the following results in terms of performance efficiency: (i) rehabilitation had ENPV of US$46 million and an EIRR of 32.1%; (ii) economic returns for rehabilitation of I&D were 25% and for Bahramtepe headwork were 39%; (iii) IDSMIP overall had ENPV of US$963/ha and EIRR of 32.9%; and (iv) financial internal rate of return was 28%. 47. Several factors contributed to differences in economic and financial results of the appraisal and current analyses. These include improvements in assumed and actual rehabilitated area, crop yields, cropping pattern improvements, and areas returned to production. Although the first three factors contributed to differences in Project benefits, higher economic and financial results produced by the analysis are mainly attributable to the significant difference between predicted and actual area that returned to production (5,600 ha vs.10,500 ha).

3.4 Justification of Overall Outcome Rating Rating: Satisfactory 48. This rating of satisfactory is justified on the basis of successful establishment of WUAs in Project raions and elsewhere in the country, successful rehabilitation on 52,000 ha, development and adoption of an appropriate legal and institutional framework for the sector, significant increases in area irrigated, improvement in crop yields, increased area irrigated and shifts to more profitable crops in several areas. Economic and financial rates of return were satisfactory. Minor shortcomings included the significant cost overruns, mainly for Bahramtepe Headworks, and the subsequent reduction in funding for equipment for WUAs.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 49. IDSMIP had the following effects on poverty, gender opportunities, equity and social inclusion.  Poverty: IDSMIP provided economic opportunities for smallholder, marginal or landless farmers through intensification of agriculture, expansion of irrigated areas and increase in employment. Improved irrigation enabled agricultural growth and increased rural income. In Project raions crop yield levels increased 23%, improving livelihoods and reducing poverty. This resulted in increased ISF levels, collection rates and improved income for farmers. More improvements, including employment, occurred in the Northern and Central Regions where high-value crops are more prevalent, but improvements in fodder production also helped farmers improve income in the Southern Region.  Equity: While farm privatization distributed land relatively equitably, differences in access to water led to inequitable opportunities and income. Social diagnosis during appraisal found that new WUAs were headed by former kolkhoz heads in more than 90% of the cases.

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IDSMIP promoted election of WUA heads, open discussions and decision making in WUA Assemblies. One indication of emerging democratic conditions is that in at least two cases WUA members have ousted WUA heads for malfeasance of duty.  Gender: IDSMIP included women and men in awareness and information campaigns to ensure that all benefitted from IDSMIP. Special gender events were organized in some raions. Women were invited to meetings, training, and assemblies. Women who met WUA mobilization specialists or received training had better understanding about the importance of women participating in WUAs. Women have irrigation water needs for their home gardens on their household plots. This topic will deserve further attention in the follow-up WUAP.  Social inclusion: In general, social development of WUAs has taken place, with increased participation of farmers in WUA operation, maintenance and decision making. Prior inequities alienated people from decision making about water. IDSMIP helped overcome this by participatory rehabilitation, disseminating information about the amended LAI and rights of WUA members, election of representatives, participation in Assemblies and actions by WUA leaders to reduce economic differences related to inequitable access to water. (b) Institutional Change/Strengthening 50. IDSMIP developed awareness and support for participatory irrigation management through WUA. Substantial training and management consultations were given to WUAs to enable them to know how to adopt appropriate and participatory practices for WUA governance, O&M, effective financial management and development of ISF and budgets. Given the Government’s commitment to providing long-term support to WUAs there is reason for optimism that the WUAs will continue to develop. The Government intends to develop self-reliant WUAs with empowerment and technical capacity to function effectively. IDSMIP restructured WUAs through the amended LAI in a way that enabled them to become autonomous, be more representative of water users, be trained, competent, and transparent. Long-term contracts between WUAs and AIOJSC provided a stable way for WUAs to rely on a dependable water supply. Capacity building of WUAs was a key component of IDSMIP. IDSMIP WUAs began to have more revenues and better financial and irrigation management. They are still dependent on RIDs and RSUs. The amount of funds collected from the WUA ISF of rehabilitated WUAs increased by more than 4 times and these WUAs are now able to do O&M reasonably well, though not yet fully. Non-rehabilitated WUAs have not been able to raise sufficient fees for O&M work. In the long run it will be essential for the MOA to become more effective in enabling farmers to produce more productive yields per unit of water for crops that are more profitable than wheat and other low value crops. (c) Other Unintended Outcomes and Impacts 51. Survey reports show positive social impacts of IDSMIP. Improved water provision for irrigation in rehabilitated WUAs led to fewer conflicts over water. Due to a shortage in the IDSMIP budget, heavy-duty maintenance equipment and motorcycles were cancelled. Farmers and WUAs complained about lack of equipment that led to insufficient maintenance work by WUAs.

3.6 Summary of Findings of Beneficiary Survey and Stakeholder Workshop 52. In August 2009 a beneficiary survey collected information from IDSMIP raions on the performance of newly established WUAs, quality of irrigation services, reasons for any

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dissatisfaction, and crop and livestock productivity in project and non-project WUA. It was found that project WUAs prepared service plans as they had been trained, water supplies doubled and farmers in rehabilitated WUAs received 4 irrigations, cultivated area increased 25%, crop yields increased 17.7 to 23%, ISF increased 3 to 5 times to 81% collections, budgets of rehabilitated WUAs increased 4.4 times, 78% of farmers were satisfied with irrigation services, and a large majority of WUA members stated that they are willing to pay more for the ISF if they get better services. 53. The Stakeholder Workshop on 23 September 2010 discussed experiences and lessons learned from IDSMIP and recommendations for future development of I&D. At the workshop 81 participants attended, including representatives of 44 WUA. Four topics were discussed. The first topic was benefits of rehabilitation and expansion. Key recommendations were: deal better with inflation of costs of rehabilitation, do not rehabilitate during cultivation season, provide more training and financial, legal and technical support for WUA, install more water measurement devices and revise water supply norms. Topic 2 was the need of WUAs for excavators, tractors, motor vehicles, motorcycles and offices. Participants recommended provision of equipment to WUAs with agreeable terms of cost sharing. Topic 3 was about priorities for support services and training. Topic 4 was a summary of recommendations, which were: needs assessment for each WUA, involve WUAs in project design and planning, give rehabilitation contracts to WUA, build more I&D facilities, one WUA should manage one hydraulic unit, build self reliance in WUAs, and rehabilitate many more on-farm systems.

4. Assessment of Risk to Development Outcome Rating: Moderate 54. The risk that IDSMIP’s development outcomes would not be sustained was considered moderate. The development of WUAs enabled them to have organizational, decision-making and implementation arrangements for operations, maintenance, and management so that water users would be able to achieve their agricultural potential. For WUAs that had rehabilitation, main constraints to effective and equitable water management were removed. Results included not only improved water security and reliability and lower operating costs, but also increased yields, more high-value cropping, greater cultivated areas, etc. 55. Risks to sustainability lie with the under-developed technical, organizational and financial capabilities of WUAs. It is not certain that support services would be available to WUAs in the long term. The inadequacy of equipment like excavators and back hoes and WUA dependence on the government is a concern. Government funding is available for O&M of off-farm systems. It appears that RID/RSU are willing to provide support to WUAs as long as they have resources.

5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory 56. The Bank provided sufficient resources during IDSMIP preparation to enable diagnostic surveys to identify issues and options. The Bank ensured that works proposed in the appraisal and loan agreement were aligned with government priorities. The studies facilitated Project

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preparation and identified needs for improvement works. IDSMIP was seen to be a series of pilot interventions and procedures. There was a need for a large-scale follow-up project. Many other I&D systems have severe and urgent needs for rehabilitation that can only become productive and sustainable with effective WUAs. Institutional development of WUAs is a long-term need. Further support is needed to ensure that WUAs in Azerbaijan can become technically and financially sustainable and can operate and maintain their systems. No changes were made to Project objectives, components and activities. Small changes occurred in design of civil works. Bank performance in Quality at Entry can be rated Satisfactory. Planned outcomes were achieved consistent with the Bank’s fiduciary role. This was done while introducing innovations. (b) Quality of Supervision Rating: Satisfactory 57. A total of 16 supervision missions, including a mid-term supervision mission, were provided by the Bank. These missions were effective and timely in addressing issues arising. Missions identified problems that could have jeopardized achievement of PDOs and resulted in cost over-runs and sub-standard results. Practical recommendations were made. Aide memoires prepared at the end of each mission were informative and clear. They identified issues that needed to be addressed before the next mission. Supervision missions were sympathetic to both problems faced by the PIU and obstacles faced by international TA teams. Where substandard performance occurred the Bank dealt with them in a realistic and fair manner, some of which resulted in replacement of international staff. The Bank’s supervision performance is rated by the Borrower as highly satisfactory. Back-up support provided by the Task Team and the Bank Country Office on implementation was highly appreciated by the PIU. Minor shortcomings included a decrease in the comprehensiveness of supervision towards the end of IDSMIP. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 58. Introduction of this innovative approach in Azerbaijan required careful diagnosis and planning during appraisal. This was done effectively as indicated by small changes in approach or component activities required during implementation. Appropriate expertise was mobilized as needed. Supervision missions were effective in providing guidance and timely adjustments. Good working relationships were maintained throughout IDSMIP.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 59. The AIOJSC has been highly supportive of IDSMIP. The Government provided counterpart funding and support whenever required, consistent with amounts identified during appraisal. They found offices and training rooms for the RSU. Senior officers and staff have always been readily available to discuss issues with Bank staff and consultants during their missions. They have repeatedly helped teams of international consultants work in Azerbaijan and have assisted to overcome obstacles in their work. The AIOJSC helped the PIU establish working relationships with the Cabinet of Ministers (COM), Ministry of Finance, Ministry of Economic Development, State Land Committee, Ministry of Environment and Natural Resources, and others. It should also be noted that the AIOJSC and COM have been willing to adopt into Law and practice several innovations in IDSMIP, such as the alternative concept of

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the WUA as a non-profit voluntary legal entity, participatory governance and management of the WUA, the design of the ISF, and so on. The Government was both flexible and quick to act on facilitating adoption of changes. However, there were weaknesses in capacities and performance of the CSU and RSU that still need to be overcome and the SSB has yet to be established. (b) Implementing Agency or Agencies Performance Rating: Satisfactory 60. The PIU was fully committed to planning, supervision and implementation of IDSMIP at a high standard. It was also well integrated with AIOJSC. It implemented IDSMIP satisfactorily. Financial management, procurement, supervision and M&E functions by the PIU were all considered satisfactory. The PIU managed suitable financial, accounting and reporting systems that provided adequate and timely information for implementation and review. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 61. The performance of AIOJSC and the PIU are considered satisfactory in their capability, commitment and wise actions taken during IDSMIP. This is especially so given the steep learning curve that the AIOJSC and PIU went through in order to adopt several technical innovations and new Bank procedures, such as procurement and monitoring. The end-of-project survey indicated that water users indicated high satisfaction with IDSMIP.

6. Lessons Learned General lessons  Project concepts and structure were simple but relevant. The focus on institutional development and rehabilitation appropriately concentrated on the essential core aspect of irrigation that needed urgent development. Simplicity and focus prevented risks of over-reach and distraction. Objectives were straightforward and not too ambitious. This was a pattern built in from the start of IDSMIP. This is a lesson with relevance beyond IDSMIP and Azerbaijan.  IDSMIP has demonstrated that combining institutional development, capacity building and rehabilitation is an important combination in Azerbaijan, and elsewhere. Clearly, rehabilitated WUAs perform much better than non-rehabilitated WUAs. Rehabilitated WUAs have much higher WUA ISFs than non-rehabilitation ones. They carried out 91% of the maintenance in their O&M plans, distributed water to 100% of their members, their members had an average of 4 irrigations per summer season (which is twice that of non-rehabilitated schemes), and 78% of users were satisfied with O&M (which is much higher than non- rehabilitated WUA). Lessons from Component 1  WUA promotion and information campaign and WUA annual conferences were successful in generating support. Arrangements should be made for WUA staff to visit successful WUAs to learn from them. Successful WUAs are the best sources of ideas and inspiration for other WUA. Study tours and training are essential to create vision and support for reforms. Introducing WUA leaders to international practices makes them willing to make changes. Development of WUAs to where they can function as democratic, self-reliant organizations requires long-term commitment and support from government.

