Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 42645-AZ

PROJECT APPRAISAL DOCUMENT

O N A

PROPOSED LOAN

IN THE AMOUNT OF US$60 MILLION

TO THE

REPUBLIC OF AZERBAIJAN

FOR AN

ABSHERON REHABILITATION PROGRAM (AFW)

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

MAY 19,2008

Sustainable Development Department South Caucasus Country Department Europe and Central Asia Region

T h i s document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective M a y 19,2008)

APL ARP C F A A CPAR CQ DA DHCS EA EAD E C A EIA EMF EMP EMS EO1 ESP FA FAD FM FMR GHG GOA GPN IAEA I C B IDA IDF IDP IF1 IFR IUFR I C B I S A I S D S

Currency Unit = Azerbaijani N e w Manats AZN 0.8449 = US$1

FISCAL YEAR January 1 . - December 3 1

ABBREVIATIONS AND ACRONYMS Adaptable Program Loan Absheron Rehabilitation Program Country Financial Accountability Assessment Country Procurement Assessment Review Selection based on Consultant’s Qualification Designated Account Department o f Housing and Communal Services Environmental Assessment Economical and Accounting Department Europe and Central Asia Region Environmental Impact Assessment Report Environmental Management Framework Environmental Management Plan Environmental Management Systems Expression o f Interest Environmental State Program Financing Agreement Financial and Economic Affairs Department of MES Financial Management Financial Management Report Greenhouse Gas Government o f Azerbaijan General Procurement Notice International Atomic Energy Agency International Competitive Bidding International Development Association Institutional Development Fund Internally Displaced Person International Finance Institution Interim Financial Report Interim Un-audited Financial Report International Competitive Bidding International Standards on Accounting Integrated Safeguards Data Sheet

FOR OFFICIAL USE ONLY

IS-ESP

LCS LFG LLW-LL M&E MED MENR MES N C B NGO NORAD N O R M O M PAD PAS PDO PFS PGI P M T PoE POM PP PPL PRSC PSA QCBS

RAP RF RPF RRAP RSC SCIR S I A S I L SOCAR SOCAR EC SOE SPN SRC SWM TA TOR UEIP UEIP

QER

Implementation Schedule for the Comprehensive Action Plan on Improving Environmental Situation in Azerbaijan for 2006-2010 Least Cost Selection Landfill Gas Long-Lived Low-Level Waste Monitoring and Evaluation Ministry o f Economic Development Ministry o f Ecology and Natural Resources Ministry o f Emergency Situations National Competitive Bidding Non Governmental Organization Norwegian Agency for Development Cooperation Naturally Occurring Radioactive Materials Operations Manual Project Appraisal Document Procurement Accredited Staff Project Development Objective Project Financial Statement Petroleum and Governance Initiative Project Management Team Panel o f Experts Project Operational Manual Procurement Plan Public Procurement Law Poverty Reduction Support Credit Production Sharing Agreement Quality and Cost Based Selection Quality Enhancement Review Resettlement Action Plan Resettlement Framework Resettlement Policy Framework Resource Restriction Action Plan Regional Safeguards Coordinator State Committee for IDPs and Refugees Social Impact Assessment Specific Investment Loan State O i l Company o f Azerbaijan Republic State O i l Company o f Azerbaijan Republic Ecology Company Statement o f Expenses Specific Procurement Notice State Rehgee Committee Solid Waste Management Technical Assistance Terms o f Reference Urgent Environmental Investments Project Urgent Environmental Investment Program

T h i s documen t has a restr icted d i s t r i bu t i on and may b e used by recipients only in the per formance o f the i r official duties. I t s contents may not b e otherwise disclosed without World Bank authorization.

UNDB United Nations Development Business UNDP United Nations Development Program VLLW Very Low-Level Waste WB World Bank WG Working Group

Vice President: Shigeo Katsu Country Director: Donna Dowsett-Coirolo Country Manager Gregory T. Jedrzejczak

Sector Manager: Wael Zakout 1 Aniruddha Dasgu ta

AZERBAIJAN Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

CONTENTS

Page

I . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1

A . B . C .

I1 . A . B . C . D . E . F .

I11 . A . B . C . D . E . F .

I V . A . B . C . D . E . F .

Country and sector issues .................................................................................................... 1 Rationale for Bank involvement ......................................................................................... 2

Higher level objectives to which the project contributes .................................................... 2

Lending instrument ............................................................................................................. 3

Project development objective and key indicators .............................................................. 5 Project components ............................................................................................................. 5

Alternatives considered and reasons for rejection .............................................................. 8

Partnership arrangements .................................................................................................... 8 Institutional and implementation arrangements .................................................................. 9

Monitoring and evaluation o f outcomes/results .................................................................. 9

Sustainability ..................................................................................................................... 10

Critical r isks and possible controversial aspects ............................................................... 11

Loan conditions and covenants ......................................................................................... 12

PROJECT DESCRIPTION ............................................................................................. 3

Program objective and Phases ............................................................................................ 3

Lessons learned and reflected in the project design ............................................................ 7

IMPLEMENTATION ...................................................................................................... 8

. . .

APPRAISAL SUMMARY ............................................................................................. 13 Economic and financial analyses ...................................................................................... 13

Technical., ......................................................................................................................... 14

Fiduciary ........................................................................................................................... 14

Social ................................................................................................................................. 15

Environment ...................................................................................................................... 16

Safeguard policies ............................................................................................................. 16

G . Policy Exceptions and Readiness ...................................................................................... 17

Annex 1: Country and Sector or Program Background ......................................................... 18

Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies ................. 23

Annex 3: Results Framework and Monitoring ........................................................................ 25

Annex 4: Detailed Project Description ...................................................................................... 29

Annex 5: Project Costs ............................................................................................................... 38

Annex 6: Implementation Arrangements ................................................................................. 39

Annex 7: Financial Management and Disbursement Arrangements ..................................... 41

Annex 8: Procurement Arrangements ...................................................................................... 47

Annex 9: Economic and Financial Analysis ............................................................................. 54

Annex 10: Safeguard Policy Issues ............................................................................................ 59

Annex 11: Project Preparation and Supervision ..................................................................... 63

Annex 12: Documents in the Project File ................................................................................. 64

Annex 13: Statement of Loans and Credits .............................................................................. 66

Annex 14: Country at a Glance ................................................................................................. 67

Annex 15: Maps ........................................................................................................................... 70

AZERBAIJAN

ARP 111: LARGE SCALE OIL POLLUTED LAND C L E A N U P

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL A S I A

ECSSD

Source

Date: M a y 19,2008 Country Director: D-M Dowsett-Coirolo Sector ManagedDirector: Peter D. Thomson

Project ID: P110682

Lending Instrument: Specific Investment Loan

[XI Loan [ ]Credit [ ]Grant [ 3 Guarantee [ 3 Other:

Team Leader: Aniruddha Dasgupta Sectors: Oil and gas (1 00%) Themes: Pollution management and environmental health (P) Environmental screening category: Partial Assessment

Project Financing Data

Local Foreign Total Borrower 114.10 9.90 124.00 International Bank for Reconstruction and I 3.40

Borrower: Republic o f Azerbaijan Ministry o f Finance 83, S.Vurgun str. Baku, Azerbaijan, AZ 1022 Tel: +994 - 12 596 71 84 Fax: +994- 12 493 05 46 / 493 29 43

56.60 60.00

Responsible Agency: State Oil Company o f Azerbaijan (SOCAR) 73 Neftchilar Avenue Baku, Azerbaijan, A Z l O O O Tel: +99412 4921789 Fax: +99412 4971 167 info@socar.az

Development Total: 11 7.50 66.50 184.00

Estimated disbursements (Bank F’YAJS$m) ZY I 2009 I 2010 I 2011 I 2012 I 2013 I h u a l I 6.00 I 24.00 I 18.00 I 6.00 I 6.00 I Zumulativel 6.00 I 30.00 I 48.00 I 54.00 I 60.00 I Project implementation period: Start November 20,2008 End: November 20,2013 Expected effectiveness date: September 15,2008 Expected closing date: September 16,2013 Does the project depart f rom the CAS in content or other significant respects? Re$ PAD L C. Does the project require any exceptions from Bank policies? Re$ PAD I K G.

I s approval for any policy exception sought from the Board? Does the project include any critical r i sks rated “substantial” or “high”? Re$ PAD IIL E. Does the project meet the Regional criteria for readiness for implementation? Re$ PAD I V . G. Project development objective Re$ PAD IL C., Technical Annex 3 The project development objective (PDO) i s to improve (i) SOCAR’S capacity and effectiveness in environmental management and in cleaning up o f o i l polluted land in the Absheron Peninsula, and (ii) the quality o f soil conditions in o i l polluted lands cleaned up under the project.

[ ]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

Have these been approved by Bank management? [ ]Yes IN0

Project description Re$ PAD ILD., Technical Annex 4 This project i s one o f several operations which the Bank wil l finance to support environmental clean up activities in the Absheron Peninsula o f Azerbaijan. I t i s the f i rs t phase o f potential longer-term support by the World Bank to SOCAR in developing and implementing i t s environmental agenda. I t wil l be achieved through three components: (i) Large Scale Oil Contaminated Land Clean-up; (ii) Monitoring, Communication and Public Outreach and (iii) Operational Costs and Project Management.

Component A: Large Scale O i l Contaminated Land Clean-up. This component wil l finance the purchase o f multiple units o f semi-mobile soil washing equipment and provide technical assistance to SOCAR with the goal o f cleaning up approximately 1,000 - 2,0002 ha o f oil- polluted land.

Component B: Monitoring, Communication and Public Outreach. This component will finance independent monitoring and supervision to the clean-up operation, and promote public awareness o f environmental clean-up challenges and activities supported by the project.

Which safeguard policies are triggered, if any? Re$ PAD I K F . , Technical Annex 10 The project has a Category B environmental classification, and therefore triggers the Bank’s Environmental Assessment (OP 4.01) Safeguard Policy. Project-financed o i l polluted land clean-up activities wi l l require civil works (excavations, backfilling), transport, construction o f temporary roads and infrastructure, and will generate waste, wastewater, and emissions. All

negative impacts are expected to be temporary and reversible, and the overall impact o f the project wil l be to make a positive contribution to environmental quality in the Absheron Peninsula.

Before project appraisal a feasibility study with an operational plan, and in compliance with OP 4.01 an EIA and EMP for the soil washing operations were prepared.

Significant, non-standard conditions, if any, for: Re$ PAD IIL F. Board presentation: none

Conditions for Loan Effectiveness: a. Procurement Specialist appointed. b. c. d.

Adoption o f the Project Operational Manual, satisfactory to the Bank. The Subsidiary Agreement has been executed on behalf o f the Borrower and the SOCAR. The Subsidiary Agreement has been duly authorized or ratified by the Borrower and the SOCAR and is legally binding upon the Borrower and the SOCAR in accordance with i t s terms.

Covenants applicable to project implementation: a. The Borrower, through SOCAR, shall maintain, throughout Project implementation, the

P M T headed by a Project Manager and with staff, resources and under terms o f reference satisfactory to the Bank. The Borrower shall ensure that people and businesses are not displaced because o f project activities. A Mid-Term Review o f the Project wi l l be carried out no later than 2 years from project effectiveness by September 2010.

b.

c.

I. S T R A T E G I C CONTEXT AND RATIONALE

A. Country and sector issues

1. The Government o f Azerbaijan has invited the World Bank to help implement the Environmental State Program (ESP), an ambitious response to the environmental challenges facing the Absheron Peninsula on which the capital c i ty o f B a k u is located-tackling critical environmental r isks while liberating land needed for the rapid economic and demographic growth o f this essential urban area. K e y development issues include the following:

Continued environmental degradation: The Absheron peninsula i s seriously polluted due to nearly 150 years o f o i l production that has contaminated some 30,000 hectares, 15,000 o f which are heavily polluted and o f primary environmental concern. Oil production on the peninsula has also affected the Caspian Sea through the discharge o f contaminated water; and generated radioactive waste (from natural radio-nuclides). Rapid urban growth and weak management capacity have caused sanitation and solid waste management to deteriorate significantly. Generally, there i s a continuing impact o f inadequate environmental management practices.

Rapid urban growth and resulting demand for land: Recently, many people have migrated to the Absheron Peninsula and i t s two main cities, Baku and Sumgayit, in search o f jobs and opportunities. This rapidly increasing population and the economic revival have created a strong demand for land. Baku i s ringed by former o i l fields and other polluted sites; urban growth has leapfrogged over these areas and extended literally across the Absheron Peninsula, often with little access to basic infrastructure. Informal settlements are growing in heavily polluted areas, creating a serious health risk. Meanwhile, contaminated land located close to rapidly growing residential and commercial areas has high potential value for redevelopment if it were to be cleaned up.

Need for effective land management: A comprehensive approach to regional planning, development and capital investments for Greater Baku is lacking. The most recent General Plan, developed in the mid- 1970s, covers only a small portion o f the current urbanized area and excludes many areas with new settlements that have developed during the past 15 years. Lit t le information exists describing ownership and/or land use for the Absheron Peninsula and available information i s usually very outdated. Cleaning up and converting polluted land requires a systematic approach that prioritizes site for rehabilitation. The cost o f rehabilitating a site i s directly related to i t s future use. Additionally, the expected future use determines the value o f the site and the economic feasibility o f i t s cleanup.

2. The Environment State Program (ESP) instituted by Presidential Decree No. 1697 o f September 28, 2006 forms the basis o f the proactive response by the Government to these challenges. It i s a comprehensive plan tackling clean up/remediation, hazardous and non-hazardous waste, and fonvard-looking environmental management through renovating facilities and improving laws and regulations. The Decree makes the Cabinet o f Ministers responsible for overall coordination

I t details 65 activities and 30 governmental or public stakeholders.

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and supervision, and demonstrates high-level commitment that has motivated key ministries and agencies.

B. Rationale for Bank involvement

Rationale for Bank support for the ESP

3. The Bank has been in dialogue with the Government o f Azerbaijan (GOA) on environmental clean-up activities for some years and supported a project with a pi lot o i l pollution cleanup component under the Urgent Environmental Investment Program (UEIP, closed 2005) to develop and test suitable cleanup technologies. The World Bank agreed with the GOA to incorporate environmental management and climate change issues as one o f four pillars in the Country Partnership Strategy (CPS) for FY07-FY10. The World Bank has thus agreed to partner with the Government in supporting the ESP through the Absheron Rehabilitation Program (ARP), a programmatic series o f projects and advisory services.

Specific Rationale for Bank involvement in the Project.

4. Under the ESP, the Cabinet o f Ministers designated SOCAR as the implementing agency with the primary responsibility o f cleaning up 8,200 hectares o f heavily oil-polluted land directly under SOCAR’S jurisdiction, and another 7,000 hectares which are leased to contractors. The estimated total area for long-term cleanup operations on Absheron i s around 30,000 ha. Although SOCAR plans to allocate more than US$600 mi l l ion for ESP activities fi-om 2006-10, and has created a dedicated joint-venture (EKOL, 51%-owned by SOCAR), i t is st i l l at the early stages o f carrying out its ambitious clean up plans. Remediation activities o f significant scale on selected sites have started, but they involve mainly low-tech solutions, and there i s scope for strengthening design, cleanup goals, standards, works organization, and construction management. Problems to date have included incomplete decontamination, spread o f contaminated material by improper handling, and poor practices in workplace health and safety. The project will provide an opportunity to introduce modern cleanup technology and equipment suited to larger-scale operations; improved operations planning and management; as wel l as to clarify the regulatory framework and post-cleanup land planning

C. Higher level objectives to which the project contributes

5. Country Partnership Strategy. The proposed Project i s part o f the Absheron Rehabilitation Program (ARP), a programmatic series o f SILs that respond to the Government o f Azerbaijan’s request for World Bank support for the ESP. The ARP supports two pillars o f the FY07-10 CPS: (a) Improving Environmental Management and Furthering the Climate Change Agenda (Pillar IV) and (b) Supporting Sustainable Growth o f the Non-oi l Economy (Pillar 11). It amplifies the assistance started under the US$20 mi l l ion Urgent Environmental Investment Project (UEIP) closed in 2005, which included pi lot ing o f technologies for mercury cleanup and onshore o i l field cleanup on the Absheron Peninsula. This project i s confirmed as a priori ty in the recent CPS Progress Report, prepared in M a y 2008.

2

6. On a systemic level, the project will contribute to the development and mainstreaming o f a functioning framework o f standards and guidelines and practical regulatory implementation and oversight capacities and experience. It wi l l also assist SOCAR benchmark against international standards i t s environmental regulatory policies and practices, past and current production practices, workers health and safety, and alignment with land management and land use master plans.

7. The project aims to clean up approximately 2,000 ha’ o f the heavily polluted 8,200 ha o f land under SOCAR’s direct jurisdiction, over about a 5-year period. It i s clear that additional equipment beyond the project wil l be needed to clean up the remaining portion o f the polluted land; SOCAR has allocated US$600 million for this purpose and has estimated that i t wil l take an additional 10-12 years to clean and remediate al l the polluted land under i t s jurisdiction. Currently, there i s no estimate o f the time it wil l take to clean up land not under SOCAR, this includes land leased by contractors.

11. PROJECT DESCRIPTION

A. Lending instrument

8. The proposed project i s conceptualized as the f i rst stage in a long-term collaboration with the Government o f Azerbaijan and SOCAR to improve the environmental conditions and practices on Absheron Peninsula. The Absheron Rehabilitation Program (ARP) wil l have important implications for the urban, environmental and o i l sectors and will focus on a l imited number o f realistic objectives considered achievable during the project lifespan. However, the project i s designed also to contribute towards longer-term, strategic environmental improvements, rehabilitation objectives and environmental and social due diligence in SOCAR’s entire operational cycle. The Specific Investment Loan (SIL) was selected as the most appropriate since the Absheron Rehabilitation Program wil l focus o n self-standing urgent interventions that wi l l be carried out simultaneously while preparing longer-term activities that require up-front strategic planning, capacity building, and/or extensive feasibility and environmental preparatory work. The project wil l be financed through an IBRD loan o f US$60 million.

B. Program objective and Phases

9. The overall objective o f the World Bank’s broader Absheron Rehabilitation Program (ARP) i s to support the Government o f Azerbaijan to implement the ESP. I t comprises o f multiple investments selected from ESP priority activities and agreed with the relevant government agencies. Each o f these agencies has been designated by the Cabinet o f Ministers as directly responsible for implementation o f specific parts o f the ESP. In the f i r s t phase the ARP would include the fol lowing three projects:

For the financial analysis o f the project minimum land clean-up a conservative estimate o f 1000 ha has been used

3

ARP I: Contaminated Sites Rehabilitation Project - includes cleanup activities at two former iodine production sites and a 1,000 ha o i l production site, to be implemented by the Ministry o f Emergency Situations (MES).

