documents.worldbank.org€¦ · Web viewCURRENCY EQUIVALENTS (Exchange Rate Effective October 11,...

Document ofThe World Bank

Report No: ICR00004007

IMPLEMENTATION COMPLETION AND RESULTS REPORT(IBRD-80240)

ON A

LOAN

IN THE AMOUNT OF US$ 12 MILLION EQUIVALENT

TO THE

Republic of Azerbaijan

FOR A

Capital Markets Modernization Project (CMMP)

January 25, 2017

Finance & Markets Global PracticeEurope and Central Asia Region

CURRENCY EQUIVALENTS

(Exchange Rate Effective October 11, 2016)

Currency Unit = Azeri New Manat (AZN1.00 AZN = US$ 1.5991.00 SDR = US$ 1.382

FISCAL YEAR

ABBREVIATIONS AND ACRONYMSABS Asset Backed Securities MoF Ministry of FinanceADB Asian Development Bank MoT Ministry of TaxesAZN Azerbaijan New Manat NCB National Competitive BiddingBSE Baku Stock Exchange NDC National Depository CenterCAS Country Assistance Strategy ORAF Operational Risk Assessment CMMP Capital Markets Modernization Project FrameworkCPS Country Partnership Strategy PAD Project Appraisal DocumentEBRD European Bank for Reconstruction and PID Project Information Document

Development PIU Project Implementation UnitECA Europe and Central Asia POM Project Operation ManualEU European Union PQ PrequalificationFIRST Financial Sector Reform and Strengthening PPP Public-Private Partnerships

Initiative RVP Regional Vice PresidentFIMSA Financial Markets Supervision Authority SBD Standard Bidding DocumentsGDP Gross Domestic Product SCS State Committee for SecuritiesIBRD International Bank for Reconstruction and SECO Swiss State Secretariat for

Development Economic AffairsICR Implementation Completion and Results TAL Technical Assistance Loan

Report USAID United States Agency forIC SSS Individual Consultant Single Source International Development

Selection WBT World Bank TreasuryIDA International Development AssociationIFC International Finance CorporationISDS Integrated Safeguard Data Sheet

Senior Global Practice Director: Gloria GrandoliniSector Manager: Rolf Behrndt

Project Team Leader: Angela PrigozhinaICR Team Leader: Stephen Pirozzi

Republic of AzerbaijanCapital Markets Modernization Project (CMMP)

CONTENTS

Data SheetA. Basic InformationB. Key DatesC. Ratings SummaryD. Sector and Theme CodesE. Bank StaffF. Results Framework AnalysisG. Ratings of Project Performance in ISRsH. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design2. Key Factors Affecting Implementation and Outcomes3. Assessment of Outcomes4. Assessment of Risk to Development Outcome5. Assessment of Bank and Borrower Performance6. Lessons Learned7. Comments on Issues Raised by Borrower/Implementing Agencies/PartnersAnnex 1. Project Costs and FinancingAnnex 2. Outputs by ComponentAnnex 3. Economic and Financial AnalysisAnnex 4. Bank Lending and Implementation Support/Supervision ProcessesAnnex 5. Beneficiary Survey ResultsAnnex 6. Stakeholder Workshop Report and ResultsAnnex 7. Summary of Borrower's ICR and/or Comments on Draft ICRAnnex 8. Comments of Cofinanciers and Other Partners/StakeholdersAnnex 9. List of Supporting DocumentsAnnex 10. Borrower ICRMap (IBRD 33365)

A. Basic Information

Country: Azerbaijan Project Name:Capital Markets Modernization Project

Project ID: P120321 L/C/TF Number(s): IBRD-80240ICR Date: 01/10/2017 ICR Type: Core ICR

Lending Instrument: TAL Borrower:REPUBLIC OF AZERBAIJAN

Original Total Commitment:

USD 12.00M Disbursed Amount: USD 11.96M

Revised Amount: USD 12.00MEnvironmental Category: CImplementing Agencies: Azerbaijan State Committee for Securities Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 12/09/2010 Effectiveness: 11/07/2011 11/07/2011 Appraisal: 01/19/2011 Restructuring(s): 05/06/2015 Approval: 03/17/2011 Mid-term Review: 01/20/2014 02/03/2014 Closing: 12/31/2015 07/01/2016

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

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance: Moderately Satisfactory Overall Borrower

Performance: Satisfactory

C.3 Quality at Entry and Implementation Performance IndicatorsImplementation

Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

NoQuality at Entry (QEA):

None

Problem Project at any time (Yes/No):

NoQuality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes Original Actual

Sector Code (as % of total Bank financing) Public administration - Financial Sector 7 7 Capital Markets 93 93

Theme Code (as % of total Bank financing) International financial standards and systems 36 36 Other Financial Sector Development 22 22 Regulation and competition policy 42 42

E. Bank Staff Positions At ICR At Approval

Vice President: Cyril E Muller Philippe H. Le Houerou Country Director: Mercy Miyang Tembon Asad Alam Practice Manager/Manager:

Rolf Behrndt Sophie Sirtaine

Project Team Leader: Angela Prigozhina Michael Edwards ICR Team Leader: Stephen Francis Pirozzi ICR Primary Author: Stephen Francis Pirozzi

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document)Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption of an effective capital markets regulatory framework and infrastructure

Revised Project Development Objectives (as approved by original approving authority)

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Increased issuance of corporate bonds

Value quantitative or Qualitative)

1.9% 3.8% 14.1%

Date achieved 10/04/2011 12/31/2015 07/01/2016Comments (incl. % achievement)

Outstanding amount of corporate debt to 2010 Non-oil GDP

Indicator 2 : Increased number of listed companies


2 8-10 5


Number of listed companies

Indicator 3 : Improved price transparency


0% 90% 100%


Ratio of competitive transactions / total equity (non-block transactions)

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Ratio of market participants electronically linked to market infrastructure (trading, clearing and settl

Value 0% 100% 100%

(quantitative or Qualitative) Date achieved 10/04/2011 12/31/2015 07/01/2016Comments (incl. % achievement)

Ratio of market participants electronically linked to market infrastructure

Indicator 2 : Enactment of new Capital Market Law

Value (quantitative or Qualitative)

No Yes Yes


Law enacted

Indicator 3 : Promulgation of capital markets regulation required upon enactment of Law


No Yes Yes


Regulations promulgated

Indicator 4 : Number of companies involved in the listing advisory program (debt and equity)


0 15 16


Number of companies involved in the listing advisory program

Indicator 5 : Increased of the threshold pass rate of the Financial Certification examination for market participants


50% 75% 75%


Measures financial literacy level

Indicator 6 : Consumer Awareness of Capital Market Instruments


24 45 59.38


using the Capital Markets Awareness Index

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements(USD millions)

1 07/09/2011 Satisfactory Satisfactory 0.00 2 02/09/2012 Satisfactory Satisfactory 0.00 3 10/08/2012 Satisfactory Satisfactory 0.45 4 01/09/2013 Satisfactory Satisfactory 1.96 5 10/24/2013 Satisfactory Satisfactory 3.41 6 06/11/2014 Satisfactory Moderately Satisfactory 4.24 7 11/22/2014 Satisfactory Moderately Satisfactory 4.75 8 05/18/2015 Moderately Satisfactory Satisfactory 6.18 9 11/10/2015 Satisfactory Satisfactory 8.38

10 06/29/2016 Satisfactory Satisfactory 11.74

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes MadeDO IP

05/06/2015 MS S 6.18

I. Disbursement Profile

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal1. From 2004 – 2008 Azerbaijan experienced an average annual increase in GDP over 20 percent and decrease in poverty, due in large part to rising oil and gas production and prices. However, given the exhaustive nature of oil and gas production, it was believed that Azerbaijan may have reached its peak, as production was estimated to remain steady over the next decade and decline thereafter, thereby leaving limited window to create an economic environment to support growth in the non-oil economy. The challenge for Azerbaijan was the ability to transform into a sustainable higher middle income country with a more diversified economy.

2. At the time of appraisal, Azerbaijan had made good progress on its first round of economic reforms. This includes establishing a sound macro-framework, including the oil fund. It also includes small-scale privatization, internal trade and price liberalization and a stable central banking and foreign exchange system. Improved policies to provide effective services in basic health, education and social protection had also been put into place. However, Azerbaijan continued to lag behind most other CIS countries in second generation reforms, in such areas as, large-scale privatization, competition policy, consumer protection, rural access to financial services, banking and securities market reform, and foreign trade in the non-oil sector. In addition, there was a lag in developing policies and institutions needed to support a competitive highly skilled workforce, an innovative and flexible private sector environment, and to address the environmental legacy of the Soviet Union.

3. The Government sought to maintain progress reflected in the 2011 Doing Business Report by further diversifying the economy and making gains in areas that at the time were identified as requiring urgent attention, including business licensing, tax and customs administration and reduction of corruption. While the Country’s rankings for business entry were good at the time of appraisal, Azerbaijan ranked poorly on exit, competition and dimensions that deal with ongoing business operations, including trading across borders, paying taxes, etc. For example, Azerbaijan’s rank for “Starting a New Business” improved from 64 to 15 during the period 2008-2011. However, during the same period, the rankings for “Trading Across Borders” and “Paying Taxes” ranged from 173-177 and 141-103, respectively.

4. During the time of appraisal, the capital market in Azerbaijan was underdeveloped, with equity and debt market capitalization of 0.5 percent and 1.9 percent of non-oil GDP, respectively, at the end 2010. Development of the capital market in the medium term was considered crucial to support economic diversification of the non-oil sector. The main activity of the Baku Stock Exchange (BSE) was to serve as the auction mechanism for the issuance of Government Securities. However, due to a number of limiting factors1, secondary trading of treasury debt did not exist. Only two companies had listed their shares on the BSE to date, one of which was closely-held and did not trade. The most active trading surrounded shares of about 500 companies privatized in the mid-1990s, which represent the “unlisted securities market”, which was not regulated by the State Committee for Securities (SCS). As virtually all equity trades were pre-arranged, traditional exchange driven price discovery is not attained. The investor base was acutely underdeveloped and banks have had little interest of investing in low yielding existing market instruments2. As a consequence of the underdevelopment of the capital markets, the banking sector dominates the financial sector with more than 95 percent of total assets.

1 These include artificially low yields, high frequency of issuance, and a broad range of available maturities

11

5. A number of key benefits would result in the medium term from the development of the capital market. As a result of prior years’ high bank credit growth, both credit and related foreign exchange risks had become concentrated in the banking system. It was anticipated that over time these risks would be diffused as the nascent corporate bond market develops and more firms are able to gain access to longer term funding. Secondly, the banking system’s domestic funding structure would be enhanced through banks’ improved access to debt and equity financing. Thirdly, through a stronger capital market, holders of privatization vouchers would be able to more readily determine the price offered to sell their holdings. In sum, lenders, borrowers and investors would each have new opportunities to participate in the growth of non-oil economy through the capital market.

6. At project design, market participants were interested in exploring more attractive financing opportunities for the private sector. At the time the project was conceived, the corporate sector was relying on expensive, short-term and increasingly scarce local financing from the commercial banks. Moreover, with the exception of IBA (which is majority owned by the State), few banks were large enough to provide substantial funding to enterprises. Market participants and the regulator alike had indicated that a number of enterprises have an interest to access the capital market for debt and/or equity financing. Equally, banks were interested in diversifying their funding sources away from short-term deposits and find alternative sources of finance. The capital market, through both equity and debt financing, offered banks potential access to longer term funding, which was considered essential to encourage private sector development.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption of an effective capital markets regulatory framework and infrastructure.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justificationThe PDO was not revised.

1.4 Main Beneficiaries

7. The main beneficiaries of the CMMP project identified in the PAD are:• State Committee for Securities• Baku Stock Exchange• National Depository Centre• Central Bank of Azerbaijan• Ministry of Finance• Ministry of Economic Development• Professional financial intermediaries• Corporate Sector• Individual, corporate and institutional investors

1.5 Original Components

2 Apart from the government securities, mostly for the reserve requirements12

8. The PAD defined five components or parts (as they are called in the Development Credit Agreement), as follows:

9. Component 1: Streamlining and Automating Market Infrastructure. This Component will address the outdated capital market infrastructure constraints by focusing on: (i) increasing automation of the market through establishing one depository center and consolidating clearance and settlement; (ii) opening the infrastructure’s inclusion/participation and access; (iii) minimizing off-market trades and improving price discovery; (iv) facilitating the operational introduction of investment funds; and (v) building better risk protection through establishing an updated trade guarantee mechanism. Market infrastructure activities supported under this Component will seek to maximize compliance with the Group of Thirty standards on clearance and settlement, IOSCO Principles 35-38 and CPSS-10 clearance and settlement principles. In this manner the Project will promote compliance with best international practices, and just as importantly, ready the reformed market infrastructure for connectivity to EU systems, when the level of Azeri market activity makes this advisable.