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 The relationship between the WUA, regional/local offices of the AIOJSC and RSU will be long term and should become a partnership of support. Assistance should not create dependency but should be designed to move WUAs toward greater self reliance.  The commitment of the Government to irrigation sector reform was realized in timely passage of the LAI, re-establishment of WUAs, adopting WUA ISF based on local costs, management transfer, provision of support services and setting up of a regulatory body (SSB). These were and are all essential reforms to enable WUAs to become sustainable. In the future these will develop into effective local management and self-financing of on-farm schemes, available support services for WUA, and regulation of the sector. The Ministry of Agriculture needs to play a more prominent role in providing support services to farmers for high-value crop choices, value added crop processing and marketing.  Initial delays were caused in project implementation because of lack of experience in preparing legal documents. More training for RSUs and WUA officers in preparing documents for WUA re-registration, water supply agreements, transfer agreements, etc. at the beginning of the next project could help avoid such delays.  IDSMIP indicates that WUAs need thorough training and management consultations to enable them to have good Irrigation Service Plans, which is also relevant internationally.  High priority should be given to designing the ISF to cover full cost of O&M in each on-farm scheme. In the future this should include area-based and volumetric charging (AZN/1000m3). The former would cover full fixed costs of the WUA and the latter would cover costs of water deliveries. Penalties should be applied for non-payment of the ISF.  The main factor for WUAs achieving sustainability lies in quality of management, operation, repair and maintenance by the WUA. Investment in rehabilitation and institutional development are mutually supportive.  IDSMIP appropriately prepared a disbursement schedule recognizing that WUA capacity building takes a long time but that a significant amount of it had to be done before participatory rehabilitation could be implemented effectively. This was factored into the disbursement schedule correctly. Lessons from Component 2  Repeated use of experts is necessary to ensure quality, cost effectiveness and timeliness of implementation. Continuity and management benefits come from use of same consultants for design and construction supervision. By adopting this approach enhanced project implementation and efficiency have been achieved. Lessons from Component 3  A project with as many new aspects for Azerbaijan as IDSMIP should provide early training for PIU staff. Such training should include institutional issues, methods for implementing a complex project with many contracts, planning participatory rehabilitation with ongoing intensive irrigation, procurement, and so on.  Although prices have stabilized by the end of IDSMIP, there is a need for the PIU to find better ways to plan projects to better deal with unforeseeable cost increases, such as through larger contingency budgets, access to supplemental funds, etc.  It is essential to have regular and detailed supervision in the field. Capable and informed PIU staff supervision and high quality supervision through Bank missions were essential for satisfactory implementation. Right skills for supervision are also essential.

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 It was learned in IDSMIP that the disbursement schedule for rehabilitation could be delayed appropriately to enable adoption of institutional reforms first.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 62. The Borrower agrees with the assessment of the ICR and has no further comments or suggestions. The Borrower’s ICR rated the project satisfactory. (b) Cofinanciers 63. There were no cofinanciers. (c) Other partners and stakeholders 64. There were no other partners or stakeholders.

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) 1. DEVELOPMENT OF WATER 6.95 3.84 55.3 USER ASSOCIATIONS 2. IRRIGATION AND DRAINAGE INFRASTRUCTURE 30.00 37.41 124.7 REHABILITATION 3. PROJECT MANAGEMENT 2.15 2.85 132.6

Total Baseline Cost 39.10 44.1 112.8 Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Project Costs 39.1 44.1 112.8 Front-end fee IBRD 0.00 0.00 .00 Total Financing Required 39.1 44.1 112.8

(b) Financing Appraisal Actual/Latest Type of Percentage of Source of Funds Estimate Estimate Cofinancing Appraisal (USD millions) (USD millions) Borrower 4.10 4.4 107.3 International Development Association 35.00 39.7 113.4 (IDA) Total 39.1 44.1 112.8

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Annex 2. Outputs by Component

General 1. Over the first half of the project period (2004 to 2006), implementation progress as measured by effected loan disbursements was poor. However, progress with low-cost but high- impact legal and WUA institutional development was favorable. During this time designs and tender documents for rehabilitation contracts (including Bahramtape headworks) were completed. The mid-term review was done in 2007, at which time all initial works contracts were ongoing and no project changes were seen to be warranted. 2. The PDO concerned improving the effectiveness and financial viability of irrigation distribution and management on 5,600 ha, the area projected for both WUA development and on- farm rehabilitation. However, Project interventions in both institutional development and system rehabilitation extended well beyond this. The PDO interventions were substantially completed on 52,000 ha (93% of the target area) and quantity and quality of institutional and physical infrastructure developments have been such that irrigation management effectiveness and financial viability have been substantially improved. Overall this is seen to be a satisfactory achievement of the PDO. Project achievements as reflected by the indicators are shown in the tables below for Annex 2. The following is a description of key outputs achieved during implementation, by component.

Component 1 3. Legal changes. Successful implementation of IDSMIP depended on initial issuance of the Amended Law on Amelioration and Irrigation and eight subsequent documents. The amended LAI was signed into law by the President in June 2004. This was followed by issuance also in 2004 of the following five documents:  Model WUA Statutes (for WUAs with a General Assembly or Representative Assembly);  Long-term Water Supply Agreement (10 years);  Annual Water Supply Contract;  Long-term System Transfer Agreement (20 years);  System Inventory Act. 4. In April 2006 the new Azerbaijan Republic Tariff Council was established and made able to issue the resolution for the new ISF. The Volumetric Water Agreement redefined the Water Tariff or ISF from an area-based to a volumetric charge (AZM/m3). 5. Regulation and State Supervisory Body. The amended LAI stated that there should be a State Supervisory Body (SSB) established and that its procedures should be developed. Soon after the amended LAI was issued in 2004 the President issued a subsequent decree that the AIOJSC should take responsibility for the SSB functions. The AIOJSC then delegated these functions to the CSU and RSUs to provide regulatory oversight for the WUA. The international Legal Specialist and WUA Development Specialist of the World Bank stated that it was a conflict of interest to have regulatory / supervisory functions given to the entities responsible for implementing WUA support and development. Subsequently the Chairman of the AIOJSC issued an order in 2006 stating that state supervision of WUAs should be done by the Operation of Irrigation Systems Department. There has been a significant delay in establishment of the SSB, which is still pending.

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6. Re-registration and capacity building of WUAs. RSUs began to re-register WUAs after the first training course on WUA formation in 2005. 470 WUAs have been re-registered and over 50 more are ready for registration. This constitutes an irrigated area of 1,240,303 ha, which is 94% of the total estimated irrigated area in Azerbaijan. The average service area of one WUA is 2,134 ha. The average number of members per WUA is nearly 1,000. Within Project raions the total number of WUAs are 208 and by the end of 2009 100% of these had been re-registered. Each of these have had their capacity built up to where they have the ability to manage themselves within the framework of an ongoing partnership for support. The AIOJSC conducted an assessment that found that one-third of the WUAs were highly effective and one-third were functioning satisfactorily. The remaining one-third were in need of significant further support to improve their capabilities. 7. Training of CSU staff. CSU staff were trained in every topic and training method that were given for other training. But most training for CSU staff was on-the-job training in the form of their involvement in preparing training material for all the modules, delivering training courses to RSU staff and visiting RSU staff to monitor their work and give them on-the-job training as well. However, all of the CSU staff were engineers and none had knowledge or experience with financial management, so a national financial consultant was contracted to providing training on financial management, including preparation of three training modules on the subject. The course on Promotion and Training was about methods and skills for promoting and providing training in WUA development and was attended by all CSU and RSU staff. Training was also given to CSU and RSU staff in computer skills, including Word, Excel and PowerPoint. Some staff were also trained in use of ArcGIS software for mapping. 8. Training of RSU staff. This training-of-trainers prepared RSU staff to train WUAs and to assist them in the following tasks:  Restructuring (including changing to hydraulic boundaries and a new set of members),  Re-registration in accordance with the amended LAI,  Formation of the WUA,  Provide formal training courses to the WUA officers, technical staff and some members,  Provide guidance through repeating consultations with WUAs. 9. Provision of office space, equipment and supplies. RSUs in the project raions were each allocated an office space and training room for WUA training. Each was provided a computer and printer, furniture, telephone/fax machine, photocopier, overhead projector and small generator. They were also allocated use of a car and staff were given a supplemental allowance for their extra work under IDSMIP. 10. Approach for training. Training under IDSMIP included identification of training needs, preparation of training modules and material and provision of training for the CSU and RSU staff and WUA officers, staff and members. This was done in a step-wise manner that included training of trainers and training of WUAs. The pattern was that the TA team trained CSU staff. Then CSU staff (sometimes with assistance from the TA) then trained RSU staff. Then the RSU staff trained WUA representatives. 11. Training needs assessment. A comprehensive training needs assessment (TNA) was conducted by the TA expert and CSU for CSU and RSU staff and for WUA officers, staff and members. It involved a rapid assessment of existing backgrounds, knowledge and skills of SU staff in comparison with knowledge and skills required for developing WUA. The TNA used

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questionnaires, individual and group interviews and information from the CSU database to identify irrigation-related topics needed for training as well as the topic of training methods. The following courses were developed and provided. a. WUA establishment RSU were given training in WUA formation, including re- registration, new concepts about WUAs from the amended LAI, WUA establishment, WUA statutes, hydraulic WUA boundaries, inventory of irrigation assets, and preparing a transfer agreement. b. Promotion and Training CSU and RSU were trained in training methods and skills. c. Annual Operation and Maintenance Plan This course was for CSU, RSU and WUA staff. It was about how to prepare annual WUA work plans with approval by the WUA Assembly. d. Course on financial management This 3-part course was for CSU, RSU and WUA staff. It covered making budgets, setting and collecting the ISF, making expenditures, bookkeeping, financial reporting and auditing. Four Regional Financial Specialists were recruited, trained and directed to provide all financial management training needed for the WUA. e. Course on Construction and Rehabilitation This course included modules on design and tendering procedures, contract management and supervision of construction, as well as modules to train WUA officers and staff for WUAs selected for rehabilitation. f. Course on Governance and Administration The objective of this course was to train RSU staff to train WUA officers and staff in how to govern the WUA (leading meetings, elections, dispute resolution) and how to administer (including taking minutes, making reports, etc.). g. Course on Monitoring and Evaluation The international M&E specialist prepared and gave a training course on 2006 for CSU and RSU staff in how to select indicators, identify methods for data collection and processing, prepare M&E reports and how to use M&E findings. 12. WUA Training Program. RSU staff developed and implemented WUA Training Programs (WTP) in each of their raions. By the end of 2006 all project raions had prepared and submitted to the CSU their WTP. Six months after this 75% of the training was completed. Training was also given to 42 other non-project raions on the amended LAI and financial management. The capacity building of SAIC (now AIOJSC) and WUAs has resulted in satisfactory achievement of all expected outcomes, although it is apparent that capacity building needs to continue for the long term. 13. Study Tours. During 2007 three study tours were conducted for AIOJSC officials, staff of CSU and RSU and WUA chairmen. The first involved 14 AIOJSC officers who went to Egypt to learn about irrigation management transfer (IMT), federation of WUA, efficient use of water and relatively high productivity of irrigation water. The second tour involved 11 participants (RSU staff, WUA chairmen, CSU staff and PIU Project Manager) who went to Turkey to observe IMT and ability of WUAs to have ISF that covered all costs of O&M. The third tour was again to Turkey to examine the process of reform by the General Directorate of State Hydraulic Works (DSI) and WUA. 14. Four Community Mobilization Specialists. Four Community Mobilization Specialists were mobilized by the Project to help WUAs re-register under the amended LAI, to restructure, change their boundaries and membership and become more participatory. The Specialists were

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appreciated by the RSU because they increased the pace and correctness of mobilizing water users, establishing and registering WUAs. 15. Inventories of WUA infrastructure. After RSUs and WUA staff received training in how to conduct inventories of the functional condition of WUA I&D infrastructure, they did I&D inventories during 2006 and completed them for all re-registered project WUAs. 16. Promotion program. The Project’s promotion program consisted of a public information campaign and WUA promotion meetings. The main focus group consisted of farmers, women heads of farm families, community elders and marginal farmers. The second focus group was policy and decision makers in government concerned with irrigated agriculture. The purpose of the promotion program was to create understanding about the rationale and approach for WUA development. A key theme conveyed was that irrigation problems are farmers’ problems and farmers must become part of the solution. 17. Public information campaign. The campaign used radio, audio cassettes, television, videos, posters, brochures, newspaper articles and newsletters, as follows:  Awareness meetings: In 2004 the CSU organized several public awareness activities including a meeting in Baku attended by 50 staff of AIOJSC and four regional seminars;  Radio broadcasts: Repeating radio broadcasts began in November 2005 and continued until 2010 in the amount of an average of 30 minutes broadcasting per month;  Newspaper articles: From early 2006 22 articles were published in 25 different newspapers;  Posters: In 2005 3 posters were distributed to the RSUs. These were posters on: (i) the 3 components of the IDSMIP, (ii) steps in formation of the WUA and (iii) the new organizational structure established by the amended LAI;  Brochures: These were prepared on the following topics: (i) structure of the WUA in accordance with the newly amended LAI and Water Code, (ii) information about the objectives, components and activities of IDSMIP, (iii) text of the amended LAI, (iv) text of the WUA statute and (v) water distribution by the WUA.  Newsletter: The newsletter has been published quarterly since 2007 and contains regular news about WUA development and current issues. These have been highly appreciated by WUA members and RSU staff. 18. WUA promotion meetings. There have been three types of meetings conducted under IDSMIP. These are Roundtable Meetings, Sensitizing Meetings and WUA Awareness workshops. The Roundtable Meeting was held in each Project raion where information on WUA development was conveyed by RSU staff to government officers and public and feedback and suggestions were received. The Raion Awareness Meetings contributed greatly to generating local support for WUAs. Many municipalities made office space available for WUAs. Sensitizing Meetings were held at the neighborhood level with farmers and other villagers to have informal discussions about WUAs, to develop a communication network among water users and to plan developing WUAs based on popular support. WUA Awareness Workshops were organized by RSU staff to provide more detailed awareness among prospective WUA members about the new WUA statute, organizational structure of the WUA and re-registration procedure.