ARP 11: Integrated Solid Waste Management Project - includes reform o f the Greater Baku solid waste collection and disposal operations to be implemented init ial ly by the Ministry o f Economic Development (MED) and subsequently by a separate institution to be developed for this purpose.

ARP 111: Large Scale Oil Polluted L a n d Cleanup Project - includes land remediation and o i l recovery activities to be implemented by the State Oil Company o f Azerbaijan Republic (SOCAR). ARP I11 i s the subject o f this Project Appraisal Document (PAD).

These three projects would be followed by others that wi l l address more complex investments, including: upgrading o f wastewater treatment for Greater Baku, strengthening o f environmental pol icy and regulatory capacity-building for the ESP, and further investments in solid waste management, remediation o f o i l polluted lands, and Naturally Occurring Radioactive Materials (NORM) clean up.

10. Programmatic support for the ESP. Operationalizing the ESP requires strong prioritization, technical assistance and monitoring to manage the complexity and number o f activities. Within these very large needs, the proposed Bank support ini t ial ly aims to help rapidly implement strategic ESP activities that focus on practical solutions to tackle the worst environmental issues on the Absheron Peninsula and deliver quick and visible results within a short timeframe.

1 1. Bank involvement wil l also help to ensure that international best practice i s designed into the investments from the outset. These initial investments wil l yield lessons, by offering opportunities to test and streamline cleanup technologies, and to use the lessons learned to design scaled-up or more complex cleanup or environmental management investments. B a n k - h d e d preparation o f strategic plans for these next investments wil l include a focus on institutional issues, including inter-agency and land ownership and transfer issues that wil l be important for program sustainability.

12. The proposed Bank-supported technical assistance wil l help assist implementing agencies internalize good international environmental and safety practices. Added emphasis on data collection, independent monitoring, public outreach campaigns, adoption o f clarified environmental standards and coordinated certification processes wil l benefit both existing operations and the design o f new investments.

13. Regional Development for the Absheron Peninsula. The Bank’s involvement wil l also help steer ESP implementation towards a regional development approach to Absheron rehabilitation, through the ARP projects as wel l as several other investment programs and advisory activities included in the CPS. These include a US$5.0 mi l l ion component o f the FY07 National Water Supply and Sanitation Project that i s financing preparation o f a Regional Development Plan for the Absheron Peninsula employing a flexible, market-based, strategic

4

spatial development approach. The Regional Development Plan work wil l also develop a land use/zoning plan and associated implementation regulations. Further, each o f the projects under the Absheron Rehabilitation Program, as wel l as the on-going Real Estate Registration Project, ongoing Internally Displaced People (IDP) project, and the Urban Transport Project under preparation, points to a specific angle o f the land use, ownership and transfer issue. Whi le no single one project could tackle constraints that run across many different parts o f Government, altogether they are expected to converge and catalyze further pol icy dialogue on how to address these systemic constraints.

C. Project development objective and key indicators

14. The project development objective (PDO) i s to improve (i) SOCAR’s capacity and effectiveness in environmental management and in cleaning up o f oil-polluted land in the Absheron Peninsula, and (ii) the quality o f soil conditions in oil-polluted lands cleaned up under the project.

15. The key indicators to be used to assess progress in achieving the PDO are: (a) improvement in SOCAR’s environmental management processes as evidenced by the implementation and execution o f SOCAR’s obligations under the ESP; (b) improved capacity and efficiency in cleaning up oil-polluted land in the Absheron Peninsular, evidenced by increase in SOCAR’s annual rates and volumes o f soil cleaned to internationally acceptable standards and (c) improved quality o f land as evidenced by the percentage o f land rendered sustainable for productive re-use.

D. Project components

This project is the init ial step in a potential long-term program o f cooperation with SOCAR in developing and implementing i t s environmental agenda. It wil l be achieved through two components:

COMPONENT A: LARGE SCALE OIL CONTAMINATED LAND CLEAN-UP: PROCUREMENT AND OPERATION OF SOIL WASHING PLANT (Total Cost i s US$166.02 mi l l ion including VAT, o f which US$53.44 mi l l ion from IBRD)

1. This component wi l l finance the purchase o f multiple semi-mobile soil washing equipment and provide technical assistance to SOCAR with the goal o f cleaning up approximately 1,000 - 2,0002ha o f oil-polluted land. The core objective and activity planned under this component i s to remove hydrocarbons and potentially associated accessory pollutants (e.g., PAH,3 Phenols) by washing and / or scrubbing with hot water, steam and / or additive detergents and chemical agents. Suitable alternative cleanup technologies wil l be employed where soil washing is unsuitable or uneconomic. They may include land farming, off-site bio- remediation in heaps, and separate removal and direct use o f heavy bitumen fi-actions and mazut, e.g., as additive for asphalt production or alternative fuel in the cement industry. Potential

* For the project financial analysis the lower number has been used Polycyclic Aromatic Hydrocarbons

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auxiliary activities include removing garbage and scrap metal, demolishing derelict installations, and fencing and securing sites against unauthorized access.

2. Al: Stationary and Semi-mobile Soil Washing Plant: Soil washing first detaches mineral solid soil components fkom hydrocarbons, by the mechanical and chemical action o f a washing liquid. Soil fractions which leave the plant as cleaned soil, typically with minor hydrocarbon concentrations, process byproducts include process water, which i s recycled and reused continuously, and a concentrate o f stripped o f f hydrocarbons, which contain varying amounts o f fine soil fractions (fine s i l t and clay). The reclaimed product wil l be degraded hydrocarbons, which i s estimated to have about 10% o f crude o i l value but s t i l l i s an economically valuable product and wil l be used for example for producing heavy fuels, or lubricants as alternative fuel, or an ingredient for bituminous asphalt.

3. A2: Auxiliary equipment needed with the soil washers described above include water treatment plants, steam generators, o i l phase separators (decanters), thermal recycling units (for ut i l iz ing mazut to provide heat for steam generation), cylindrical sorting screens and scrap and refuse separators (details are in Annex 4).

4. A3: Operational costs include energy, water, consumables, civil works, transport services and labor and are estimated to about US$18 mi l l ion per year, or roughly US$90 mi l l ion for the project lifetime (US$102.96 mi l l ion including VAT), borne entirely by SOCAR.

5. A4: Technical Support and Assistance: TA wil l be provided with the clean-up equipment to support optimized, efficient, and sustainable operation throughout the project lifetime (and beyond) and firmly embed sk i l ls and capacities for plant operation and cleanup management in SOCAR’S environmental department. To ensure best advice to SOCAR an independent Consultant not connected to the plant supplier wil l be hired for this subcomponent providing assistance with plant procurement, development o f sector-specific environmental standards and clean-up methodologies, and criteria to select and optimize cleanup methods.

6. Additional TA will be provided via a technical cooperation agreement between SOCAR and the Norwegian O i l Producer “STATOIL”, which wil l include a series o f workshops and training activities to improve environmental monitoring and analytical quality, to analyze current corporate environmental performance and scope a road map for further jo int activities and information transfer.

COMPONENT B: INDEPENDENT MONITORING, COMMUNICATION AND PUBLIC OUTREACH, AND PROJECT MANAGEMENT (Total Cost i s US$1.50 million including VAT, out o f which US$0.94 mi l l ion from IBRD)

7. The objective o f this component i s to provide independent monitoring and supervision to the operation, promote public awareness and stimulate an informed public debate o n the environmental challenges facing SOCAR, and cover costs o f training for project management.

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8. B1: Panel o f Experts: For diligent monitoring and supervision, a Panel o f Experts (PoE) wil l be established as independent advisory body to provide high-level, independent technical oversight and advice.

9. B2: Monitoring and evaluation: Within SOCAR’s environmental department an M&E unit exists and will be strengthened by the project. The main responsibilities o f the M&E group would be the development o f a monitoring system which, starting f rom the clean-up project activities, captures improvements in corporate environmental performance.

10. B3: Communication and Outreach to Public: The bulk o f this activity wi l l be carried out by SOCAR staff trained and experienced in communication and public relations. Targeted advisory services by experienced international and local communication specialists and training wil l be financed by the project.

11. B4: PMT operating and training costs. The loan wil l finance an annual independent financial audit and training activities for P M T staff. Other P M T operational costs will be borne entirely by SOCAR.

E. Lessons learned and reflected in the project design

16. The foremost key lesson is the necessity for strong Government ownership and willingness to lead this kind of operation, without which a project o f significant scale and sustainability i s not possible. GOA’S commitment i s evidenced by the decree establishing the ESP and the designation o f the Deputy Prime Minister to oversee i t s implementation and coordination. SOCAR’s commitment i s evident from the ongoing significant cleanup activities, and also the establishment o f a new Environment Vice Presidency. The Bank task team has engaged in an active and constructive dialogue with SOCAR management and technical staff, the results o f which were duly considered in project design and preparation.

17. The Bank has experience in the sector and with o i l spill cleanup o n Absheron peninsula from the Urgent Environmental Investment Program (UEIP, PO551 55, completed 2005), which included a component to pi lot cleanup activities on oil-polluted soil. SOCAR was responsible for the implementation o f this component, which provided a comprehensive demonstration o f site cleanup technologies, tested technical approaches, and provided a basis for cost estimates and for assessing remediation re uirements on other sites. Cleanup equipment and infrastructure (pilot scale, capacity ca. 150 m /day) became the property o f SOCAR at the end o f the project and are s t i l l operating today (at Benagadi o i l field).

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18. SOCAR and the government used UEIP lessons as a model for preparing their project cleanup strategy; MENR and other key stakeholders provided comments o n earlier versions, which were incorporated in the strategy eventually ratified by the Cabinet o f Ministers. UEIP was also a catalyst in establishing E K O L and strengthening the SOCAR environmental department. Among the critical lessons learned from UEIP are the following: (a) Extensive cleanup projects require sustainable institutional structures; participation o f Azeri regulatory institutions, and clear regulation and enforcement o f land ownership and land use planning. (b) Capacity building is needed not only for technical sk i l ls but also for managerial development;

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and (c) technical assistance can only be useful when Government and implementing agencies recognize i t s importance. T h i s i s the case with SOCAR, which i s interested in to develop i t s own technical capacity through exposure to international experience.

17. Looking to the future, the project will also benefit from analytical work o f the “Petroleum and Governance Initiative” (PGI), a joint undertaking o f the Wor ld Bank and the Norwegian Agency for Development Cooperation (NORAD). The P G I has three pillars: Governance, Environment, and Community Development. I t aims to evaluate the degree to which countries with upstream o i l and gas industries are adopting international environmental good practices; and which elements o f environmental management systems (EMS) are priorities for technical assistance programs. Among other outcomes, P G I recommendations wil l guide Bank assistance with legal, regulatory, contractual, and institutional issues and calibrate future action plans.

F. Alternatives considered and reasons for rejection

18. SIL vs. Adaptable Program Loan (APL). One option considered was to combine Bank- financed activities in support o f the Environment State Program into a single horizontal and vertical APL. However, the Government requested that the activities be structured as a series o f separate SILs because the benefits o f the APL structure are insufficient to overcome the coordination and ownership issues that would arise by including multiple agencies and sectoral activities in the same operation.

19. Alternate institutions were considered to lead this project; however given that SOCAR has jurisdiction over vast amounts o f contaminated land on the Absheron Peninsula and i s determined to play a key role in cleanup activities, i t i s preferable to have SOCAR play the leadership role for this part o f the ARP. Alternatives such as stand-alone projects implemented by other entities such as MENR or MES could hardly secure cooperation by SOCAR and would thus not be implementable.

20. Focus on low-tech activities. Project preparation considered continuing with low-tech activities, but these so far have cleaned only about 25 ha o f contaminated land per year. The investment in large-scale soil washing equipment envisaged under the project will multiply cleanup capacity and integrate soil washing with a blend o f technologies, including thermal utilization and biological remediation. Feasibility studies carried out by international consultants engaged by SOCAR concluded that the soil washing i s the optimum method for roughly 50-75 percent o f contaminated areas. This technology rapidly restores land to conditions fit for other economic uses, avoids prolonged cleanup that ties up potentially valuable land, and prevents collateral problems such as illegal land appropriation, construction, or squatting o n contaminated land. Other technologies may be used by SOCAR for land that i s less polluted.

111. IMPLEMENTATION

A. Partnership arrangements

2 1. Under auspices o f the “Petroleum and Governance Initiative” (PGI), implemented jo int ly by the Bank and the Norwegian Agency for Development Cooperation (NORAD), a multi-

8

country survey on a range o f indicators including environmental indicators has been initiated (inception phase o f Consultancy contract commenced) and includes Azerbaijan. The Bank project team and SOCAR wil l cooperate to disseminate information and share results. In addition, SOCAR’S management i s in talks with the Norwegian Statoil regarding TA for environmental issues. This wil l include a series o f workshops and training activities to improve environmental monitoring and analytical quality, to analyze current corporate environmental performance and scope a road map for further jo int activities and information transfer.

B. Institutional and implementation arrangements

22. Over the past few years, SOCAR has carried out cleanup activities on at least two heavily pollutes sites. In the course o f project preparation, SOCAR has established a project management team (PMT). Core positions (e.g., Director, FM specialist, procurement specialist, technical remediation specialist and communication specialist) are already staffed. Technical support to the P M T i s provided by a working group with a staff profile o f mainly engineers with strong technical capacity already demonstrated during other pi lot cleanup operations and the preparation o f ARP I11 project. During project preparation, the working group addressed the following tasks: (a) data procurement, preparation o f environmental assessment, (b) development o f technical specifications for cleaning equipment, (c) site investigations and field-testing, (d) administratiodcoordination, management o f domestic and international consultancy contracts.

23. A Panel o f Experts (PoE) will be established as independent advisory body after loan effectiveness, comprising Azeri and international members with long-term experience in o i l production, management, governance o f o i l firms and environmental, social, and regulatory experience.

24. A Deputy Prime Minister i s responsible for overseeing implementation o f the overall ESP. H e wil l head a Steering Committee established before negotiations to enhance coordination among al l agencies responsible for implementing ESP activities financed by the World Bank. SOCAR P M T wil l report to the SOCAR Vice President for Environment and to the Steering Committee on the status o f project scheduling and achievement o f milestones set out by the ESP.

C. Monitoring and evaluation of outcomedresults

25. ARP I11 will monitor progress against performance indicators specified in Annex 3. The SOCAR P M T will provide regular reports (with monthly summaries) on key technical parameters to benchmark cleanup progress, such as soil volume processed, hydrocarbons recovered, and land reclaimed. These parameters are measured in part by ongoing technical operations (plant logbooks, automatic gauges, sensory and measurement equipment), and in part by entities such as SOCAR property management and municipal land authorities.

26. capacity for monitoring and evaluation, and elaboration and distribution o f technical reports.

The TA component B will help to strengthen SOCAR’S institutional and technical

9

27. SOCAR wil l be responsible for monitoring and budgeting with TA provided from the loan. Consultants and Bank specialists wi l l review TA results and the general effectiveness o f TA components wil l be assessed during mid-term review.

D. Sustainability

28. Ownership. The Environmental State program (ESP) provides an overall framework for clean-up activities in the Absheron Peninusla, and it enjoys strong government support. SOCAR i s both involved as key stakeholder in the ESP and in addition committed to the implementation o f the ESP through i t s own environmental program, "Working Program for implementation o f SOCAR related projects under the State Program on Improving the Environmental Situation in Azerbaijan for 2006-2010", approved by resolution o f the President o f SOCAR on December 7, 2006.

29. Before the ESP, SOCAR had begun to engage in polluted land cleanup in the early 2000s, at the time o f the UEIP. After closure o f that project, SOCAR has continued to operate the Benagadi soil washing plant and to undertake recent remediation activities at Bibi Heybat. SOCAR cleanup activities now have momentum and close attention and support f rom top management.

30. Financial Sustainability. Demand for clean land in the Absheron Peninsula i s growing rapidly, both new construction and other economic uses. Moreover, preliminary economic analysis based on technical parameters described in the Feasibility Study for ARP I11 predicted a high rate o f return on cleanup operations from the recovery o f marketable hydrocarbons (similar in type to 'heavy crude'), and the value o f reclaimed land for development, which should produce a fairly rapid return to investment and create long-term economic sustainability. Furthermore, these outcomes provide a strong financial incentive for SOCAR to apply acquired capacity to maximize output, and use it wherever i t is technically and financially relevant (see the financial analysis in Section IV below).

3 1. Institutional Sustainability. Sustainability requires a regulatory framework and institutional capacity to oversee and manage environmental due diligence. In the context o f land cleanup, existing regulations are deficient and technical capacity and experience i s st i l l limited. Addressing these issues requires a proper balance between creating standards that are neither too stringent and unaffordable, or too loose leaving residual contaminations - as either scenario would not be environmentally sustainable over the long term. Project design wil l respond to these issues through the following: (a) embedding the P M T in SOCAR's ecology department and subsidiary EKOL, and (b) providing TA to improve corporate environmental performance and practice, (establish TA to strengthen regulatory functions, establish workable land-cleanup standards, and build technical capacity for enforcement (e.g. by understanding risk-based standards and project design).

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E. Critical risks and possible controversial aspects

Description of risk

SOCAR’s long-term environmental record has historically been very weak, i t s environmental standards are still rudimentary, and there i s low technical capacity to implement complex cleanup projects.

Although the Ministry o f Environment and Natural Resources (MENR) has official responsibility for permitting and enforcement in this sector (contaminated land cleanup), i t s capacity and track record in licensing and enforcement in cleanup activities has been inconsistent.

A highly specialized, sophisticated cleanup technology i s planned for bulk o f SOCAR’S contaminated sites, requiring higher levels o f design and supervision capabilities than those that are currently available at SOCAR.

As SOCAR’s primary mandate i s o i l production, not o i l clean up, it might choose to reduce, postpone or drop environmental agenda thus rendering expensive high tech equipment underused or redundant. The PMT has no prior experience in implementing Bank FM requirements, and existing financial management arrangements need to be strengthened to handle the accounting and reporting o f the project. The PMT has no experience in implementing Bank procurement

Mitigation measures

SOCAR made firm commitments under the ESP and has shown commitment to contaminated land remediation as evidenced by i t s activities under and following the Bank-financed UEIP, including the recent establishment o f an environmental vice presidency.