10. Component 2: Updating and Strengthening the Legal and Regulatory Framework. To maximize the benefits of adopting an adequate legal and regulatory framework, this Component will focus on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are addressed through the forthcoming new Capital Market Act and identifying key implementing regulations needed to make the law effective; (ii) enhancing market confidence and safety by introducing minimum capital requirements for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry of Finance, eliminating tax obstacles to capital formation for companies and avoiding double taxation of participants in investment funds; (iv) allowing pooled investments by insurance companies; (v) fostering competitiveness by extending market participation through new licenses and broader geographic coverage; and (vi) ensuring effective coordination with other regulatory authorities in the financial sector (e.g., the Central Bank of Azerbaijan and the Ministry of Finance Insurance Directorate) to minimize regulatory gaps and arbitrage opportunities. The EU TACIS project is currently supporting drafting of the new and approximation of the EU directives in Azerbaijan regulatory framework. This Component of the Project will largely build on the preparation of the draft Capital Market Act and be strengthened through the SCS undertaking in 2013 an IOSCO self-assessment and an independent IOSCO assessment at the end of the Project

11. Component 3: Stimulating Supply. This Component will promote greater use of capital markets as a financing alternative by focusing on: (i) creating a more appropriate environment to encourage equity listings and the corporate bond market; (ii) actively reaching out to corporations to promote benefits of financial market as a funding alternative and working proactively with prospective issuers to assist them in coming to the market; (iii) promoting development of reliable benchmarks in the government bond market (in cooperation with IMF); (iv) supporting domestic capital market financing of the large infrastructure projects, by examining the potential for PPPs; and (v) assessing potential for introduction of new financial products (e.g., Electronic Traded Funds in the medium term).

12. Component 4: Capacity Building. This Component will seek to overcome the low capacity of market participants and regulators through launching capacity building activities. First, as the SCS is the major force leading the CMMP reform, it is important to assure that the agency’s human and financial capacities are sufficient and effective. This Component, will aim to: (i) strengthen the SCS’ knowledge

13

management, its policy formation processes and transparency of operations; and (ii) strengthen the institutional capacity of the SCS’ surveillance, reporting and enforcement systems. Second, investor education is a key factor to the encouraging the breadth and depth of participation in capital markets. It is therefore necessary to ensure that potential investors are well-informed as to the use, benefits and risks of securities ownership.

13. This Component will include, inter alia, activities to: (i) improve public awareness of the capital market by carrying out a series of effective communication programs through media, outreach sessions hosted by the SCS in major cities of Azerbaijan; (ii) increase potential investors’ understanding of capital market by series of education seminars and outreach tools to nascent investment funds and insurance industry; and (iii) promoting the Azeri market to international investors. Third, skilled capital markets intermediaries are essential to the creation of efficient capital markets. The establishment of high professional standards for capital markets professionals has a direct influence on the credibility of the capital market and encourages the inflow of investment funds. 14. The set of proposed measures regarding on-going training and certification under this Component should provide investors with confidence that the persons they are dealing with have the necessary skills, knowledge, experience and ethical standards to administer their investments This Component will support an increase in the professional knowledge base by: (i) developing a capital markets training center; (ii) gauging the current capacity of the capital markets participants; (iii) establishing curricula for qualification for licenses; and (iv) developing a sustainability plan for Training Center.

1.6 Revised Components

15. No material changes were made to project components.

1.7 Other significant changes

16. Changes were made to the loan closing date and funds were reallocated between procurement categories. The revised closing date was July 1, 2016 which was six months beyond the original closing date of December 31, 2015. Funds totaling USD 440,000 were reallocated, between procurement categories. The extension of the project closing date was requested to accommodate the installation of the Capital Market Information System (CMIS) under Component 1 of the Project “Streamlining and automating capital markets infrastructure”. The work under the CMIS contract commenced in late February 2015 and installation was estimated to be completed within 12 months thereby representing a two-month slippage from the original project end date. A formal letter (#13/06-53-1271) dated March 4, 2015 was received from the Ministry of Finance of the Republic of Azerbaijan (MOF) requesting extension of the closing date to July 1, 2016 and the reallocation of funds between procurement categories.

17. Project funds were reallocated as follows:

• USD 400,000 transferred from “Consulting Services, Audit and Training” category to “Goods” category;

14

• USD 40,000 transferred from “Consulting Services, Audit and Training” category to “Incremental Operating Costs” category

Table 1: Reallocation of Proceeds

Category

Amount of the Loan Allocated (expressed in USD) Current)

Amount of the Loan Allocated (expressed in USD)

(Revised)

Percentage of Expenditures to be Financed (Net of VAT)

(1) Goods 4,300,000

4,700,000 100.00

(2)Consultants' services including audit and training

7,600,000

7,160,000 100.00

(3) Incremental Operating Costs 70,000 110,000 100.00

(4) Front-end fee 30,000 30,000

TOTAL 12,000,000

12,000,000 100%

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

18. Preparation of the CMMP took place in an economic climate significantly different from that of today. In 2010, the corporate bonds market saw eight new issuances making it one of the most active segments of the capital markets. These new issuances were led by banks, insurance and microfinance companies. The total amounted to 17.6 AZN million with an average maturity of 1.5 years and an average interest rate of 14 percent. One bank issued a 0.999 AZN million Eurobond with a maturity of 1 year and an interest rate of 11 percent. The Azerbaijan Mortgage Fund (AMF) issued 5 and 7 year covered bonds at 3.0 and 3.25 percent respectively3. The CMMP intended to leverage these positive trends in the market and increase private sector financing through the capital markets as an alternative to bank financing which was more expensive and offered shorter terms. The bond market remained active but it was apparent by early 2015 that there was waning interest in listing equities as the macroeconomic conditions began to weaken.4

3 See Pre-Implementation mission Aide-Memoire (May 26th-June 3rd, 2011)

4 16 bond issuances occurred in the first quarter of 2016 compared to 82 issuances during the same period in 2015. The Manat devaluations in February and December 2015 negatively impacted investor sentiment, while tighter monetary policy and fiscal consolidation resulted in a tightening of local currency liquidity and an increase in cost of funds in the period 2H2015-1H2016. Several IPOs planned for 2015 had been cancelled pending improved conditions. (See Aide-Memoire June 6-10, 2016)

15

19. The TAL was the appropriate instrument for the implementation of the CMMP. As described in detail in the PAD, the GoA was committed to improving the capital market infrastructure so that it would encourage and support securities issuance (debt and equity) as an alternative to bank borrowing.5 The CMMP continued and complemented work focused on the securities and capital markets supported by IMF, SECO, IFC, EBRD, USAID and EU TACIS. More specifically, the project was designed to address existing regulatory, infrastructure and capacity gaps identified in the Capital Market Assessment Report developed with support of the FIRST Initiative in mid-2010

20. Commitment to the project remained high despite economic challenges. In spite of the prevailing economic challenges facing Azerbaijan during project implementation, the borrower remained committed to achieving the reforms and structural changes required under the CMMP plan. The level of commitment is evidenced by the issuance of Presidential Decree #760 (February 3, 2016) which created an integrated Financial Market Supervisory Authority (FIMSA). FIMSA has been created with regulatory and supervisory responsibility over banks, non-bank credit institutions, capital markets, payment systems, and financial monitoring of AML/CFT. Upon approval of the FIMSA Charter on March 11, 2016, the State Committee for Securities (SCS) had been dissolved. The move was designed to add efficiency to securities and capital markets regulation and oversight.

21. Appropriate risks were identified at the time of project design. However, macroeconomic stability and a decline in crude oil prices were neither identified nor anticipated. Given the scope of the project, the team correctly identified the following core risks:

Stakeholder risks. Failure to secure broad political, industry and investment community would potentially result in delay or discontinued implementation of the capital markets reform process. Institutional risks. Unforeseen changes in the SCS leadership structure (both high and mid-level) could significantly delay portions of the project implementation. Implementation risks. Given the limited capacity of the SCS there was a potential for delay. The SCS had no experience leading a broad reform agenda and implementing World Bank Projects. However, SCS did have successful experience implementing projects with other IFIs

22. The team believed that “the relatively simple design and implementation arrangements”6 would help mitigate operational risks, while other risks regarding the institutional environment and governance will be mitigated through the active engagement of the SCS Board of Directors and robust local project supervision. However, the team did not identify macroeconomic risks that could have an adverse effect on both project implementation and market participation. An unanticipated significant drop in oil prices7 triggered a series of negative consequences including sharply reduced economic activity, tightened liquidity and significant distress in the banking sector which resulted in several high profile bank closures.

5 See PAD page 12, Paragraph 37

6 See PAD page 12, Paragraph 34

7 Crude oil prices began a steady trend upward starting in early 2002 and dipped in early 2007 when the financial crisis hit. Subsequently, there was a rapid and dramatic rise to a peak price of $139.05* in June 2008 which was followed by an equally dramatic drop to $35.23* in February 2009. Since then, the price per barrel has risen to about $100* and has settled to about $52* as of January 2, 2017 *(2016 Dollars)

16

With the benefit of hindsight, it is apparent that this has had a significant negative affect on the expected uptake and issuance of corporate debt and securities.

2.2 Implementation

23. In spite of some delay in implementation, all deliverables were realized by the revised project end date. As mentioned, in spite of unforeseen economic challenges most of the project deliverables were completed on time. In April 2015, the project team sought a six month extension in the project closing date.8 The extension was requested due to a delay in procurement and contracting of a consultant for the IT solution related to the capital markets infrastructure system (CMIS) under component 1. By June 10, 2016, all deliverables under components 1, 2 and 3 were completed. Two remaining items under Component 4 were completed before project closing. These were (i) recommendations of expanding commercial b2b consultancy services of the CMTC, and (ii) Financial Literacy Survey. 24. Delays were encountered in the early stages of the project which are attributed to a more complex preparation process than anticipated and a delayed launch in the CMIS. The disbursement schedule lagged almost 12 months behind initial projections and persisted until the end of 2015 Q3 when disbursements began to pick up. In addition to project complexities cited by the team, it is understandable why such a project would experience delays given the overarching threat of financial crisis and two currency devaluations in February and December 2015. In spite of these challenges, the project had achieved essentially all its objectives by the revised closing date, which was only six months beyond that of the original closing date.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

25. At the time of approval the Project was relevant to country needs and the M&E framework supported the assessment of progress towards the achievement of the PDO. At the time of approval, Azerbaijan had largely weathered the financial crisis in 2008 and experienced a 9.3% GDP growth rate in 2009. However, growth in the non-oil sectors had slowed down to 3.2% in 2009 compared with double digit growth during the period 2006-2008. As Azerbaijan had already begun instituting economic reforms, strengthening of the capital markets by modernizing, facilitating access and promoting transparency was a logical step towards market expansion and encouraging non-bank long-term financing. The banking system, however, was not a primary focus of these efforts.

26. Monitoring of the CMMP TAL was conducted by the PIU, located within the State Committee for Securities (SCS), in close collaboration with the Government and World Bank. The SCS was responsible for project implementation and M&E. The PIU was established within the SCS and had direct responsibility for procurement, disbursement, accounting and reporting to the SCS, Government and World Bank. The Internal Audit Department of the SCS was specifically given the responsibility of M&E tracking and reporting. It was also responsible for ensuring that the implementation units were integrated into the management information results aggregation process. Reporting was provided on a

8 See Report No: RES18549 Restructuring Paper on a Proposed Project Restructuring of Capital Markets Modernization Project Loan IBRD-80240 Board Approval: March 17, 2011 To the Republic of Azerbaijan

17

regular and timely basis. The project was also closely monitored by the World Bank. Two ISR missions per year were completed at regular intervals during Project implementation for a total of ten missions.

27. Of three PDO indicators, two were achieved, and one fell short. The indicator which fell short of its target is “number of companies with listed equity”. At the time of project closing, five companies had listed equity which fell short of the target of 8-10. It is not hard to see why this was not achieved given the prevailing macroeconomic conditions. Poor investor sentiment, low market liquidity and uncertainty in the stability of the Manat are not conducive to IPOs or other forms of equity issuance. All other indicators linked to the Project’s four components were either met or surpassed – a significant achievement given the uncertain macroeconomic conditions during project implementation.

