Country Assistance Program Evaluation Azerbaijan, 2011–2017 Independent Evaluation Raising development impact through evaluation Country Assistance Program Evaluation December 2018 Azerbaijan, 2011–2017 This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011. Independent Evaluation: CE-35 NOTES (i) In this report, “$” refers to United States dollars. (ii) For an explanation of rating descriptions used in Asian Development Bank (ADB) evaluation reports, see ADB. 2015. 2015 Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila. Director General Marvin Taylor-Dormond, Independent Evaluation Department (IED) Deputy Director Véronique Salze-Lozac'h, IED General Director Walter Kolkma, Thematic and Country Division, IED Team leaders Joanne Asquith, Principal Evaluation Specialist, IED Kapil Thukral, Principal Evaluation Specialist, IED Marco Gatti, Principal Evaluation Specialist, IED (until July 2018) Team members Ed Alfred Abrahm Alvinez, Evaluation Assistant, IED Glennie Castillo, Evaluation Analyst, IED Lauren Hauck, Senior Evaluation Specialist, IED Alvin Morales, Senior Evaluation Officer, IED Tomoo Ueda, Principal Evaluation Specialist, IED Lucille Ocenar, Evaluation Officer, IED (until July 2018) The guidelines formally adopted by the Independent Evaluation Department on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of Independent Evaluation Department management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area. Abbreviations ADB – Asian Development Bank ADIF – Azerbaijan Deposit Insurance Fund AZN – Azerbaijani manat CAPE – country assistance program evaluation CAREC – Central Asia Regional Economic Cooperation COBP – country operations business plan CPS – country partnership strategy CPSFRV – country partnership strategy final review validation CSF – Countercyclical Support Facility CSPU – country strategy and program update ESG – environmentally sustainable growth FIMSA – Financial Market Supervisory Authority GDP – gross domestic product IDP – internally displaced persons IED – Independent Evaluation Department IEG – inclusive economic growth IFI – international finance institution IMF – International Monetary Fund km – kilometer kV – kilo-volt m3 – cubic meter MFF – multitranche financing facility MSMEs – micro, small, and medium-sized enterprises NAR – Nakhchivan Autonomous Region NSO – nonsovereign operations O&M – operations and maintenance OCR – ordinary capital resources PBL – policy-based lending PCG – partial credit guarantee PCR – project completion report PPP – public–private partnership PSM – public sector management RCI – regional cooperation and integration SAWMC – State Amelioration and Water Management Committee SGC – Southern Gas Corridor SMEs – small and medium-sized enterprises SOE – state owned enterprises SOFAZ – State Oil Fund of Azerbaijan SPPRSD – State Program on Poverty Reduction and Sustainable Development SRNEP – Strategic Roadmaps on National Economic Perspectives TA – technical assistance TFP – trade finance program WSS – water supply and sanitation WUS – water and other urban infrastructure and services WWTP – wastewater treatment plant Contents Page Acknowledgments vii Evaluation in Brief ix Executive Summary xi Management Response xxi Chair’s Summary: Development Effectiveness Committee xxv Chapter 1: Country Program and Evaluation Methodology 1 A. Country Program and Portfolio 2 B. Scope and Methodology of the Evaluation 5 C. Summary 7 Chapter 2: Country Context and Development Needs 9 A. Macroeconomic Developments 10 B. Poverty and Regional Inequality 14 C. Economic Diversification 17 D. Environmental Sustainability 19 E. Future Challenges 19 F. Summary 21 Chapter 3: Development Strategies and ADB Support 23 A. Government of Azerbaijan Development Strategies and Borrowing Policy 24 B. ADB’s Strategies in Azerbaijan and Responsiveness 26 C. Previous Country-Level Evaluations of ADB and Partner Experience in 29 Azerbaijan D. Summary 30 Chapter 4: Sector Program Performance 31 A. Energy Program 32 B. Transport Program 36 C. Water and Other Urban Infrastructure and Services Sector Program 39 D. Public Sector Management Operations 42 E. Nonsovereign Operations 45 F. Summary 48 Chapter 5: Strategic Agendas and Country Priorities 51 A. Inclusive Economic Growth 52 B. Regional Cooperation and Integration 55 C. Environmentally Sustainable Growth 56 D. Diversification and Capacity Development 58 E. Summary 60 Chapter 6: Summary, Lessons, and Recommendations 61 A. Summary of Assessments 62 B. Lessons 66 