ARP I11 includes TA to improve general environmental practices and technical capabilities o f environmental staff. The Bank will separately pursue a freestanding TA operation to assist MENR to establish more effective policies, standards and capacity. However, even i f t h i s does not prove possible in the short-tern, ARP 111, itself wil l help to establish and entrench workable, consistent cleanup approaches and reliable standards within SOCAR. The feasibility study for the project has covered all relevant parameters for plant configuration and develop workable operational instructions. Extensive TA will assist SOCAR staff in developing necessary s k i l l s and practices for effective utilization and management o f equipment. SOCAR has a track record o f recent cleanup activities. Profits from hydrocarbon recovery will create high returns and strong financial incentives for continuing cleanup activities.

Responsible FM staff will be appointed in the PMT, and existing accounting software will be customized.

A procurement specialist with experience in World Bank funded

Rating of residual risk

Substantial

Substantial

Moderate

Moderate

Moderate

Substantial

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guidelines and procedures.

A portion o f the oil-polluted land i s habited. Clean-up activities may require resettlement and land acquisition.

Poor environmental practice in ongoing operations might re- contaminate contaminations cleaned up sections.

SOCAR may not use the equipment as agreed after the project i s completed, or beyond the project scope.

The cleaned up land may not be returned to a productive use.

Overall Risk

projects wil l be recruited wi th adequate remuneration, continuous training wil l be provided, and there wil l be close supervision by the Bank.

SOCAR firmly committed to exclude from cleanup operations any areas with potential resettlement or land acquisition issues; th i s i s a loan covenant. TA will foster SOCAR’s environmental due diligence during cleanup.

Firm commitment by GOA for continued project support, leverage on SOCAR through ESP.

The project support substantial TA including development o f a SOCAR brownfield strategy focused on prioritizing land for clean up and linking clean up standards to future land use.

Moderate

Substantial

Substantial

F. Loan conditions and covenants

32. Conditions for Loan Effectiveness: a. Procurement Specialist appointed. b. Adoption o f the Project Operational Manual, satisfactory to the Bank, to include a

detailed work program, implementation schedule and key TORS. c. The Subsidiary Agreement has been executed on behalf o f the Borrower and the

SOCAR. d. The Subsidiary Agreement has been duly authorized or ratified by the Borrower and

the SOCAR and i s legally binding upon the Borrower and the SOCAR in accordance with i t s terms.

33. Legal Covenants: a. The Borrower shall maintain a financial management system acceptable to the Bank

and provide quarterly un-audited financial reports satisfactory to the Bank. The project’s financial statements, withdrawal applications, and designated accounts wil l be audited by independent auditors acceptable to the Bank and o n terms o f reference acceptable to the Bank. The annual audited financial statements and audit reports wil l be provided to the Bank within six months o f the end o f each fiscal year.

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b. The Borrower, through SOCAR, shall take al l action required to carry out the Project in accordance with the requirements set forth or referred to in the Project Operational Manual.

c. In selection o f the priority areas for clean-up under Component A o f the Project, the eligibility criteria include the following:

(a) The land shall be under legal control or lease by the SOCAR.

(b) The techno-economical and environmental studies shall have been produced for each plot, confirming the feasibility o f remediation with soil washing method.

(c) The SOCAR shall ensure that: (i) the land cleaned through the Project activities shall not be recontaminated; and (ii) the SOCAR shall not use cleaned land for continued o i l production or related activities, likely to cause new contaminations, except retaining minor sections o f the cleaned-up plots for continued production with modernized equipment, such as directional drilling.

(d) The land shall be uninhabited and free o f any informal or formal land use other than oil-related activities authorized by the SOCAR.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

34. Economic analysis. Using simple hypotheses to assign value to land returned to economic use (i.e. increase from zero to the current lower limit o f land values on Absheron), and applying basic parameters from the technical feasibility study, calculations yield the fol lowing conclusions:

the project should generate high economic returns (economic rate o f return i s 55 percent with a net present value o f US$165 mil l i~n)~, the remediation technique chosen i s financially and economically the most adapted to this type o f pollution; the potential value o f recoverable hydrocarbons (under conservative price assumptions - see Annex 9) i s at least o f the same order o f magnitude as the reclaimed land value, increasing the economic value o f the project.

35. Financial analysis. Under the current pol icy and institutional framework in Azerbaijan, revenues from any future sale o f land would not accrue to SOCAR but to the State. However, the high value o f the recovered hydrocarbons i tself makes the proposed cleaning technique profitable for SOCAR: the financial rate o f return for SOCAR o f the cleaning process i s 26 percent over 10 years, and the initial investment payback period is 3.5 years2. This profitability should ensure continuous operation o f the facilities by SOCAR.

Given the uncertainties in input parameters these figures should be taken only as orders o f magnitude. 4

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B. Technical

36. The key rationale for the project i s to scale up SOCAR’s cleanup capacity by a factor o f 10-20. Annual cleanup o f contaminated land i s now about 25 ha; the investment in high-tech / high capacity soil washing equipment wil l multiply cleanup capacity and integrate this method into a blend o f technologies, including thermal utilization and biological remediation. Soil washing equipment i s optimum for roughly 50-75 percent o f contaminated areas and rapidly restores conditions fit for subsequent economic use. SOCAR has resources to engage in a major cleanup and i s committed to carry i t out, but needs to gain experience and capacity. TA provided under ARP I11 wil l address these needs.

37. International standards and good practices wil l apply to procurement (the plant wil l be procured via ICB) and operation o f equipment, as well as cleanup design and implementation, with the perspective o f future Azeri legislation. using them as reference

C. Fiduciary

38. Procurement: An assessment o f the procurement arrangements for the project was undertaken in December 2007 and updated during the Appraisal mission in March 2008.’ SOCAR has been doing i t s procurement in accordance with the Azeri Public Procurement Law, The P M T wil l therefore recruit a procurement specialist with previous knowledge and experience in procurement under World Bank funded projects to work specifically for the project, and this specialist will receive additional training as required. Technical support to the P M T will be provided by the technical staff from the relevant departments o f SOCAR on an “as required” basis. At the country level, a comprehensive analysis o f the public procurement system was carried out during the Country Procurement Assessment Review (CPAR) o f June 2003, which concluded that Azerbaijan should be rated as a medium to high-risk country in respect o f public procurement. A new CPAR i s underway in 2008 to benchmark progress against agreed actions and provide further guidance on improvements needed.

39. Financial Management. An assessment o f the financial management (FM) arrangements for the project was undertaken in December 2007 and updated during the Appraisal in March 2008. The current Project FM arrangements together with agreed upon FM system improvement activities are found to be moderately satisfactory to the Bank.

40. Although the P M T has no prior experience with Bank financial management, SOCAR’s accounting system i s now being reformed to meet the international standards: Internationally recognized S A P accounting software wil l be introduced at HQ o f SOCAR by June 30, 2008. The Bank and SOCAR officials have agreed that the S A P system wil l be customized to have capacity to record and report project financial activities.

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41, The following table summarizes financial management agreements.

Budgeting

Internal Controls

Staffing Accounting and

Existing budgeting procedures wil l be used. SOCAR will provide detailed project expenditures in their annual budget. SOCAR existing controls wil l be adapted to process project transactions; internal controls will be documented in the FM section o f the Project Operations Manual. SOCAR appointed FM staff who will work on the project. S A P that i s being installed by SOCAR will be customized to have

Reporting Flow o f funds

capacity to record and report project related transactions. SOCAR will open a designated account in U S $ for h d s flow from and

I I financial statements. I Auditing

SOCAR’S Economical and Accounting Department (EAD) wil l manage project finances. EAD comprises three units: accounting, finance and tax, economic analysis and forecast and has 17 professional staff. SOCAR nominated experienced and qualified EAD staff to carry out project

’ budgeting, accounting, disbursements, payments, bank transactions, auditing arrangements, and reporting.

to the Bank and a Manat account to pay contractors. SOCAR will hire independent auditors for the audit o f project annual

42. Flow o f funds: There wil l be one Designated Account (DA) for SOCAR for disbursements. The DA will be in the currency o f the loan and will be at the International Bank o f Azerbaijan on terms and conditions acceptable to IBRD. All payments to contractors, suppliers, and consultants wil l be made either directly from the loan account, or from the Designated Account, authorized by the responsible personnel. The EAD will be responsible for the f low o f funds from the loan account and the f low o f counterpart funds. SOCAR wil l ensure that al l planned counterpart funds are allocated for the project needs in a timely manner.

43. Project financial statements wi l l be subject to external auditing by independent auditors under the terms o f reference acceptable to the Bank. SOCAR’S accounting, budget formulation and monitoring systems wil l be used for the project implementation. The overall residual financial management risk i s rated as moderate. Detailed financial management assessment, including agreed upon action plan i s outlined in Annex 7 o f the PAD.

D. Social

44. The capital ci ty Baku i s on the Absheron peninsula, an area that now accommodates nearly 40 percent o f the national population. Rapid population growth has increased density with the result that many poor people have now built illegally on contaminated state-owned land that is leased to SOCAR for o i l production. The project wil l contribute to improving conditions for Absheron Peninsula population by increasing SOCAR cleanup capacity thus providing potential land for new housing, businesses, and recreational areas.

45. social importance.

Cleaning up oil-contaminated lands close to human settlements wil l have significant At the same time, i t i s SOCAR’S policy to avoid cleanup o f already

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encroached land where squatters are present, to avoid the high political and social issues associated with relocating large numbers o f squatters. Therefore, the project will not displace people and local businesses.

E. Environment

46. The project has a Category B environmental classification. Current environmental conditions on o i l production sites are poor. The sheer geographical scale o f the problem, with about 10,000-1 5,000 ha (1 00-1 50 km2) o f land contaminated beyond any potential use, calls for a major investment in high-capacity, efficient technology to make an impact o f any significance. Vast expanses are currently used only as dumping areas for secondary waste f rom households and industry.

The main project objective i s to increase cleanup capacity, and the project focuses on procuring equipment, building a plant, and developing a business and operational plan to conduct cleanup in the most technically, environmentally, and economically effective way. TA components wil l improve environmental management, practices, and performance in SOCAR extractive operations, and establish independent oversight and monitoring by a Panel o f Experts staffed with Azeri and International Experts. The net project impact will be significantly positive.

47. T o ensure environmental due diligence and best practices during cleanup operations, an environmental impact assessment (EIA) was conducted during the preparation phase, and an environmental management plan (EMP) developed for project implementation. Both documents as wel l as a technical feasibility study were disclosed in the InfoShop on February 28,2008, and two consultation workshops held in Baku in December 2007 and February 2008. This will be included as part o f the project manual. Moreover, an independent panel o f experts wil l be established to monitor project outcomes and provide expert advice.

48. SOCAR,s environmental vice presidency i s engaged in dialogue with European o i l companies regarding TA and knowledge transfer to improve environmental performance. The Norwegian STATOIL wil l conduct a workshop in M a y 2008 in which the main TA topics and a road map for TA delivery wil l be agreed.

F. Safeguard policies

49. In view o f its Category B classification, the project triggers Environmental Assessment (OP 4.01) Safeguard Policy. It wil l involve the use o f large-capacity equipment, and cleanup activities wil l require large-scale c iv i l works (excavations, backfilling), transport, construction o f temporary roads and infrastructure, and will generate waste, wastewater, and emissions, but al l negative impacts are expected to be temporary, reversible, and restricted to already-polluted areas. No resettlement activities wil l take place as a result o f the project. In this context, i t should be born in mind that the equipment supplied and operated under the project i s geared specifically to the highest range o f contaminations, where soils are saturated or covered with bituminous crusts or fee o i l phase i s stored in ponds and puddles. The contamination levels in these areas have so far proven prohibitive to any settlement and land use. There are squatters in areas adjacent to these highly contaminated lands and/or in areas with lesser contaminations.

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Decontamination operations can be executed in a precise manner with only minor impacts on such occupied areas during cleanup operations.

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (u [I [XI Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [X 1 Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI

G. Policy Exceptions and Readiness

50. The Project complies with all applicable Bank policies and no exceptions are required.

51. (consultants’ services) wil l be completed before effectiveness.

I t i s expected that procurement documents for the initial contracts o f the Project

52. The formal adoption o f the Project Operational Manual i s a condition o f Loan Effectiveness

a By supporting the proposedproject, the Bank does not intend to prejudice theJinal determination of the parties’ claims on the disputed areas

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Annex 1: Country and Sector or Program Background

AZERBAIJAN: Absheron Rehabilitation Program ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

The challenge

1. This Project i s part o f a broader World Bank support to the Environmental State Program (ESP) instituted by a Presidential Decree on Sept. 28, 2006. The ESP i s a comprehensive and proactive approach that signals the highest-level commitment to remedy the acute environmental situation in Azerbaijan in general, and on the Absheron Peninsula in particular. The Bank supports the ESP as an effective and ambitious response to development challenges facing the Absheron Peninsula: tackling critical environmental risks and liberating land necessary for rapid economic and demographic growth o f this essential urban area.

2. Economic growth. Since regaining independence and signing the “Contract o f the Century” with a consortium o f foreign o i l companies, the o i l economy o f Azerbaijan has been undergoing a strong resurgence with the development o f the massive Azeri-Chirag-Gunashli field and the Shah Deniz gas field. These o i l and gas discoveries have given Azerbaijan new means to combat poverty and develop into a diversified, sustainable middle-income economy: per capita income rose to US$2,740 in 2006, up from a post-independence l o w o f just US$470 in 1995.

3. Demographic growth. Recently many people have migrated to the Absheron Peninsula in search o f jobs and opportunities. According to official statistics, the registered population o f the Ci ty o f Baku (including al l settlements) increased from 1.1 mi l l ion at the 1989 census to 1.87 mi l l ion by the end o f 2006. However, unofficial estimates are much higher-ranging from 2.5 to 3 .O mil l ion when Absheron Rayon inhabitants, unregistered migrants and internally displaced people from the conflict with Armenia are included. Similarly, the off icial population o f the Ci ty o f Sumgayit on the northwest peninsula i s 294,400 but unofficial estimates range up to 400,000.

4. Demand for land. A rapidly increasing population and the economic revival fostered by increased o i l revenues have created a strong demand for land. Baku i s ringed by former o i l fields and other polluted sites; urban growth has leapfrogged over these areas and extended literally across the Absheron Peninsula, often with l i t t le access to either basic infrastructure, such as waterhewerage, or to social infrastructure, such as schools. The demand for land i s such that informal settlements are even growing in heavily polluted areas, creating a serious health risk. The city urgently needs land for communication networks, housing, businesses, and recreational areas. I t i s necessary to reuse degraded land within the city and ringing the city. Meanwhile, contaminated land located close to rapidly growing residential and commercial areas has high potential value for redevelopment if it were cleaned up.

5. However, land reuse requires a system to select land for remediation and determine what i t wi l l be used for; to balance redevelopment values (linked to urban growth) and rehabilitation criteria (e.g. clean soil depth required; level o f residuals acceptable) which determine rehabilitation costs. The system must also monitor the progress o f land conversion and tackle institutional issues o f land ownership to permit the transfer o f land to developers. Currently, this

18

system does not exist or, where it exists, i s dysfunctional. A comprehensive approach to planning infrastructure investment needs i s also lacking; the former General Plan, developed in the mid-l970s, covers only a small portion o f the current urbanized area and excludes many areas with new settlements that have developed during the past 15 years.

6. Environmental demadation. Pollution on the Absheron Peninsula has many origins: Nearly 150 years o f o i l production have left some 30,000 hectares o f oil-contaminated land, o f which 15,000 are heavily contaminated. Soviet enterprises that no longer exist created most o f the pollution but since SOCAR took over in 1991, pollution has continued with many examples o f poor practice, including o i l and wastewater spil ls onto the ground at drilling sites. Inefficient environmental control, o i l production, and other Soviet-era chemical producers on the peninsula also generated radioactive waste (from naturally occurring radioactive materials -- NORM). The solid waste management system has deteriorated significantly due to rapid urban growth, weak management, and lack o f institutional framework. Municipalities lack collection equipment, infrastructure, and funds to cover costs so that most solid waste i s never picked up. The official Balakhani waste disposal site i s in deplorable condition with continuous fires, and new unofficial dumps are being established in inappropriate locations. Untreated residential and industrial wastewater i s contaminating the Caspian Sea, damaging public health and the marine environment, including the sturgeon population.

The Environmental State Program

7. The Environmental State Program (ESP) instituted by the September 28, 2006 Presidential Decree (no. 1697) forms the basis o f the proactive response by the Government to this challenge. The ESP focuses on the Absheron Peninsula but includes some nation-wide activities. It i s a comprehensive plan involving cleanup hemediation, hazardous and non-hazardous waste, and forward-looking environmental management through renovating facilities and improving laws and regulations. The Decree makes the Cabinet o f Ministers responsible for overall coordination and supervision, and demonstrates high-level commitment that has motivated key ministries and agencies.

It details 65 activities and 30 governmental or public stakeholders.

8. Legacy vs. onaoina pollution. The ESP addresses legacy and ongoing environmental pollution in the Absheron Peninsula. Legacy problems have developed over many years but have little new degradation. Bibiheybat, the heavily polluted artificial peninsula at one end o f Baku Bay exemplifies legacy pollution. In contrast, ongoing problems wil l create future environmental degradation unless steps are taken to curb them-the ESP includes untreated industrial and residential wastewater, solid waste disposal, and continued o i l production pollution.

9. Implementation o f the ESP. T o carry out efficient implementation, supervise performance o f the ESP, and improve coordination among government agencies, the Cabinet o f Ministers issued a subsequent decree (no. 325 S, October 21, 2006), which defined the “Implementation

19

Schedule for the Comprehensive Action Plan on Improving Environmental Situation in Azerbaijan for 2006-2010” (IS-ESP), and assigned a Deputy Prime Minister as the supervisor and implementer o f the ESP. The implementation schedule specifies the government agencies directly responsible for implementation o f each action - the key ones being the Ministry o f Emergency Situations, the Ministry o f Economic Development, SOCAR, and Azersu - while the Ministry o f Ecology and Natural Resources i s responsible for reporting to the Cabinet o f Ministers on implementation o f the ESP, based on inputs o f implementing agencies. It also specifies when the action should be started and completed, and requires the responsible agencies to determine expected costs and identify funding sources. However, the general inadequacy o f existing data and the lack o f feasibility studies prevent even a basic estimate o f costs and timeline.

World Bank strategy for supporting the ESP

10. The World Bank has agreed to partner with the government in supporting the ESP, through the Absheron Rehabilitation Program (ARP), a programmatic series o f projects and advisory services. I t will be implemented through a series o f SILs and supports two pillars o f the 2006- 10 Country Partnership Strategy: (a) improve environmental management and conditions and (b) support sustainable and balanced growth o f the non-oil economy. I t amplifies the assistance started under the US$20 mill ion Urgent Environmental Investment Project closed in 2005, which included mercury cleanup and onshore o i l field cleanup on the Absheron Peninsula. The ARP projects wil l support operationalizing the ESP through stronger prioritization, monitoring and technical assistance to manage i t s sheer complexity.