2.4 Safeguard and Fiduciary Compliance

28. Fiduciary performance by the Borrower was satisfactory. The PIU provided financial reporting on a timely basis in a form and format satisfactory to the World Bank Financial Management Specialist. All annual audits were conducted by a reputable firm and all audit opinions on the Project’s financial statements were unqualified. Accounting records are maintained in a 1C based accounting system for SCS components and accounting records were consistently found to be accurate and with adequate controls to ensure accuracy of accounting records and reports.9

ISR FM Rating Key ISR Indicator Previous Rating Final ISR Rating Financial Management Satisfactory Satisfactory Counterpart Funding Satisfactory Satisfactory

29. Environmental Safeguards: Current Environmental Assessment Category: C - Not Required.

2.5 Post-completion Operation/Next Phase

30. At the time of the drafting of this ICR, The GoA is in discussions with the World Bank for an Advisory Services and Analytics (ASA) package for the purposes of financial sector stabilization and development. Given the decline in macroeconomic conditions in Azerbaijan, the shift to focus on broader issues to stabilize the financial markets appears to be an appropriate and much needed follow up to the CMMP.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

Dimension RatingRelevance of Objectives Moderate

9 Capital Market Modernization and Financial Sector Modernization Projects Financial Management Supervision Report, May 2016

18

Relevance of Design SubstantialRelevance of Implementation SubstantialOverall Relevance Rating Substantial

Sub-Rating for Relevance of Objectives: Moderate

31. The objectives of the Project have less relevance to current Government priorities than when it was approved. At the time of project approval, the economic situation in Azerbaijan was reasonably stable. At the time, emphasis was placed on diversification of the local economy and fostering the development of alternative sources of financing to support growth in the private sector. The deepening of the capital markets was accepted as a path forward to create a more efficient means for companies to obtain cheaper long term capital and encourage growth in the non-oil economy. However, the macroeconomic environment has changed significantly and there is greater need to stabilize the economy and the financial sector generally to prevent further deterioration. Currency devaluation in 2015 has put the banking sector under enormous pressure and has contributed to the failure of some institutions. Markets are virtually illiquid and companies are not accessing the equity markets and are conducting limited bond issues in the bond market. This is due to the currently high degree of economic uncertainty and waning confidence in the financial sector, manly banks.

Sub-Rating for Relevance of Design: Substantial

32. The Project’s design correctly placed emphasis on institutional strengthening, reform of the regulatory regime and streamlining market infrastructure. As mentioned earlier in this document, gaps existed in the regulatory and institutional structures supporting capital markets development and growth. The CMMP project leveraged off of prior work that had identified these weaknesses and focused on critical elements that would serve as a platform for the issuance of debt and equity securities. Among these elements are capacity building, streamlining and automation of the capital market infrastructure including the trading platform, strengthening the legal and regulatory framework and educating business and the public, generally, on capital markets operations and corresponding benefits. The level of transparency achieved by the project should not be undervalued given the prevailing adverse macroeconomic conditions that has shaken confidence in the banking sector and financial markets. It is also important to note, however, that there has been lower than originally expected market activity and participation due to these poor conditions. Uncertainty over the strength of the Manat as well as the viability of several large retail banks (following a series of attempted restructurings and liquidations) has dogged the domestic financial sector.

Sub-Rating for Relevance of Implementation: Substantial

33. Throughout project implementation, the SCS, Baku Stock Exchange, National Depository Center and the Bank remained committed to meeting project objectives and in spite of a challenging environment, substantially all objectives were met within budget and on time. The CMMP, has established a streamlined capital market trading platform underpinned by a revised legal framework and regulations that support its operations. However, the prevailing economic climate is not attractive to potential issuers of securities and more fundamental financial sector strengthening work is needed at this time. Related challenges such as instability of the banking sector and two currency devaluations had a negative effect on the banks’ ability to attract deposits. Several commercial banks have been declared insolvent and overall confidence in the financial sector is low. Measures to stabilize the financial sector,

19

generally, are very much needed at this time. As mentioned above, WB is working with the GoA to develop an ASA package focused on financial sector stabilization to address these issues.

3.2 Achievement of Project Development Objectives

Overall Achievement of PDOs Rating: Substantial

34. The Project contributed to the overall development objectives, with gains made in most areas. Project contribution is broadly recognized and well appreciated by the GoA and significant advances in PDO outcomes were achieved despite considerable challenges.

Responsible Institution

PDO Indicator Description – Indicator Definition

End Target (Approved)

Actual Result

Level of Achievement

(ICR’s Assessment)

Rating

PDO: Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption of an effective capital markets regulatory framework and infrastructure.Internal AuditDepartment ofSCS

1. Increased issuance of corporate bonds

Outstanding Amount of Corporate Debt to 2010 Non-oil GDP

3.80% 14.1% Fully achieved High

Internal AuditDepartment ofSCS

2. Increased number of companies with listed equity (cumulative)

Number of Listed Companies

8-10 5 Partially achieved Substantial


3. Improved price transparency

Ratio of Competitive Transactions/Total Equity (Non-Block Transactions)

90% 100% Fully achieved. High

35. PDO: “Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption of an effective capital markets regulatory framework and infrastructure”

36. PDO Indicator one: Increased issuance of corporate bonds. There has been an increase in the issuance of securities during the life of the project based on results tracked under the indicator “Outstanding Amount of Corporate Debt to Non-oil GDP”. The baseline in 2010 was 1.9%. The percentage rose steadily during the life of the project and was 14% as of May 2016. This was down from a high of 24% in 2015 and highlights the quickly changing macroeconomic environment as well as the short-term nature of corporate debt issues. Nonetheless, it is significantly higher than the target of 3.8%. In retrospect this target, although a doubling of the 2010 baseline, may have been set at a more ambitions level considering the fact that the result of 14% has been achieved under the current challenging economic conditions.

20

Outstanding Amount of Corporate Debt to 2010 Non-oil GDP (actual)2011 2012 2013 2014 2015 May 20164.9% 4.1% 7.3% 21.4% 24% 14%

37. PDO Indicator two: Increased number of companies with listed equity. This indicator fell short of its original target range of 8-10 companies with listed equity. It is not surprising that there was a slowdown in equity issues given the lack of appetite and ability of companies to conduct an initial public offering. Unanticipated price volatility, lack of market confidence and tightening liquidity contributed to a stagnation in the equity markets.

38. PDO Indicator three: Improved price transparency. This indicator achieved 100% of its target. The indicator was defined as the ratio of competitive transactions to total equity. “Competitive transactions” are non-block transactions as block transactions are not considered competitive and transparent. However, the BSE has taken measures that are designed to make block (or cross trades) more competitive by allowing a 60 minute price discovery period to allow counter-bid/offers and prepay requirements have been eliminated for purchase orders. Whether this actually increases competitiveness and transparency of block trades remains untested in the currently illiquid market.10

Intermediate Results Indicators

39. Component 1: Streamlining and Automating Market Infrastructure. The rating for this component in the project’s final ISR was Satisfactory and targeted results had been achieved by project closing. However, this comment was rated as moderately satisfactory in two consecutive ISRs, November 22, 2014 and May 18, 2015, respectively. The implementation of new (CMIS) is a critical step in advancing and supporting capital market development as it main focus/function is aimed at substantial upgrading of trading, clearance and settlement, depository and surveillance functions. The procurement process experienced delays in finalizing the supporting technical specifications and the bid invitation which was originally planned for September 2013 was delayed until April 2014.

Intermediate Indicators for Component 1.Responsibl

e Institution

Intermediate Indicator End Target (Approved)



Rating


1. Ratio of market participants electronically linked to market infrastructure (trading, clearing and settlements)

100% Fully achieved High

40. Component 2: Updating and Strengthening the Legal and Regulatory Framework. The rating for this component in the project’s final ISR was Satisfactory and targeted results had been achieved by project closing. This component had experienced some minor delay during project implementation as the

10 See CMPP Mission Aide-Memoire (June 6-10, 2016)21

review and consultation process within the Cabinet of Ministers and the Presidential Administration was longer than anticipated.Despite the delay in the enactment of the Law, the SCS and the consultancy firm had in parallel advanced thirty required regulations while awaiting the Law’s passage.11

Intermediate Indicators for Component 2Responsible Institution




Rating


2. Enactment of a new Capital Market Act

Enacted Fully achieved High


3. Promulgation of capital markets regulation required upon enactment of Law

Regulations Promulgated

Fully Achieved High

41. Component 3: Stimulating Supply: The rating for this component in the project’s final ISR was Satisfactory and results were fully achieved by the time of project closing.. However, this comment was rated as moderately satisfactory in two consecutive ISRs, January 11, 2014 and November 22, 2014, respectively. The objective of Component 3 is to stimulate supply of issuers in the Azerbaijan capital market and its core activity is the Listing Advisory Program (LAP) which an effort to focus available resources on increasing listings on the Baku Stock Exchange. The LAP was approved in March 2013 and formally launched in April 2014 after a 6 months delay which resulted from ) as a result of recommendations made in the Inception Report to shift certain deliverables into this unified program. By September 2014, realignment of these deliverables were agreed.





Rating


Number of companies involved in the listing advisory program (debt and equity)

15 Companies Fully achieved High

42. Component 4: Capacity Building. The rating for this component in the project’s final ISR was Satisfactory, and was rated at Satisfactory for the life of the project. The Capital Markets Training Center has been with some slight delay and curricula for the Training Center have been adopted and a train-the-trainers program enacted. A nation-wide education program was approved by the SCS and has been

11 See CMPP ISR #7 (22-Nov-2014)22

continued under FIMSA. FIMSA leadership confirmed that in addition to university curricula, an agreement was made with the Ministry of Education to include security markets materials to school books and to explore expanding the curriculum to secondary schools. The 100US$ million SOCAR bond issue in 2016 played an important role in raising public awareness of the bond market due to SOCAR’s visibility.





Rating


Increase of the threshold pass rate of the Financial Certification examination for market participants

75% Fully achieved High


Consumer Awareness of Capital Market Instruments12

45 Fully Achieved: 59.38

High

3.3 Efficiency

Rating for Efficiency: Substantial

43. The project achieved a high level of cost effectiveness given the multitude of complex deliverables competed within budget. However, the project required an extension of six months due to early delays. The project helped facilitate the modernization of the debt and equity trading platform for the BSE and helped inform the creation of the Financial Markets Supervision Authority (FIMSA) and subsequent liquidation of the SCS. However there was some delay experienced in the early stages of the project due to unanticipated complexities surrounding the TOR, tendering and ultimate installation and testing of the CMIS system. The successful completion of the later tasks necessitated a six month extension of the project closing date. Aside from this particular delay, the amount of progress made was considerable. For example, the new “On Securities Markets” Law was adopted on July 14, 2015. Twelve new NDC and post-trading system rules and thirty implementing regulations were adopted in support of the new securities law.

44. The markets are currently too illiquid to perform an economic analysis to assess the cost savings accruing to issuers of corporate debt or equities vis-à-vis the alternative of short term bank financing. An economic analysis calculating the cost savings benefits to securities issuers’ vis-à-vis reliance on bank debt would have been a useful measure to quantify current savings and perhaps extrapolate future benefits. Furthermore, bank lending activity has declined due to macroeconomic uncertainly, recent devaluations of the Manat and illiquidity.

12 Using the Capital Markets Awareness Index. 23

3.4 Justification of Overall Outcome RatingRating: Satisfactory

Overall this TAL is rated as Satisfactory. Dimension RatingRelevance SubstantialAchievement of Objectives SubstantialEfficiency SubstantialOverall Outcome Rating Satisfactory

45. The overall outcome rating for the project is Satisfactory. This is based on its Substantial rating for Relevance, Substantial rating for Achievement of Objectives, and Substantial rating for Efficiency. The project’s objective of strengthening key institutions continues to be highly relevant for the GoA’s and World Bank’s development priorities, and the project objectives were substantially met. Revisions to the project completion data was needed – and reflects the Bank’s responsiveness to the project and implementing institutions. There were moderate shortcomings primarily in the project’s efficiency evidenced by the six month extension.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development - (N/A)

(b) Institutional Change/Strengthening

46. During the implementation phase, the responsible agency, SCS, was dissolved and its responsibilities transferred to the newly established Financial Market Supervisory Authority (FIMSA). The Decree of the President of Azerbaijan #760 dated February 3, 2016 called for the creation of an integrated Financial Market Supervisory Authority (FIMSA) with regulatory and supervisory responsibility over banks, non-bank credit institutions, capital market, payment systems and financial monitoring for AML/CTF. Upon approval of the FIMSA Charter on March 11, 2016, the State Securities Committee (SCS) was dissolved with FIMSA designated as its legal successor. Prior to this, the World Bank had expressed concern that the oversight powers of the SCS (as they related to inspection and investigation of market players) were impeded by the Inspections Law13. The FIMSA has a much broader mandate than the SCS and is responsible for ensuring the effective functioning of the financial markets, as well as protection of the rights of creditors, investors and insurers.14 This institutional change is viewed as an improvement that will have a positive effect on capital markets oversight and securities price transparency. Experienced leadership within SCS (many of whom were directly involved in the CMMP) were assigned new roles in FIMSA thereby retaining the knowledge and experience of key managers.