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19. Strong attention to WUA formation. The early and heavy focus given to establishment and development of WUAs had the effect of delaying on-farm infrastructure rehabilitation. This had been foreseen in Project planning, but delays were substantially increased due to slow early progress in Component 1. However, once commenced, participatory design and rehabilitation proceeded well, such that completion was achieved as scheduled. The strong attention to WUA formation has provided a good basis for future advancement of needed on-farm rehabilitation. 20. Towards self reliance in financing irrigation. The Project developed much higher Irrigation Service Fees (ISFs) and better collection rates. The project has significantly improved WUAs’ recovery of management, operation and maintenance (MOM) costs for the irrigation and drainage infrastructure. In the north region, WUA ISFs increased in the 2008/9 irrigation season from AZN 0.5/1,00m3 to AZN 6.0 /1,000 m3 with close to 100 percent collection rates as the project enhanced farmers’ capacity to pay for irrigation services. WUAs have more revenues, better financial and irrigation management, and depend less on the Raion Irrigation Departments. Over years 2006-09, budgets of the rehabilitated WUAs increased by more than 4 times reaching on average AZN 12,000 per year), compared to AZN 7,400 for non-rehabilitated WUAs. In 2009, the rehabilitated WUAs had carried out 91 percent of the O&M works agreed in their plans. In contrast, one third of the non-rehabilitated WUAs have not done any O&M work at all, heavily depending on Raion Irrigation Departments to carry out such work.

Component 2 21. Factors that specifically affected outputs of irrigation and drainage infrastructure system rehabilitation are discussed below: a. Selection of WUAs for on-farm rehabilitation. As defined at appraisal, the eligibility criteria to be applied to select WUAs for which subsidized system rehabilitation works would be undertaken considered the WUA’s status of development, technical readiness, past performance and future commitment. A minimum acceptable economic rate of return of 12% was also specified. All of these were aimed at ensuring long-term sustainability. It was also intended that there should be a uniform distribution of WUAs between various project raions. b. Restricted funding for off-farm rehabilitation. Since the Project focus was on-farm institutional and physical improvements, the restriction of 35% of the amount of available rehabilitation funding for off-farm works was justified. It was found in Project areas that the functional condition of off-farm works was mostly sound. This was due partly to preceding interventions under RIDIP and other projects and partly due to timely repair and maintenance works by Raion Irrigation Departments (RIDs). c. Rehabilitation of Bahramtape headworks. Conversely, the Bahramtape headworks rehabilitation, the project’s major off-farm system intervention, eventually consumed a larger-than-planned portion of the rehabilitation funds. This was because of cost escalations, insufficient pre-project assessments and late insertion of this item into the Project. However, the value of the Bahramtape intervention was well seen when in 2010 it safely withstood a major flood that reportedly would have caused its collapse before its rehabilitation. The Project also provided water measurement structures (hydroposts) at key WUA/RID interface locations. d. Indicated average rehabilitation investment level. The average cost average of USD 300 per ha that was indicated in the PAD, to cover reinstatement of on-farm systems to

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operational norms, was set with a view to benefiting the greatest possible number of WUAs. It is considered that application during implementation of this initial guideline value, or of a subsequently increased value, as a cost ceiling level may have been unduly rigid or severe, resulting sometimes in important rehabilitation works not being undertaken. The need for a specified maximum (rather than average) cutoff unit area cost, to help keep costs at a reasonable level, is recognized. e. Participatory rehabilitation planning and design. In general there was comprehensive farmer consultation, participation and involvement throughout the rehabilitation planning, design and construction process. At project completion there appears to be almost universal farmer satisfaction with the processes and results. f. Re-introduction of volumetric water measurement. It was indicated in the IDSMIP PAD that, as a conditionality for financing on-farm rehabilitation, volumetric water measurement was to be reintroduced. 1,000 water measurement structures (hydroposts) were installed at key WUA/RID interface locations around the country, not only for the few systems that were rehabilitated. Indications have been given that some hydroposts may not always have been well located, well constructed and/or properly placed into service, mainly those outside of rehabilitated systems. g. Design and construction supervision consultants. An engineering consulting firm was engaged for Project design and construction supervision services, one for the WUA systems rehabilitation works and one for the Bahramtape headworks rehabilitation. There were some early difficulties in quality of services, but these were corrected and the overall end result was good. Final designs were appropriate and cost effective; construction supervision ensured quality construction; and final drawings and documentation were up to a high standard. Supervision is seen to have been sound. h. Fund reallocations. Project fund reallocations for the last 6 months of the Project period forced cancellation of procurement of heavy-duty O&M equipment for WUAs with rehabilitated on-farm systems. WUAs communicated that, in the absence of access to small excavator/backhoe equipment, they are very constrained in their ability to remove vegetative growth and sediment. Many Project areas are affected by rapid growth of vegetation in watercourses. Because of heavy floods in main rivers in June 2010, sediment loads were very large. Although manual operations to remove vegetation and sediments had been done seasonally or more often, the scope of the task was such that keeping works handed over to the WUA in functional condition could not be achieved without basic machinery, mainly excavators. i. Abbreviated support to WUAs. Over the life of the Project, WUAs were formed, developed and supported by Raion Support Units (RSUs). For most of the WUAs with rehabilitated systems, provision of support by the RSU stopped after rehabilitation was completed. WUAs with still under-developed technical, organizational and financial capabilities were largely left to themselves in performing new post-rehabilitation management responsibilities. This is a risk to the sustainability of WUAs since they need periodic capacity building for the long term future. j. Rehabilitation of on-farm schemes. Rehabilitation of the on-farm irrigation systems managed by the selected WUAs was done for 22 WUAs serving 52,000 ha at a cost of $21.8 million USD. Specified irrigation and drainage infrastructure rehabilitation target outputs included 340 km of rehabilitated off-farm and 1,800 km of on-farm irrigation canals, for a total of 2,140 km. Achieved outputs were 1,225 km for irrigation rehabilitation,

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or 60% of target. Target rehabilitated off-farm and on-farm drainage channels were 340 km + 550 km, respectively, for a total of 890 km. Actual output achieved for drainage channels was 542 km, which was also about 60% of target. Under-achievement in rehabilitation of irrigation and drainage canals was largely due to original over-estimation of the needs for off-farm system rehabilitation. Target area rehabilitated and working with adequate irrigation or drainage services was 5,600 ha. The actual amount achieved was 5,200 ha, which was over 90% of the target. The small shortfall was due to escalation of construction costs. Responsibility for O&M and use rights for up to 20 years was transferred to 22 project WUAs in July 2005. 22. Outputs of rehabilitation. The Project rehabilitated some 53,000 ha of service area in 22 WUAs in 11 raions. Cost of on-farm rehabilitation averaged about US$ 450/ha. Incremental benefits include: a. Average increases in yields due to improved irrigation water distribution to farmers of 23% for all crops; b. Increases in area irrigated and a subsequent reduction of uncultivated land from approximately 10,500 ha in 2006 to 2,300 ha in 2009-2010; c. Change in cropping patterns to more lucrative cash crops like vegetables and orchards; d. With efficient on-farm irrigation management, beneficiary WUAs will likely see their yields continue to increase over the next 20 years, corresponding to an estimated annual income increase of about US $70/ha for wheat and barley, US $300/ha for vegetables and US $130/ha for orchards. 23. Outputs of rehabilitation of Bahramtape headworks. Rehabilitation and modernization of the major diversion and irrigation water intake structure, the Bahramtepe Headworks, on the Araz River was completed in July 2009. It has withstood recent flooding and it has a financially viable and technically experienced management in place. The analysis predicted that the overall project would generate a financial rate of return at 21 % and the same rate of economic return. The results of individual analyses suggested that the economic returns to the investments in the irrigation and drainage infrastructure and the Bahramtepe headwork were around 25% and 39%, respectively. Evidence of the sustainability of the improved Bahramtepe headworks will take time, but it was encouraging to note that the Bahramtepe Headwork was able to withstand the peak flows in the Araz River during the May/June 2010 floods. 24. Outputs to Outcomes. These outputs were linked to specified outcomes relating to (i) number of potential water users who actually receive irrigation water (95% of all potential water users in each WUA with a rehabilitated system), and (ii) volumes of water distributed to the farm plots (4 irrigations for summer crops for 80% of all farmers in WUAs with rehabilitated systems). The achieved outputs were sufficient to produce good estimated results for the first outcome (93% of water users), 98% of target, and for the second outcome (4 or more irrigations for summer crops for 96% of farmers), over 120% of target. 25. Changes in water supply. There was an increase in the total amount of water supplied, better planning of water delivery, and reduced water losses. While the amount of water supplied to non-rehabilitated WUAs remained relatively constant over 2006-09, beneficiary WUAs witnessed an increase in water supplied by over 40 percent.

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26. Irrigation and drainage system works undertaken under Component 2 covered (i) rehabilitation of on-farm irrigation and drainage infrastructure systems serving about 5,200 ha for 22 selected WUAs in 11 raions; (ii) rehabilitation of the Bahramtape headworks on the Araz river, which supplies irrigation water to an area of about 140,000 ha including 89,000 ha in 3 of the project raions; (iii) rehabilitation of other off-farm infrastructure systems as needed to ensure sufficient and timely water delivery and service to the above-indicated on-farm systems; and (iv) provision or reinstatement of 979 water measurement structures (hydroposts) in 46 raions, to enable volumetric measurement of bulk irrigation water flows at WUA/RID interface locations across much of the country. The works were undertaken under a total of 23 works contracts, of which one, for the Bahramtape headworks rehabilitation was procured using international competitive bidding (ICB) procedures and the rest were procured using national competitive bidding (NCB) procedures6. Corresponding design and construction supervision was undertaken under 2 consultancy services contracts procured using quantity- and cost-based selection (QCBS). 27. Out of a total Component 2 investment of 37 million USD, 90% (33 million USD) was for the various on-farm and off-farm rehabilitation works while 10% (4 million USD) was for the corresponding design and construction supervision services. It also shows that, of the total Component 2 investment value, the Bahramtape headworks rehabilitation accounted for 34% and other off-farm works rehabilitation including hydroposts accounted for 9%. The on-farm works rehabilitation accounted for the remaining 57% of the total Component 2 investment value. 28. Rehabilitation works contract costs totaled 33.4 million USD, of which 11.6 million USD were for the Bahramtape headworks contract and 21.8 million USD were for the 22 WUAs’ system contracts. Of this latter amount, 1.3 million USD was for the provision of hydroposts country- wide; the remaining 20.5 million USD was for WUA-specific rehabilitation of on- and off-farm systems. Over the total corresponding service area of 52,000 ha, this was equivalent to an average unit WUA system rehabilitation cost of 395 USD/ha, of which 9% was the off-farm works portion. 29. It is noted that WUA system contracts were let in 5 successive batches of 4 or 5 contracts each. The progression of unit rehabilitation costs, and of off-farm works portions, over 3 relatively distinct implementation phases is summarized in the table below. The indications from site and office discussions are that, after a first phase (batch 1) in which incurred costs were significantly higher than the value of 300 USD/ha indicated in the PAD, successful efforts were made to reduce costs in a second phase (batches 2 and 3) by reducing the scope of the interventions, particularly for the off-farm systems. The cost increases of the third phase (batches 4 and 5) would have resulted primarily from general price escalation but would also have reflected some more comprehensive addressing of on-farm works deficiencies. The indications are that some of the contracts of the second phase in particular (batches 2 and 3) may not have attended to all of the important water management constraints, mostly drainage system deficiencies.

6 Due to the larger than projected WUA areas and a perceived sufficiency of national contractors, the upper threshold for procurement of contracts for WUA systems rehabilitation works under NCB procedures was increased from 600,000 to 2,000,000 USD per contract in year 3 of the project, at about the time of preparations for the first such contracts.