11. The World Bank’s strategy for support for the ESP rests on three fundamental considerations: (a) the importance o f regional economic development and growth; (b) the need to address land conversion; and (c) the importance o f independent monitoring and public outreach.

12. Bank involvement wil l also help steer ESP implementation towards a regional development approach to Absheron rehabilitation. This regional development approach starts with a US$5.0 mill ion component o f the National Water Supply and Sanitation Project (approved in FY07) that finances preparation o f a Regional Development Plan for the Absheron Peninsula. This wil l help the Government move from the former system o f general planning to a flexible, market-based, strategic spatial development approach.

13. The Bank’s strategy also prioritizes the importance o f developing a systematic approach to land conversion. Land conversion has emerged as a critical constraint on clean up as land reuse i s essential for sustainability. The SOCAR and MES projects both include components to support connecting clean up o f land with i t s future use. The ARP projects, as well as the on-going Real Estate Registration Project, and the urban transport project under preparation, addresses a specific element o f the land use, ownership and transfer issue. While no single project can simultaneously tackle constraints that run across many parts o f Government, together they are expected to converge and catalyze further policy dialogue on how to address these systemic constraints.

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14. Finally, the Bank’s strategy supports independent monitoring and public outreach. In order to monitor the overall program, a Panel o f Experts will be established to serve as an independent advisory body providing high-level, independent technical oversight and advice for ARP clean up projects. The Panel o f Experts wil l consist o f qualified experts with long-term o i l and gas sector experience, recruited from sector-specific enterprises and institutions with a strong environmental track record. Both local and international organizations will be included on the Panel. The ARP projects also include components to promote public awareness and stimulate informed public debates.

Program design

15. Government plans to complete the ESP by 2010, but realistically the scope o f work suggests that i t may take much longer. Within these very large needs, the goal o f the proposed Program i s to help rapidly implement strategic ESP projects. Discussions between the Bank and the agencies focused on selecting activities for which Bank support would best add value, and on practical solutions to operationalize the ESP and boost Government momentum by supporting projects that could deliver quick and visible results within the short timeframe established for the ESP. The program therefore i s structured as follows:

(a) The first series o f S I L s focuses on: (i) critical, self-standing emergency projects ready for implementation, that wi l l quickly tackle some o f the worst environmental issues in Absheron and dramatically improve living conditions for residents, including informal settlers, (ii) strengthening environmental management and clean up capacity in key agencies; and (iii) preparation o f strategies, feasibility work and designs for the more complex cleanup or environmental management investments to be financed in the next phase. The projects wil l provide visible results and provide momentum for the ESP. The first phase includes:

i. ii. iii.

ARP I: Contaminated Sites Rehabilitation Project (P104985) ARP 11: Integrated Solid Waste Management Project (P110679) ARP 111: Large Scale Oil Polluted Land Cleanup Project (P110682)

These three projects would be followed by others that wil l address more complex investments, including: upgrading o f wastewater treatment for Greater Baku, strengthening o f environmental pol icy and regulatory capacity-building for the ESP, and further investments in solid waste management, remediation o f o i l polluted lands, and Naturally Occurring Radioactive Materials (NORM) clean up.

Project-specipc background issues

16. Under the ESP, the Cabinet o f Ministers designated SOCAR as the implementing agency with primary responsibility to clean up upwards o f 8,000 hectares o f heavily oil-polluted land during the next few years. The estimated total area for long-term cleanup operations on Absheron i s around 15,000 ha. and for this large-scale undertaking, SOCAR has taken various organizational and managerial steps in producing an environmental strategy, upscaling i ts environmental department, developing capacities and skills and establishing technical cooperation arrangement with EKOL, a newly established company that specializes in o i l

21

cleanup (51 percent SOCAR-owned). SOCAR plans to allocate more than $600 mill ion for ESP activities from 2006-10.

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Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Project

1. Azerbaijan: Urgent Environmental Investment project (UEIP): Completed 2. Azerbaijan: National Water Supply and Sanitation Project

3. Real Estate Registration Project

4. IDP Economic Development Support Project

Other Donors 5. Capacity Building for Clean Development Mechanism in Azerbaijan

6. Preparing the Social Infrastructure for Internally Displaced Persons and Vulnerable Population

Amount

USD $20 mi l l ion

USD $230 mi l l ion

USD $30

USD $11.5

USD $0.3

USD $0.84

Financier

World Bank (IDA)

UNDP

ADB

Sector Issues Addressed ___ ~~

Address urgent actions identified in the Azeri National Environmental Plan (NEAP). Improve the availability, quality and reliability o f water supply and sanitation services in twenty o f Azerbaijan’s regional (Rayon) centers. T o ensure a reliable, transparent and efficient real estate registration system supporting real property markets and suitable systems for the management and use o f State-owned immovable property. Help improve the living conditions o f IDPs and enhance their economic opportunities and prospects for social integration

Building capacity o f the Azeri public and private sector to involve in and benefit from participation in the CDM. Improve access to basic social infrastructure for vulnerable segments o f the population, including internally displaced Dersons (IDPs).

OED Rating for Bank Projects

IP: s DO: S

IP: M S DO: S

IP: s DO: S

IP: s DO: S

23

7. Capacity Building and On-the-Ground Investment for Integrated and Sustainable Land Management

8. Solid Waste Management Improvement Project (SWMIP) Azerbaijan

USD $0.69

USD $0.86

UNDP (GEF / Government o f Norway)

Promote sustainable and integrated management o f land resources and meet country’s obligations to the UN Convention to Combat Desertification (UNCCD).

UNDP (Government o f Norway)

Improve solid waste management by exploring multi-sector partnerships approaches.

24

Annex 3: Results Framework and Monitoring AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Results Framework

PDO The project development objective (PDO) i s to improve (i) SOCAR’s capacity and effectiveness in environmental management and in cleaning up o f o i l polluted land in the Absheron Peninsula, and (ii) the quality o f soil conditions in o i l polluted lands cleaned up under the project.

Intermediate Results One per Component

Component A Improve soil conditions in o i l polluted land remediated under the project.

Component B The Project i s independently monitored by a Panel o f Experts, and the public i s better aware o f the environmental challenges facing Absheron and o f SOCAR’s efforts to clean up oil- polluted land.

Outcome Indicators improvement in SOCAR’S environmental management processes as evidenced by the implementation and execution o f SOCAR’s obligations under the ESP; improved capacity and efficiency in cleaning up oil-polluted land in the Absheron Peninsular, evidenced by i) increase in SOCAR’s annual rates and volumes o f soil cleaned to internationally acceptable standards, ii) Increase in the area o f oil-polluted land cleaned by SOCAR (ha) improved quality o f land as evidenced by the percentage o f land rendered sustainable for productive re-use..

Results Indicators for Each ComDonent

Component A: X ton o f soil cleaned up per year with new equipment. Increase in average annual cleanup productivity o f SOCAR (as multiple o f baseline) Accumulated absolute amount o f o i l products recovered and safely disposed. % decrease o f recoverable hydrocarbons concentrations in soil through soil washing. Improved capacity o f SOCAR to apply risk based management practices aimed at mitigating post-remediation land utilization. Development and implementation o f sector- specific cleanup goals and standards.

Component B: Establishment & operation o f internal Monitoring & Evaluation group for the Project within SOCAR. Independent panel o f impartial, local and international experts established and project i s regularly monitored. Establishment o f a communication unit that maintains a website and publishes periodic newsletters on al l relevant activities

Use of Outcome Information

environmental management capacity. Asses SOCAR’s commitment and performance within the Environmental State Plan Program (ESP).

Evaluate SOCAR’s

Use o f Results Monitoring

Component A: Assess the nominal technical capacity o f SOCAR. Verify effective use o f cleanup equipment

Gauge the improvement o f the environmental quality o f the land.

Evidence o f SOCAR’s capabilities in risk based land management.

sector to engage in active environmental policy dialogue

Demonstrate willingness o f

Component B: Evidence o f project transparency and independent quality control

Demonstrate increase o f SOCAR-ED’S empowerment within company

25

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Annex 4: Detailed Project Description

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE O I L POLLUTED LAND CLEANUP PROJECT

1. The Environmental State Program (ESP) instituted by the September 28, 2006 Presidential Decree (no. 1697) forms the basis o f the proactive response by the Government to the environmental problems o f the Absheron Peninsula. The ESP focuses on the Absheron Peninsula but includes some nation-wide activities. It details 65 activities and 30 governmental or public stakeholders. I t i s a comprehensive plan involving cleanup hemediation, hazardous and non-hazardous waste, and fonvard-looking environmental management through renovating facilities and improving laws and regulations. Through the Decree, the government appointed SOCAR as the lead agency to tackle the enormous challenge o f cleaning up o f vast tracts o f land polluted by 150 years o f o i l extraction.

2. SOCAR has taken this mandate and responsibility as a launching pad for rethinking i t s overall environmental practice in every aspect o f i t s business. SOCAR has proactively undertaken a number o f steps: i t has started building and improving i t s own environmental capabilities; developed plans to address past environmental liabilities; and initiated plans to improve corporate environmental performance in al l aspects o f i t s operations. SOCAR has committed nearly US$600 mi l l ion over the next five years o f i t s own funds (2007: US$60 million) to cleanup operations. This work has already started in a significant scale on the Bibi Heybat oilfield. SOCAR has reorganized i t s management structure to create a new position for the Vice President for Environment. This wil l allow SOCAR to better coordinate the overall environment agenda within SOCAR and also signal the world about SOCAR’s commitment to this agenda. In addition, a new environmental strategy i s currently being developed. This strategy wil l have two major pillars. First, gradual alignment o f environmental policy, practice and performance in al l o f SOCAR’s divisions with international best practice. Second, the remediation and productive reuse o f o i l polluted land.

3. A key challenge for investment i s the cleanup o f high priority, “legacy” o i l fields from the former Soviet era o f o i l and gas production, handling, storage, and transport activities. Latest estimates quote 15,000 hectares o f highly contaminated areas, o f which 8,200 hectares are under direct control by SOCAR and about 7,000 leased to contractors. Large variations in the level o f pollution patterns across o i l fields in the Absheron Peninsular pose a serious challenge to cleanup efforts. Mult iple technologies and appropriate cleaning methods wil l be explored and applied as part o f SOCAR’s remediation strategy. Under this project the core cleanup technology selected for the highly polluted areas wil l be high-capacity (semi) mobile soil treatment equipment, capable o f processing contaminated soils on site, allowing clean soil to be immediately backfilled. Soil washing will also be integrated with a blend o f technologies to increase overall clean up capacity. Byproducts such as residual contaminated sludge and spent process water / agents wil l be re-used, recycled or disposed off-site.

This project i s the initial step in the planned long-term support by the Wor ld Bank to SOCAR in developing and implementing its environmental agenda. This wil l be achieved by means o f three components which address SOCAR’s environmental strategy in a comprehensive way. They range from pol icy implementation support, over the developing a comprehensive clean-up plan

29

for SOCAR’s environmental legacies, developing and testing technological and managerial capacities by means o f a large scale, and a concrete clean-up project on Absheron peninsula, and by providing a reliable benchmark by establishing independent monitoring and oversight.

4. Choice of Cleanup Approach and Methodology: Any cleanup program for such a wide scope o f environmental problems must encompass a comprehensive approach with a range o f methods targeted at specific environmental problems, contamination patterns and waste types. There i s an inventory o f cleanup and decontamination technologies available, including mechanical, physical, chemical and biological techniques, each o f which has an optimum applicability defined by contamination type and severity, soil type, ground- and surface water conditions and topographical / geographical surroundings. Moreover, the timing foreseen for the clean-up and the post cleanup land use rehabilitation i s an additional consideration.

5. The land in and around the project area i s characterized with very high hydrocarbon soil concentrations and sufficiently coarse soil composition. In addition, there i s an strong demographic and economic pressure to clean-up and return remediated land to productive use as quickly as possible. These demands are best met by the soil washing technique, which offers a number o f advantages to the project: (i) fast processing o f contaminated soils for immediate reuse o f cleaned up lands, (ii) recycling o f cleaned soils as backfi l l on remediated sites site, (iii) reliable results and controllable processes and quality, (iv) short transport distances due to deployment o f multiple units directly onto contaminated sites, (v) reclamation o f hydrocarbons from soils for economic re-use and revenue generation.

6. SOCAR has hired local consultants to develop an environmental corporate policy, which will be reviewed by international experts. The Bank has also been requested by SOCAR’s environmental Vice President to review and comment on the pol icy document once finalized, which i s expected some time in mid-2008.

7. Criteria for Site Selection: Land selected for cleanup by soil washing equipment supplied under the project must meet the fol lowing criteria: (i) be uninhabited and free o f informal economic land uses by squatters or IDPs; (ii) under legal control or leased by SOCAR; (iii) not earmarked for continued unabated o i l production or related activities l ikely to cause new contaminations (except retaining minor sections o f the cleaned plots for continued production with modernized equipment, such as directional drilling); and (iv) techno-economical and environmental studies have been carried out for each plot confirming feasibility o f remediation with soil washing method.

COMPONENT A: LARGE SCALE OIL CONTAMINATED LAND CLEAN-UP: PROCUREMENT AND OPERATION OF SOIL WASHING PLANT (Total Cost is US$166.02 mi l l ion out o f which US$53.44 mi l l ion from IBRD)

8. This component wil l finance the purchase o f multiple semi-mobile soil washing equipment and technical assistance to SOCAR with the goal o f cleaning up approximately 1,000 - 2,0008 ha o f oil-polluted land. The core objective and activity planned under this component is

* For the project financial analysis the lower number has been used

30

to remove hydrocarbons and potentially associated accessory pollutants (e.g., PAH9, Phenols) by washing and / or scrubbing with hot water, steam and / or additive detergents and chemical agents.

9. The component wil l finance (i) soil washing plants, (ii) o i l phase removal systems such as e.g. decanters, (iii) water treatment plants and (iv) auxiliary equipments such as steam generators, sorters, screens, as wel l as (v) technical services and consultancies to support plant operation and cleanup execution.

10. Suitable alternative cleanup technologies will be employed for areas, soil types, or contamination types unsuitable or uneconomic for soil washing. For the Absheron Peninsula these include land farming, o f f site bio-remediation in heaps, and separate removal and direct use o f heavy bitumen fractions and mazut, e.g., as additive for asphalt production or alternative fuel in the cement industry. Frequently required auxiliary site activities include removing garbage and scrap metal, and demolishing derelict installations, buildings, and foundations, and then fencing and securing these sites against unauthorized access.

11. Al: Stationary and Semi-mobile Soil Washing Plant (base cost US$25 mil l ion, cost with VAT US$29.5 million, IBRD loan US$25 million): Soil washing f i rs t detaches mineral solid soil components from hydrocarbons, and partially washes fine fractions. Second, the washing liquid and fines are separated from the coarser soil fractions, which leave the plant as cleaned soil, typically with minor hydrocarbon concentrations.

12. The process byproducts include process water, which i s recycled and reused continuously, and a concentrate o f stripped of f hydrocarbons, which contain varying amounts o f fine soil fractions (fine s i l t and clay). The reclaimed product wi l l be degraded hydrocarbons, which i s estimated to have about 10% o f crude o i l value but s t i l l i s an economically valuable product and wil l be used for example for producing heavy fuels, or lubricants as alternative fuel, or an ingredient for bituminous asphalt.

13. Three sites on Absheron were investigated regarding their suitability for cleanup operations in a feasibility study completed in February 2008. They were found to constitute a representative sample o f the bulk o f contaminated land on Absheron. At Bibi Heybat a highly polluted area o f approximately 460 hectares contains a total o f approximately 2.3 mi l l ion m3 o f highly o i l contaminated material and supematant o i l phase and oil/water emulsion. O f the 2.3 mi l l ion m3 about 1.37 million m3 are o i l saturated, sandy to silty material, which i s suitable for soil washing, after decanting the oil-phase.

14. At Qala the area suitable for reclamation by soil washing consists o f four o i l ponds, totaling approximately 2.41 mi l l ion m3 o f highly oil contaminated material and supernatant o i l phase and oil/water emulsion. The total area o f Qala i s 464 ha o f lands, 140 ha o f which i s o i l polluted. The oil-ponds at Qala comprise approximately 50 ha and these are foreseen to be treated. The by far larger part o f the contaminated land o f the Qala oil-field consists o f dried out crusts o f soil with a bituminous matrix, extending to a depth o f about 1-2 m. The volume o f this material i s difficult to estimate, but may also run into the magnitude o f over 1 million m3.

Polycyclic Aromatic Hydrocarbons

31

15. The sites at Mashtaga-Buzovna envisaged for reclamation by soil washing consist o f abandoned o i l ponds, totaling approximately 0.42 mi l l ion m3 o f o i l contaminated sands o f varying concentration, averaging about 15% oil. These materials are also mostly highly bituminous. The equipment foreseen for a technically feasible soil-washing operation includes:

A.

B.

C.

16.

One stationary 600 m3/d soil washer with decanter and thermal recycling unit for mazut for steam generation for the washing process, supported by 2 semi-mobile 150 m3/h soil washers (see below) for three years; Two semi-mobile 150 m3/d soil washer with o i l phase separators (decanters) and thermal recycling units for mazut to provide heat for steam generation for the washing process; Four semi-mobile 150 m3/d soil washers with cylindrical sorting screens and scrap and refuse separator, and thermal recycling units for mazut to provide heat for steam generation for the washing process.

A2: Auxiliary equipment (base cost US$28 million, cost with VAT US$29.5 million, IBRD loan US$28 million) needed with the soil washers described above i s listed below:

A. Seven water treatment plants B. Five steam generators; C. Two o i l phase separators (decanters); D. Six thermal recycling units for ut i l iz ing mazut to provide heat for steam generation for

the washing process; E. Four cylindrical sorting screens; F. Four scrap and refuse separator.

17. The water treatment systems wil l reinstate process waters to acceptable levels o f hydrocarbon concentrations, strip chemicals before their final release into the environment, or treat accumulated rainwater / groundwater from former o i l storage ponds. Oil phase separators are required for collecting free hydrocarbon phase in ponds, or seeping from saturated soils during excavations. Steam generators wil l burn mazut and bitumen as heat source to generate steam to mobilize heavy hydrocarbon fractions and facilitate soil washing. Screens and sorters are required to separate rubble, scrap metal and various waste types from soil, and ensure consistent grain size distribution, before it enters the washing process.