(c) Other Unintended Outcomes and Impacts (positive or negative) – None identified

13 Law on Audits of Entrepreneurs and Protection of Interest of Entrepreneurs. Adopted in August 2013 and enforced in March 2014.

14 See: http://en.fimsa.az/pages/1024

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops – No Stakeholder workshop was conducted. However a project closing event was held in Baku on November 4, 2016. See Annex 6.

4. Assessment of Risk to Development Outcome

Rating: Significant

47. The overall risk the project outcomes are rated as Significant due to the struggling banking and financial sector. The devaluation of the Manat, lack of liquidity in the financial markets and the draining of deposit accounts in retail banks have shaken popular confidence in the banking system. Direct stakeholders and market participants have reported that the lack of regulatory transparency and uncertainty in the markets are major factors contributing to the anemic state of the financial sector. Several large banks have been declared insolvent thereby eroding confidence in the banking sector.15

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry

Rating: Moderately Satisfactory

48. The Bank correctly assessed the relevance of the PDO at the time of project design as well as the strategic relevance of the objective to broaden and deepen the capital markets in Azerbaijan. This was a timely and relevant project from inception. The project is well aligned with the FY07-10 and FY11-14 Country Partnership Strategies16 and their common objective of strengthening the non-oil economy through changes in a wide range of areas including financial markets. In the case of the CMMP, the focus was on the development of the securities markets. At the time of project design, this was a highly relevant objective. However, over the course of project implementation the financial sector generally began to weaken under the pressure of lower economic activity, tighter liquidity and distress in the banking sector

49. The Bank team failed to identify potential macroeconomic risks that could have an adverse effect on the overall success of the project. During implementation, an unanticipated significant drop in oil prices triggered a cascade of negative effects including a sharp reduction in economic activity, tightened liquidity and significant distress in the banking sector. As a result of the increasingly adverse macroeconomic conditions, there was and remains an acute need for financial market stability and management and oversight of the banking sector. This threatened the success of the project as well as cast some question on project relevance vis-à-vis the prevailing economic issues and distress in the financial and banking sectors.

15 Based on interviews with private sector stakeholders during the ICR Preparation Mission

16 See: Country Partnership Strategy FY07-10 for Republic of Azerbaijan (37812 – AZ); November 8, 2006, and; Country Partnership Strategy for Azerbaijan FY11-14 (56246 – AZ).

25

(b) Quality of Supervision

Rating: Satisfactory

50. The Bank team actively supervised project implementation and was responsive to client needs. The project was closely monitored by the Bank. Two ISR missions per year were completed at regular intervals during project implementation for a total of ten missions. A review of project documents indicates regular and active communication between the Bank, the PIU and implementing agencies. The ISRs provided straightforward assessments of project progress and highlighted potential issues or areas on concern. The project was led by four TTLs at varying points, with most of them supervising the project from Washington DC. A variety of senior technical staff from the Bank joined implementation missions to ensure quality control of the technical aspects of components, as detailed in ISRs and AMs. Procurement and Financial Management specialists were present in the region. Project implementation took place in a very challenging macroeconomic environment and the Bank team provided adequate support and expertise to bring the project to a satisfactory completion.

51. Fiduciary aspects of the project were managed in a timely manner and all audits were clean. As mentioned earlier in this document financial reporting was submitted by to the World Bank Financial Management Specialist on a timely basis in the proper form and format. All annual audits were conducted by a reputable firm and all audit opinions on the Project’s financial statements were unqualified. Accounting records were consistently found to be accurate and with adequate controls to ensure accuracy of accounting records and reports. A review of project–related documents and correspondence indicate a close working relationship between the Bank’s Financial management Specialist and the PIU. (c) Justification of Rating for Overall Bank PerformanceRating: Moderately Satisfactory

52. The Bank’s overall performance is assessed to be Moderately Satisfactory based on the ratings for quality at entry, quality of supervision, and the overall outcome rating (see table below). The CMMP project was relevant at the time of time of its inception and had the solid backing the GoA and the respective implementing agencies. Substantially all targets were met and some were surpassed. Delays were experienced early in the preparation stage which delayed the launch of the procurement process for the capital markets information system (CMIS). Some delay was also experienced in the launch of the national public awareness program for capital markets. The project team requested a six month extension of the closing date to allow for the completion al all project components. The extension was reasonable given the unexpected challenges that were encountered and the high quality of deliverables. Substantially all outcomes were achieved in spite of unforeseen macroeconomic challenges including falling oil process, tightened liquidity and a deteriorating banking sector. The Bank team did not account for these macroeconomic or financial sector risks during project design. Consequently, the project is less relevant today given the current market conditions. The successful completion of the CMMP can be largely attributed to strong counterpart commitment to the project.

Dimension RatingQuality at Entry Moderately SatisfactoryQuality at Supervision Satisfactory

26

Overall Bank Performance Moderately Satisfactory

5.2 Borrower Performance

(a) Government Performance


53. The Government’s performance is rated as Satisfactory. The Azerbaijan Ministry of Finance demonstrated ownership and commitment to the project during preparation and led project implementation via a PIU established at the SCS. It maintained the PIU with staff responsible for project coordination, procurement, financial management and M&E. The project was declared effective on Nove. 7. 2011, eight months after Board approval, which is a period longer than average for this type of project and was the result of a lengthy approval process and delays in establishing and staffing the PIU. Following Bank Board approval, the Borrower initiated a lengthy review process of the Loan document which included the Ministry of Finance, Ministry of Education, Ministry of Justice, and the Cabinet of Ministers. The initiation of the CMMP was also dependent on the then-anticipated Presidential decree endorsing the State Program on the Development of the Securities Markets.17

(b) Implementing Agency or Agencies Performance


54. The Azerbaijan State Committee for Securities (SCS) was the primary implementing agency for the CMMP. The overall implementation of the CMMP was delayed during the preparation phase. The establishment and staffing of the PIU proved to be a more problematic than anticipated.18 In March 2011, two specialists were identified but could not be retained until project effectiveness. As the process edged forward, one of the specialists took another position and notified SCS of this decision in late August. Similarly, the procurement of the 1C financial system and the search for consultants for the task “Creation of General Framework for Stimulating Supply and Capacity Building of Capital Markets”, took longer than what was originally anticipated. The unexpectedly complex preparation process also delayed the launch of the procurement process for the CMIS. The setbacks experienced early in the project had a ripple effect that ultimately required an extension of the closing date by an additional six months.

55. Despite early implementation delays and unanticipated negative macroeconomic conditions, SCS remained fully committed to the project and achieved all deliverables. As mentioned earlier in this document, commitment to the project remained high despite economic challenges. The borrower remained committed to achieving the reforms and structural changes required under the CMMP plan. The

17 Decree of the President of the Republic of Azerbaijan endorsing the State Program on the Development of the Securities Market of the Republic of Azerbaijan in 2011-2020. May 16, 2011,18:35

18 In March 2011, two specialists were identified but could not be retained until project effectiveness. As the process edged forward, one of the specialists took another position and notified SCS of this decision in late August.

27

creation of the integrated FIMSA resulted in an improved agency with regulatory and supervisory responsibility over banks, non-bank credit institutions, capital market, payment systems and financial monitoring for AML/CTF. (c) Justification of Rating for Overall Borrower Performance


56. Overall Borrower performance is assessed to be Satisfactory. (see table below).With a high level of commitment, the borrower undertook and implemented complex reforms in a difficult environment which was exacerbated by falling oil prices, tightened liquidity and a weak financial sector. Despite delays experienced during the initial phase of the project, significant achievements were realized and internal capacity ultimately improved.

57. As of July 1 (the amended closing date), all the deliverables envisioned under the project had been delivered and endorsed by the implementation agency. These include:

• Component 1: the adoption of 31 new regulations by the State Committee for Securities (SCS) following the enactment of the new Law on Securities Market, which introduced new standards for capital market operation and new requirements for licensing and operations of market participants;

• Component 2: successful installation of the new integrated Capital Market Information System (CMIS) and its satisfactory testing result,

• Component 3: all the activities under the component were completed at the previous supervision mission;

• Component 4: finalization of the national capital market education program and launch of the respective public financial awareness activities; the development of strategic plan for a sustainable operation of the Capital Market Training Center (CMTC).

58. Procurement under the project has been completed. Disbursement of the loan funds are at 98% in June 2016, with several outstanding payments due in the next few months. Funds under the capital market component of the FSMP grant TF00975 has been fully disbursed by October 2015.

Government Performance Rating SatisfactoryImplementing Agency Rating SatisfactoryOverall Borrower Performance Rating Satisfactory

6. Lessons Learned

59. When a country’s economy is reliant on a particular commodity or sector, it is critical to assess the risks associated with both short and long-term price fluctuations. Azerbaijan’s economy has been and remains highly reliant on oil exports. Based on customs data, petroleum products represented

28

over 90% of the country’s exports in 2011.19 Sustained downward price movements would have significant effects on the country’s national budget and, as experienced during project implementation, negative effects on GDP, pressure on the national currency, tightened liquidity and pressure on the financial sector. As a result, the prevailing economic conditions are not conducive to participation in the capital markets. The countries’ vulnerability to macroeconomic conditions must therefore be identified and, if available, a mitigation plan should be developed.

60. It is important to fully assess all required actions during the preparation stage of a project and identify and assess the implementing agency’s internal capacity to execute or manage all required functions. The project experienced initial delays largely due to a protracted process requiring approval from multiple government authorities before loan signing and staffing the PIU. The procurement process also proved to be challenging in the early stage as the PIU team lacked the capacity and had taken time to become familiar with requirements and standards. Tendering and contracting also proved to be more involved that initially anticipated. As a result, the project got off to a slow start and, despite efforts to catch up, required a six month extension. The scale and scope, as well as the timeline, of a project should be well aligned with the implementing agency’s capacity for coordination, procurement, contract management, and financial management. The Bank should consider up-front training of key government operational staff or temporarily embedding experts in the PIU if necessary to help support the weaker aspects of project implementation

61. Strong government commitment to a project agenda is a vital aspect in helping assure the success of Bank-sponsored projects. Strong ownership of this TAL helped to make sizable progress which included decisive legal and regulatory actions by the Government including the President, Cabinet of Ministers and the SCS/FIMSA. It is especially noteworthy that a high level of commitment was maintained in the face of macroeconomic and financial sector distress. If not for the Government’s perseverance the project may very well have been sidelined in order to shift resources to other pressing issues.

62. Capacity building and institutional reforms are not only more challenging to measure, but often take longer to be realized. The Bank should dedicate resources to monitoring and tracking such projects after closure since impacts may be realized more in the medium-term as opposed to the short term just after closing. This could help account for longer development periods needed for capacity building and institutional reforms to be fully realized. Teams should also be encouraged at the design stage to consider indicators and M&E arrangements that will allow for the tracking of results and follow up after closing.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies – No Comments received

(b) Cofinanciers – No Comments received

19 Economist Intelligence Unit, Country Risk Services: Azerbaijan. August 2016.29

(c) Other partners and stakeholders – No Comments received

30

Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Component 1: Streamlining and Automating Market Infrastructure 6.05 7.72 127%

Component 2: Updating and Strengthening the Legal and Regulatory Framework

1.89 1.42 74%

Component 3: Stimulating Supply 1.86 1.70 91%Component 4: Capacity Building 3.84 2.70 58%

Total Baseline Cost 13.64 13.56 99%

Physical Contingencies 0.00 0.00

0.00

Price Contingencies 0.00 0.00

0.00Total Project Costs 0.00 0.00

Front-end fee PPF 0.00 0.00 0.00Front-end fee IBRD 0.03 0.03 100%

Total Financing Required 13.64 13.56 99%

(b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 2.2 2.2 100% International Bank for Reconstruction and Development 12.00 11.96 99.6%

SECO (Component 2 and 3) 1.60 1.6 100%Total: 15.80 15.76 99.7%

31

Annex 2. Outputs by Component

The following are Key deliverables by Component:

Key deliverables Component 1: - The country’s post-trading architecture and environment was consolidated making the National

Depository Centre (NDC) the sole CSD for government and corporate securities, providing clearing and settlement functions to members;

- The central role of the NDC was supported by converting it to the non-for-profit infrastructure organization serving its members and local issuers. All other registry-keeping licenses in the country were abolished. The securities numbering and lean registration were transferred to the NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems ensuring DVP principles of both government and corporate securities.

- The securities numbering function was transferred to the NDC and its methodology was harmonized with internationally recognized ISIN standards; the NDC is a member of the Association of National Numbering Agencies.