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30. Out of the 1,225 km of irrigation canals and 542 km of drainage channels that were rehabilitated, 57% (702 km) and 91% (493 km) respectively were open earth type, for which rehabilitation primarily consisted of cleaning (vegetation removal) and restoring (excavation of sediments and reforming of sections). For the remaining lengths, additional works included selective repairs or provision of in-situ concrete linings, pre-cast concrete canalette sections and pipeline networks. Perhaps the most significant system water management and physical durability improvements would have been those resulting from the repair or provision of 4,239 structures including water control structures (e.g. canal intakes, head regulators, cross regulators, gated outlets) and water passage structures (e.g. culverts, flumes, bridges). Finally, the 979 hydroposts, put in place at key water measurement locations for both rehabilitated and non- rehabilitated systems, should also make a major contribution to enhancement of future operational sustainability of the systems. 31. The effected works have resulted in confirmed water management improvements of great importance to system users and operators. Positive impacts reported included the following:  Reduced water-logging and soil salinity,  Lower groundwater levels,  Greater irrigation water supply reliability,  Increased physical and operational efficiency (lower water losses leading to water savings), (v) increased water distribution control, equity and flexibility, and  Consequent corresponding financial savings, cultivated area reclamations and expansions, and higher and more secure levels of agricultural production and income. 32. However, an important concern arising from evaluation visits to system rehabilitation sites relates to the potential for sustainability. Less than half of the schemes, and a very small number of locations within each scheme, were visited. After a year or two of post-rehabilitation operations, the types and numbers of perceived deficiencies were small but still seemingly significant considering the small sample of visited sites. These deficiencies were judged to be mostly a consequence of shortcomings not in works design or construction but in systems management, operational knowledge and practices, and physical care and maintenance. They point to a need for continuing relevant technical, managerial, social and institutional support to WUAs. Some example noted deficiencies include: 33. Heavily weeded and overgrown previously cleared earth canals and drains  Sediment and trash accumulations at new flow control structures  Some broken new outlet gates in need of repair  Excessive flows and submergence at provided hydropost structures (which may have an element of design and/or construction shortcomings), and other possible indications of sometimes infrequent use of hydroposts  Improper operation at some locations of the long-crested overflow weir and gated water level control structures (leaving the gate open and increasing flows to raise water levels instead of closing the gate and allowing for design weir overflows). 34. The later solution was to prevent sediment buildup at the structure and hence to reduce the scope and effort of later sediment removal operations, but it could also generate hydraulic damage to outlet structures and downstream earth canals. 35. Improper localized physical interventions to solve local problems included the following:

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 Retrofitted raised weir crest to achieve higher irrigation water levels, leading to local area flooding and risk of structure failure (instead of serving the higher land from an upstream outlet location);  Broken irrigation canal banks to divert excess flows to local drainage, again leading to localized flooding plus probably prejudicing water supplies to downstream areas (instead of adjusting canal inflows or distributions or rotations); and  Broken canal banks and makeshift canal diversions to bypass provided control and outlet structures, jeopardizing system integrity and control, and generating flood and water loss problems, all to resolve various local problems that would have more technically correct and less disruptive and degenerating solutions. 36. Some leakage through the Bahramtape headworks downstream dividing wall at high water level (an item reportedly repaired under the rehabilitation works contract). Beyond this, it is noted that recent major Kura and Araz river floods have impacted rehabilitated schemes in Sabirabad raion (and possibly elsewhere). The reported damages include:  Complete scheme inundation in one instance,  Drainage systems backflow blockages,  Lost or damaged intake pumping station, head distribution basin and structures, and supply canal, in one scheme, and  Severe canal flow disruptions and sediment loads. 37. It is understood that special government funding has been allocated to effect flood damage repairs. It may prove desirable to properly assess the damaged systems during preparation of a successor project, with a possible view to assisting with needed repairs under such a project if warranted. At the Bahramtape headworks it was seen that the main trash racks had been badly distorted and damaged by tree trunks and debris carried by the flood, that heavy tree and trash loads had blocked the sediment tanks and other parts of the complex, and that downstream bank protection works had been damaged locally by water seepage from an adjacent flooded canal. However, the regional AIOJSC agency operators were immensely pleased at the overall good performance of the rehabilitated structure during the flood. 38. Finally, the WUA system rehabilitation works as a whole have, after one or two post- rehabilitation seasons, reportedly generated some substantial irrigated agriculture benefits. The key indicators of presumed impact of system rehabilitation works on irrigated agriculture include: (i) yields for the four major project area crop groups, (ii) areas under high value cropping (fruit and vegetables), and (iii) overall cultivated area. Indicator values from 2006 (pre- rehabilitation) and 2009 (post-rehabilitation) surveys are compared in terms of percentage increase from 2006 to 2009. For the overall area served by the 22 rehabilitated WUA systems, the average indicator value increases from 2006 to 2009 are in the range of from 13% to 39%; the latter highest increase value is for high value cropping. These results, which were qualitatively confirmed by farmers at the visited schemes, are considered to be most pleasing. 39. Tables A2.1 and A2.2 below summarize key costs and contract details for on-farm and off- farm rehabilitation. Table A2.3 summarizes key information about key infrastructure works quantities for WUA/on-farm rehabilitation and Table A2.4 summarizes information about key impacts of rehabilitation.

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Table A2.1 Component 2 - Infrastructure Improvement Interventions - Key Cost and Contract Details - Sheet 1 Rehabilitation Works Location Total Contract Contract Costs Summary Unit Contract Costs Contract Dates Service Batch / On- Off- Total Hydro- Total Total Total Total Start Finish Area Number Farm Farm System post Contract Contract Contract System Works Works Works Works Works Works Works Works ha M AZN M AZN M AZN M AZN M AZN M USD USD/ha USD/ha D-M-Y D-M-Y Bahramtape Headworks 140,000 0.00 9.53 9.53 0.00 9.53 11.59 83 83 27-Mar-07 07-Jul-09 Raion WUA Guba Zerdabi 2,005 1/1 0.48 0.09 0.57 0.00 0.57 0.67 336 336 06-Mar-07 31-Mar-08 Guba Dagly 2,038 4/5 0.92 0.02 0.94 0.05 0.98 1.22 599 571 15-Sep-08 28-Feb-10 31-May- Khachmaz Chinartala 3,055 2/4 0.59 0.06 0.64 0.00 0.64 0.78 255 255 04-Oct-07 09 31-May- Khachmaz Gimilgishlag 2,531 3/4 0.60 0.12 0.71 0.01 0.73 0.89 351 344 24-Dec-07 09 Goranboy Shahmammadli 1,326 1/2 0.38 0.14 0.53 0.00 0.53 0.62 466 466 06-Mar-07 31-Mar-08 Goranboy Hajally 1,271 4/3 0.45 0.04 0.50 0.12 0.61 0.76 597 482 04-Apr-08 31-Oct-09 Goranboy Borsunlu 2,081 5/5 0.45 0.07 0.52 0.07 0.59 0.74 353 311 15-Aug-08 31-Jan-10 31-May- Agjabedi Salmanbeyli 4,569 3/1 0.67 0.00 0.67 0.01 0.68 0.83 182 180 07-Dec-07 09 Beylagan Sharg 5,050 3/2 1.44 0.00 1.44 0.03 1.47 1.82 359 352 07-Dec-07 25-Dec-09 Zerdab Gelme 1,446 4/2 0.54 0.17 0.71 0.23 0.94 1.16 804 604 04-Apr-08 25-Sep-09 Zerdab Gendebil 1,754 5/1 0.71 0.00 0.71 0.06 0.77 0.96 548 506 16-Sep-08 25-Dec-09 Imishly Jaferli 1,889 3/3 0.48 0.11 0.59 0.00 0.59 0.71 378 378 18-Dec-07 11-Nov-08 Imishly Yeni Heyat 2,543 4/4 0.51 0.00 0.51 0.12 0.63 0.77 304 248 14-Mar-08 30-Jun-09 Saatly Garanuru 3,718 2/3 0.91 0.01 0.92 0.00 0.92 1.13 303 303 01-Oct-07 28-Feb-09 Saatly Garajalar 3,115 5/4 1.29 0.00 1.29 0.08 1.37 1.70 546 515 10-Oct-08 25-Dec-09 Sabirabad Garatapa 1,800 1/4 0.73 0.09 0.82 0.00 0.82 0.96 534 534 06-Mar-07 28-Feb-08 Sabirabad Garaguney 1,483 4/1 0.62 0.00 0.62 0.14 0.76 0.93 630 512 17-Apr-08 08-Sep-09 Sabirabad Nizamikend 2,323 5/2 1.06 0.11 1.17 0.02 1.20 1.49 640 628 17-Oct-08 30-Sep-09 Sabirabad Javad 2,284 5/3 0.94 0.14 1.08 0.01 1.09 1.36 595 588 10-Oct-08 21-Dec-09 Sharur Agridagh 1,772 1/3 0.45 0.09 0.55 0.00 0.55 0.65 365 365 09-Mar-07 31-Mar-08 Sharur Nalbend 1,007 2/1 0.32 0.09 0.42 0.09 0.51 0.62 615 501 03-Oct-07 31-Oct-08 Babek Nehram 2,937 2/2 0.68 0.16 0.84 0.00 0.84 1.03 350 350 03-Oct-07 28-Feb-09 Values for 22 WUAs 51,997 - 15.24 1.51 16.75 1.05 17.80 21.80 419 395 06-Mar-07 28-Feb-10 Cost Totals in M USD 18.67 1.84 20.50 1.29 21.80 Values for All Works - - 15.24 11.04 26.28 1.05 27.33 33.38 - - 06-Mar-07 28-Feb-10 Cost Totals in M USD 18.67 13.42 32.09 1.29 33.38

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Table A2.2 Component 2 - Infrastructure Improvement Interventions - Key Cost and Contract Details - Sheet 2 Rehabilitation Works Location Total Contract Contract Costs Summary Unit Contract Costs Contract Dates Service Batch / On- Off- Total Hydro- Total Total Total Total Start Finish Area Number Farm Farm System post Contract Contract Contract System Works Works Works Works Works Works Works Works

ha M AZN M AZN M AZN M AZN M AZN M USD USD/ha USD/ha D-M-Y D-M-Y Values by WUA Contract Batches Batch 1 (4 WUAs) 6,903 1 / 1-4 2.05 0.41 2.46 0.00 2.46 2.90 420 420 06-Mar-07 31-Mar-08 - % of Total System Works 83 17 100 - % of Total Contract Works 83 17 100 0 100 Batch 2 (4 WUAs) 10,717 2 / 1-4 2.50 0.32 2.82 0.09 2.91 3.55 332 321 01-Oct-07 31-May-09 - % of Total System Works 89 11 100 - % of Total Contract Works 86 11 97 3 100 Batch 3 (4 WUAs) 14,039 3 / 1-4 3.19 0.22 3.41 0.06 3.47 4.25 303 298 07-Dec-07 25-Dec-09 - % of Total System Works 93 7 100 - % of Total Contract Works 92 6 98 2 100

Batch 4 (5 WUAs) 8,781 4 / 1-5 3.04 0.23 3.27 0.66 3.93 4.85 552 460 14-Mar-08 28-Feb-10 - % of Total System Works 93 7 100 - % of Total Contract Works 77 6 83 17 100 Batch 5 (5 WUAs) 11,557 5 / 1-5 4.46 0.32 4.78 0.24 5.03 6.24 540 514 15-Aug-08 31-Jan-10 - % of Total System Works 93 7 100 - % of Total Contract Works 89 6 95 5 100 Values for All Batches 51,997 - 15.24 1.51 16.75 1.05 17.80 21.80 419 395 06-Mar-07 28-Feb-10 - % of Total System Works 91 9 100 - - - % of Total Contract Works 86 8 94 6 100 Values for All Contracts - - 15.24 11.04 26.28 1.05 27.33 33.38 - - 06-Mar-07 28-Feb-10 - % of Total System Works 58 42 100 - - - % of Total Contract Works 56 40 96 4 100 Note Design and construction supervision of works covered by the contracts indicated in this table was undertaken under two consultancy services contracts as follows: (a) Design and construction supervision for the rehabilitation of the Bahramtape Headworks, start date 13-Oct-2005, finish date 07-Jul-2009 (completed), current value 1.05 M USD (b) Design and construction supervision for the rehabilitation of the on-farm and off-farm infrastructure, start date 22-Feb-2006, finish date 30-Sep-2010 (ongoing), current value 2.78 M USD