C. Recommendations 67 APPENDIX 69 1. List of Linked Documents A. Azerbaijan Loans, Guarantees, and Technical Assistance Portfolio Covered by the Evaluation, 2011–2017 B. Energy Sector Program Assessment C. Transport Sector Program Assessment D. Water and Other Urban Infrastructure and Services Sector Program Assessment E. Public Sector Management Program Assessment F. Nonsovereign Sector Program Assessment Acknowledgments This report was prepared by an independent evaluation team led by Marco Gatti (until July 2018) and thereafter by Joanne Asquith and Kapil Thukral. The evaluation team included Lauren Hauck (nonsovereign operations), Lucille Ocenar (public sector management), Tomoo Ueda (water and other urban infrastructure and services), Alvin Morales, Glennie Castillo, and Ed Alfred Abrahm Alvinez. Kapil Thukral also led the evaluation’s energy sector program performance assessment. Marvin Taylor-Dormond, Director General; Véronique Salze-Lozac’h, Deputy Director General; Walter Kolkma, Director, Thematic and Country Division provided overall guidance; and Nathan Subramaniam, Director, Sector and Project Division, also provided inputs. International consultants included Jaime Jaramillo Vallejo (lead consultant), Charles Melhuish, and Robert Schenck. National consultants were Afsun Alakbar, Laura Bakhtizina, Tarana Jafarova, Farrukh Najafov, and Elshan Rustamov. Zulfiya Safarli provided translation and interpretation services for both missions. Special thanks also go to Asian Development Bank staff for the time given to meet and discuss issues with the evaluation team, as well as staff of the Azerbaijan Resident Mission, Aziz Haydarov, and Nariman Mannapbekov for facilitating our missions and arranging meetings and field visits. The Independent Evaluation Department retains full responsibility for this report. Independent THE EVALUATION IN BRIEF Evaluation Country Assistance Program Evaluation for Azerbaijan, 2011–2017 RECOMMENDATIONS This evaluation assesses Asian Development Bank (ADB) support to Azerbaijan during 2011-2017. The evaluation found that the program had strengths in project delivery and Strategic macroeconomic support but was weak in other areas. ADB 1. The ADB program should have a needs to use a more cohesive approach in providing support greater focus on building human with emphasis on building human and social capital relative and social capital in parallel with to infrastructure and policy reform development, and a developing and improving physical wider range of instruments and modalities in crafting a new infrastructure and supporting policy country strategy in the context of the government’s decision reform. to limit external borrowing. ADB also needs to increase due diligence and do better preparatory work to improve 2. ADB should use a broader range of its project implementation and expand its policy dialogue instruments and modalities as part of a across sectors to support economic diversiication including new strategy in Azerbaijan. greater proactive involvement in private sector operations. 3. ADB support for the diversiication A consultation mission with Azerbaijan authorities on a of the economy must include more draft of the evaluation in December 2018 conirmed the analytical work, a focus on the non- indings, assessments, and issues raised in the report. oil tradeable sectors, and a more proactive involvement in private PORTFOLIO sector operations in Azerbaijan beyond simple onlending operations. ADB’s lending portfolio was valued at $3.9 billion for sovereign operations and $1.2 billion for nonsovereign Operational operations. Of the total funding, 42% was provided to the energy sector to improve power transmission and 4. ADB should step up its due diligence distribution, as well as new power generation and gas and preparatory work for its operations ield expansion that will take Azerbaijan’s gas to European to handle expectations properly and markets; 27% was provided to the transport sector which avoid delays or failures, especially in included two multitranche inancing facilities for the road transport operations. sector, and a very recent railway sector development 5. ADB should expand its policy program comprising a policy-based loan and an investment dialogue, drawing on the iterative loan; 15% was provided for improvement of public sector and interpersonal approach that has management although it was added only at the end of the proved valuable in areas such as iscal evaluation period; 12% was for water supply, sanitation