- Implementation of the renewed post-trading procedures complying with the international best practices and newly adopted securities market legislation;

- Drafting extensive, best-practices based TOR for the new electronic trading/post-trading/surveillance platform comprising.

- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement, issuing functionalities in the market in strict compliance with the newly adopted securities market legislation;

Key deliverables Component 2: - Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law

harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3) and National Depository Centre (as a part of the Component 1) fully complying with the country’s new governing legislation;

- Drafting tax regulation initiatives covering various aspects of the securities market operations.

Key deliverables Component 3:- Re-organization of the BSE listing tiers and adoption of the new listing requirements;- BSE trading (subscription, public offer and secondary market) rules and procedures enabling

transparent and competitive price discovery and fully complying with the newly adopted securities market regulation;

- Conducting Listing Advisory Program (LAP) to local issuers, stimulating new issues at BSE platforms.

Key deliverables Component 4:- Conducting of the Nation-wide Education Program, including producing and disseminating

printed, visual and interactive study materials for schools, universities and general public, establishment of the Financial Laboratory at the Azerbaijan State University of Economics;

- Establishing Capital Markets Training Centre (CMTC);

32

Annex 3. Economic and Financial Analysis

The markets are currently too illiquid to perform an economic analysis to assess the cost savings accruing to issuers of corporate debt or equities vis-à-vis the alternative of bank financing. By 2013, the twin shocks of low oil prices and currency devaluations had brought to an end the growth in bank credit availability that the markets had enjoyed up to that point.

Therefore, as both the securities and banking sector are under severe pressure and uncertainty, it is impossible to conduct an analysis of relative savings that issuers of securities could realize over the alternative of bank financing.

33

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team membersNames Title Unit

Alina Nagdimunov Consultant GTCDRAltantsetseg Shiilegmaa Economist GMF02Angela Prigozhina Senior Financial Sector Specialist - TTL GFM09Arben Maho Procurement Specialist GGO03Deepal Fernando Consultant GGO03Dulguun Byambatsoo Consultant GGO20Farid Bakhshiyev Economist ECSF2Gantuya Paniga Senior Program Assistant EACMFGhada Youness Senior Counsel LEGLEJianjun Guo Senior Procurement Specialist GGO08Johanna Jaeger Senior Financial Sector Specialist GFM03Joseph Huntington La Cascia Senior Procurement Specialist GGO03Joseph Paul Formoso Senior Finance Officer CTRLAKetut Ariadi Kusuma Senior Financial Sector Specialist GFM08Lars Jessen Lead Debt Specialist GMF13Michael Edwards Adviser GFMDRMichael Engelschalk Consultant GGO15Nasreen Chudry Bhuller Program Assistant GFM03Robert H. Singletary HQ Consultant ST GFM10Sabina Vagif Majidova Program Assistant ECCAZSandro Nozadze Procurement Specialist GGO03Sau Ngan Wong Senior Counsel GFM02Stephen Francis Pirozzi Senior Monitoring and Evaluation Specialist GFMSOTanja Boskovic E T Consultant ECSPF - HISTural Jamalov Senior Financial Management Specialist GGO21Uzma Khalil Senior Financial Sector Specialist GFM01Yagut Iltifat Ertenlice Procurement Assistant ECCAZYi Dong Senior Financial Management Specialist GGO20Zahid Hasnain Senior Public Sector Specialist GGO15

(b) Staff Time and Cost

Stage of Project CycleStaff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Le

Lending

FY10 3.10 26,023.63

FY11 27.96 173,689.25

Total: 31.06 199,712.88

34

Supervision/ICR

FY11 7.01 50,653.03

FY12 14.38 136,454.66

FY13 17.34 109,879.30

FY14 11.15 99,207.36

FY15 12.95 77,346.30

FY16 12.26 89,507.74

FY17 6.90 45,272.48

Total: 81.99 608,320.87

Overall Total: 113.05 808,033.75

35

Annex 5. Beneficiary Survey Results

No official survey was administered. However, an ICR mission in Baku20 from October 17-21, 2016 included meetings with the stakeholders listed below.

The main objectives of the mission were to:

a) Conduct meetings with key stakeholders to inform the preparation and completion of the project ICR.

b) Use the findings of these meetings in concert with information provided during and subsequent to the June 2016 ISR mission to assess the achievement of project objectives and identify measurable results for inclusion in the ICR.

c) Identify lessons learned that may improve future capital markets activities and projects.

Name of Organization Name of Representative Title of Representative1. Financial Market

Supervisory Authority and Project Management team

Mr. Ilgar Muradov Deputy Board Director Mr. Bakhtiyar Azizov Project Manager, Head of Supervisory

Board of National Depository CenterMr. Fariz Azizov PIU Manager, Chairman of Baku Stock

Exchange2. Azerbaijan Mortgage

FundMr. Samir Rzayev Head of Treasury

3. Demir Bank Mr. Elshad Ibrahimov Head of Treasury4. Rabita Bank Mr. Ogtay Gasimov Head of Treasury5. Pasha Bank Mr. Ivan Ukhlianidza Deputy Head of Investment Banking

DepartmentMr. Mansur Mammadov Chief Risk Officer

6. Finex Group Mr. Farid Hamidov Chairman of the Board, FinexkreditMr. Vugar Zeynalov

8. European Bank for Reconstruction and Development

Ms. Ayten Rustamova Senior Banker

9. AXA MBASK Insurance

Mr. Selcuk Adiguzel Chief Executive OfficerMr. Fuad Musa Director of Legal & Finance

20 Mission led by Stephen F. Pirozzi, Senior Monitoring and Evaluation Specialist, GFMSO36

Annex 6. Stakeholder Workshop Report and Results

A closing event was held in Baku on November 4, 2016. Below are links to local media reports as well as a WB project impact video. Two sample articles are also included.

WB project impact video: http://www.worldbank.org/en/country/azerbaijan

Report on the website of the implementation agency http://en.fimsa.az/articles/58

Media reports (in English and Russian)http://www.xebersaati.com/85041-wb-project-benefits-azerbaijani-capital-markets.htmlhttp://www.azernews.az/business/104682.htmlhttp://en.trend.az/business/economy/2681183.htmlhttps://report.az/en/finance/azerbaijan-completed-implementation-of-capital-markets-modernization-project/http://azertag.az/en/xeber/1007867http://en.azvision.az/WB-project-benefits-Azerbaijani--51139-xeber.htmlhttps://report.az/ru/finansy/vsemirnyj-bank-azerbajdzhan-effektivno-ispol-zuet-sozdannuyu-dlya-rynkov-kapitala-infrastrukturu/

Government of Azerbaijan, World Bank conclude implementation of Capital

Markets Modernization Project04.11.2016 [15:11]

A+ A–

Baku, November 4, AZERTAC

Azerbaijan’s Financial Markets Supervisory Authority (FIMSA) and World Bank have today hosted a conference to

discuss the results of the Capital Markets Modernization Project (CMMP) supported by the World Bank and

Switzerland’s State Secretariat for Economic Affairs (SECO). The conference was attended by the representatives

of the Government of Azerbaijan, World Bank, international development partners, private business community,

civil society and media. Participants took stock of Azerbaijan’s path in modernizing its capital markets, and

discussed future challenges and actions to deepen financial markets and make capital market an important source of

financing the country’s private sector growth and economic diversification.

37

http://azertag.az/en

https://report.az/ru/finansy/vsemirnyj-bank-azerbajdzhan-effektivno-ispol-zuet-sozdannuyu-dlya-rynkov-kapitala-infrastrukturu/

https://report.az/ru/finansy/vsemirnyj-bank-azerbajdzhan-effektivno-ispol-zuet-sozdannuyu-dlya-rynkov-kapitala-infrastrukturu/

http://en.azvision.az/WB-project-benefits-Azerbaijani--51139-xeber.html

http://azertag.az/en/xeber/1007867

https://report.az/en/finance/azerbaijan-completed-implementation-of-capital-markets-modernization-project/

https://report.az/en/finance/azerbaijan-completed-implementation-of-capital-markets-modernization-project/

http://en.trend.az/business/economy/2681183.html

http://www.azernews.az/business/104682.html

http://www.xebersaati.com/85041-wb-project-benefits-azerbaijani-capital-markets.html

http://en.fimsa.az/articles/58

http://www.worldbank.org/en/country/azerbaijan

Rufat Aslanli, Chairman of the Board of Directors of FIMSA, said: “CMMP has provided organizational and

operational support to modernization of Azerbaijan’s capital markets. It has supported implementation of

Azerbaijan’s national program for development of securities market, and made important contribution to creating

state-of-the-art legal and operational infrastructure, and building capacity of the market.”

Rolf Berhnd, World Bank’s Practice Manager for Finance and Markets, said: “Improved access to finance for SMEs

and increased foreign direct investments are crucial for non-oil sector development and modernization in

Azerbaijan. Capital market is one of the key vehicles for domestic and international investment mobilization, but it

requires concerted efforts, holistic reforms and time to do it right.”

“CMMP supported a package of reforms needed to diversify the financial sector and ease the access to alternative

financing tools for Azerbaijani companies operating in the non-oil sectors. We believe that effects of the project will

be transformational and long-lasting,” said Angela Prigozhina, World Bank’s senior financial sector specialist and

the team leader for the project.

CMMP was approved on March 17, 2011 with a $12 million loan from the World Bank, supplemented by SECO

Trust Fund grant of $1.6 million. The Project closed on July 1, 2016. It supported capital market reform program

through four components aimed at enhancement of legal and regulatory framework for capital market, development

of a modern capital market infrastructure for securities trading, clearing, settlement and surveillance, increased

transparency, access and awareness of market participants, issuers and potential investors about capital market

opportunities, and enhanced capacity of the financial regulator to enforce sound market conduct rules and investor

protection practices.

Among notable results of the project are enactment in July of 2015 of the modern Law on Securities and

implementation of new regulatory requirements and normative acts in line with the best international practices,

establishment of Centralized Trading System (CETA) which linked investors, market-players, Baku Stock Exchange

and National Depositary Center in a single trading and post-trading system, and thus, significantly reduced

transaction time and costs. The project also helped streamline listing requirements at the Baku Stock Exchange and

build capacity of 16 local companies under the Listing Advisory Program (LAP) to raise more than half a billion

Manats from the domestic capital market.

AZERTAG.AZ :Government of Azerbaijan, World Bank conclude implementation of Capital Markets

Modernization Project

© Content from this site must be hyperlinked when used.

38

Azerbaijan, WB hail implementation of Capital Markets Modernization Project4 November 2016 17:58 (UTC+04:00)571

By Nigar Abbasova

The development of the capital market, which is considered to be a multi-faceted sector of the economy, is currently in focus of relevant financial authorities of Azerbaijan.

The results of the Capital Markets Modernization Project (CMMP) supported by the World Bank and Switzerland’s State Secretariat for Economic Affairs (SECO), was at core of discussions at the conference hosted by Azerbaijan’s Financial Market Supervisory Body (FMSB) and the World Bank (WB).

The CMMP for Azerbaijan was aimed at the increase of the use of equity and corporate debt as financing or investment instruments through the adoption of an effective regulatory framework of the capital market.

Head of FMSB Rufat Aslanli addressing the event said that the project has significantly enhanced the potential of Azerbaijan’s capital market, providing organizational and operational support to modernization of the market.

However, the authority believes that the country needs implementation of additional measures in this direction. Aslanli mentioned that the main objective is to attract those, who will be interested in the use of the potential of the market.

SECO Deputy Regional Director for South Caucasus Simone Haeberli, speaking at the event said that the secretariat is ready to implement new projects of technical assistance to help Azerbaijan solve the most difficult issues existing in the sphere.

Haeberli said that Azerbaijan and Switzerland have been cooperating effectively for already 25 years, including the cooperation within the SECO, which covers the microeconomic policy and ensuring financial stability. She

39

underlined that modern and transparent capital markets are now more important for Azerbaijan than at the time when the SECO started implementation of the project.

Capital market, which stands for the market for buying and selling of equity and debt instruments, is vital to the functioning of an economy, since capital is a critical component for generating economic output.

World Bank’s Practice Manager for Finance and Markets Rolf Berhnd, in turn, said that one of the main functions of the WB is improvement of conditions for small and medium-scale entrepreneurs, mentioning that capital markets are considered to be one of the main tools for reaching the goal. He mentioned that capital market is one of the key vehicles for domestic and international investment mobilization, which requires concerted efforts, holistic reforms and time to do it right. Berhnd said that the implementation of the reform of the capital market is quite a difficult process, underlining that Azerbaijan has managed to succeed in the sphere despite the difficulties. He mentioned that the reform will allow to create favorable conditions for the attraction of foreign investments.