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Table A2.3 Component 2 - WUA Systems Rehabilitation Works - Key Achieved Infrastructure Quantities Raion WUA Total Irrigation Canals Drainage Channels Structures Hydroposts Service Area Earth Lined Canalette Pipeline Total Open Closed Total Total Total Ha km km km km km km km km No. No. Guba Zerdabi 2,005 0.0 9.5 0.0 5.0 14.5 0.0 0.0 0.0 198 - Guba Dagly 2,038 24.9 11.5 0.0 0.5 36.9 0.0 0.0 0.0 103 43 Khachmaz Chinartala 3,055 10.3 25.8 3.3 1.3 40.8 10.4 0.0 10.4 201 - Khachmaz Gimilgishlag 2,531 9.4 41.6 0.0 1.9 53.0 0.0 0.0 0.0 253 38 Goranboy Shahmammadli 1,326 0.0 3.3 0.0 26.5 29.8 0.0 0.0 0.0 75 - Goranboy Hajally 1,271 71.5 0.0 0.0 0.0 71.5 0.0 0.0 0.0 142 65 Goranboy Borsunlu 2,081 35.4 0.0 0.0 0.0 35.4 0.0 0.0 0.0 130 93 Agjabedi Salmanbeyli 4,569 6.4 46.3 1.2 0.0 54.0 32.0 0.0 32.0 217 10 Beylagan Sharg 5,050 126.2 15.0 9.2 0.0 150.4 81.9 0.0 81.9 444 33 Zerdab Gelme 1,446 4.7 28.2 6.9 0.0 39.8 17.8 0.0 17.8 130 239 Zerdab Gendebil 1,754 7.1 21.7 4.3 0.0 33.1 17.0 16.2 33.2 205 42 Imishly Jaferli 1,889 36.1 30.9 1.3 0.0 68.3 23.1 0.0 23.1 307 - Imishly Yeni Heyat 2,543 35.8 2.1 11.2 0.0 49.1 35.5 0.0 35.5 152 62 Saatly Garanuru 3,718 19.1 89.3 3.7 0.0 112.1 0.0 0.0 0.0 189 - Saatly Garajalar 3,115 23.2 29.1 20.8 0.0 73.0 41.9 12.0 53.9 265 59 Sabirabad Garatapa 1,800 18.6 13.4 16.9 0.0 48.9 72.6 0.0 72.6 167 - Sabirabad Garaguney 1,483 30.4 3.1 20.8 0.0 54.3 20.1 0.0 20.1 199 154 Sabirabad Nizamikend 2,323 56.4 0.0 4.5 0.0 60.9 38.1 0.0 38.1 268 15 Sabirabad Javad 2,284 42.1 9.8 1.8 0.0 53.7 29.5 0.0 29.5 293 12 Sharur Agridagh 1,772 67.3 0.0 0.0 0.0 67.3 17.7 0.0 17.7 86 - Sharur Nalbend 1,007 34.1 0.0 0.0 0.0 34.1 16.7 0.0 16.7 101 114 Babek Nehram 2,937 42.7 0.0 0.0 1.0 43.7 38.8 20.5 59.3 114 - Totals for 22 WUAs 51,997 701.6 380.6 106.0 36.3 1,224.5 493.2 48.7 541.9 4,239 979 Note All of the hydroposts were provided under a total of 14 out the 22 WUA infrastructure rehabilitation contracts, as shown in the table. However, they were physically placed at key WUA/RID interface locations not only for the 22 WUAs but also for all WUAs in the 11 project area raions and for WUAs in 35 additional raions across the country. Thus the numbers of hydroposts shown in the table for each WUA reflect contract provisions but not physical placements.

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Table A2.4 Component 2 - WUA Systems Rehabilitation Works - Key Impact Indicators Raion WUA Total Key Impact Indicators - Value Changes 2006-2009 Service Area High Value Cultivated Wheat Yield Fodder Yield Fruit Yield Veg. Yield Cropping Area ha % increase % increase % increase % increase % increase % increase Guba Zerdabi 2,005 18 13 24 4 18 11 Guba Dagly 2,038 9 9 11 3 8 5 Khachmaz Chinartala 3,055 17 23 42 11 208 94 Khachmaz Gimilgishlag 2,531 18 31 44 8 54 9 Goranboy Shahmammadli 1,326 32 18 25 10 75 75 Goranboy Hajally 1,271 32 14 50 10 74 23 Goranboy Borsunlu 2,081 69 50 0 100 120 64 Agjabedi Salmanbeyli 4,569 20 33 8 12 0 6 Beylagan Sharg 5,050 20 13 8 5 7 13 Zerdab Gelme 1,446 25 27 25 13 57 103 Zerdab Gendebil 1,754 33 15 20 22 22 20 Imishly Jaferli 1,889 23 11 0 0 infinite 40 Imishly Yeni Heyat 2,543 19 6 0 0 0 25 Saatly Garanuru 3,718 9 52 26 27 158 24 Saatly Garajalar 3,115 20 47 10 53 infinite 3 Sabirabad Garatapa 1,800 18 14 0 25 -16 12 Sabirabad Garaguney 1,483 26 10 6 6 30 37 Sabirabad Nizamikend 2,323 22 30 0 47 infinite 29 Sabirabad Javad 2,284 16 10 0 6 -40 43 Sharur Agridagh 1,772 13 56 11 11 30 38 Sharur Nalbend 1,007 13 51 9 57 -47 21 Babek Nehram 2,937 13 56 8 11 6 7 Overall Values for 22 WUAs 51,997 21 23 13 15 39 25 Notes 1. Source of data is the PIU’s draft benchmark (end-of-project) survey report of January 2010, specifically crop yield and area data for 2006 (pre-rehabilitation) and 2009 (post-rehabilitation) 2. For each WUA, the area under high value cropping is the sum of the areas cropped to fruit and vegetables. 3. An infinite percentage increase in the area under high value cropping occurs when there is 0 ha under such cropping in 2006 and a positive ha value for this in 2009

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Component 3 40. Implementation and supervision arrangements for IDSMIP were similar to those of RIDIP. The PIU supervised, managed and coordinated the Project. The PIU conducted financial management, recruited all consultants, purchased Project supplies, goods and equipment, paid for part of the operating costs, financed and oversaw monitoring and evaluation, managed implementation of the environmental monitoring plan and financed and made contracts with annual auditing firms. Annual auditing was done starting with Price Waterhouse Coopers in 2004, followed by Deloitte & Touche, LLC, Azerbaijan and Moore Stephens Azerbaijan. All these audits concluded an unqualified opinion of satisfactory accounts and financial statements. 41. Procurement. Procurement was done in accordance with the Bank’s Procurement Guidelines under IBRD loans and IDA credits, which were new and rather demanding relative to conventional procurement practices in Azerbaijan. The Project’s first component included purchasing of vehicles, office equipment, furniture and small equipment for WUAs. Procurement of technical assistance for consulting services was done through the Quality- and Cost-Based Selection (QCBS) method. The second component was for I&D infrastructure rehabilitation that consisted of consulting assistance and civil works, which was rehabilitation of off-farm infrastructure, (such as headworks, main and secondary I&D canals, hydraulic control structures, on-farm canals and structures and hydroposts. Except for rehabilitation and modernization of the Bahramtepe Headworks, for which procurement was done by ICB, all the rest of component 2 was done through National Competitive Bidding (NCB). All other forms of procurement followed Bank procedures.

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Annex 3. Economic and Financial Analysis for IDSMIP

Introduction 1. The purpose of this analysis was to re-evaluate the financial and economic impacts of the Irrigation Distribution System and Management Improvement Project (IDSMIP) completed in 2010. The project cost was estimated at US$39.1 million during appraisal and was completed for US$43.3 million. The development objective of the project was to improve the effectiveness and financial viability of irrigation water distribution and management. The project expected to achieve this objective through (i) strengthening institutional and technical capacity of Water Users Associations (WUAs) and State Amelioration and Irrigation Committee (SAIC) that would result in improved management of irrigation and drainage infrastructure and increased timeliness and efficiency of irrigation water delivery; (ii) rehabilitation of on- and off-farm irrigation and drainage infrastructure serving 56,000 ha and (iii) rehabilitation of Bahramtepe headwork and sediment basin serving 140,000 ha of agricultural land. 2. At appraisal, the analysis estimated the financial and economic returns to farm households and to the economy likely to benefit from the investments in irrigation and drainage infrastructure and the Bahramtepe network. Benefits to the farm households were expected to derive from (i) improved yields; (ii) increased area of irrigated land; and (iii) improved cropping patterns with increased share of lucrative cash crops. While benefits from the investment in the Bahramtepe headwork were assumed to derive from (i) reduced maintenance costs of on- and off-farm irrigation infrastructure and (ii) avoided agricultural losses that would occur if the network collapses. 3. The appraisal analysis separately estimated returns to (i) the irrigation and drainage infrastructure rehabilitation component and (ii) the Bahramtepe headwork rehabilitation. The analysis predicted that the overall project would generate a financial rate of return at 21.0% and the same rate of economic return. The results of individual analyses suggested that the economic returns to the investments in the irrigation and drainage infrastructure and the Bahramtepe headwork would be around 25% and 39%, respectively. 4. The Project as a whole generated an ENPV of US$74 million or US$963/ha and an EIRR of 32.9%. The investment in the irrigation and drainage infrastructure generated economic net incremental benefits with an ENPV of US$46 million and an EIRR of 32.1%. The investment in the Bahramtepe headwork yielded economic net incremental benefits with an ENPV of US$28 million and an EIRR of 34.5%. The financial internal rate of return (FIRR) was 28% for the Project overall. 5. Several factors contributed to the differences in economic and financial results produced by the appraisal and the current analyses. These include improvements in the assumed and actual rehabilitated area, crop yields, cropping pattern improvements, and areas returning to production. Although the first three factors contributed to the differences in Project benefits, higher economic and financial results produced by the analysis are mainly attributable to the significant difference between the predicted and actual area that returned to production (5,600 ha vs.10,500 ha). Although it is too early to fully document the entire Project impact on agricultural performance, as 2010 was only the third season after the completion of rehabilitation, the results of the ICR analysis suggest that the Project will reach its development objectives.

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Methodology 6. The initial project design and objective remained unchanged over the project implementation period. Therefore, the current analysis re-estimates the project benefits from the irrigation and drainage infrastructure rehabilitation following the appraisal methodology but by applying actual size of rehabilitated area, changes in cropping patterns and yields, benefit accumulation phases, project costs and revising assumptions on future yields and cropping patterns. However, it introduces a small modification to the types of benefits deriving from the investment in the Bahramtepe headwork that would be discussed under a relevant section. 7. The financial analysis estimates net incremental returns attributable to the project by comparing returns in the without project (WOP) scenario and with project (WOP) scenario over 20 year project life (e.g., 2004-2023) and using a 12 discount rate. The net incremental benefits are estimated at: (i) a crop level and (ii) a farm household level. 8. The analysis mainly based on the results of the Final Survey that has been conducted in September-November 2009 and has collected comprehensive information on WUAs and their members, socio-economic characteristics of farm households, agricultural production technology and output and input prices in the project areas. The survey covered three types of WUAs that: (i) received rehabilitation assistance from the project; (ii) did not receive rehabilitation support but benefited from the project activities aimed at strengthening of WUAs; and (iii) did not receive any assistance from the project (control WUAs). 9. The rehabilitated lands are located in three different agro-climatic zones with distinctive cropping patterns and production technology. Therefore, the lands are grouped into three regions - Northern, Central and Nahkchivan. An average farm household in the Northern region owns 1.82 ha of land while average farms in the Central and the Nahkchivan regions hold 3.13 ha and 0.77 ha, respectively. 10. The financial analysis uses 2009 constant prices for all inputs and outputs for the entire project period except for the irrigation service fees (ISF). At appraisal, the ISF for the ground irrigation were estimated approximately at AZN1.0 per 1000m3 which is insufficient to provide an adequate operation and maintenance to the irrigation and drainage infrastructure. However, the project’s activities (i) supporting WUAs to improve their institutional, managerial and technical capacities and (ii) improving farmers’ awareness resulted in some improvements of the ISF rates. The average ISF rate in 2009 was estimated at 2 AZN per 1000 m3 although in some WUAs the rate is recorded at AZN5.0 per 1000m3. According to the engineers’ estimates, the WUAs could properly operate and maintain the infrastructure when the ISF rate is US$18/ha that corresponds to AZN5.0 per 1000 m3. The analysis conservatively assumes that the ISF will continue increasing gradually until it reaches 5 AZN per 1000 m3 in 2013 and remains at this level since then. 11. In the economic analysis, the financial prices were converted into economic prices by removing taxes and subsidies from input and output prices and calculating import and export parity prices of major inputs and outputs. A shadow wage rate of 0.8 was used to convert a financial cost of labor into an economic one. The Government’s hectare based direct subsidies for crops were removed from the financial and economic analyses.

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Irrigation and Drainage Infrastructure Rehabilitation 12. Initially, the project targeted to rehabilitate irrigation and drainage systems serving approximately 56,000 ha of land. However, due to high inflation rates that reached its peak at 20.8% in 2008, prices for construction materials increased significantly leading to an increase in the average rehabilitation cost from the appraisal rate of US$300/ha to US$460/ha. As a result, the Project rehabilitated systems served 53,124 ha or 95% of the targeted area. 13. Shifts to more profitable crops According to the survey results, there were noticeable changes in cropping patterns towards more lucrative crops both in the rehabilitated and non- rehabilitated areas although the change occurred at different levels. This natural trend is used as the basis for the cropping patterns in the without and with project scenarios. In the with project scenario, the cropping patterns recorded in the rehabilitated areas 1-2 years after rehabilitation completion, i.e., in 2008/09 were kept constant (e.g., no further improvement in cropping patterns were assumed). The cropping patterns are summarized in Table A.3.1 below.

