Report No. 60180-AZ Public Disclosure Authorized Azerbaijan: Country Environmental Analysis Public Disclosure Authorized Priorities, Public Environmental Expenditures, and Institutional Readiness March 2011 Public Disclosure Authorized Sustainable Development Department Europe and Central Asia Region The World Bank Public Disclosure Authorized Azerbaijan: Country Environmental Analysis Priorities, Public Environmental Expenditures, and Institutional Readiness Contents Abbreviations and Acronyms ........................................................................................................... 6 Acknowledgments ............................................................................................................................ 8 Executive Summary ......................................................................................................................... 9 Introduction .................................................................................................................................... 14 A. The approach ....................................................................................................................... 15 B. Key environmental issues and priority setting .................................................................... 15 C. The State Environment Program ......................................................................................... 20 i. The process of formulation and implementation ............................................................. 20 ii. Selection of priority interventions ................................................................................... 21 iii. Assessing progress to date ............................................................................................... 23 iv. Setting budgets ................................................................................................................ 27 v. Quality of SEP actions‘ technical preparation ................................................................ 27 vi. Interagency collaboration ................................................................................................ 28 D. Environmental expenditure accounting in Azerbaijan: current conventions ...................... 28 i. Modified estimates of environmental expenditure .......................................................... 30 E. Financial monitoring of the State Environment Program ................................................... 34 F. Integrating SEP into a public expenditure program: Suggestions for reform ..................... 36 G. Institutional constraints to SEP implementation ................................................................. 36 i. Multiple actions, multiple actors ..................................................................................... 37 ii. Broad direction of recent institutional changes and its implications............................... 38 iii. The roles of MENR and other agencies .......................................................................... 38 iv. Beyond Baku: Addressing municipal and rural environmental priorities ...................... 40 v. Role of development partners vis –a- vis SEP priorities ................................................. 41 H. Conclusions ......................................................................................................................... 41 I. Recommendations ............................................................................................................... 42 List of references ............................................................................................................................ 46 Appendix 1: List of People and Institutions Consulted .................................................................. 48 2 Appendix 2: Principal Environment-related Investments Supported by IFIs and other Development Partners since 2006 .................................................................................................. 51 Appendix 3: State Environment Program 2006–2010 ................................................................... 54 Appendix 4: Priority Setting Using Multi-Criteria Analysis ......................................................... 63 Appendix 5: Inter-Agency Working Group Multi-Criteria Analysis Worksheet .......................... 64 Appendix 6: Preliminary List of SEP Additional Projects for Implementation During 2011–14 . 65 Appendix 7: The Budget System of Azerbaijan ............................................................................. 71 Appendix 8: Revised Environmental Expenditure in Azerbaijan, 2004–2009 (million AZN) ...... 74 Appendix 9: MENR budgets, 2004–2009 (million AZN) .............................................................. 76 Appendix 10: SOCAR Environmental Expenditure ...................................................................... 77 Appendix 12: Foreign Investment in the Water Supply and Sanitation Sector ............................. 79 Appendix 13: SOFAZ and Environment-related Investments ....................................................... 80 Appendix 14: Quantitative Tools for Priority Setting .................................................................... 82 Appendix 15: Summary of Recommendations for SEP Institutional Responsibilities .................. 83 Boxes Box 1: Azerbaijan‘s Environmental Policy and Planning Framework .......................................... 17 Box 2: Definitions of Environmental Expenditure ........................................................................ 29 Box 3: Strategic Framework for Improved Public Sector Governance ......................................... 36 Box 4: Institutional Changes in Environmental Management in Azerbaijan: A Case Study ........ 38 Box 5: Environmental Investments and MENR Institutional Capacity ......................................... 39 Figures Figure 1: Environmental and Public Expenditure, 2004–2009 (million AZN) .............................. 33 Figure 2: Share of Environmental Expenditure in Public Spending (%) ....................................... 33 Tables Table 1: Mapping of 2006–2010 SEP Actions to 1998 NEAP Priority Areas .............................. 21 Table 2: Mapping of 2011–2014 SEP Actions to 1998 NEAP Priority Areas .............................. 22 Table 3: Top 10 Criteria for Ranking SEP Actions1 ...................................................................... 22 Table 4: Current Status of 2006–2010 SEP ................................................................................... 25 Table 5: Completed 2006-2010 SEP Actions as of 2010 ............................................................... 26 Table 6: Percentage of SEP Projects with Proper Documentation ................................................. 28 3 Table 7: Official Environmental Expenditures and Revenues in Azerbaijan, 2002–2008 ............ 30 Table 8: Mapping Modified Estimates of Environmental Expenditure to 1998 NEAP Priority Areas (million AZN) ...................................................................................................................... 32 Table 9: State Ministries or Agencies with Environmental Responsibilities ................................. 37 4 This report is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 5 Abbreviations and Acronyms ADB Asian Development Bank AIC Azerbaijan Investment Company AREA Absheron Region Executive Authority ARP Absheron Rehabilitation Program AZN Azerbaijan manat (until 2006, AZM) BMO Baku Mayor‘s Office BSL Budget System Law CEA Country Environmental Analysis CJCS Closed joint stock company CoM Cabinet of Ministers CSC Caspian Shipping Company DFID Department for International Development (U.K.) EBRD European Bank for Reconstruction and Development EITI Extractive Industries Transparency Initiative EU European Union GDP Gross domestic product GEF Global Environment Facility GoA Government of Azerbaijan IAWGE Inter-Agency Working Group on Environment IBRD International Bank for Reconstruction and Development IFI International financial institution JBIC Japan Bank for International Cooperation JICA Japan International Cooperation Agency JSC Joint Stock Company KfW Kreditanstalt für Wiederaufbau-Development Bank (Germany) MCA Multi-Criteria Analysis MED Ministry of Economic Development MENR Ministry of Environment and Natural Resources MES Ministry of Emergency Situations MoA Ministry of Agriculture MoCT Ministry of Culture and Tourism MoD Ministry of Defense MoE Ministry of Education MoF Ministry of Finance MoH Ministry of Health MoHA Ministry of Home Affairs MoIE Ministry of Industry and Energy MoJ Ministry of Justice MoT Ministry of Transport NEAP National Environmental Action Plan NGO Nongovernmental organization NWSS National Water Supply and Sanitation (Project) OJSC Open joint stock company OPG Office of Prosecutor-General OSCE Organization for Security and Cooperation in Europe PEER Public environmental expenditure review PEFA Public expenditure and financial accountability PEM Public expenditure monitoring PER Public Expenditure Review PID Public Investment Department (of MED) PIP Public Investment Program PMF Performance