WB’s senior financial sector specialist Angela Prigozhina said that the project supported a package of reforms needed to diversify the financial sector and ease the access to alternative financing tools for Azerbaijani companies operating in the non-oil sectors.

CMMP was approved on March 17, 2011 with a $12 million loan from the World Bank, supplemented by SECO Trust Fund grant of $1.6 million. The share of Azerbaijani government in the project, which was closed on Luly 1, 2016 amounted to $2.2 million.

Among the most notable results of the project are enactment of the modern Law on Securities and implementation of new regulatory requirements, which are in line with the best international practices. Moreover, the project contributed to the establishment of the Centralized Trading System (CETA) which linked investors, market-players, Baku Stock Exchange and National Depositary Center in a single trading and post-trading system, significantly reducing transaction time and costs.

40

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

Executive Summary of Borrowers’ ICR (Portions extracted from the Borrower’s ICR)

1. Context of the project initiation phase: Economic reforms which were implemented in the Republic of Azerbaijan during the recent years determined the economic system functioning on the basis of free market relations. Fundamental institutions of the market economy, including, legislative framework fixing new economic relations, public institutions regulating such relations and private entrepreneurs, which are the main subjects of new economic systems have been formed. During this period price and exchange rate policy had been liberalized, large scale privatization program implemented and favorable environment for the entrepreneurial activities in whole, macroeconomic stability and the country’s significant investment attractiveness had been achieved.

Consequently, during the recent decade before the project the country’s GDP increased approximately 9 times, export more than 15 times, strategic currency reserves 31 times, hundreds of thousands of new jobs has been created, relative number of poor population reduced by more than 5 times. During this period, comprehensive reforms were implemented aimed at establishment and institutional development of effective financial sector, administration, supervision and regulation of this sector was improved in line with the international standards and consequently competing abilities of banks’ increased significantly. For the decade preceding the project initiation the bank assets increased 15 times, deposits of population 36 times and credit investment into economy increased 19,6 times. Securities market, being an important component of financial system, had permanently been subject to attention and advanced legal and organizational measures had been undertaken in this area. Initial legal and regulatory framework and mechanisms, trading, clearing and settlement system, financial intermediary institutes had been created for the securities market.

For the 5 recent years before the project volume of trading at the organized securities market increased 4,3 times. In whole, the securities market had demonstrated growth higher than general economic growth and ratio of trading volume of the Baku Stock Exchange to non-oil GDP increased by 41% reaching 12,1%.Lessons and consequences of resent Global Financial Global of 2007-2008 urged reshaping of regulatory paradigm in the financial services sector including strengthened capital adequacy norms for financial services intermediaries, reforms in post-trade/depository infrastructure, etc. In parallel, development of the non-oil sector of the economy was declared by the government as a main priority. Achieving new level of quality for the securities market enhances means to regulate economy, facilitates attraction of financial resources to real sector and cross-sector movements of investment flows and by putting forth necessary requirements, such as increasing transparency of economic activities ensures increased effectiveness of the economic system in whole.

41

Increasing geopolitical instability in the region and commodities prices volatility of the mid-2010s underpinned the importance and timeliness of the government’s “2011-2020 State Program on Capital Market Development” (endorsed by the Presidential Degree on 16th May, 2011). The Capital Markets Modernization Project supported the implementation of the State Program goals for the first 5 years of it. A primary goal of the State Program on the Development of the Securities Market of the Republic of Azerbaijan in 2011-2020 is to develop a highly effective securities market, which is modern, complying with the international standards, providing large capitalization opportunities for the economy and ensuring reliable risk management.

To achieve this goal, the following tasks were identified:

- Improving securities market regulation mechanism in line with the best international practices, increasing institutional development level of the securities market and ensuring that it complies with the international standards ;- achieving increased capitalization rate in national economy, enhancing use of non-inflational investment resources attracted through the securities market for the purposes of financing economic projects;- creating conditions with protected investment and reliable risk management for the purposes of effective placements of savings of economic subjects and the public;- creating relevant conditions necessary for gradual integration of national securities market into international stock market.

The State Program is comprised of three stages:

- First stage (2011-2014) envisions modernization of securities market infrastructure, improvement of legal and regulatory base for this purposes, strengthening material-technical base, as well as creating necessary opportunities for the development of human capacity at the securities market.

- Second stage (2015-2017) provides for full automation and consolidation of transactions at the securities market and, meanwhile, establishment of framework necessary for introduction of new tools and services.

- Third stage (2018-2020) envisions increased depth of securities market through the introduction of new and more complicated types of tools and services and, in parallel, creation of effective system risks management arrangements. Upon completion of this stage covering the last 3 years of the State Program the stock market of Azerbaijan will be ready for integration into international financial markets.

A very important role in the formulation of the capital markets strategic development goals was played by the FIRST project initiated by the SCS in March 2010. Through the intense cooperation with the SCS and country’s capital market organizations, by late 2010, FIRST consultants prepared a comprehensive capital market assessment report. The FIRST initiative also catalyzed the inception of the CMMP project supported by the World Bank and the SECO.

2. The Project:

According to the agreement with donors assisting in financing the implementation, the project was divided into 4 parts and included 2 major tenders: on provision of the consultant services and on provision of goods (the Capital Market Information System).

42

The agreements defined project parts as follows: Part A: Streamlining and Automating Capital Market Infrastructure;

Part B: Updating and Strengthening the Legal and Regulatory Framework;

Part C: Stimulating Supply;

Part D: Capacity Building.

The total project finances breakdown is as follows:1. IBRD loan- 12,000,000.00 USD2. SECO grant – 1, 600,000.00 USD3. Azerbaijan Government – 2,200,000. USD (for VAT)

Brief information of two major procurements within the project:

The Request of Expression of Interests for provision of the consulting services, namely the assignment "Creation of General Framework for stimulating supply and capacity building of Capital Markets" was announced on 11 October, 2011. QCBS was used as the selection method for this procurement. Forty-six international companies, expressed their interests. The consortium of companies Corporate Solutions Consulting Ltd, Wiener Borsa, CAPMEX was selected as a winner and the contract was signed on the 15th of August 2012. The Consulting services contract 95 deliverables and 102 tasks to support the implementation of the four project parts (components).

The tender for supply and installation of Capital Markets Information Systems was announced on 18 April 2014 within works and goods category. The two stage bidding selection method was used for this procurement. KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the contract was signed.

3. Project Development Objective (PDO) Indicators and Intermediate Result Indicators:

The project’s development objective was to increase the use of equity and corporate debt as financing and/or investment instruments through the adoption of an effective capital markets regulatory framework and infrastructure. The PDO level results indicators are: (i) increased issuance of corporate bonds; (ii) increased number of listed companies and (iii) improved price transparency. The Project outcome and output indicators are measurable

PDO 1. Increased issuance of corporate bonds

2010 2011 2012 2013 2014 2015 2016 6mOutstanding amount of corporate debt 344 907 751 1,340 3,940 4,418 2,619

Non-oil GDP 18,443 24,165 28,474 32,638 35,969 37,670 10,939Outstanding amount of 1.9% 3.8% 2.6% 4.1% 11.0% 11.7% 23.9%

43

corporate debt/Non-oil GDP

This indicator represents the ratio of outstanding amount of corporate debt to non-oil GDP (the outstanding amount of corporate debt to 2010 non-oil GDP, 1.9% was taken as a baseline for the indicator).

In 2016 outstanding amount of corporate debt to non-oil GDP increased to 23.9%. The baseline indicator was 1.9% and the target was 3.8%.

The major factor for increase in indicator was a significant increase of corporate bond issuance including by organizations like Azerbaijan Mortgage Fund (AMF). From 2011 to 2015 total issuance of AMF bonds amounted to 256.6 mln AZN. Optimized REPO procedures, introduced incentives for market makers, awareness programs to treasury managers resulted in total amount of corporate debt issuance from 2011 to 2016 was 2,400 mln AZN. The outstanding amount of corporate debt at the end of the project to baseline year’s (2010) non-oil GDP is 14.2%, which is still considerably higher than expected target of 3.8%.

PDO 2. Increased number of companies with listed equity

2010 2011 2012 2013 2014 2015 2016 6MPrime Market - 1 1 1 1 2 2Standard Market - - - - - 3 3

In 2016 number of companies with listed equity is 5. The baseline was 2 and the target was 8-10 companies. There was only one listed company during 2010 - 2014 periods. The company was listed in the first Tier. However, most of the transactions occurred in the Alternative Trading Market (ATM) without needing to fulfill extensive listing and disclosure requirements. The first listing took place in the first tier in 2011 which was Demir Bank OJSC with market capitalization of 23.11 million AZN. Due to the low volatility in the market, this number has not significantly changed during the period from 2011 to 2014. In 2015 four new companies were listed in BSE. 1 – International Bank of Azerbaijan in Prime Market 2 – Azerkosmos, Turanbank and Aqrolising in Standard market. Overall market capitalization increased to 1,019 million AZN. The Listing Advisory Program and other initiatives worked with tens of local potential IPO candidates. Global financial crisis consequences, geo-political and regional instability and volatilities in national currencies in all neighboring countries as well as in commodity prices turned local issuers to conservative mood, making them consider bond issuances as more applicable capital market fund raising tool, if any at all. PDO 3. Improved price transparency

2010 2011 2012 2013 2014 2015 2016 6MPrice Transparency - 0% 0% 0% 100% 100% 100%

In 2016 overall price transparency indicator was 100%. The target for that period was 90%. In 2014 the SCS, BSE and NDC took a number of measures to increase transparency and accessibility of trades to all categories of traders and investors. First, a special regime was adopted at BSE for all cross transactions at secondary market (cross transactions are transactions conducted by the same broker from

44

the buying and the selling side). Thus, a crossing transaction cannot be matched (finalized) unless within next 30 minutes of trade session any other broker bids with better conditions (price) for the buying or the selling side of the transaction. If the latter happens, the auction starts. If no interest was shown the original transition was finalized. In 2015 the holding period of cross transactions was prolonged to 60 minutes. Secondly, in 2014 the special regime was introduced by the NDC to let smaller and less financially advanced brokers to participate instantly in cross transaction. The NDC eliminated funds pre-validation regime for all categories of brokers and let them deliver funds after the transaction matched. The funds provision is ensured by liquid assets pledged or bank guaranty mechanisms. Elimination of funds pre-validation allows brokers and all categories of investors to promptly react on bid quotes in the trading system. All transactions that appear on BSE trading system are a non-block transaction which means that all of the transactions are counted as being competitive transactions. Thus all transactions in BSE trading system are transparent and competitive.

Intermediate Results:

Intermediate Result One (Component One): Streamlining and Automating Market Infrastructure:

2010 2011 2012 2013 2014 2015 2016 6MRatio of market participants electronically linked to market infrastructure (trading, clearing and settlements)

0% 0%100%

0%100%

75%100%

90%100%

100%100%

100%100%

Despite the project planning phase expectations of gradual grow of number of market participants electronically connected to trading and post-trading operations at BSE, NDC and other involved entities, the transformation was instant due to the decision of BSE and NDC to conduct all the necessary changes at once and at their own expense. Thus, in 2011 BSE and NDC agreed the electronic protocol of data exchange, developed the connection facilities and handed over them to all brokers. Later, in 2016 the achievement was reinforced by implementation of the Korean technologies, through which, inter alia, the surveillance, market watch and DVP processes were also processed and automated.

Intermediate Result Two (Component Two): Updating and Strengthening the Legal and Regulatory Framework

2010 2011 2012 2013 2014 2015 2016 6MEnactment of a new Capital Market Act No No

NoYesNo

YesNo

YesNo

YesYes

YesYes

After inter-ministerial, parliamentary and Presidential Administration discussions, the “On Securities Markets” Law was enacted in July 2015.

Intermediate Result indicator Three (Component Two): Promulgation of capital markets regulation required upon enactment of Law

2010 2011 2012 2013 2014 2015 2016 6M45

Promulgation of capital markets regulation required upon enactment of Law

No NoNo

YesNo

YesNo

YesNo

YesYes

YesYes

All implementing regulations required by the enactment of the “On Securities Markets” Law were adopted by end of the 2015.

Intermediate Result indicator Four (Component Three): Number of companies involved in the listing advisory program (debt and equity)

2010 2011 2012 2013 2014 2015 2016 6MNumber of companies involved in the listing advisory program (debt and equity)

0 5

0

10

0

15

1

15

4

15

16

15

16

The Listing Advisory program came into being after extensive negotiations with potential service providers (brokers, auditors, lawyers and others) on 16th of April 2014.