Table A.3.1. Cropping Patterns Assumptions by Regions North 1.82 Central 3.13 Nahkchivan WOP WP WOP WP WOP WP Wheat 24% 14% 28% 30% 38% 39% Barley 1% 2% 9% 9% 0% 0% Lucerne 1% 7% 22% 30% 16% 21% Cucumber 0% 0% 1% 5% 1% 1% Tomato 2% 7% 3% 6% 9% 13% Potato 2% 7% 3% 6% 10% 13% Water melon 18% 26% 1% 5% 0% 0% Apples 26% 38% 2% 2% 6% 6% Cotton 0% 0% 10% 6% 0% 0% Sugar beat 0% 0% 0% 0% 4% 6% Unused land 25% 0% 21% 0% 16% 0% Total 100% 100% 100% 100% 100% 100% Note: WOP – Without project; WP – With project

14. Similarly, as presented in Table A.3.2, yields for some crops slightly increased even in the non-rehabilitated areas. This natural trend is applied to the without-project scenario and availability of such data contributes to a more accurate estimation of the incremental benefits deriving solely from Project activities.

Table A.3.2. Yield Trends in Rehabilitated and Non-Rehabilitated Areas (kg/ha) Non-Rehabilitated WUAs Rehabilitated WUAs change change Regions Crops 2006 2009 (%) 2006 2009 (%) Wheat 2,100 2,200 5% 2,200 2,580 17% Fodder 11,700 11,600 -1% 12,800 15,180 19% Northern Fruits 8,000 8,800 10% 8,300 10,830 30% Vegetables 14,400 16,470 14% 15,500 16,650 7% Wheat 2,000 2,130 7% 2,100 2,660 27% Central Fodder 11,400 12,100 6% 11,900 14,460 22% Fruits 7,000 7,140 2% 5,900 6,860 16%

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Non-Rehabilitated WUAs Rehabilitated WUAs change change Regions Crops 2006 2009 (%) 2006 2009 (%) Vegetables 11,300 11,660 3% 14,000 16,100 15% Cotton 1,800 1,830 2% 1,800 1,940 8% Wheat 3070 2900 -6% 3200 3430 7% Nahkchivan Fodder 6,000 6,200 3% 6,200 8,850 43% Vegetables 8,130 7,600 -7% 10,100 11,800 17%

15. The bulk of the rehabilitation works were completed in 2008 and 2009; thus the survey does not provide information on the fully potential achievable yields as a result of the improved timeliness and efficiency of irrigation water delivery. However, on the basis of the yield improvements achieved in the rehabilitated areas in the first and the second seasons after the rehabilitation completion (or 2008/09), the analysis conservatively assumes that these 2008/2009 yields will increase by further 2-5%, depending on the sensitivity of the crop to water . These additional yield improvements are expected to occur during a 3- year period. Consequently, the Project’s full maturity is expected to come in Year 8-11 depending on the rehabilitation completion year in each WUA. Table A.3.3 summarizes the without and with-project yields.

Table A.3.3. Yields Assumptions by Regions (kg/ha) Yields (kg/ha) Incremental Regions Crops WOP/1 WP/2 (%) Wheat 2,230 2,700 21% Barley 2,000 2,600 30% Lucerne 12,430 15,700 26% Northern Potato 18,000 20,000 11% Tomato 12,000 15,000 25% Melon 26,500 32,000 21% Apple 8,300 9,800 18% Wheat 2,000 2,700 35% Barley 2,200 2,800 27% Lucerne 12,880 15,800 23% Potato 16,000 19,000 19% Central Tomato 20,000 24,000 20% Cucumber 20,000 23,000 15% Cotton 1,790 2,200 23% Melon 27,000 34,000 26% Apples 5,500 6,500 18% Wheat 3200 3700 16% Potato 14,000 18,000 29% Tomato 11,900 15,000 26% Nahkchivan Sugar beet 36,000 40,000 11% Melon 24,000 28,000 17% Apple 8,800 10,000 14% Tomato 11,900 15,000 26% Notes: 1) presented yields are for Year 1 and will change over time (decline/increase); 2) at project's full maturity that comes to Year 8-10 depending on the rehabilitation completion in the region.

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16. Variable yield improvements. The yield improvements vary from the one region to the other and consequently, benefits too. Therefore, the analysis provides only examples of some representative crops in each region. As the results in Table A.3.4 demonstrate, vegetables and melon show the highest returns at US$475/ha and US$300/ha, respectively. These crops are followed by lucernes and cotton that generates net incremental margin at US$283/ha and US$163/ha, respectively. The grains show lower incremental net returns in average at around US$70/ha.

Table A.3.4. Summary of Crop Performances Net Margin, US$/ha Without With Project Project Incremental Northern region Wheat 99 184 85 Potato 1,003 1,133 130 Melon 1,922 2,222 300 Central region Barley 91 147 56 Lucerne 1,380 1,663 283 Apple 947 1,168 221 Cotton 403 566 163 Nahkchivan region Tomato 1,431 1,906 475 Sugar-beet 1,708 1,813 105 17. Financial returns to the farm households. The investments in the rehabilitation of the irrigation and drainage infrastructure generates incremental returns to farm households in the Northern, Central and Nahkchivan regions at US$1,608, US$2,067 and US$726, respectively. This will correspond to the incremental gross margins of US$729 per ha in the Northern region, US$623 in the Central region and US$644 in the Nahkchivan region. The component generates a FIRR at 25.4 % and a FNPV of US$26 million. Benefit to cost ratio is estimated at 1.74. The results are summarized in Table A.3.5.

Table A.3.5. Summary Financial Results - Irrigation and Drainage Infrastructure Rehabilitation

Without With Incremental Project Project* Northern region Net margin per farm (US$) 1,210 2,819 1,608 Net margin per ha (US$) 665 1,549 884 Central region Net margin per farm (US$) 1,502 3,570 2,067 Net margin per ha (US$) 480 1,140 661 Nahchivan region Net margin per farm (US$) 454 1,180 726 Net margin per ha (US$) 589 1,533 943 FNPV Financial Net Incremental Benefits (US$) 27,654,152 FNPV Financial Net Incremental Benefits Per Ha (US$) 522 FIRR 25.4% Benefit-to-Cost Ratio 1.57 * At project’s full maturity in PY 11.

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18. The economic analysis shows that the component generates economic net incremental benefits with an ENPV of US$46 million and an EIRR of 32.1%. Benefit-to-cost ratio is estimated at 2.7 as shown in Table A.3.6.

Table A.3.6. Summary Economic Results - Irrigation and Drainage Infrastructure Rehabilitation ENPV Economic Net Incremental Benefits (US$) 46,256,872 ENPV Economic Net Incremental Benefits Per Ha (US$) 873 EIRR 32.1% Benefit-to-Cost Ratio 2.70 19. With regard to cost recovery and sustainability, the analysis estimates financial impacts of an increased ISF rate and a 10% equity contribution to rehabilitation cost at US$460/ha on household budgets. As the repayment conditions are not defined yet, the analysis assumed that the equity contribution will be repayable over four year period with a five year grace period. As the results in Table A.3.7 demonstrate, in PY10-15 the shares of the ISF rates and the 10%equity contribution in the annual net margin of the farm household vary from 2.2% to 4.0%, while these shares in the annual net incremental returns to farm households are estimated around 8.0%. These results imply that the equity contribution (if required to be made) would not be a financial burden for the farm households.

Table A.3.7. Financial Impact of the Equity Contribution on Farm Budget ISF As % of As % of net ISF*, Regions Options for 100% of O&M cost plus: net incremental USD/ha margin margin of of farm farm

A: No Cost recovery of rehabilitation cost 22 1.4% 4.9% North D: 10% of total rehabilitation cost 41 2.2% 8.1% A: No Cost recovery of rehabilitation cost 29 2.6% 5.6% Central D: 10% of total rehabilitation cost 47 3.9% 8.3% A: No Cost recovery of rehabilitation cost 31 3.0% 5.0% Nahkchivan D: 10% of total rehabilitation cost 49 4.0% 8.0% * Assuming the ISF rate at AZN 4.0 per 1000 m3 in PY 10-11. ** Assuming 10% cost recovery @ USD 460 per ha

Bahramtepe Headwork Rehabilitation 20. The appraisal analysis assumed that the benefits to the investment in the Bahramtepe headwork would derive from the two sources: (i) reduced maintenance costs of on- and off-farm irrigation infrastructure that would result from the reduced quantities of the silt entering the irrigation networks and (ii) avoided three year agricultural losses that would occur if the network collapses leaving 140,000 ha of land without irrigation water. Nevertheless, on the basis of the discussions with the project engineers and due to a lack of information on ‘would be reduced’ maintenance costs of on- and off-farm infrastructure, the analysis removed the first source of the benefit from the analysis. The assumption on the second benefit source proved to be valid as, according to engineers the flooding that occurred in May 2010 would most likely destroy the headwork leaving the 140,000 ha of land without water. However, in order to avoid over-

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estimation of the project benefits, the current analysis removed the second benefits too. Instead, it estimates the benefits only to agricultural land that due to the lack of irrigation water remained uncultivated before the rehabilitation and returned to production as it became irrigable. Further details on this change will be discussed below. 21. The Bahramtepe headwork and sediment basin was rehabilitated during 2007-2009 at a cost of US$13.2 million as opposed to the projected US$4.2 million. As mentioned above, the headwork serves 140,000 ha of agricultural land of which 33,254 ha was out of the production due to the lack of the irrigation water. In 2009, when the rehabilitation works were due to complete, about 10,840 ha of land returned to production. The analysis conservatively assumes that another 13,300 ha of land will be gradually brought back to the production during 2008- 2020. It further assumes that during the first five year after returning to production this land will be cultivated with non-cash crops such as wheat and barley. To avoid over-estimation of the benefits attributable to the project, the analysis assumes that in the without project scenario the previously uncultivated 33,250 ha would also be used for production of rainfed wheat. 22. Despite these conservative assumptions, the investment in the Bahramtepe headwork generates financial net incremental benefits with a FIRR of 33.7% and FNPV of US$25.8 million. Benefit to cost ratio is estimated at 3.44. The economic analysis shows that the component yields economic net incremental benefits an EIRR of 34.5% and an ENPV of US$28.3 million. Benefit to cost ratio to the investment is 3.87 as shown in Table A.3.8.

Table A.3.8. Summary Economic and Financial Results - Bahramtepe Headwork Rehabilitation Financial Results FNPV Financial Net Incremental Benefits (US$) 25,808,723 FNPV Financial Net Incremental Benefits Per Ha (US$) 1,069 FIRR 33.7% Benefit-to-Cost Ratio 3.44 Economic Results ENPV Financial Net Incremental Benefits (US$) 28,310,084 ENPV Financial Net Incremental Benefits Per Ha (US$) 1,173 EIRR 34.5% Benefit-to-Cost Ratio 3.87

Overall Project 23. The project as a whole yields a financial net incremental benefits with a FNPV of US$53 million or US$692/ha and a FIRR of 28.2%. Benefit to cost ratio is estimated at 2.13. The economic analysis demonstrate that the project generates an ENPV of US$74 million or US$963/ha and an EIRR of 31.4% Benefit to cost ratio is 3.04. The results are summarized in Table A.3.9.

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Table A.3.9. Summary of Financial and Economic Results –Overall Project Financial Results FNPV Financial Net Incremental Benefits (US$) 53,462,872 FNPV Financial Net Incremental Benefits Per Ha (US$) 692 FIRR 28.2% Benefit to Cost Ratio 2.13 Economic Results ENPV Financial Net Incremental Benefits (US$) 74,413,827 ENPV Financial Net Incremental Benefits Per Ha (US$) 963 EIRR 32.9% Benefit-to-Cost Ratio 3.04

Comparison of the appraisal and ICR analyses 24. Several factors contributed to differences in economic and financial results produced by the appraisal and the current analyses. These include differences in the assumed and the actual (i) rehabilitated area; (ii) yield improvements; (iii) cropping pattern improvements; and (iv) areas returning to production. The appraisal analysis estimated benefits to 56,000 hectares of rehabilitated land while in reality only 53,124 ha were rehabilitated. It adopted more optimistic assumptions on yields improvements assuming that the crops yields will increase in the range of 15%-45%, while the current analysis expects lower yield improvements (11%-30%). The appraisal assumptions on the cropping patterns changes were pessimistic, i.e. 69% of area assumed to be allocated for wheat that would reduce to 65%, while even in the non-rehabilitated WUAs, only about 40% of the total area was cultivated with wheat in 2006. As the WUAs for the rehabilitation were still unknown before the project start, the appraisal analysis assumed that only 5,600 ha are uncultivated. However, around 10,500 ha of those WUAs that were selected for the rehabilitation program remained uncultivated before the rehabilitation. Although above mentioned three factors contributed to the differences in project benefits at various degrees, the higher economic and financial results produced by the current analysis mainly attributable to the significant differences in the appraisal assumption and the actual area of land that returned to production. The assumptions and financial indicators used in the appraisal and the current analyses are summarized in Table A.3.10 below.