18. Operation, Optimization, Trouble-Shooting: Within the supply contract for the plant, technical assistance services will be packaged for plant operation, process optimization, trouble- shooting, and technical staff training. The key TA-objective i s to train SOCAR’S staff to optimize and monitor plant operations to maximize efficiency and output quality and minimize energy consumption, consumables, and waste generation. Due diligence in site management wil l also be addressed, particularly to avoid diluting and spreading contaminants, as wel l as monitoring, quality control, evaluation and reporting on specific cleanup operations.

19. Underground Risk Management: Historical oilfields o f such a long lifetime often constitute a highly complex environment, characterized by multiple generations o f extraction related installations, many o f them underground. Abandoned and derelict underground facilities,

32

materials and equipment such as pipes, buried wellheads and wells, drillings rods, casings and tanks might pose r isks to civil works, as accumulated hydrocarbons, especially volatile components, might occur in harmful or toxic concentrations, or upon release form explosive mixtures with the atmosphere. These r isks would especially affect c iv i l works, e.g. the excavation o f contaminated soils. To ensure safety on the excavation sites measures such as research o f historical layout drawings, and geophysical surveys may be used to detect underground installations and take precautionary measures during excavation works.

20. A3: Operational costs (base cost US$90 million, cost with VAT US$102.96 mi l l ion financed by SOCAR) include depreciation, energy, water, consumables, c iv i l works, transport services and labor and are estimated to about US$18 mi l l ion per year. The total amount over the project lifetime will be borne entirely by SOCAR.

21. A4: Technical Support and Assistance (base cost US$0.44 million, cost with VAT US$0.52 million, IBRD loan US$0.44 million): TA will be provided with the clean-up equipment to support optimized, efficient, and sustainable operation throughout the project lifetime (and beyond) and firmly embed skills and capacities for plant operation and cleanup management in SOCAR’s environmental department. T o ensure best advice to SOCAR, an independent Consultant not connected to the plant supplier, wil l be hired for this subcomponent.

22. Assistance with Plant Procurement: Due to the innovative character o f the project, the large financial amount o f the procurement package and the particular environment o f World Bank procurement guidelines, a consultancy contract o f 6-9 months duration for an experienced procurement specialist wil l be financed from the project. The Consultant wil l combine sound knowledge from the sector with specific experience o f World Bank procurement procedures and guidelines and wil l assist the PMT’s procurement specialist through tender process, delivery, installation and putting into operation o f the equipment.

23. Development of sector-specific environmental standards and clean-up methodologies: Currently no modem cleanup standards for hydrocarbon contaminations are available in Azerbaijan, which could be compared to international good practice. A draft i s in early review process at the Cabinet o f Ministers. Meanwhile, for sustainable implementation o f the project, a projects specific set o f standards (and related methodologies and guidelines) wil l be developed.. Such standards need to be firmly in place to provide a technical and quality framework within which to manage the cleanup process effectively and efficiently. This activity was specifically endorsed by the Cabinet o f Ministers and communicated to the implementing agencies o f a l l projects under ARP.

24. This activity aims to fill the current regulatory vacuum between formerly used Soviet- style technology-based contaminant and emissions standards, and the development o f risk-based standards that can be applied consistently across the sector, which i s not yet completed in Azerbaijan. Assistance would be offered via advisory services to SOCAR to introduce and apply a risk-based approach to developing and applying remediation standards for hydrocarbon contaminations in soil and groundwater. The approach would be a bottom-up project specific perspective in the context o f SOCAR’s own remediation operations. Due to the large scale o f the cleanup project, the standards developed in i t s context are expected to have considerable

33

impact and become representative for the sector within Azerbaijan and be able to significantly influence national law / regulations. Standards development would be supported by Azeri and International Consultants and be closely monitored and advised by the PoE (see Component B).

25. Criteria to Select and Optimize Cleanup Methods: SOCAR’s Environmental Department will establish criteria to select and optimize cleanup methods according to soil composition, contamination properties, actual r isks / hazards to human health and safety, and environmental common goods, and potential revenues from recovered hydrocarbons. If any training o f SOCAR’s staff should be required to analyze and recognize such criteria and develop optimized remediation tactics, i t wil l be provided by experts selected and financed by SOCAR. This activity wil l also establish experience in r isk based land management, in selecting and prioritizing individual land plots and areas for specific cleanup methods based on above criteria and maintain a mid- to long-term operational plan which wil l be linked to re-utilization plans and marketing strategies.

26. Additional TA wi l l be provided via a technical cooperation agreement between SOCAR and the Norwegian Oi l Producer “STATOIL,”, which will include a series o f workshops and training activities to improve environmental monitoring and analytical quality, to analyze current corporate environmental performance and scope a road map for further joint activities and information transfer.

COMPONENT B: INDEPENDENT MONITORING, COMMUNICATION AND PUBLIC OUTREACH (Total Cost i s US$1.50 million out o f which US$0.94 mill ion from World Bank loan)

27. The objective o f this component i s to provide independent monitoring and supervision to the operation, promote public awareness and stimulate an informed public debate on the environmental challenges facing SOCAR.

28. B1: Panel of Experts (base cost US$0.28 million, cost with VAT US$0.33 million, IBRD loan US$0.28 million): For diligent monitoring and supervision, a Panel o f Experts (PoE) wil l be established as independent advisory body to provide high-level, independent technical oversight and advice. I t will be staffed with 4 highly qualified and experienced experts with long-term o i l and gas sector experience, recruited from sector-specific enterprises and institutions with a credible ecological track record and capabilities in environmental due diligence, management and compliance monitoring and enforcement. These could include entities such as international environmental initiatives and associations for the oi l and gas sector, nationalhnternational industry regulators, o i l and gas producers with exemplary environmental performance and environmental NGOs working in the sector.

29. The specific activities o f the PoE wi l l be:to (i) provide SOCAR with review and advice on technical and economic aspects o f the project, such as optimized deployment and operation o f equipment, spatial configuration and sequence o f cleanup measures, economic utilization o f reclaimed product, (ii) provide independent advice on cleanup program, site selection and prioritization, implementation arrangements, choice o f technology, progress o f the cleanup measures and achieved quality o f the cleaned up land, (iii) support and quality-assure o f deliverables from cleanup operations including environmental and social assessments, technical

34

studies and analysis, progress reports and completion / handover certificates for cleaned up land, (iv) review activities around standards and guidelines for remediation o f hydrocarbon contaminations, (v) assist development o f criteria and provide advice on selection o f technologies and methods for soil remediation, (vi) provide advice to enhance overall environmental and social outcome o f the Project, (vii) produce independent review reports o n the project’s activities and the success o f the cleanup program, aimed at the general public, both describing achievements and ways for further improvement.

30. B2: Monitoring and evaluation (base cost US$0.26 million, cost with VAT US$0.31 million, IBRD loan US$0.26 million): Within SOCAR’s environmental department, an M&E unit exists and will be strengthened by the project. Within SOCAR’s environmental department an M&E unit exists which i s responsible for monitoring o f environmental parameters such as liquid and gaseous emissions from various production facilities, ambient pollution levels and quality o f air, water and soil. It has about 150-200 staff and i t s head reports to the environmental vice president o f SOCAR. It i s envisaged that 2-3 staff would be assigned to the project in i t s inception phase. The positions wil l be financed by SOCAR; staff wil l be trained under the project.

3 1. The main responsibilities o f the M&E group would be the development o f a monitoring system which, starting from the clean-up project activities, captures improvements in corporate environmental performance. The M&E system will address issues such as (i) analytical monitoring and supervision, (ii) confirmation o f remediation goals by clearly specified, reliable tests and analyses for remediation measures o n o i l contaminated sites. (iii) recording how much land was cleaned up under the project and to which quality standards, (iv) detection o f environmental problems in SOCAR’s operations on or near contaminated sites and (v) mid to long term monitoring o f trends and changes in environmental conditions and performance o f SOCAR land and facilities.

32. The f i rs t steps would be to review and adapt systematic data collection practice as wel l as evaluation and interpretation capacities to project requirements. In case o f environmentally hazardous substances or situations, early warning and appropriate emergency response procedures shall also be addressed.

33. B3: Communication and Outreach to Public (base cost US$0.20 million, cost with VAT US$0.27 million, IBRD loan US$0.20 million): This subcomponent wil l be financed mostly by SOCAR and entail a communication program aimed at building SOCAR’s communication capacity and establishing transparency and dialogue mechanisms with relevant stakeholders. The key activities will include: a) identification o f stakeholders’ information needs and perceptions; b) developing consistent messages to be conveyed to al l stakeholders; c) strengthening the institution’s image and i t s credibility among stakeholders; e) establishing on- time and credible information mechanisms regarding the project activities. The objective i s to involve c iv i l society in environmental monitoring and pol icy oversight and demonstrate to the public that the cleanup operations are carried out in a transparent, responsible and accountable manner.

35

34. For this to be effective, information on environmental activities such as cleanup and remediation, as wel l as land re-use has to be made available to the public, and transparency and good governance in the crucial areas o f environmental and land management emphasized. Within this context, the outward communication and projection o f an environmentally responsible corporate image wil l be crucial tools to promote internal environmental governance and to counter internal institutional resistance to change.

35. In a project o f this magnitude and complexity, i t i s highly recommendable that SOCAR adopts a strategic approach to communication and make use o f international experience brought into the project by external advisory services to (i) design a communication strategy" and (ii) carry out formal and on-the-job training in order to prepare SOCAR staff to carry out al l communication functions by the end o f the external consultancy.

36. following process:

The communication strategy should be designed and implemented according to the

A preliminary assessment should be carried out to (i) identify the main stakeholders; (ii) understand levels o f influence & power; (iii) identify their knowledge, attitudes and opinions regarding key issues; (iv) define their needs o f information; (vi) recognize effective messages and communication channel to be used. Based on the results o f the communication research, the strategy wil l be defined and the Communication Plan developed with clear sets o f actions and activities to be implemented. During the implementation o f the communication program, impact evaluation activities should be carried out to measure the effectiveness o f communication plan and activities using standard media assessment methods. The evaluation activities would be included in the project M&E framework.

37. The external consultant wil l be financed by the loan and train the P M T Coordinator/communication specialist and work with her and SOCAR PR Department as one team on the development o f the strategy in time to be prepared for the commencement o f any cleanup operations financed under the project.

38. On the basis o f independent review reports on the project's activities and the success o f the cleanup program produced by the Panel o f Experts (subcomponent Bl), the communication activities will include: (i) press briefings with journalists and other opinion-makers, (ii) broadcasts for TV and radio, (iii) regular community-based briefings and questiodanswer opportunities; (iv) establishment and maintenance o f an environmental page at SOCAR website; (v) publications o f periodic online newsletters to provide up-to-date information o n implementation o f the ESP and ARP projects' progress.

39. The costs o f the external consultancy and communication activities to be implemented within the communication strategy will be mostly covered by SOCAR with a minor part financed

"The Communication strategy will be developed for the project as a tool to help SOCAR to engage with stakeholders, educate and build consensus, convey important messages related to the Project and i t s details as well as generate feedback from beneficiaries and stakeholders in order to improve quality o f implementation.

36

by the loan. In addition, the World Bank wil l be available for a l l advice and / or supervision SOCAR might require.

40. B4: PMT operating and training costs (base cost US$0.50 million, cost with VAT US$0.59 million, IBRD loan US$0.20 million). The loan wil l finance an annual independent financial audit and some training activities for P M T staff. Other P M T operational costs wil l be borne entirely by SOCAR.

FINANCING PLAN VATborne by SOCAR with VAT US$ mi l l ion excl. VAT us$ million

costs IBRD share share o f costs

US$ mil l ion U S $ mil l ion

A Procurement and operation o f soil washing 166.02 53.44 90.00 22.58 plant

€3 Independent monitoring, communication 1 .so 0.94 0.30 0.26 and public outreach, and P M T Total baseline costs 167.52 54.38 90.30 22.84

Price contingencies Front-end fee

16.33 5.47 8.67 2.19 0.15 0.15

Total costs 184.00 60.00 98.97 25.03

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Annex 5: Project Costs

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE O I L POLLUTED LAND CLEANUP PROJECT

Local For e i g n Total US$ mil l ion US$ mil l ion US$ mi l l ion

Project costs by component

A Procurement and operation of soil washing 106.36 59.66 166.02

B Independent monitoring, communication and 0.73 0.77 1.50 plant

public outreach, and PMT

Total baseline cost Price contingencies Physical contingencies Front-end fee

107.09 60.42 167.52 16.33

(included) 0.15

Total funding required 184.00

Identifiable taxes include only the 18% VAT. The total project baseline cost net o f taxes i s US$144.7 million.

The IBRD loan would be a U S Dollar denominated Fixed-Spread Loan (FSL) with a 17 year maturity and 4 years o f grace, with annuity repayment o f principal.

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Annex 6: Implementation Arrangements

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

1. The Project Management Team will be established within SOCAR; most technical personnel wil l be drawn from existing staff; FM and Procurement specialists familiar with IF1 / Wor ld Bank requirements and procedures may be externally recruited.

2. SOCAR has already nominated the core team for PMT, which has been endorsed by an appointment letter by the president o f SOCAR. The positions staffed at appraisal are the Director, the Financial Management Specialist, the Procurement Specialist, the Technical Remediation Specialist and the Communication Specialist. The PMT is embedded within SOCAR who wil l bear al l costs o f the P M T including salaries, office space, IT and communication, consumables, local travel. There i s a budget in the Project for P M T training.

3. SOCAR has in i t s environmental department established a working group, which wil l provide resources and support the P M T technical specialist. The working group has several sub- groups with specific tasks including (i) data procurement, preparation o f environmental assessment, (ii) development o f technical specifications for the cleaning equipment, (iii) site investigations and field-testing, (iv) administrative / coordination unit. The group’s staff profile features mostly engineers and thus strong technical capabilities, which are evident from current cleanup operations. Moreover, SOCAR i s already drawing on specialized external expertise for the preparation o f the cleanup project and has proven good capabilities in procuring and managing consulting and advisory services. This wil l remain an important technical pillar during project implementation, at which time it wil l be integrated with the technical expertise provided under the planned TA components.

4. A technical Panel o f Experts (PoE) wi l l be established as independent advisory body, comprising Azeri and international members with long-term sector experience, both in o i l production, management and governance o f o i l f i rms, environmental, social and regulatory experience. The PoE wil l be made up o f four experts and provide high level, independent technical oversight and advice, especially in sensitive and potentially far-reaching issues such as corporate environmental governance and Azer i environmental regulations relating to o i l extraction and land remediation. The PoE will also certify that the land cleaned meets agreed project standards. The PoE wil l meet one to two times per annum in Baku (probably six times throughout the project lifetime). Draft TOR and structure o f the PoE were agreed upon during project appraisal.

5. SOCAR wil l contract international and Azeri Consultants to assists with key TA tasks in the project, relating to techno-economic consultancy for plant operation, broader environmental Strategy for SOCAR’s brownfields, review o f SOCAR’s environmental policies and practices and review o f existing and development o f workable Azeri environmental standards.

6. SOCAR P M T wil l establish and maintain an active dialogue with the other two projects (ARP I and ARP 11) currently developed under the Absheron Rehabilitation Program. Cooperation and exchange o f ideas / experience wil l focus on developing sustainable, pragmatic

39

and workable cleanup goals and standards to consistently apply in Azerbaijan, with view o f introducing experience from a large-scale cleanup project into policy-making process.

7. The Deputy Prime Minister is responsible for overseeing implementation o f the overall Environment State Program. H e wil l head a Steering Committee that wil l be established before negotiations to enhance coordination among al l agencies responsible for implementing ESP activities financed by the Wor ld Bank. SOCAR P M T wil l report to the SOCAR Environmental Vice President and to the Steering Committee on the status o f project scheduling and achievement o f milestones set out by the ESP. A detailed work program, implementation schedule and key TORS will be prepared as part o f the project Operational Manual prior to Effectiveness.

8. detailed in the respective Annexes 7 and 8.

Implementation arrangements regarding financial management and procurement are

40

Annex 7: Financial Management and Disbursement Arrangements

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Entity Level SOCAR ED has no prior Bank project implementation experience

A. Financial Management Arrangements

Substantial

1. The overall financial management risk for the project i s substantial before mitigation measures and moderate after the implementation o f the mitigation measures. A summary o f the risk assessment for the project i s as follows:

Project Level

Overall Inherent Risk

FM Risk Rating

Moderate

Substantial

Inherent Risk

Funds Flow

Financial Reporting The FM software is not customized to generate the project reports at this stage

Moderate

Substantial

Control Risk I Budgeting Accounting The FM software is not customized for the project accounting and the stafnot appointed at this stage. SOCAR intends to change its FM software in 2008 and therefore the project accounting and reporting should be integrated into the new software. Internal Controls The project internal controls are not documented at this stage

M o d era t e Substantial

Substantial

Auditing No arrangements for audits at fhis stage

Overall Control Risk Substantial , Overall FM Risk Substantial

Substantial

Risk Mitigating Measures

Legal and regulatory reforms conducive to increased accountability and efficiency addressed in the PRSC and in the proposed Corporate & Public Sector Accountability project The responsible FM staff have been appointed and IFRs formats have been agreed with the Bank, S A P will be customized for the project needs. The project does not include complex activities wi th respect to financial management.

SOCAR has appointed deputy head of accounting unit o f EAD responsible for the project FM and English spealung assistant will assist him. S A P wi l l be customized to have capacity to record and report project related transactions.

Establishment o f project internal control policies and procedures and documentation o f these in the Operational Manual. Traditional disbursement techniques will be used. S A P will be customized and the Interim Financial Reports (IFRs) will be generated using the accounting software; and submitted to the Bank on a quarterly basis. Appointment o f acceptable independent auditors to audit the project accounts under the TOR acceutable to the Bank.

Risk after mitigation

Moderate

Moderate

Moderate

Moderate

Moderate Moderate

Moderate

Moderate

Moderate

Moderate

Moderate Moderate

41

Country Issues

Action SOCAR ED will nominate the staff that will be responsible for the financial management o f the project. These staff will continue to be supervised by the Head o f Accounting Department. The SAP will be customized to have capacity to record and report project transactions. The templates for the interim unaudited project reports will be prepared A project financial management manual w i l l be prepared to reflect the financial management arrangements o f the project.

2. A Country Financial Accountability Assessment (CFAA) for Azerbaijan was carried out in 2003. The report identified weaknesses and made recommendations to strengthen public and corporate sector accounting, auditing, governance and financial accountability frameworks. With respect to the public sector, the Government has made efforts to strengthen public financial management through enactment o f a Budget System Law, modernization o f the Treasury operations, and strengthening capacity o f the Chamber o f Accounts. The Government continues to receive support from the donors to continue i ts efforts in reinforcing public financial management, particularly on improving budget preparation and allocation, introducing internal audit function and overall accountability and transparency in financial reporting. The proposed Corporate and Public Sector Accountability Project wil l provide support to corporate sector development and investment, improve public financial management and accountability, and establish a sustainable training capacity in accounting and auditing, thus integrating Bank support into the Government’s overall program o f accounting and auditing reform in the country.