Since its establishment LAP partners arranged numbers of company meetings and organized several group seminars for companies that might be interested in listing. The aim of those seminars was to educate companies and its management about the capital markets opportunities and help them to take advantage of this market. Key events were:

On the 17th of October 2014 the BSE staged a workshop for companies who had potential to do initial public offers (IPOs) or otherwise to issue and list equity or debt securities. This workshop was led by BSE team and invited guest expert Dr. Albrecht Buerger. There was an inspiring and “lessons learned” presentation from the first company joined LAP, Embawood Furniture Production, about their successful listing, through which they issued AZN10 millions of corporate bonds. A guest speaker from Borsa İstanbul gave a presentation on the similar experience, corporate governance practices in Turkey, challenges that Turkish SME issuers are facing.

On the 22nd of May 2015 together with PWC Azerbaijan, BSE organized a workshop on the topic of “Raising Public Equity and Debt Capital”. Over 70 representatives of 40 companies attended. The workshop was led by Mr. Rustem Teregulov, Partner and Capital Markets Leader, PwC CIS and CEE. Issues of major Azerbaijani companies were case studied in detail.

Since its establishment and till the end of the Project period, the LAP signed consortium contracts with 16 organizations, out of which 12 listed their instruments at Prime and Standard tier of BSE listing. Alternative tier companies are decided not to be taken into account for the purposes of this indicator as ATM tier companies are either offered to or traded by limited number of investors or have lower listing entrance requirements.

Intermediate Result indicator Five (Component Four): Increased of the threshold pass rate of the Financial Certification examination for market participants

46

2010 2011 2012 2013 2014 2015 2016 6MIncreased of the threshold pass rate of the Financial Certification examination for market participants

50%50%

50%

55%

50%

60%

75%

65%

75%

75%

75%

75%

75%

Financial Certification examinations were conducted by the SCS and lately by the FSMA. In 2013 the methodology of the examination was completely revised based on the Consultant’s recommendations. Since 2014 the CMTC provides preparation courses for the examinations. The threshold pass rate for the Financial Certification has been 75% for the last 4 reporting periods.

Intermediate Result indicator Six (Component Four): Consumer Awareness of Capital Market Instruments

2010 2011 2012 2013 2014 2015 2016 6MConsumer Awareness of Capital Market Instruments

24%28

N/A

33

32

37

36

41

56

45

59.11

45

59.38

Consumer Awareness of Capital Market instruments was the most important indication that the SCS was focusing on. Initiatives like establishing CMTC, launching LAP, Nation-wide Education Program initiative, cooperation with universities, youth organizations and journalists, conducting local and international conferences and workshops (detailed in above chapters) contributed to the increasing rates of financial literacy and consumer awareness. Moreover, the CMMP coincided with analogous initiatives of other financial institutions and governmental bodies, with whom the SCS cooperated closely in this regard (CBAR, MoF, etc). The indication surveys were conducted by the external independent specialized companies.

4. Amendments and extensions to the original project work plan. There were 3 occasions when the Project’s work plan was amended to comply with its main direction and goals: at the inception (October 2012), in the midst of the project span (October 2014) and at the end of the original project period (extension negotiations, October 2015- February 2016). All amendments were pre-approved by the World Bank and consequently confirmed by official amendments to the consulting services contract (the provision of goods contract remained unchanged for the whole period from Jan 2015 to Feb 2016).

4.1. Inception period amendments:

In the initial meetings in October 2012 with the project team, the Consultant and the World Bank, the SCS’ Chairman raised the issue of importance of increasing listing on BSE as a priority of the initial phase to be supported by CMMP. The SCS had been considering the creation of a Listing Advisory Program (LAP) to attract issuers to listing with resources to be allocated from BSE, SCS and other market participants and professionals to actively promote Capital Market, provide training and provide

47

preliminary listing advisory services. The Consultant was requested to take the lead in defining the program and provide technical and managerial support with its delivery. Supporting the LAP necessitated changes to the activities under Component 3 namely 3.1.1, 3.1.2, 3.2.3, 3.3.1 and 3.3.2. (See table 2.1.1 above).

Moreover, other changes were also agreed in the inception phase. Activities 2.3.1: “Review and analyze the risks and opportunities” and 2.3.2: “Recommendations on the optimal participation of the banks and requirements” were considered no longer required as the Central Bank had decided that commercial banks would only participate in Capital Market through their subsidiaries and not directly. Resources of these two tasks were agreed to utilize to support BSE to develop their rules and regulations to adapt new technological and legislative environment after launching the Capital Markets Information system and enactment of the new “On Securities Market Law” accordingly.

Activities 3.2.4 and 3.3.2 were similarly re-focused to concentrate on LAP activities, supporting seminars to be provided by the LAP etc. Activity 3.4.2: “Develop and publish educational material on Corporate Governance” was considered no longer valid as the IFC had initiated, prepared and published extensive material on Corporate Governance for local issuers. The Consultant was asked to assist BSE and prepare a study material on opportunities of IPO for local issuers.

All changes were endorsed by the World Bank and then confirmed in the Amendment to the contract with the Consultant (in October 2014).

4.2. Mid-period amendments:

In mid-2014 the SCS initiated another round of negotiations with the World Bank and the Consultant on updating and amending the tasks and activities in the deliverables to comply with the recent developments at the capital markets.

The role of the NDC as an asset manager of commercial investment funds were was reconsidered based on the experts recommendation in order to prevent the State owned NDC’s monopolization of the segment. Thus, it was asked to re-direct the Activity 1.3.8 from NDC to providing recommendations on potential private fund administration entities. Activities 2.2.2 and 2.2.3 were renamed and reshaped in order to comply fully with the task of preparing the implementing regulations that would support the new “On Securities Market Law” draft.

Activity 2.3.3 was reconsidered to concentrate more specifically on role of banks in newly proposed settlement model for the securities market of the country.

In light of the local real estate market dynamics, Activities3.5.4 and 3.5.5 were re-organized to focus on bringing international expertise of organizing foreign securities trade (MTF) to BSE.

Activities 4.6.4 and 4.6.5 supporting the CMTC were completed by the SCS itself before the commencement date of the Consultant assignment. So, the Consultant was asked to prepare self-study materials on various topics of the capital market operations.

48


4.3. Extension of the Project period:

In light of the complexity and significance of CMIS procurement tender as well as multiplicity of terms and conditions to be assessed, in the first quarter of 2015 the SCS and the World Bank started negotiating the possibility of the Project Period extension. Indeed, the procurement of the CMIS took longer time than initially anticipated. The project closing date extension topic was eventually triggered by the need to complete installation of CMIS in 12 months period after its inception, whereas all pre-requisite technical agreements and future contract negotiation were completed by mid-February 2015. The implementation of the information system could be finalized at least within 12 months, meaning a two-month slippage from the project’s original end-date (31 Dec 2015). In turn, the assessment of the development and implementation results of the CMIS was possible only after its go-live and required the consultants at least one month after its launching to be able to comprehensively assess all aspects of the implementation. At the same time, the SCS requested to consider two additional tasks for CMTC strategic development and sustainability. In consultation with the World Bank it was decided to sign new agreement with the same Consultant for additional services. The SCS asked the World Bank’s no-objection for SSS method and the Bank provided SCS with NOL on February 1, 2016 and new agreement with Corporate Solutions Consulting Ltd was signed on the same date. At the same time the existing agreement was extended to conduct the deliverable no 1.4.5 on assessing the CMIS implementation results. The Borrower, Ministry of Finance (MOF) of Azerbaijan, requested extension of the project for additional 6 months to have enough time for CMIS installation and handover and accommodating services. The Bank provided its approval of Project Closing Date extension till July 01, 2016.

49

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

None Available

Annex 9. List of Supporting Documents

World Bank Group (WBG), Country Partnership Strategy FY07-10 for Republic of Azerbaijan. November 8, 2006.

WBG. Country Partnership Strategy FY11-14 for Azerbaijan. September 15, 2010.

WBG. Country Partnership Strategy Progress Report for the Period FY2-11-FY2014 for Azerbaijan. April 30, 2013.

Independent Evaluation Group (IEG) of the WBG. Completion and Learning Review CPS Period: FY11 – FY14. June 30, 2015.

WBG. Project Information Document (PID) Concept Stage: Capital Markets Modernization Project. November 30, 2010.

WBG. Project Appraisal Document on a Proposed Loan in the Amount of $12 Million Equivalent to the Republic of Azerbaijan for the Capital Markets Modernization Program (CMMP). February 10, 2011.

WBG. Implementation Status and Results Reports: Capital Markets Modernization Project (P120321). Sequence 1-10

WBG. Aide Memoires for Capital Markets Modernization Project (P120321). Dated June 2011; June 2012; March 2013; February, September 2014; February, October 2015. WBG. Loan Agreement (Capital Markets Modernization Project) between the Republic of Azerbaijan and the International bank for Reconstruction and Development. September 22, 2011.

WBG. Restructuring Paper on a Proposed Project Restructuring of Capital Markets Modernization Project Loan IBRD-80240. Board Approval: April 29, 2015.

WBG. Azerbaijan Systemic Country Diagnostic. June 3, 2015

WBG-IMF. Financial Sector Assessment Azerbaijan. November 2015.

The Economist Intelligence Unit, Country Risk Service. Azerbaijan. London, UK. August 2016.

State Committee for Securities (SCS) PIU. Project Operations Manual, Capital Markets Modernization Project. December 24, 2012

50

WBG. Azerbaijan Partnership Program Snapshot. April 2015.

WBG. Doing Business 2008. September 26, 2007.Doing Business 2009. September 10, 2008.Doing Business 2010: Reforming through difficult times. September 9, 2009.Doing Business 2011: Making a difference for entrepreneurs. November 4, 2010.

51

Annex 10. Borrower’s ICR

COMPLETION AND RESULTS REPORT

ON A LOAN

IN THE AMOUNT OF US$12 MILLION TO

THE REPUBLIC OF AZERBAIJAN

FOR THE

CAPITAL MARKETS MODERNIZATION PROJECT

OCTOBER, 2016

52

ABBREVIATIONS AND ACRONYMS

ABS Asset Backed Securities MoF Ministry of FinanceADB Asian Development Bank MoT Ministry of Taxes

AZN Azerbaijan New Manat NCBNational Competitive Bidding

BSE Baku Stock Exchange NDCNational Depository Center

CAS Country Assistance Strategy ORAFOperational Risk Assessment

CMMPCapital Markets Modernization Project Framework

CPS Country Partnership Strategy PADProject Appraisal Document

EBRDEuropean Bank for Reconstruction and PID

Project Information Document

Development PIUProject Implementation Unit

ECA Europe and Central Asia POMProject Operation Manual

EU European Union PQ Prequalification

FIRSTFinancial Sector Reform and Strengthening PPP

Public-Private Partnerships

Initiative RVPRegional Vice President

FSMAFinancial Markets Supervision Authority of SBD

Standard Bidding Documents

the Republic of Azerbaijan SCSState Committee for Securities

GDP Gross Domestic Product SECOSwiss State Secretariat for

IBRDInternational Bank for Reconstruction and Economic Affairs

Development USAIDUnited States Agency for

ICRImplementation Completion and Results

International Development

Report WBT World Bank Treasury

IC SSSIndividual Consultant Single SourceSelection

IDAInternational Development Association

IFCInternational Finance Corporation

ISDS Integrated Safeguard Data SheetLAP Listing Advisory Program

53

5. Context of the project initiation phase:

Economic reforms which were implemented in the Republic of Azerbaijan during the recent years determined the economic system functioning on the basis of free market relations. Fundamental institutions of the market economy, including, legislative framework fixing new economic relations, public institutions regulating such relations and private entrepreneurs, which are the main subjects of new economic systems have been formed. During this period price and exchange rate policy had been liberalized, large scale privatization program implemented and favorable environment for the entrepreneurial activities in whole, macroeconomic stability and the country’s significant investment attractiveness had been achieved.

Consequently, during the recent decade before the project the country’s GDP increased approximately 9 times, export more than 15 times, strategic currency reserves 31 times, hundreds of thousands of new jobs has been created, relative number of poor population reduced by more than 5 times.

During this period, comprehensive reforms were implemented aimed at establishment and institutional development of effective financial sector, administration, supervision and regulation of this sector was improved in line with the international standards and consequently competing abilities of banks’ increased significantly.

For the decade preceding the project initiation the bank assets increased 15 times, deposits of population 36 times and credit investment into economy increased 19,6 times.

Securities market, being an important component of financial system, had permanently been subject to attention and advanced legal and organizational measures had been undertaken in this area. Initial legal and regulatory framework and mechanisms, trading, clearing and settlement system, financial intermediary institutes had been created for the securities market.

For the 5 recent years before the project volume of trading at the organized securities market increased 4,3 times. In whole, the securities market had demonstrated growth higher than general economic growth and ratio of trading volume of the Baku Stock Exchange to non-oil GDP increased by 41% reaching 12,1%.