25. The appraisal and current analyses estimated different sources of benefits deriving from the investment in the Bahramtepe headwork.

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Table A.3.10. Summary of Benefits and Assumptions adopted by the Appraisal and ICR Analyses

Benefits and Financial Indicators Appraisal ICR A. Irrigation and Drainage Infrastructure Rehabilitation Total area for rehabilitation, ha 56,000 53,124 Land returned to production, ha 5,600 10,500 Average incremental yield increase, % 15-46 11-30 First benefit accumulation year Year 1 Year 5-6 Cropping pattern changes, % (i) wheat (WOP and WP) from 69% to 65% from 30% to 28% (ii) fodder (WOP and WP) from 11% to 10% from 16% to 23% (iii) fruits, vegetables and cotton (WOP and WP) from 3% to 4% from 11% to 17% B. The Bahramtepe Headwork Rehabilitation Benefit sources: (a) reduced on-and-off farm operation and maintenance yes no cost (b) 3 year agricultural losses that would occur if the yes no headwork collapses (c) benefits from the agricultural land that is returned to none 24,300 production, ha

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Annex 4. Bank Lending and Implementation Support

(a) Task Team members Responsibility/ Names Title Unit Specialty Lending Sandra Broka Consultant ECSSD Institutions Agricultural & Rufiz Vakhid Chirag-Zade Operations Officer ECSS1 Institutional Aspects Junko Funahashi Senior Counsel LEGEN Legal Counsel Joseph Goldberg Sector Manager ECSSD Agriculture Naushad Khan Senior Procurement Specialist ECSSD Procurement Rita Klees Senior Environmental Specialist ECSSD Environment Hannah Koilpillai Finance Officer CTRFC Disbursement Ida N. Muhoho Financial Management Specialist ECSC3 Financial Management Alessandro Palmieri Lead Dam Specialist OPCQC Dam Safety Social & Institutional Stan Peabody Lead Social Scientist ECSSD Aspects Salman A. Salman Lead Counsel LEGEN Safeguards Joop Stoutjesdijk Irrigation Engineering SASDA Task Team Leader William Sutton Agriculture Economist ECSSD Agriculture Economics Hiwote Tadesse Senior Program Assistant ECSSD Operations

Supervision/ICR Ian Anderson Consultant Irrigation Engineer Elmas Arisoy Lead Procurement Specialist ECSPS Procurement Pari Bauman Consultant Social Specialist Agricultural & Rufiz Vakhid Chirag-Zade Senior Operations Officer ECSS1 Institutional Aspects Norpulat Daniyarov Financial Management Specialist ECSC3 Financial Management Timothy Robert Jackson Consultant ECSSD Irrigation Engineering Sam H. Johnson Consultant ECSSD Water Users Associations Yoshi Kobayashi Sr. Water Resources Specialist MNSWA Institutional aspects Zeynep Lalik Financial Management Specialist ECSC3 Financial Management Pieter David Meerbach Water Resources Spec. ECSS1 Task Team Leader Senior Financial Management Ida N. Muhoho ECSC3 Financial Management Specialist Joop Stoutjesdijk Irrigation Engineering SASDA Task Team Leader Hiwote Tadesse Senior Program Assistant ECSSD Operations Douglas L. Vermillion Consultant ECSSD ICR lead author Yingwei Wu Senior Procurement Specialist ECSC2 Procurement

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(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY00 0.45 1.05 FY01 0.00 0.00 FY02 2.75 32.85 FY03 32.04 172.77

Total: 35.24 206.67 Supervision/ICR FY03 0.20 0.85 FY04 13.26 53.34 FY05 10.69 58.71 FY06 9.47 59.13 FY07 7.64 103.28 FY08 15.71 101.27 FY09 15.03 99.82 FY10 26.50 180.13 FY11 2.53 36.88

Total: 101.03 693.41

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Annex 5. Beneficiary Survey Results

Introduction 1. The end-of-project beneficiary survey conducted in 2009 can be compared with results of the baseline survey done in 2005. The following are main findings of the baseline survey: a. More than 87% of WUA officers were satisfied with promotion and information campaign; b. Attendance of WUA members at Assembly meetings was 72.5% (51.5% in non-project raions); c. During 2006 project WUAs received on average 74% of their planned irrigation water supply; d. 9% of water users in project raions & 18% in non-project raions were in default paying ISF; e. An average of 45 applications for assistance were given to each WUA Dispute Resolution Committee, but settlements or sanctions applied were never reported in Assembly meetings; f. In project WUAs 62% of farmers received more than 50% of water expected; in non- project WUAs 77% of farmers received less than 50% of expected deliveries; g. Inequity in water delivery and crop yields is found between head and tail-end farmers; h. 96% of farmer complaints were related to deteriorated canals and water losses. 2. The beneficiary survey, hereafter referred to as the ‘end-of-project survey’, was undertaken by the organization “Ictimayi Ray” to identify the level of sustainability of Water Users’ Associations (WUA) by assessing their representativeness, efficiency, transparency, accountability and other important characteristics. The purpose of the end-of-project survey was to estimate the extent to which the project has been successful in achieving a range of benefits and outcomes that are expected from the creation of sustainable WUAs. 3. The end-of-project survey was conducted in autumn 2009 and covered all 11 project raions and 2 non-project ones. Three questionnaires constituted a research tool: 1. household questionnaire, 2. the questionnaire for irrigation practices and relations with WUA and 3. the questionnaire for WUA administration and performance – all of them consisting of open, semi- closed and closed questions. The respondents were selected from the areas with three types of WUAs. “Rehabilitated” WUAs were selected from the regions in which the project was active; “non-rehabilitated” WUAs were the ones from the regions of project activity; and the third category constituted WUAs from the regions of the project inactivity. The total number of households randomly selected for the interview from these regions amounted to 779 ones. The surveyed WUAs came from three distinct regions: 1. Guba – Khacmaz region, 2. Raions of Kura plain, including Goranboy, and 3. Nakhchivan region.

Characteristics of the WUAs and farmers (HHs) Surveyed 4. WUAs were classified into three categories. “Rehabilitated” WUAs of project raions. These WUAs benefited from rehabilitation works that included reconstruction of on-farm and off-farm infrastructure as well as sufficient and timely water delivery works. In addition, these WUAs have received the training programs, focused on mobilization of water users, provision of support to WUAs, and ad-hoc advice through regular contacts with Raion Support Units staff.

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5. “Non-rehabilitated” WUAs of project raions. These WUAs only benefited from the Component 1 of the project and didn’t get any rehabilitation. WUAs of non-project raions. These WUAs represent the control group in non-project raions. Other category of the IDSMIP beneficiaries represents the farmers (water users/WUA members) of several geographical zones.

Farmers (Households) in Central Zone 6. Raions covered by survey in the Central Zone are Agcabadi, Beylagan, Imishli, Saatli, Sabirabad, Zardab, Geranboy (project raions) and Ujar was selected as a Control Area. 7. The average household size is 4.97 persons. In 85.7 % of surveyed HHs the head of the household is male and only in 14.3% of cases the household head was female. The average operational farm size is 3.79 ha. Arable land of the farm consists mainly of cereals, vegetables, fodder crops, fruits and fallow. Wheat is the major crop of the cereals, while the leading fodder crop is alfalfa. Apple, grapes, and pomegranates dominate the areas of perennials plantations. Average yield changes are noted in Table A.5.1.

Table A.5.1. Average crop yields in the Central Zone WUAs (t/ha)

Crop 2006 2009 Percentage change Wheat 2.1 2.47 17.6 % Fodder (Alfalfa) 11.9 13.80 15.9% Fruits 6.0 6.75 12.5% Vegetables 13.3 14.81 11.3% Cotton 1.9 1.94 2.1% House garden 4.5 5.38 19.5% 8. The livestock of the farms consists 3.65 cattle/cow and 4.57 sheep. The average size of poultry per household amounts to 13.52 heads.

Farmers (Households) in Northern Zone 9. Raions covered by survey in the Northern Zone are Guba, Khachmaz (project raions), while Gusar was selected as a Control Area. Males are dominant in the farmer family in the Northern zone of the project (with 98.5% of survey cases featuring males as household heads). The average household population size as amounted to 5.22 persons. The average operational size of a farm in the project area is 1.87 ha. Agricultural enterprises in the project area are mainly mix activity farms, including cropping and livestock breeding. The crops, that grown in this zone are cereals, vegetables, fodder crops, fruit and fallow mainly. Wheat is the major crop among cereals. Tomato is the main crop for vegetables, while alfalfa is the most widespread crop among the fodders. The area of the perennials is covered mainly by apple plantation. 10. It is calculated that in the Northern Zone project WUAs the main crops’ yields have increased in average by 13% in comparison with the baseline, as shown in Table A.5.2. and Table A.5.3.

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Table A.5.2. Crop yields across Northern Zone Rehabilitated WUAs (t/ha)

Crop 2006 2009 Percentage change Wheat 2.2 2.58 17.2% Fodder 12.8 15.18 18.5% Fruits 8.3 10.83 30.4% Vegetables 15.5 16.65 7.4% House garden 5.8 6.75 16.4%

Table A.5.3. Crop yields across Northern Zone Non-Rehabilitated WUAs (t/ha)

Crop 2006 2009 Percentage change Wheat 2.1 2.20 4.8% Fodder 11.7 11.60 -0.9% Fruits 8.0 8.80 10.0% Vegetables 14.4 16.47 14.4% House garden 5.4 5.85 8.3%

Farmers (Households) in Nakhchivan Zone 11. WUAs covered by survey in the Nakhchivan Zone are Nehram (Rehabilitated WUA) and Sunay (Non-rehabilitated WUA), which are both from Babek Raion and two rehabilitated WUAs from Sharur Raion: Agridagh and Nalbend. The average household population size is 4.56 persons. The average operational size of land is 1.34 ha. Agricultural activities in the project area are mainly cropping and livestock breeding together. Arable land of the farms is allocated mainly to cereals, vegetables, fodder crops, fruits and fallow. Wheat is the major crop of the cereals, tomatoes of vegetables. Sugar beet is also cultivated in the region. Alfalfa is the major crop among the fodder ones. Average crop yield changes are noted in Table A.5.4.

Table A.5.4. Average crop yields in Nakhchivan Zone WUAs (t/ha)

Crop 2006 2009 Percentage change Wheat 3.2 3.43 7.1 % Fodder 6.2 8.85 42.7% Fruits 13.2 14.40 9.1% Vegetables 10.1 11.80 16.8% House garden 5.3 5.30 .0% 12. It is calculated that in the Nakhchivan Zone WUAs the main crops’ yields have increased in average by 15.1% in comparison with the baseline as shown in Table A.5.5.

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Table A.5.5. Crop yields across Nakhchivan Zone Rehabilitated WUAs (t/ha)

Crop 2006 2009 Percentage change Wheat 3.2 3.60 12.5% Fodder 6.3 9.73 54.4% Fruits 13.2 14.40 9 % Vegetables 10.8 13.20 22.2 % House garden 5.0 5.33 6.6% 13. It is calculated that in rehabilitated WUAs of the Nakhchivan Zone the main crops’ yields have increased in average by 21 % in comparison with the baseline, while the yield of fodder has increased by more than 50%. The livestock of the farms consists of 1.98 cattle/cow and 10.83 sheep. The average size of poultry population per household amounts to 13.21 heads.

Perceived changes in agricultural performances 14. Over the six years of implementation, IDSMIP has achieved a number of significant results. The area of irrigated land has increased (see Table A.5.6. and 7), hence reducing the area of uncultivated lands. The main crop yields increased in average by 23%. Irrigation Service Fees (ISF) and collection rates have improved. In the WUAs where rehabilitation works took place, the amount of irrigation water supplies increased almost two times in comparison to non- rehabilitated WUAs where it is remained at the same rate.

Table A.5.6. Cultivated land in WUAs (ha)

Zone WUA 2006 2009 Dif. % North Rehabilitated 7264 9052 1788 24.6% North Non-Rehabilitated 3646 2611 -1035 -28.3% Central Rehabilitated 28646 36063 7417 25.8% Central Non-Rehabilitated 13498 14526 1028 7.6% Nakhchivan Rehabilitated 4839 5704 865 17.8% Nakhchivan Non-Rehabilitated 103 241 138 133.9% Rehabilitated 40749 50819 10070 24.7 % Total Non-Rehabilitated 17247 17378 131 0.7 %

Table A.5.7. Changes in crop areas in the Northern Zone (example of Gimilgishlag WUA)

Cropping pattern Gimilgishlag 2006 2007 2008 2009 Crops ha % ha % ha % ha % 1 Wheat 914 39.5% 316 12.6% 190 7.6% 219 8.7% 2 Fodder 76 3.3% 316 12.6% 340 13.5% 316 12.5% 3 Fruits 1230 53.2% 1770 70.8% 1869 74.5% 1872 74.0% 4 Vegetables 23 1.0% 29 1.2% 41 1.6% 54 2.1% 5 House garden 70 3.0% 70 2.8% 70 2.8% 70 2.8% Cultivated area 2313 100% 2501 100% 2510 100% 2531 100% Uncultivated area 218 8.6% 30 1.2% 21 0.8% 0 0.0%

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15. The share of highly valued crops, mainly fruits in this region, increased replacing the traditional wheat production. The increase in the cultivation of the fodder crops is typical for all regions and can be explained by the commercial advantage of meat production. The cultivation of crops in WUAs in Central Zone and Nakhchivan is traditional and conservative. The only one fact that can be pointed out is the decrease of cotton production in the Central Zone WUAs.