Responsibility Deadline SOCAR Done

SOCAR by June 30,2008

SOCAR Done SOCAR by effectiveness

Strengths

3. The SOCAR i s in the process o f installing and customizing S A P accounting software, the completion o f which at Headquarters i s expected by June 30, 2008. S A P wil l be customized in l ine with Bank’s requirements on financial management. The institution i s required to prepare i t s financial statements in accordance with the International Financial Reporting Standards and its FM staff received relevant trainings to meet these standards.

Weaknesses and Action Plan

4. SOCAR has no prior experience in implementing Bank-financed projects. The financial management environment o f SOCAR wi l l be strengthened to handle the accounting and reporting o f the project. The following action plan i s proposed:

Implementing Entity

5. SOCAR i s a State Owned Enterprise and assigned the implementation o f the proposed project to i t s Ecology Department (SOCAR ED). SOCAR ED was established in September 2006. SOCAR ED has no prior experience in the implementation o f Bank-financed projects.

42

6. The financial management o f the project wil l be the responsibility o f SOCAR’S Economical and Accounting Department (EAD). EAD i s staffed with 17 professionals and has three units: accounting, finance and tax, and economic analysis and forecast. The budgeting, accounting, disbursements, payments and bank transactions, auditing arrangements and reporting will be done by the EAD staff, with sufficient experience and qualifications. The responsible staff has been nominated by SOCAR.

The risk associated with the implementing entity is assessed as substantial and residual risk is upgraded to moderate after mitigation measures agreed,

Budgeting 7. Each year in May, SOCAR prepares a consolidated (including i ts subsidiaries) draft budget and submits it to the approval o f the Cabinet o f Ministers. However, the approval o f the Cabinet o f Ministers i s not a pre-condition for disbursements. The project budget wil l be part o f the annual budget o f SOCAR. Accordingly, the EAD will be responsible for finalizing the budget in accordance with the estimates o f spending units/technical departments and in l ine with the accounting and reporting requirements o f the project (i.e. split by quarterly expenditures, components and sources o f finance). The risk associated with the budgeting process is assessed as moderate.

Accounting 8. StafJing. SOCAR wil l use i t s own staff for the financial management o f the project. Deputy head o f accounting unit and English speaking assistant have been appointed as a responsible for the project FM arrangements. They will be responsible for maintaining accounting records in the system and preparing the quarterly reports and the Head o f EAD will be responsible for regular reconciliations and overall supervision o f the financial management o f the project.

9. Information Systems and Accounting Procedures. SOCAR is in the process o f installing S A P . It was agreed that SOCAR would have the new software customized in l ine with the project’s accounting and reporting requirements. During customization works, the EAD wil l ensure that the structure o f the Chart o f Accounts i s in conformity with the project cost tables, capturing financial data under appropriate components, including sources and uses o f funds in sufficient detail to satisfy reporting requirements. The project accounts wil l be denominated in U S Dollars for Bank reporting and in Azeri Manats for reporting to Azerbaijan authorities.

10. Accounting policies and procedures. SOCAR, through its EAD, wil l maintain appropriate financial records and reports in accordance with existing government financial regulations and standards acceptable to IBRD. The Project Operational Manual (POM) wil l have a separate FM section where al l essential accounting policies and procedures wil l be outlined.

1 1. The major accounting policies to be applied for project accounting are as follows: i) cash accounting as the basis for recording transactions, ii) reporting should be done in U S dollars (reporting currency), iii) Interim Unaudited Financial Statements should cover al l funds, including Government co-financing funds.

43

The risk associated with accounting is considered substantial before mitigation measures agreed and residual risk is moderate.

Internal Control and Internal Auditing

12. FM controls and procedures for project implementation, including f low o f funds, contracting, authorizations, segregation o f duties, wi l l be documented in the POM. An intensive supervision to be undertaken by the project team will ensure that SOCAR has maintained a reliable internal control framework for the project.

13. following ways:

SOCAR could minimize the risk o f misuse with respect to financial management in the

The EAD will process the payments to contractors upon receipt o f the payment request letter by the spending unit, supported by the invoices and other payment documents containing al l required technical approvals. The EAD will also make sure that the payment requests are in l ine with the contracts and relevant legal documents.

The EAD will be responsible for making regular reconciliations o f the Designated Account and the loan account at the Wor ld Bank. The reconciliation files wil l be supervised and signed by the Project Coordinator or a designated manager on a monthly basis.

The assets and equipments purchased from the project funds wil l be registered in a separate asset register.

The risk associated with internal control is assessed as substantial and the residua rating is reduced to moderate after mitigation measures agreed.

Financial Reporting

14. The interim unaudited financial reports (IFRs) wil l be prepared on a quarterly basis and wil l be submitted to the Bank no later than 45 days after the end o f each calendar quarter. Moreover, the EAD wil l ensure that these reports are automatically generated from the accounting software that wil l be installed and customized for project accounting purposes.

15. The IFRs wil l include the fol lowing reports: Sources and Uses o f Funds, Uses o f Funds by project activities, designated account statement and project Balance sheet. The IFR templates have been prepared and agreed upon with the Bank. The POM/financial management manual wil l have sample IFRs o f the project.

The risk associated with reporting and monitoring is assessed as substantial and the residual risk is reduced to moderate after mitigation measures agreed.

Auditing

16. The project financial statements wil l be audited by the independent auditors under the terms o f reference acceptable to IBRD and in accordance with International Standards on Auditing (ISA).

17. The f i rs t set o f audit reports wil l be submitted to the Bank before June 30 o f the year following the calendar year in which the f i rs t disbursement from the loan has been made and at

44

the closing o f the project. The contract for the audit awarded during the f i rs t year o f project implementation can be extended from year to year with the same auditor, subject to satisfactory performance. Sample audit TORS was discussed with SOCAR during appraisal and wil l be attached as an annex to the minutes o f negotiations. The audit costs are eligible for financing from the proceeds o f the Loan.

Audit Report Entity Audit Project financial statements (PFS), including SOEs and designated account. PFS include sources and uses o f funds by category and by components; SOE statements, Statement o f Designated Account, notes to the financial statements and reconciliation statement.

18. SOCAR to the Bank:

The fol lowing chart identifies required audit reports that wil l need to be submitted by

Due Date NIA. Withm six months after the end o f each calendar year and also at the closing o f the project.

The risk associated with auditing is assessed as substantial before mitigation measures and moderate after mitigation measures agreed.

B. Funds Flow and Designated account

Funds Flow and Disbursement Arrangements.

19. There wil l be one Designated Account (DA) for SOCAR for disbursements. The DA will be in the currency o f the loan and will be at the International Bank o f Azerbaijan on terms and conditions acceptable to IBRD. All payments to the contractors, suppliers and consultants wil l be made either directly from the loan account or from the Designated Account. The DA will be used following procedures to be agreed with the Bank, and will have an authorized allocation o f US$5,000,000. Two signatures indicated in the l i s t o f authorized signatures submitted by SOCAR will be required on the withdrawal applications. The minimum application size for payments directly from the Loan Account or for issuance o f Special Commitments i s U S $ 1,000,000. Withdrawal Applications documenting funds utilized from DA will be submitted to the Bank on a monthly basis, and wil l include a reconciled bank statement and other appropriate supporting documents.

Transaction Based Disbursement Methods

20. The IBRD Loan funds under the Absheron Rehabilitation Project wil l be provided on standard IBRD Credit terms, to be disbursed through transaction-based disbursement methods that include reimbursements with full documentation, reimbursements on basis o f Statements o f Expenditures for small expenditures with defined thresholds, payments against issued Special Commitments, direct payments to third parties, and payments through the Designated Account.

2 1. Disbursements will be made on the basis o f full documentation for (a) contracts for works costing more than the equivalent o f US$2,000,000 each; (b)contracts for goods costing more that the equivalent o f US$300,000 each; (c) contracts for consulting services with f i r m s costing more than the equivalent o f US$lOO,OOO each; and (d) contracts for individual consultants costing more than the equivalent o f US$50,000 each. Full documentation in support o f SOEs would be retained by SOCAR at least two years after the Bank has received the audit report for the fiscal

45

year in which the last withdrawal f rom the Loan Account was made. This information wil l be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment o n the propriety o f SOE disbursements and the quality o f the associated record-keeping.

The risk associated with fundsflow is considered as moderate.

C. Supervision Plan

22. During project implementation, the Bank will supervise the project’s financial management arrangements as follows: (i) during the Bank’s supervision missions financial management and disbursement arrangements wil l be reviewed to ensure compliance with the Bank’s minimum requirements (ii) project’s quarterly interim unaudited financial reports and the project’s annual audited financial statements and auditor’s management letter will be reviewed. As required, a Bank-accredited Financial Management Specialist wil l assist in the supervision process. The Bank FMS will conduct at least two supervisions every year at the init ial stages o f the project implementation and the frequency o f FM supervisions can be reduced at a later stage subject to acceptable project FM arrangements. FM supervision wil l focus o n procurement o f cleaning equipment and c iv i l work contracts to monitor whether al l supporting documents are properly authorized and filed.

46

Annex 8: Procurement Arrangements

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

A. General

1. Procurement o f goods and works for the proposed project wi l l be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004, revised October 2006 (Procurement Guidelines) and the relevant provisions stipulated in the Financing Agreement (FA). Selection o f contracts for consulting services wil l be carried out in accordance with the "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, revised October 2006 (Consultant Guidelines) as well as and the relevant provisions stipulated in the FA. The various items under different expenditure categories are described in general manner below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, if any, estimated costs, prior review requirements, and time frame wil l be agreed between the Borrower and the Bank and documented in the Procurement Plan (PP).

2. Advertisement: A General Procurement Notice (GPN), acceptable to the Bank, wil l be published online in the United Nations Development Business (UNDB) and in the Development Gateway's dgMarket. The GPN wil l give a description o f the goods, works and consulting services contracts to be procured under the project and wil l invite al l potential suppliers, contractors and consultants to express interest and request additional information from the respective Borrower. Specific Procurement Notices (SPN) for International Competitive Bidding (ICB) procurement packages and Expression o f Interest (EOI) for consulting assignments estimated to cost US$200,000 equivalent per contract will be published in UNDB (on-line), and dgMarket. In addition, the PP (including al l formal updates), SPNs and EOIs for al l contracts as wel l as results o f contract awards wil l be published on the external website o f the State Oil Company for Azerbaijan State (SOCAR).

3. The Borrower wi l l respect debarment decisions by the Bank and wil l exclude debarred f i r m s and individuals from the participation in the competition for Bank-financed contracts. Current listing o f such f i r m s and individuals i s found at: http://www.worldbank.orn/debarr.html

4. Procurement of Works: Works estimated to cost more than US$2.0 mi l l ion shall be procured using International Competitive Bidding (ICB) procedures. Works estimated to cost less than US$2.0 million and less than US$lOO,OOO each may be procured using National Competitive Bidding (NCB) and shopping procedures respectively.

5. Procurement of Goods including supply and installation: Goods procured under this project wil l include but not be limited to: (i) semi-mobile soil washing equipment; (ii) recovery systems for hydrocarbons; and (iii) mobile water treatment plants. The procurements wil l be done using the Bank's SBD for al l I C B procurement o f goods. Goods and equipment estimated to cost more than US$300,000 would be procured through ICB. Goods estimated to cost less than US$300,000 each may be procured through National Competitive Bidding. Small contracts

47

for supplies and minor equipment estimated to cost less than US$lOO,OOO each may be procured under Shopping procedures based on a model request for quotations satisfactory to the Bank, on the basis o f three or more written price quotations obtained from suppliers. Where certain goods are available from one particular supplier or in case where compatibility with existing equipment requires that goods must be procured under Direct Contracting and have obtained prior approval from the Bank can be purchased in accordance with paragraphs 3.6 and 3.7 o f the Procurement Guidelines.

6. Consulting services under this project would include: (i) technical assistance for preparation o f bidding documents, and bid evaluation for the cleaning plants, cleanup process optimization, plant operation, trouble shooting and staff training; (ii) monitoring and evaluation o f cleaning activities; and (iii) communication advisory services.

Selection o f Consultants:

7. Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

8. Bank in accordance with paragraphs 3.9 through 3.13 o f the Consultant Guidelines.

Single-Source method may be used for certain assignments with prior approval o f the

9. Training / Study Tours / Seminars: Training, study tours and attending to seminars wi l l be carried out according to a training plan that wi l l be prepared by SOCAR annually and submitted to the Bank for review and no objection prior to implementation. Substantial revisions during the year will also be submitted to the Bank.

B. Assessment of the agency’s capacity to implement procurement

10. The project will be implemented through a P M T to be established in the State O i l Company for Azerbaijan State (SOCAR). SOCAR has been doing their procurement under the Azer i Public Procurement Law, but has no previous experience with procurement under World Bank funds. SOCAR already appointed a project manager, to lead the PMT, which i s already staffed with specialists appointed as procurement specialist and financial management specialist. The procurement specialist assigned to P M T has experience o f doing procurement under the Azeri Public Procurement Law. H e has received an init ial training in Bank procurement rules procedures at the Bank organized workshop in April 21-25 but does not have practical experience on Bank procurement rules and procedures. Therefore, an individual consultant with previous experience in Wor ld Bank funded projects wil l be selected o n the basis o f h isher qualifications, to serve as procurement specialist in the PMT. The selected procurement specialist will be employed for the init ial 12-18 months o f the project after effectiveness to start the procurement, provide training and transfer knowledge to the P M T procurement specialist. The technical experts wi l l be seconded to the project by SOCAR.

11. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project, made during the December 2007 mission, i s updated by the project PAS, during the Appraisal mission in March. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for

48

procurement and financial management and the SOCAR's relevant central unit for administration and finance. The 2003 CPAR concluded that Azerbaijan should be rated as a medium to high-risk country in respect o f public procurement systems. A new CPAR i s underway in 2008 to benchmark progress against agreed actions and provide further guidance on improvements needed. In light o f the overall environment and the implementing agencies unfamiliarity with Bank procurement procedures, the overall project procurement risk, after mitigating measures, i s deemed "substantial.

12. been identified and include the following:

The key issues and risks concerning procurement for implementation o f the Project have

(a) At the project level, SOCAR lacks experience with the Bank's procurement;

(b) P M T members and other officials, who would be involved in project procurement through Tender Committees, may not be familiar with the Wor ld Bank procurement procedures;

(c) Evaluation o f bids, contract approval and signature procedure may be too long and seriously affect timely implementation.

(d) Publication o f contract announcements and contract awards should be done widely to ensure wide participation and transparency.

Mitigation Measures

13. The Bank team intends to maintain customary oversight and wil l carry out prior review o f all major contracts according to the thresholds that wil l be regularly reviewed and adjusted as needed in Procurement Plan. Initially set up thresholds are provided below in Table 1 o f Section E o f this Annex. The following measures wil l be carried out to mitigate corruption risk:

(a) A procurement specialist, with previous experience in Bank projects and international procurement and a financial management specialist wil l be recruited for the PMT. All fiduciary staff in the P M T participated in the procurement training arranged by the RPM office at the end o f April 200811;

(b) All fiduciary staff wil l be given specialized training focusing on the necessary connection between proposals or bids and the resulting contracts as wel l as the need to assure that payments are not directed to any party other than the one performing the contract. The Bank wil l review and comment on qualifications and experience o f proposed members o f the Evaluation committee(s)'z with a view to avoid that unqualified or biased candidates are nominated. All members wil l be required to s i g n a disclosure form (sample wil l be included in Operational Manual). The members o f the tender committees should receive the basic training in procurement;

PMT Procurement Specialist already attended this workshop in April 2 1-25,2008 Evaluation committee( s) means committees to be established to evaluate bidding proposals submitted under the

Project

49

Borrower will prepare the procurement planI3 and keep i t updated for project indicating procurement method, available budget and estimated time schedule (key steps o f the procurement process) for each contract and wil l try to avoid the slippages in the contract schedules;

.................................................................................................. ................................................................................ .............................. .., ............................................................................................................................................................................................................................... NCB <300 First 2 and all > 200

S <IO0 First 2

All publications o f advertisements and contract awards, including the results o f the awards wil l be done in accordance with the Guidelines requirements and also in the Borrower's web site.

D C 2. Works ICB

Procurement Plan

~

NA All contracts NA All contracts

The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on April 29, 2008 and is available at SOCAR. It wil l also be available in the project's database and in the Bank's external website. The Procurement Plan wil l be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

14. In addition to the regular prior and post review supervision to be carried out by the project PAS, the capacity assessment o f the Implementing Agency has recommended an average o f two supervision missions per year to visit the field. Contracts to be post reviewed wil l be selected from the procurement plan. It i s currently planned that no less than 20 percent o f contracts subject to post review will be reviewed ex-post.

E. Details of the Procurement Arrangements

15. Thresholds for procurement methods and prior review requirements are summarized below in Table 1. The correspondence between procurement thresholds and prior review requirements i s based on the Bank team's assessment o f the capacities o f the agency carrying out procurement. The r isks o f corruption and fraud in the country as wel l as the capacities o f the manufacturing, construction and consulting industries in Azerbaijan have also been taken into consideration.

Table 1: Summary of Procurement and Pr ior Review Thresholds (in thousand US$)

Exp Category Proc Method Proc Threshold Prior Review Threshold * '

l3 The Borrower prepares a procurement plan that covers the activities necessary to ensure that project procurement will be carried out efficiently and professionally. I t contains, inter alia, l i s t o f packages to be procured, methods to be used to procure, and an init ial time schedule.

50

ICB: International Competitive Bidding, NCB: National Competitive Bidding, S: Shopping, DC: Direct Contract, AF': Agreed Procedures, QCBS: Quality and Cost Based Selection, QBS: Quality Based Selection, FBS: Fixed Budget Selection, LCS: Least Cost Selection, CQS: Selection based on Consultant Qualifications, SSS: Single Source Selection, IC: Individual Consultant Selection

* All amendments require justification and prior review by the Bank **Short l is ts for contracts estimated at < U S $ 100,000 may comprise national consultants only.

1. Goods, Works, and Non Consulting Services

(a) L i s t o f contract packages to be procured following ICB and direct contracting:

1

Ref. No.

-

- G- 1

G -2

G -3

G-4

-

2

Contract Description

Procurement o f 7 semi-mobile soil washing Plants

Procurement o f 3 hydrocarbon recovery systems

Procurement o f 7 unitsof mobile water treatment plants

Procurement o f Auxiliary equipment for soli washing (screens, sorters, steam generators, etc.)