Beneficiaries’ assessment of project interventions 16. The majority of the respondents of the end-of-project survey mentioned that they had benefited from promotion and training program component of the project and gained new skills and knowledge. The farmers indicated data on cropping water norms and proper timing of water supply as the most important information from the trainings. Feedback from the survey indicates that only 40% of WUA Administrations have discussed the water distribution plan at the Assembly. 17. The main benefit from the project and rehabilitation is timely and increased water supply to the farms. This has allowed farmers to increase the arable land and increase crop yields. The survey indicates that the majority of farmers (78%) in rehabilitated WUAs are satisfied with irrigation services while it was only 23% in the baseline survey. The rate of farmers’ satisfaction with the irrigation service in non-rehabilitated and Non-project WUAs is about 37% in average that also shows an increase in comparison with 23% of the baseline survey figures. It must be noted that farmers rated quality of irrigation services better than gas provision, as well as service offered in the case of farm credit. 18. The survey revealed a considerable increase in ISF rates in comparison with the baseline. However there is a discrepancy among regions in measuring ISF (in some of them ISF rates are calculated per 1000 m3 and in others - per ha.) The WUAs that don’t have or can’t use the flow measurement devices, measure and charge ISF in terms of fee per ha. Both the baseline as well as the end-of-project survey revealed that WUAs don’t apply any sanctions to defaulters for non- or late payment of ISF. Therefore, it was recommended to introduce a penalty system that will be stated and approved during the Assembly.

Unaddressed needs and recommendations for future interventions 19. A number of recommendations and suggestions were made by the beneficiaries, PIU staff and consultants. It is recommended: a. To continue awareness raising/ promotion activities in non-project raions with the involvement of the most successful WUAs from the project raions b. To carry out General/ Representative WUA Assemblies/ meetings in accordance with WUA Charter regulations and to protocol these meetings c. To calculate ISF in terms of AZN/ 1000m3 and take into account water norms for different types of crops d. To establish the penalty system and rate for ISF non-payment or delay, prior to discussing and approving this at the Assembly e. To involve more farmers into the decision-making process on WUA operation , taking into account gender equality approach f. To ensure transparency of WUA financial performance and report it at the General/ Representative WUA Assembly

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g. For WUAs to become more independent from the Raion Irrigation Departments and be more self-sustained h. To provide necessary machinery and maintenance equipment for WUAs to be able to repair and maintain the irrigation and drainage system

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Annex 6. Stakeholder Workshop Report and Results

1. A Stakeholders Workshop was held on 23 September 2010 in Baku to discuss experiences and lessons learned from IDSMIP and recommendations for future development of I&D. 81 participants attended, including representatives of 44 WUA. Four topics were discussed. The first topic was about the benefits of rehabilitation and expansion of on-farm I&D systems. Participants were satisfied with the Project, including the legislative reforms, reorganization of WUA, rehabilitation of some schemes, and improvement of water management. Stakeholders noted improved water supply and distribution, more effective conflict resolution during irrigation, lessening of soil salinization in some areas, decrease in groundwater tables where drainage systems were rehabilitated and installation of water measurement devices. Key recommendations were: arrange to deal better with inflation of costs of rehabilitation, do not do rehabilitation during cultivation season, provide more training and financial, legal and technical support for WUA, install more water measurement devices and revise water supply norms. 2. Topic 2 was about the needs of WUA for equipment such as excavators, tractors, motor vehicles, motorcycles and offices. WUA are not willing to share this equipment with other WUA. Participants recommended provision of equipment to WUA with agreeable terms of cost sharing, more Bank projects and increasing the ISF to at least 35 AZN. 3. Topic 3 was about priorities for support services and training. Participants said that WUA needed support for conflict resolution, financial and legal assistance, awareness raising, assistance with accounting, and provision of equipment. Support must come from the government and IFI’s since private companies either lacked the ability to help or would charge costs that the WUA could not afford to pay. 4. Topic 4 was a summary of main issues and recommendations. The main recommendations were: i) there should be a needs assessment for each WUA at start of projects like IDSMIP, ii) involve WUA in project design and planning, iii) give rehabilitation contracts directly to WUA, iv) build more I&D facilities including water treatment, v) one WUA should manage one hydraulic unit, vi) build self reliance of WUA and vii) extend rehabilitation to many more WUA.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR 1. The Borrower’s ICR provided a description of the IDSMIP Project objectives, components, activities, beneficiaries and results. The Borrower’s ICR rated the project satisfactory. The Borrower’s ICR included a description of the implementation of each of the three Project components: Component 1: Development of Water Users’ Associations, Component II: Rehabilitation of Irrigation and Drainage Infrastructure, including rehabilitation of the Bahramtape headworks, and Component III: Project Management. How Project procurement and financing were done are also briefly described. The Borrower’s ICR provided detailed descriptions of all the different training courses provided for WUA as well as descriptions of each contract implemented for rehabilitation and environmental monitoring. The section on Monitoring and Evaluation described the database to be prepared that would include findings from Monitoring and Evaluation and implementation of Monitoring and Evaluation. 2. The key findings of end-of-project survey are following:  100% of WUA Administration in the survey raions prepared the water distribution plan on the base of tables and charts indicating the farmers’ land share and the crops they traditionally cultivate on it and in 54% of cases (64 % of WUAs benefited under project rehabilitation) they directly asked farmers on what farmers had planned to cultivate this year or whether there were some changes with respect to the previous year.  In WUAs benefited from the project rehabilitation, the amount of irrigation water supplied to WUAs increased almost two times while in without rehabilitation WUAs is remained at the same rate. The most progress can been seen in Northern Zone WUAs where the rate of that indicator increased two and a half times and in some cases tripled.  An average four irrigations has been applied according to crop water norms for main crops by 82% of water users in rehabilitated schemes.  The cultivated area increased by 25% in the rehabilitated WUAs while in the non- rehabilitated WUAs it remained at the same rate as in the baseline. In the Northern Zone non-rehabilitated WUAs the arable land decreased by 28%.  The main crops’ yields increased in average on 17.7% in rehabilitated WUAs comparison with the baseline, while the yields of crops in non-rehabilitated WUAs also increased but on 4.3%.  100% collection rate of ISF for SAIA, for rehabilitated WUAs - 81% in average. ISF rates increased 3-5 times in comparison with 2006.  The Revenue Budget increased 4.4 times in average in WUAs under project rehabilitation in comparison with the baseline and it increased 2.3 times in average in WUAs without project rehabilitation.  In 22 project WUAs that have benefited from rehabilitation and modernization it has been carried out 91% of the planned O&M. The Administrations of rehabilitated WUAs have spent money for O&M from WUA budget and in average amount that is 4 times greater than in the baseline year..  Feedback from the survey indicates that about 78% of farmers in rehabilitated WUAs are satisfied with irrigation services while it was only 23% in the baseline case.  Larger proportion of WUAs’ members are willing to pay more for better service.

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3. The Borrower’s ICR found the following lessons that should be taken into account in the future for WUA Development:  IDSMIP showed that the approach of supporting WUAs with training and rehabilitation is successful: (i) rehabilitated WUAs perform much better than non-rehabilitated WUAs; and (ii) rehabilitated WUAs charge significantly higher ISFs.  It's important to strengthen the capacity of WUAs and expose them to the international best practice from the very beginning of the Project. The experience showed that WUA leadership exposed to international practice from the beginning demonstrate diversity in the way they operate and willingness for more changes than their counterparts.  Limited institutional experience in preparing legal normative documents exacerbated by bureaucratic delays cause more delays in the Project implementation, hence creating need for more targeted training.  It's important WUAs prepare their annual action plans. The experience showed that WUAs without annual action plans demonstrate weak tendency towards development.  It's important to train the WUA staff on the technical aspects of hydraulic structures in their respective command areas.  Social inclusion by informed membership and representatives contributes highly to the normal functioning of the WUAs.  It's important to train WUAs on preparation of water requirement plans, as the lack in the preparation of the mentioned plans cause serious problems in supplying water to WUAs.

4. The following were Borrower’s ICR comments about lessons learned on Project Management:  It is important to develop capacity of PIU for institutional issues and effective implementation of multicontractual projects. Especially limited experience in planning implementation of rehabilitation works in areas with ongoing intensive irrigation should be eliminated. IDSMIP showed that limited experience in cooperation with WUA members in rehabilitation contracts inversely affects the overall progress of project implementation.  Limited experience on price increase implications on rehabilitation works, as these increases are not possible to foresee.  Good supervision work is essential for satisfactory outcome. Besides the quality and commitment of PIU staff, the high quality and the continuity of supervision WB missions was industrial to the satisfactory implementation of the project. The proper skill-mix is important to enable participation of experts on a need basis.

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5. Letter received from Mr. A. Sharifov, Deputy Prime Minister, Government of the Republic of Azerbaijan on February 17, 2011.

Dear Mr. Owen As a response to your letter dated 18 January, 2011 about "Irrigation Distribution System and Management Improvement" we would like to inform you that the draft ICR of the project has been reviewed in the Cabinet of Ministers. We have no additional suggestions on the above mentioned document. Sincerely , A. Sharifov

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Annex 8. Comments of Co-financiers and Other Partners/Stakeholders

There were no co-financiers or other partners.

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Annex 9. List of Supporting Documents

Agency for Support to the Development of the Private Agricultural Sector, Agriculture Development and Crediting Project, Agriculture Strategy Component. Investigation of evaluation present situation of irrigation and drainage networks on irrigation regions in the Republic. Report Book 1. Agricultural Policy Group. Government of Azerbaijan. 2002. Euroconsult Mott MacDonald with SU/YAPI Engineering & Consulting Inc. WUA Development Final Report. Reporting Period 10 January 2005 TO 17 November 2008. Rehabilitation and Completion of Irrigation and Drainage Infrastructure Project Implementation Unit. Irrigation and Distribution System and Management Improvement Project (IDSMIP). July 2009. Rzayev, Mehman Agarza oglu. Current Irrigation System Management Features in Azerbaijan Republic. Azerbaijan Scientific Research Institute of Hydraulic Engineering and Amelioration, Azerbaijan. No date. Merkle, Rita. Final Report Gender Survey: Enhancing the role of women in Water Users Associations in Azerbaijan. World Bank. 2010. Prioritising Investments in Irrigation in Central Asia. Draft Concept Note. No author, no date. Project Implementation Unit, State Amelioration and Irrigation Committee. Technical Assistance on Preparation of Institutional Support for SAIC and Irrigation Sub-sector Review, Irrigation Sub-sector Review Report. No Date. Project Implementation Unit, Irrigation Distribution System and Management Improvement Project, Azerbaijan. Draft Borrower’s Completion Report. 2010. Stryker, Dr. J. Dirck with Vugar Ahmadov and Tohida Rashidova. Domestic Resource Cost Analysis of Azerbaijan Final Report. Private Sector Competitiveness Enhancement Program in Azerbaijan. March 18, 2009. World Bank. Azerbaijan: Proposed Irrigation Distribution System and Management Improvement Project. 2nd IDA Preparation Mission (September 18 to October 15, 2002) Aide Memoir. November 14, 2002. World Bank. Project Appraisal Document. Irrigation Distribution System & Management Improvement Project. Environmentally and Socially Sustainable Development Sector Unit, Europe and Central Asia Region. May 15,2003. World Bank. IDSMIP Project Status Reports, June 2003 to November 2004 World Bank. Implementation Review Mission Reports, May 2004 to December 2009 World Bank. Implementation Completion and Results Report Guidelines. OPCS. August 2006 (Last updated: 5/25/2010) World Bank. IDSMIP Project Implementation Status and Results Reports. March 2005 to March 2010 World Bank. Azerbaijan: Public Expenditure Review – Agricultural Policy Note. Edited by Sari Söderström. July 12, 2010.

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60 IBRD 32319

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Map Design Unit of The World Bank. Sea TURKMENISTAN L Lankaran LERIK en The boundaries, colors, denominations ka ARMENIA ran and any other information shown on AZERBAIJAN this map do not imply, on the part of Baku The World Bank Group, any judgment on the legal status of any territory,or TURKEY ISLAMIC REPUBLICTo Jolfa OF IRAN ASTARA any endorsement or acceptance of Astara such boundaries.

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