Procure- ment

Method

ICB

ICB

ICB

ICB

4 -

P-Q

- Yes

sent

1 010 1 108

No

P/Q

by

No

No

-

5

Domestic Preference

(yesho)

No

No

No

No

6

Review

Bank (Prior I

Prior

by

Post)

Prior

Prior

Prior

7

Invitation to Bid

0 11 16/09

0 111 7/09

0 111 8/09

0 1/06/09

I

Expected Bid-

Opening Date

03/17/09

03/18/09

03/18/09

03/20/09

Q

Contract Award

0510 1/09

05/0U09

05/03/09

05/03/09

10

Contract Completion

12/27/09

12/28/09

12/29/09

12/30/09

51

(b) All ICB contracts for goods and works, f i rs t two NCB contracts for goods and works, all NCB contracts for goods estimated to cost USD 200,000 or larger, all N C B contracts for works estimated to cost USD 1,000,000 or larger, f i rs t two shopping contract for goods and works and all direct contracting wil l be subject to prior review by the Bank.

2. Consulting Services

(a) List o f consulting assignments with short-list o f international f i rms.

1

Ref. No.

CS-1

cs -2

CS-3

cs-4

2

Description of Assignment

Technical assistance with plant procurement, and process optimization

Monitoring and Evaluation activities

Communication Advisory services

Project Financial Audit

I

3

Selection Method

QCBS

QCBS

QCBS

LCS

4

Review by

Bank (Prior I

Post) Prior

Prior

Prior

Prior

5

Expected Proposal

Invitation Date

06/21/08

02.29.09

10125108

09/02/08

6 Expected Proposal

Submission Date

08/22/08

04/24/09

1211 9/08

1 O i l 7/08

7 Expected Contract Award

11/09/08

0711 2/09

03/08/09

12/07/08

II

Expected Contract

Completion

11/09/10

07/12/11

0310811 1

1111 1/03

(b, U1 consultancy services under QCBS and LCS, and the f i rst two contracts under CQ and all contracts with f i r m s estimated to cost more than US$ 100,000 per contract and all contracts with individuals for assignments estimated to cost more than US$ 50,000 will be subject to prior review by the Bank.

(c) Short l i s ts composed entirely o f national consultants: Short-lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

F. Ex-Post Review:

16. All other contracts for goods and consulting services below prior review thresholds are subject o f Bank’s selective ex-post review. Periodic ex-post review by the Bank will be undertaken during regular supervision missions. Procurement documents, such as bidding documents, bids, bid evaluation reports and correspondence related to bids and contracts wil l be kept readily available for the Bank’s ex-post review during supervision mission or at any other

52

point o f time. Bank’s mission will review at least one out o f every five contracts which are subject o f ex-post review.

17. Record Keeping: The P M T wil l maintain complete procurement files, which wil l be reviewed by supervision missions. All procurement related documents that require prior review wil l be cleared by the Procurement Accredited Staff (PAS) and related technical staff. Procurement information wil l be recorded by the P M T and submitted to the bank as part o f quarterly (FMRs) and annual progress reports. A simple management information system with a procurement module would be established to assist the P M T procurement officer to monitor procurement information.

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Annex 9: Economic and Financial Analysis

AZERBAIJAN: Absheron Rehabilitation Program ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Economic rationale for the project

1. The general economic rationale for land remediation on the Absheron peninsula i s to convert land that i s currently unsafe for any purpose into areas that can be redeveloped and put to economic use. With population on a steep growth and the economic revival fostered by increased o i l revenues, demand for land on Absheron i s strong and prices are high. Many o f the former o i l fields operated by SOCAR are located near rapidly growing residential and commercial areas. T h i s includes the vicinity o f the airport and a crescent surrounding the center o f Baku. New developments leapfrogging over the crescent o f former and / or current oi l extraction areas cause a disconnection with the city center and a physical constraint to urban development on Absheron. Given the extent o f the environmental damage, removing these constraints will take decades; the corresponding benefits will take even longer to fully materialize.

2. However, i t i s possible to approximate the economic value o f cleaning up land by comparing the cost o f the remediation process and the potential increase in the market value o f the land once cleaned up. Whi le the machinery to be purchased has a technical l i f e o f at least 10 years, the increase in value (under conservative assumptions) o f the land that could be cleaned up in only one year with the proposed technique, minus the operational costs, represents already 2/3 o f the initial investment cost. Even with uncertain input parameters, the magnitude o f the benefits justif ies a remediation project. Calculations are discussed in more detail below.

3. In the specific case o f this project, the remediation technique to be acquired by SOCAR, soil washing, w i l l be used on particularly polluted land - with hydrocarbon concentrations o f up to 25%. A particular feature o f this technique i s to make it possible to recover a substantial part o f the impregnated hydrocarbons, which represent an estimated 700 mill ion barrels o f o i l for the whole o f the Absheron peninsula. Using simple hypotheses and basic parameters from the technical feasibility study, calculations yield two significant conclusions:

the remediation technique chosen appears financially and economically the most adapted to this type o f pollution; the value o f the hydrocarbons that can be recovered i s possibly o f the same order o f magnitude as the value o f the cleaned-up land, greatly increasing the economic value o f the project .

Details of the cost-benefit analysis

4. The summary results o f cost-benefit calculations are attached in the table at the end o f this document. Including conservative approximations for both land value and recovered hydrocarbons, the calculated economic rate o f return i s 55%. This should be only considered as an indication that the project makes sense economically.

54

5. Cost assumptions. Operational costs are based o n the feasibility study and o n industry benchmarks. Project costs that relate to overall environmental practices o f SOCAR (in ongoing extraction activities) have not been included. However, they wil l need to be ascertained with the first tests.

6. Equipment usage. The Project design is to develop SOCAR’S cleanup capacity. Project implementation, in terms o f actual cleanup, wil l only cover an init ial assistance phase but wil l allow SOCAR to clean up land wel l beyond the project closing date. The benefits f rom the built- up capacity are a function o f how much land SOCAR wil l be able to clean over the lifetime o f the equipment (conservatively assumed at 10 years). The assumption i s that the area cleaned over this lifetime corresponds to the maximum quantity o f soil that i t i s technically possible to process under reasonable machinery downtime assumptions. This area i s by far smaller than the o i l extraction areas on Absheron that need to be cleaned and for which soil washing i s l ikely to be cost-effective.

7. Value o f cleaned-up land. In a free, well-functioning real-estate market, the economic value o f land is entirely captured by i t s price. However, not only i s the real market estate market in Azerbaijan distorted in many ways, but the increase in the value o f the specific parcels to be cleaned up depends on several difficult to estimate factors:

Current value of the parcels. Given i t s high concentration in hydrocarbons, the land to be remediated i s deemed unfit for any economic use, therefore having a zero value. This is an assumption as there i s no market for such heavily polluted land.

Future use of reclaimed land. In theory, this also affects remediation costs, because the pollutant concentration targets, and therefore the remediation technique chosen, are normally a function o f future use. However, in this case, given the very high concentration in hydrocarbons, future use is not a determinant o f the primary remediation technique. I t might however affect additional remediation techniques required for certain uses (to reach even lower concentrations), or techniques to be used on adjacent parcels.

Future evolution of unit landprices. On one hand demand i s l ikely be pushed up by strong economic growth. On the other hand, cleanup operations have the potential to put vast amounts o f new land on the market. As the combined effect on price o f these potentially sharp evolutions in both supply and demand i s uncertain, this analysis assumes constant unit land prices in real terms.

Lack of transparency in the market for land. The real estate registration system in Azerbaijan i s inadequate and is being improved under a current World Bank project. Many owners do not have documented title to their land, and when documents exist, their legality can be problematic as some institutions have sold publicly-owned land, and issued corresponding titles, without having the actual right to do so.

Specifics of theparcel. All o f SOCAR land does not have equal value. I t varies depending on specific location, access to infrastructure, etc.

8. Therefore the average used for the increase in land value has been conservatively set at the lower end o f currently observed land values o n Absheron: US$150,000 per hectare, based on

55

consistent expert estimates o f actual private transaction prices by governmental experts (staff from the land registration office) and private experts (real estate agency).

9. Time lapse before the reclaimed land returns to economic use. The institutional mechanism to transfer land from public (State) ownership to the private sector does not function. Some existing land that has been cleaned-up under pi lot projects has not been transferred and lies unused. In addition, for land used by SOCAR (which i s owned by the State but put at the disposal o f SOCAR), while SOCAR has a legal responsibility to clean up parcels before returning them to the State, i t has no incentive to return them: it does not benefit from the increased parcel value (through, for example, a share o f the privatization proceeds). In addition, i t i s the sole judge o f whether they could s t i l l be used for extraction purposes - and thus o f whether they can be returned to the State. The result could be a long time lapse before remediated land i s returned to economic use. However, the vast surface o f land to be cleaned provides a strong rationale to start as early as possible. In the net present value analysis, the assumption i s that this delay wil l average two years over the l i f e o f the equipment. In practice, i t could be more at the beginning but less after adequate institutional mechanisms are implemented.

10. Price assumptions. (i) The value o f the recovered hydrocarbons i s hard to estimate. They wil l be o f lower quality than crude oil, but exactly how much i s hard to quantify. The market for these products i s also unclear. However, they have at least a significant value, for example calorific / as alternative fuels or as add-on to crude o i l in SOCAR refineries. Either by using them as substitute for other hydrocarbons or by selling them with or without preliminary transformation, this value would materialize financially. Given the uncertainty o f use, calculations are shown assuming a very conservative price o f 10% o f the current price for crude oil. (ii) As the benefit-to-cost ratio i s very high, and given the level o f uncertainty on several inputs, projections were made only assuming constant real prices. Higher precision assumptions o f changes in prices over time would not have been meaningful.

Comparison of design options

1 1. A comparison o f remediation techniques has been made using realistic assumptions and industry benchmarks. The three techniques considered are soil washing, bio-remediation and thermal treatment. In comparison to soil washing, both thermal treatment and bio-remediation require minimal ini t ial investment (it i s has been valued at zero for the comparison); but for the type of polluted soil considered, while thermal treatment also has minimal operating costs, bio- remediation has significantly higher operating costs than soil cleaning. In addition, only soil cleaning can extract the full value o f impregnated hydrocarbons, providing a very large added benefit. The economic value o f bio-remediation i s therefore much lower than soil-washing. Thermal treatment yields a higher economic rate o f return (no physical investment and lower operating costs), but due to the much lower benefits the net present value generated i s lower (almost by one-half) than for soil washing.

Financial analysis and sustainability

12. The high value o f the recovered hydrocarbons makes this technique - applied on this particular type o f polluted soil - very profitable for SOCAR. Under the assumptions described

56

above, the financial rate o f return o f the cleaning process i s 26% over 10 years. The payback period for the init ial investment i s one and a hal f years. This should ensure that SOCAR, once the proposed technology i s fully tested and operational, wil l use its acquired capacity to maximum output, and even extend i t s application wherever i t i s technically and financially relevant. Even if the proposed technique were not to yield as high a return as expected (for example if commercialization o f the recovered hydrocarbons proved difficult), SOCAR has set aside ca. US$600 mi l l ion in i t s budget for environmental programs, ensuring that funds wil l be available to operate the equipment.

Fiscal analysis

13. The loan wil l be on-lent to SOCAR, which wil l therefore bear the financial investment. However, net benefits from the project are expected to finally accrue to the Government o f Azerbaijan, through land privatization proceeds and through increased tax receipts and dividends from SOCAR’S operations.

57

I a c)

3 N 0 N

0 N 0 N

z 0 N

si 0 N

N

0 N

- I - 0 N

si 0 N

a 0 0 N

c) .- 5

1 o o o o v , N I I O I I N m o m s ;

m 2- m- m- m , m m

, . . . . , . . . . . . . . .

m o o o w N m o m z N II 0- II-

m , m m m- 2 m m"

m o o o m m m o v r s ; m- 2 m ml m , m m

N II 0- II,

0 0 z P

0 0 9

3 w? cn

: 'g F 0

E 0

*

0

0

C C c e - v: L

0 Y

0 0

0 8 3

0 0

8 3

8 8 3

0 0

8 3

8 8 3

0 0

8 c?

0 0

FA 9

3

Annex 10: Safeguard Policy Issues

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Relevant Project Activities

1. The ARP has the overall objective o f improving environmental conditions in the Absheron Peninsula to increase l ivabi l i ty and facilitate economic growth by supporting a selected set o f priority investments, and strengthening the regulatory, certification and enforcement processes. The Large Scale Oil Polluted Land Cleanup Project is focused on tackling the substantial environmental legacies on areas affected by past or ongoing o i l extraction under the state o i l company SOCAR. The key investments wil l be in plant and equipment o f substantial scale to increase SOCAR’s technical capacities to address and remediate i t s environmental legacies. The project wil l be supported by TA components to ensure effective and efficient use. The key equipment wil l be:

2. Soil Washing Plant: The core activity planned under this component wi l l be the removal o f hydrocarbons and potentially associated accessories (e.g. PAH14, Phenols) by washing and / or scrubbing with hot water, steam and / or additive detergents and chemical agents. In the f i rs t step o f the soil washing process mineral solid components o f the soil are detached from hydrocarbons by washing, in this process the fine fractions from the soil are also partially washed out. In a second step, washing liquid and fines are separated from the coarser soil fractions, which leave the plant as cleaned soil with usually minor concentrations in hydrocarbons.

3. Auxiliary equipment to the soil washing plant would include water treatment systems and recovery equipment for free hydrocarbon phase in ponds, or seeping from saturated soils during excavation works, would be required. Some o f the recovered product might be usable as raw product for refinery, other parts might have economically value as alternative fuels (e.g. in cement kilns or waste incinerators), or as bitumen for asphalt production.

4. Alternative cleanup technologies wil l be planned as complementary remediation methods for areas, soil types or contamination types not suitable or economically viable for soil washing. For the Absheron Peninsula the most l ikely candidates include land farming, o f f site bio-remediation in heaps, and the separate removal and direct utilization o f heavy bitumen fractions and mazut, e.g. as additive for the production o f asphalt or as alternative fuel in the cement industry.

5. K e y outputs from the investment component wil l be the technically effective, economically efficient reclamation o f significant portions o f polluted land for subsequent residential or economic use, and the recovery and economic utilization o f spilled hydrocarbons.

l4 Polycyclic Aromatic Hydrocarbons

59

Key Safeguards Issues Identified in Project

6. The only Safeguard Policy triggered by the project i s OP 4.01, Environmental Assessment because the ‘ARP 111: Large Scale O i l Polluted Land Cleanup Project’ entails large capacity equipment, and the cleanup activities wil l require substantial civil works (excavations, backfilling), transport, construction o f temporary roads and infrastructure and the generation o f waste, waste water and emissions. However, all negative impacts are expected to be temporary, reversible and locally restricted to the already polluted areas.

7. The project i s not aimed at a specific plot o f land, but deals with the procurement o f equipment / plant and the development o f a business and operational plan to proceed with the cleanup in the technically, environmentally and economically most effective fashion. Moreover, T A components wil l assist improving environmental management and practice in SOCAR’S extractive operations by developing sector-specific cleanup goals and standards and introducing monitoring, evaluation an communication activities. As the net impact o f the project will be significantly positive, the project has a Category ‘B ’ classification for Environmental Assessment.

8. Absheron Peninsula, with the capital city Baku in it, has seen considerable increase o f population moving out from the hinterland and now accommodates almost half the national population. A large part o f the peninsula i s heavily contaminated as a result o f long o i l production without any care on environment. Due to rapid population increase and the resultant increase in population density, many poor have found shelter and built housing stocks and apartment buildings in the contaminated area, which belongs to the state and leased to SOCAR for o i l production, without a legally valid permission. The project w i l l help SOCAR purchase new cleanup equipment and increase the cleanup capacity, which wil l improve l i f e conditions for a large number o f people in and around the Absheron Peninsula. Once cleaned up, the site could be returned to the state and offer important space for new housings, commercial undertakings and recreational / ecological activities.

9. The operational policy on Involuntary Resettlement, OP 4.12 i s not triggered. The project wil l clean up only areas which, due to their pollution levels and access restriction during ongoing or recent production, are not inhabited and do not show any signs o f incipient construction or settlements. Moreover, in the past, SOCAR has avoided any cleanup activities when resettlement would have been required.

10. Given the level o f contamination in such a close proximity to, and in some cases in the middle of, large human settlements, the cleanup o f the o i l contaminated lands wil l be o f a significant social benefit. In this context, i t should be born in mind that the equipment supplied and operated under the project wil l be used specifically on areas with heavy degrees o f pollution, where soils are saturated or covered with bituminous crusts or fee oi l phase i s stored in ponds and puddles. The contamination levels in these areas have so prevented any settlement or land use other than oi l production and waste disposal. Residential areas are observed only adjacent or close to contaminated areas or on areas with lesser degrees o f pollution, and decontamination operations can be executed in a precise manner with minor impacts on residents during cleanup operations.

60

11. T o meet the requirements o f OP4.01 SOCAR has prepared a draft Business Plan for cleaning up o f oil-contaminated land. This Business Plan i s part o f the overall Operational Plan and i t s formal adoption i s an effectiveness condition. This document includes a detailed environmental section which refers to the E M P and the arrangements and for i t s due implementation, such as (i) approach to the selection and prioritization o f sites for cleanup (ii) the nature and level o f site investigations to be undertaken prior to beginning excavations (including identification o f both surface and sub-surface hazards), (iii) components, capacities and deployment schedule for soil cleaning equipment, (iv) disposal o f residue from soil cleaning and re-use o f reclaimed o i l products, (iv) definition o f levels to which given parcels would be cleaned (i.e. for what types o f subsequent usage or development), and other aspects which directly influence cleanup costs and risks.

12. Whi le the project wi l l invest directly in cleanup o f legacy contamination, current pollution from SOCAR ongoing production practices i s also a concern. SOCAR has firmly committed to cease production activities o n cleaned areas and concentrate remaining o i l extraction to few drill pads for modern, mult i-well sites using directional drilling techniques.

Borrower’s Institutional Capacity for Safeguard Policies

13. The Presidential Decree and approved ESP signals high level commitment and has stimulated action by key ministries and agencies. I t focuses primarily on the Absheron Peninsula (which has the highest concentration o f contaminated sites in the country), although some activities are national in scope. It i s a comprehensive plan involving both cleanup hemediation and forward-looking environmental management. It addresses legacy contamination and ongoing pollution, and hazardous and non-hazardous waste.

14. During project preparation, SOCAR has prepared an Operational Plan containing detailed environmental, economic, financial and organizational parameters which wil l define project implementation. The environmental defines cleanup standards and goals and the applicable regulations, guidelines and procedures. SOCAR has also prepared an environmental management framework (EMF) and an environmental management plan (EMP) which provide detailed (however not site specific) provisions on the mainstreaming o f safeguards issues into project implementation.

15. There will be a continuous dialogue and exchange o f ideas and experience among the entities involved with implementation o f ARP I, I1 and 111, to work national standards development, regulatory strengthening and policymaking.

16. T w o rounds o f public consultations were diligently organized and chaired by SOCAR’S Environmental Department and took place on December 19, 2007 and February 8, 2008. The Environmental Management Plan (EMP) and environmental management framework (EMF) were disclosed on the World Bank’s InfoShop on February 29,2008.

17. SOCAR has recently established a new vice presidency for environmental issues, which among other objectives will promote environmental culture and performance within SOCAR’S

61

corporate structure, improve corporate environmental performance and image, enhance communication with the public and develop strategies for environmental projects and supervise their implementation. As a f i rs t concrete step the vice president has commissioned a consultancy to assist SOCAR prepare a corporate environmental policy, which wil l be available as draft within the next months. SOCAR would seek World Bank review and comment on the draft corporate environmental pol icy when ready.

62

Annex 11: Project Preparation and Supervision

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Planned Actual PCN review 11/12/2007 11/12/2007 Init ial PID to PIC 121 12/2008 Init ial ISDS to PIC 0111 112008 02/14/2008 Appraisal 03/03/2008 03/03/2008 Negotiations 04/21/2008 0412 81200 8 Board/RVP approval 06/17/2008 Planned date o f effectiveness 09130l2008 Planned date o f mid-term review 09130120 10 Planned closing date 0913012013

0 1 / 1 01200 8

Key institutions responsible for preparation o f the project: - State Oil Company o f Azerbaijan (SOCAR)

Bank staff and consultants who worked on the project included:

Name Title unit Aniruddha Dasgupta Lead Urban Planner ECSSD Ellen Hamilton Sr. Urban Planner ECSSD Frank Van Woerden Sr. Environmental Engineer ECSSD Gulana Hajiyeva Environmental Specialist ECSSD Satoshi Ishihara Social Development Specialist ECSSD Wolfhart Pohl Sr. Environmental Specialist ECSSD Francois Boulanger Urban Economist ECSSD Ahmet Gokce Sr. Procurement Specialist ECSPS Bakhtiyar Karimov Consultant ECSSD Grazia Atanasio Communications Officer EXTCD Hadji Huseynov Infrastructure Specialist ECSSD Ruxandra Floroiu Environmental Engineer ECSSD Solvita Klapare Operations Analyst ECSSD Vusala Asadova Team Assistant ECCAZ Yarissa Sommer Consultant ECSSD Norpulat Daniyarov Financial Management Spec. ECSPS

Junk0 Funahashi Senior Counsel LEGEM Delphine Hamilton Sr. Program Assistant ECSSD

Hanna M. Koilpi l lai Senior Finance officer LOAFC

Bank funds expended to date on project preparation: 1. Bank resources: US$984,362.35 2. Trust funds: US$O.OO 3. Total: (P110679); & (iii) ARP 111- (P110682)

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 75,000 (for (i) ARP I - P104985; (ii) ARP I1 - (P110679); & (iii) ARP 111- (P110682) 2. Estimated annual supervision cost: US$lOO,OOO (for this project)

US$984,362.35 (for (i) ARP I - P104985; (ii) ARP I1 -

63

Annex 12: Documents in the Project File

AZERBAIJAN: Absheron Rehabilitation Program ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Bank Assessments common for four project in the Absheron Rehabilitation Program ( M P )

1. 2. 3. 4. 5. 6. 7. 8. 9.

Project Concept Document (PCN) Minutes o f PCN Review Meeting PCN Peer Reviewers Comments Project Information Document -Concept Stage Aide Memoires o f Project Preparation Missions Financial Management Assessment Agency’s procurement Assessment Economic and Financial Analysis OER minutes Minutes o f Safeguard Review Meeting, November 14,2007

Other Reports and Studies for specific projects General

1, Presidential Decree : Comprehensive Action Plan on Improving environmental Situation in Azerbaijan for 2006-201 0 (English translation)

2. Cabinet Minister’s Decree #325 S (English translation) 3, Deputy Prime Minister’s letter requesting inclusion o f Solid Waste Management (English

translation) 4. Deputy Prime Minister’s letter requesting inclusion o f 1000 ha site clean up and

Implementation o f Environmental Standards and Certification component (English translation)

5. Decree # 094 establishing working group within Ministry o f Emergency Situations (MES) (English translation)

6. Decree # 653 establishing working group within Ministry o f Economic Development (MED) (English translation)

7. ARP Minutes o f Public Consultations: 1 st Round December 19,2007 8. ARP Minutes o f Public Consultations: 2nd Round SOCAR, February 8,2008 9. AFW Minutes o f Public Consultation: 2nd Round MED, February 21,2008 (To be

obtained)

ARP I: Contaminated Sites Rehabilitation Project (MES) 10. Environmental Impact Assessment (EIA) Executive summary 1 1. Environmental Impact Assessment (1 000 ha) 12. Environmental Management Framework (EMF) 13. Draft Resettlement Action Plan (RAP) 14. Resettlement Policy Framework (RPF) 15. Social Impact Assessment 16. Procurement Schedule

64

ARP 11: Integrated Solid Waste Management Project. (MED) 17. EU Pre-Feasibility Report: Baku Solid Waste Management Project 18. Socio Economic Survey o f Modernization o f the Balakhani Landfill: Draft Report 19. Absheron Peninsular Integrated Waste Management Report 20. Procurement Schedule

ARP 111: Large Scale Oil Polluted Land Cleanup Project (SOCAR)

21. SOCAR Feasibility Study (Development o f Clean-up Strategies and Procurement o f Plant and Equipment for the Remediation o f Oil-polluted Land, Absheron Peninsula, Azerbaijan, 21. Jan. 2008)

22. Resolution o f the President o f SOCAR, December 7,2006 : Working Program for implementation o f SOCAR related projects under the State Program on Improving the Environmental Situation in Azerbaijan for 2006-201 0

23. SOCAR Restructuring and Commercialization Project: Draft Report 24. Environmental Management Framework (EMF) 25. Environmental Management Plan (EMP) 26. Draft Operational Plan 27. Procurement Schedule

65

Annex 13: Statement of Loans and Credits

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Project F Y ID

P100667 2008

P102117 2008 PO99924 2008 P107613 2008 PO83108 2008 P109885 2008

P100582 2007 PO96213 2007 PO99201 2006 PO94488 2006 PO94220 2006 PO90887 2006 PO89751 2005 PO83341 2005 PO81616 2005 PO77031 2005 PO66199 2005 PO76234 2004 PO49892 2004 PO70989 2003 PO08286 2003

PO66100 2002 PO40716 2001

Purpose

HIGHWAYS I1 - ADDL. FINANCING EDUCATION APL I1 CORE' & PUBLIC ACCT IDP - ADDL. FINANCING

RAIL, TRADE & TRANSP

FINANCING REAL ESTATE REG. WATER SUPPLY JUDICIAL MOD Highway 2 Health Sector Reform Project ADCP-I1 IDP ECON DEVT SUPPORT POWER TRANSMISSION FIN SERVS DEVT RURAL ENVIRONMENT (GEF) RURAL ENVIRONMENT RURAL INVSMT (AZRIP) PENSION & SOC ASST ED SECT DEV (APL #1) IRRIG DIST SYS & MGMT IMPROVMT AVIAN FLU (formerly IBTA 2) HIGHWAY

RURAL INVEST - ADDL.

Original Amount in US$ Millions

IBRD

300.0

450.0

30.00 230.00

0.00 200.00

0.00 0.00 0.00

48.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

IDA

0

25.0 11.0 15.0

15.0

0.00 0.00

21.60 0.00

50.00 29.20 11.50 0.00

12.25 0.00 8.00

15.00 10.00 18.00 35.00

9.45 40.00

SF

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

GEF

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

Cancel. Undisb.

300.0

25.0 11.0 15.0

450.0 15.0

0.00 30.00 0.00 230.00 0.00 22.43 0.00 182.82 0.00 50.97 0.00 28.92 0.00 4.30 0.00 46.94 0.00 11.59 0.00 4.75 0.00 7.78 0.00 5.50 0.00 5.87 0.00 3.23 0.00 30.98

0.00 3.77 0.00 5.20

Difference between expected and actual

disbursements

orig. FIm. Rev'd

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.83 0.00 0.82 0.00

29.49 0.00 7.45 0.00 5.78 0.00 1.72 2.29

25.61 0.00 5.12 0.00 1.92 0.00 2.63 0.00

-1.63 0.00 4.68 1.77 1.25 0.00

10.53 0.00

-1.24 1.87 -1.71 -2.02

Total: 1258.00 326.00 0.00 5.00 0.00 1491.05 93.25 3.91

66

Annex 14: Country at a Glance

AZERBAIJAN: Absheron Rehabilitation Program

ARP 111: LARGE SCALE OIL POLLUTED LAND CLEANUP PROJECT

Azerbaijan a t a glance 3/14/08

Key Development Indicators

(2006)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population ( % of total population)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (%) GDP per capita growth (%)

(most recent estimate, 2000-2006)

Poverty headcount ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Azerbaijan

8.5 87 1.1 52

16.0 1,890 5,960

34.5 33.0

4 33 72 74 7

97 95

77 54

Europe 8 Central

Asia

460 24,114

0.0 64

2,206 4,796 9,662

6.8 6.8

1 10 69 28

5

99 96

103 100

92 85

Lower middle income

2,276 28,549

0.9 47

4,635 2,037 7,020

8.8 7.9

71 31 13

93 85

117 114

81 55

Net Aid Flows 1980

(US$ mi//ions) Net ODA and official aid Top 3 donors (in 2005):

United States Turkey Germany

Aid (% of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer pnces (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services Manufacturing

6.2

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services Imports of goods and sewices Gross savings

1990 2000

0 139

19 0 4 I 9

2. I 2.8 0 17

107.0 1.8 83.5 12.5

0.0 0.9

7.2 8.0 8,858 5,273

(%of GDP) 29.0 17.1 32.9 45.3 19.3 5.6 38.1 37.5

51.2 63.5 17.6 15.2 26.5 20.7

43.9 39.0 39.2 38.4 4.9 17.3

2006

223

44 29 19

1.9 27

8.4 11.3

0.9

8.5 20.982

7.5 60.6 6.1

23.8

31.6 10.8 29.9

66.5 38.8 47.5

Age distribution, 2006 I Male Female

I l5 lo percent O lo l5

Jnder-5 mortality rate (per 1,000)

120 ,

100

80

BO

40

20

0 1880 1885 2WO 2005

OAzerbaijan 0 Eumpe &Central Asia

Srowth of GDP and GDP per capita (%)

10-

80 00 05

+GDP -GDP per capita

1980-90 1990-2000 200046 (average annual growth %)

1 S 1.2 0.9 -6.3 15.6

-2. I 5.9 -0.8 20.1

-12.0 8.8 -2.3 12.2

1.5 12.2 -1.7 10.6 42.9 39.5

6.8 15.4 15.5 24.9

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available a. Aid data are for 2005.

Development Economics, Development Data Group (DECDG).

67

Azerbaijan

Voice and acmuntability

Balance of Payments and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and sem'ces

Current account balance as a % of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

Central Government Finance

(% of GOP) Current revenue (including grants)

Current expenditure

Overall surpluddeficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ mi/lions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

I

2000

1,656 1,539

95

-168 -3.2

57

680

20.2 13.3 17.8

0.6

35 27

1,328 130 -

25.2 5.6

130 0

2006

13,015 5,269 5,622

3,706 17.7

693

2,500

27.2 19.0 18.4

-0.2

35 22

1,900 242 -

9.1 1.6

-584 1

Composltlon of total external debt, 2006

I IBRD, 5 IDA 583 I Short-term 302

IMF 134

~ Bilateral, 573 Other ia1.ra1, mulU- -288

PII"I10, 589

US$ millions

Private Sector Development 2000 2006

Time required to start a business (days) - 52 Cost to start a business (% of GNI per capita) - 9.3 Time required to register property(days) - 61

Ranked as a major constraint to business (% of managers surveyed who agreed)

Tax administration Tax rates

.. 24.9

.. 22.9

Stock malket capitalization (% of GDP) 0.1 Bank capital to asset ratio (%) .. 14.2

1 P o l i t i m i s t a b i l i t y k 1 I

Regulatory quality I Contml of mrrupbon I 1 1 ozooo 0 25 50 75 1W

.20m Country's percentile rank (0.100) highw vsiue,s mpiy bltw ,stings

S o u m KaufmannKmay-Mastmi, World Bank

Technology and Infrastructure

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

Environment

Agricultural land (%of land area) Forest area (% of land area) Nationally protected areas (% of land area)

Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources)

C02 emissions per capita (mt)

GDP per unit of energy use (2000 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

World Bank Oroup portfolio

(US$ millions)

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

IFC (fiscal year) Total disbursed and outstanding portfolio

Disbursements for IFC own account Portfolio sales, prepayments and

repayments for IFC own account

of which IFC own account

MlGA Gross exposure New guarantees

2000

92.3

152

4.5

57 11.3

213.0

3.7

1.7

1,430

Moo

0 0 0 0

216 27 2

163 124 46

6

65 30

2005

49.4

397

0.8

58 11.3 4.8

966

3.5

2.3

1,559

2006

5 5 0 1

583 60 8

10 10 5

29

1 0

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available. - indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

3/14/08

68

Millennium Development Goals Azerbaijan

With selected targets to achieve between 1990 and 2015 (estimate dosesf to date shown, +/- 2 years) Azerbaijan

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, % of population) 10.9 3.7 Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5)

68.1 49.6 6.8 7.4

10.1 16.8

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 89 86 85 Primary completion rate (% of relevant age group) 81 89 94 Secondary school enrollment (gross, %) 88 75 83 Youth literacy rate (% of people ages 15-24) 100

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 100 100 97 Women employed in the nonagricultural sector (% of nonagricultural employment) 33 38 44 49 Proportion of seats held by women in national parliament (%) 12 12 11

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %)

105 98 93 89 a4 80 77 74 66 97 99 98

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total)

94 a4

Goal 6: halt and begin to reverse the spread of HIWAIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.1 Contraceptive prevalence (% of women ages 15-49) Incidence of tuberculosis (per 100,000 people) 35 50 75 76 Tuberculosis cases detected under DOTS (%) 5 6 55

55

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 68 70 75 77 Access to improved sanitation facilities (% of population) 55 55 54 Forest area (% of total land area) 11.2 11.3 11.3 Nationally protected areas (% of total land area) 4.8 C02 emissions (metric tons per capita) 7.5 4.2 3.7 3.5 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) 1.9 1.1 1.7 2.3

Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) 87 a4 152 397 Internet users (per 1,000 people) Personal computers (per 1,000 people) Youth unemployment (% of total labor force ages 15-24)

Education indicators (%)

2000 2002 2W5

+Primary net enmllment ratio

+Ratro of girts to boys in pnrnary 8 secondary education

Measles immunization (% of l-year olds)

I Q Q O 1905 2000 2005

OAzeIbagan OEumpe 8 Central Asia

0 0 1 81 23

ZOW 2002

0 Fixed t nwbiie subscribers Internet users

Note: Figures in italics are for years other than those specified. .. indicates data are not available

Development Economics, Development Data Group (DECDG).

3/14/08

69

A B S H E R O NA B S H E R O N

S U M G A Y I TS U M G A Y I T

B A K UB A K UB A K UB A K U

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LOKBATAN

GYUZDEK

GEOKMALY

KOBU

SARAINOVKHANA

BINGADI

PIRSHAGA

SUMGAYIT

DIGYAKH

MAMEDLI

ZABRAI

RAMANA

BYULBYULA

SABUNCHU

SURAKHANI

AMIRADZHAN

GOVSAN

BINA

MASHTAGABUZOVNA

MAPDAKAN

SHUVELAN

KALA

TURKAN

ZIRA

NARDARAN

BILGYAKH

BAKU

GORADIL

FATMAI

JEIRANBATAN

KHYRDALAN

RASULZADE

BALAKHANY

MASAZYR

BALADZHARY

PATAMDAR

B INAGAD I D I S TR ICT( RESORT AREA )

B I N A G A D I D I S T R I C T

KHATAI DISTRICT

NIZAMI DISTRICTNARIMANOV

DISTRICT

NASIM

IDISTRICT

YASAMALDISTRICT

A Z I Z B E Y O V

D I S T R I C T

Q A R A D A G H

D I S T R I C T

SABAYI LD ISTR ICT

SURAKHANIDISTRICT

SABUNCHUDISTRICTA B S H E R O N

S U M G A Y I T

B A K UB A K U

LakeJeiranbatan

Lake

Masazyrgyol

Lake

Mirzaladi

Lake Khojhasan

Lake Ganli Gel

Lake Beyuk Shor

Lake Byul

Byula

Lake Zikh

Lake

Krasn

oye

S u m g a y i tB a y

PIRALLAHIISLAND

B a k u B a y

C A S P I A N

S EA

C A S P I A N

S E A

APRIL 2008

49˚45' 50˚15´50˚00´

49˚45´ 50˚15´50˚00´

40˚30´

40˚20´ 40˚20´

40˚30´

AZERBAIJANARMENIA

ISLAMIC REP. OF IRAN

TURK

MEN

ISTANT U R K E Y

SYRIAN ARAB REP. IRAQ

GEORGIA

U K R A I N E

RUSS IAN

FEDERAT ION

KAZAKHSTAN

Baku

B lack SeaCasp ian

Sea

0 2 4 10 6 8

KILOMETERS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

IBRD 36088

l l l

MAIN ROADS

OTHER ROADS

DIRT ROADS

RAILROADS

BUILT-UP AREAS

AIRPORT

RIVERS

BAKU DISTRICT BOUNDARIES

RAYON BOUNDARIES

INTERNATIONAL BOUNDARIES (INSET)

OIL CONTAMINATION LEVELS:

LOW

MEDIUM

HIGH

HEAVILY CONTAMINATED

CONTAMINATED SOIL & LAND TYPES:

BLACK, OILY SOIL (”MAZUT”)

BITUMINOUS SOIL

OIL SATURATED LAND COVERED WITH DRILL CUTTINGS

LAND IMPACTED BY DRILL FLUIDS AND FORMATION WATERS

LAND CONTAMINATED DUE TO PRODUCTION RELATED OIL SPILLS

AZERBAIJAN

ABSHERON REHABILITATION PROGRAMIII – Implementation of SOCAR’s Environmental Strategy and

Large Scale Oil Polluted Land Clean Up Project

ZIRA