Lessons and consequences of resent Global Financial Global of 2007-2008 urged reshaping of regulatory paradigm in the financial services sector including strengthened capital adequacy norms for financial services intermediaries, reforms in post-trade/depository infrastructure, etc.

In parallel, development of the non-oil sector of the economy was declared by the government as a main priority. Achieving new level of quality for the securities market enhances means to regulate economy, facilitates attraction of financial resources to real sector and cross-sector movements of investment flows and by putting forth necessary requirements, such as increasing transparency of economic activities ensures increased effectiveness of the economic system in whole.

Increasing geopolitical instability in the region and commodities prices volatility of the mid-2010s underpinned the importance and timeliness of the government’s “2011-2020 State Program on Capital Market Development” (endorsed by the Presidential Degree on 16 th May, 2011). The Capital Markets Modernization Project supported the implementation of the State Program goals for the first 5 years of it.

54

A primary goal of the State Program on the Development of the Securities Market of the Republic of Azerbaijan in 2011-2020 is to develop a highly effective securities market, which is modern, complying with the international standards, providing large capitalization opportunities for the economy and ensuring reliable risk management.

To achieve this goal, the following tasks were identified:

- Improving securities market regulation mechanism in line with the best international practices, increasing institutional development level of the securities market and ensuring that it complies with the international standards ;- achieving increased capitalization rate in national economy, enhancing use of non-inflational investment resources attracted through the securities market for the purposes of financing economic projects;- creating conditions with protected investment and reliable risk management for the purposes of effective placements of savings of economic subjects and the public;- creating relevant conditions necessary for gradual integration of national securities market into international stock market.

The State Program is comprised of three stages:

- First stage (2011-2014) envisions modernization of securities market infrastructure, improvement of legal and regulatory base for this purposes, strengthening material-technical base, as well as creating necessary opportunities for the development of human capacity at the securities market.

- Second stage (2015-2017) provides for full automation and consolidation of transactions at the securities market and, meanwhile, establishment of framework necessary for introduction of new tools and services.

- Third stage (2018-2020) envisions increased depth of securities market through the introduction of new and more complicated types of tools and services and, in parallel, creation of effective system risks management arrangements. Upon completion of this stage covering the last 3 years of the State Program the stock market of Azerbaijan will be ready for integration into international financial markets.

A very important role in the formulation of the capital markets strategic development goals was played by the FIRST project initiated by the SCS in March 2010. Through the intense cooperation with the SCS and country’s capital market organizations, by late 2010, FIRST consultants prepared a comprehensive capital market assessment report. The FIRST initiative also catalyzed the inception of the CMMP project supported by the World Bank and the SECO.

6. The Project:

According to the agreement with donors assisting in financing the implementation, the project was divided into 4 parts and included 2 major tenders: on provision of the consultant services and on provision of goods (the Capital Market Information System).

The agreements defined project parts as follows:

Part A: Streamlining and Automating Capital Market Infrastructure;

55

Part B: Updating and Strengthening the Legal and Regulatory Framework;

Part C: Stimulating Supply;

Part D: Capacity Building.

The total project finances breakdown is as follows:4. IBRD loan- 12,000,000.00 USD5. SECO grant – 1, 600,000.00 USD6. Azerbaijan Government – 2,200,000. USD (for VAT)

Brief information of two major procurements within the project:

The Request of Expression of Interests for provision of the consulting services, namely the assignment "Creation of General Framework for stimulating supply and capacity building of Capital Markets" was announced on 11 October, 2011. QCBS was used as the selection method for this procurement. Forty-six international companies, expressed their interests. The consortium of companies Corporate Solutions Consulting Ltd, Wiener Borsa, CAPMEX was selected as a winner and the contract was signed on the 15 th

of August 2012. The Consulting services contract 95 deliverables and 102 tasks to support the implementation of the four project parts (components).

The tender for supply and installation of Capital Markets Information Systems was announced on 18 April 2014 within works and goods category. The two stage bidding selection method was used for this procurement. KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the contract was signed.

56

2.1. List of the Consultancy services contract deliverables:

Task name No Deliverables Del No.

Date Approved Comment

Formation of Policy Steering Committee 1.1.1

Draft description of the Steering Committee and establishment of Steering Committee

1 30/01/13

Formation of MAGs 1.1.2 Draft description of the MAGs and establishment of MAGs 2 30/01/13

Arranging MAG(s) and Policy Steering Committee 1.1.3 Minutes for each of the meeting 3 24/11/14

Diagnostic study on clearance and settlement and depository functions

1.2.1Financial and operational diagnostic report for consolidating the clearance and settlement and depository functions

4 15/05/13

Road map for consolidating functions 1.2.2. Road map for consolidating the clearance

and settlement and depository functions 5 24/06/13

Present the consolidation plan to industry. 1.2.3

Organization and delivering of workshop on the presentation of the plan to the industry with support of SCS

6 15/08/14

Rules and procedures for clearance and settlement systems

1.2.4Draft rules and procedures for administering clearance and settlement systems at CSD

7 24/11/2014

Settlement default guarantee fund procedures and procedures for use of guarantee fund for CSD

1.2.5 Draft Settlement default procedures at CSD 8 23/02/15

Review of ISIN codification system, its implementation and functionality.

1.2.6 Review of already-existing ISIN Implementation 9 24/06/13

57



Prepare new rules and procedures for CSD on its participants‘ structure that allows custodians and investment firms to access CSD

1.3.1Prepare new rules and procedures for CSD 10 23/02/15

Draft internal procedures on registry keeping services 1.3.2 Draft procedures on registry keeping 11 15/08/14

Draft procedures for dematerialized securities 1.3.3

Draft procedures on conversion of certificated securities into dematerialized securities

12 03/04/14

Recommendations on the transfer of functions on registration of securities liens from SCS to CSD, including business procedures

1.3.4Recommendations report on the proposed approaches for the transfer of lien registration from SCS to CSD

13 24/11/14

Draft procedures for CSD in managing information security

1.3.5 Draft procedures ensuring the security of accounts 14 23/02/15

Draft risk-management and internal technical-audit procedures for the new CSD

1.3.6Risk management and internal technical audit procedures for CSD (name is different in the work plan)

15 23/02/15

The CSD’s ability to provide services 1.3.7

Feasibility report on the CSD’s ability to provide the services mentioned under activity 1.37

16 24/11/14

Review the CSD’s ability to act as share registry for investment funds

1.3.8 Feasibility report on the CSD’s ability to provide services mentioned under activity

17 28/04/15 This deliverable was changed to “Report on how Investment Funds Asset Managers can provide fund administration services for

58



investments funds” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Provide capacity building to newly formed CSD 1.3.9

Completion of around 10 training sessions on the operations of the newly formed CSD through CMTC.

18 08/10/15

IT system needs of the consolidated capital market infrastructure

1.4.1Report on the assessment of the IT system requirements for the consolidated capital market infrastructure

19 24/06/13

Develop functionality for the required IT systems 1.4.2

Presentation of the parameters for the required IT systems’ functionality on the main infrastructure components: trading, depository, registry, clearance-settlement and surveillance.

20 24/06/13

Draft the technical specifications for IT system and bidding documents

1.4.3ToR for acquiring the integrated IT systems for the consolidated capital market infrastructure.

21 24/10/13

Assist PIU with selecting the appropriate system(s) and consult SCS for selection of appropriate system(s

1.4.4Provide assessment report for each of the proposed IT systems during the IT procurement

22 23/02/15

Oversee the system installation and testing 1.4.5

Assessment report on the testing results of the selected and installed systems prior the ownership transfer.

23 May 2016

The deadline for this deliverable was changed due to prolongation of the project life span till 1 July 2016. The

change was confirmed by parties in additional contract signed with the Consultant

on 1 February 2016

59



Analyze the market risk for revised settlement procedures.

1.5.1 Risk assessment report of revised settlement procedures 24 24/11/14

Review of various options for clearance and settlement procedures

1.5.2 Recommendations report on clearance-settlement procedures 25 15/08/14

Identify the extent of a required settlement guarantee fund, including sources of funding, such as transaction-based fees, letters of credit and/or insurance

1.5.3 Identify the extent of a required settlement guarantee fund 26 23/02/15

Roadmap for reforming the current pre-pay / pre-deliver system

1.5.4

Road map containing recommendations for reforming current pre-pay / pre-deliver system into a system based on payment and delivery post-trade, implemented together with risk-reducing mechanisms.

27 24/10/13

Devise the required rules to implement the roadmap and revise business processes and procedures

1.5.5Draft rules to implement the roadmap, including revised business procedures (Rule Book)

28 08/10/15

Recommendations on the CCP capacity of the CSD 1.5.6 Assessment report on the CCP capacity of

the newly established CSD 29 24/10/13

Review the fee schedules and incentives for trade 1.6.1

Recommendations report including proposed fee structure on eliminating financial incentives for pre-arranged trades

30 24/06/13

Definition and use of “address sales” and provide

1.6.2 Draft revised legislation to cover the gaps 31 24/06/13

60



recommendations indicated under activity 1.6.2.

Recommendations for integrating C&S of limited off-market transaction

1.6.3Feasibility report on integrating clearance and settlement operations of the limited off-market transactions.

32 15/08/14

Review the definition and use of non-trade transfers 1.6.4 Draft revised legislation to cover gaps in

negotiated trade transfer. 33 24/06/13

Recommendations on approaches to order placement and trading rules for thinly-traded securities that will promote depth and better price discovery

1.6.5Recommendations report on the placement and trading rules for thinly –traded securities

34 24/11/2014

Support SCS and review laws and regulation 2.1.1

Recommendations and international expertise (cases) during the discussions of the Draft Law, as required.

35 30/01/13

Revisions to the legislation and international standards 2.1.2

The list of the laws and regulations requiring amendment including the scope of the amendments to ensure the maximum compliance with IOSCO principles.

36 30/01/13

Inventory of implementing regulations supporting Law on Securities

2.2.1The list of the new implementing regulations and revisions to the existing legislation under the new law.

37 30/01/13

Draft/comments on the required new implementing regulations

2.2.2 Draft and deliver 16 high-priority implementing regulations

38 24/10/13 This deliverable was changed to “Draft and deliver high-priority implementing regulations” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the

61



Consultant.

Revisions to existing regulations to conform to new Law

2.2.3 Draft and deliver remaining implementing regulations 39 15/08/14

This deliverable was changed to “Completion of remaining implementing regulations” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Review, analyze the risks and opportunities 2.3.1 Review/ development of agreed rules for

BSE 40 28/04/15

This deliverable was changed to “Review/development of agreed rules for BSE” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Additional regulation for BSE 2.3.2

Additional regulation for BSE to ensure compliance with new Securities Market Law

41 07/10/15

This deliverable was changed to “Additional rules for BSE to ensure compliance with new Securities Market Law” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Recommendations and Guidelines related to the role that banks will play in the new settlement model

2.3.3 Recommendations and Guidelines related to the role that banks will play in the new settlement model imposed by the new draft legislation

42 24/11/14 This deliverable was changed to “Report on Recommendations and Guidelines related to the role that banks will play in the new settlement model imposed by the new draft legislation ” by the

62



Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Adopt accounting and tax treatment for shares sold above nominal value

2.4.1Recommendations report on the proper accounting and tax treatment for shares sold above nominal value

43 03/04/14

Implement “tax transparency” of investment funds

2.4.2Recommendations report on the “tax transparency” implementation of investment funds

44 03/04/14

Reinstate the tax waiver on dividend and interest income from bonds

2.4.3Recommendations report on the tax waiver on dividend and interest income from bonds

45 15/08/14

Provide tax incentives for companies to list their securities on the BSE

2.4.4Recommendations report on the tax incentives for companies to list their securities on the BSE

46 03/04/14

Analyze pooled investment by insurance companies 2.5.1 Report on feasibility of pooled

investment by insurance companies 47 15/08/14

Drafting the regulations on capital adequacy of the market participants.

2.6.1 Draft the regulations on capital adequacy of the market participants. 48 03/04/14

Drafting regulations on risk management & requirements of the market

2.6.2Draft regulations on risk management systems and prudential requirements of the market participants.

49 24/10/13

Drafting regulations on reporting procedures of the market participants

2.6.3Drafting regulations on the prudential reporting procedures of the market participants

50 24/10/13

Assessment report on the modality of attracting local and foreign issuers to the

3.1.1 Assessment report on the modality of attracting local and foreign issuers to the

51 10/04/13 This deliverable was changed to “Listing Advisory Programme (LAP)

63



listing listing

Report” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

1st LAP Progress Report 3.1.2Strategy for BSE for providing fund raising platform for Azerbaijani companies

52 03/04/14

This deliverable was changed to Strategy for BSE for providing fund raising platform for Azerbaijani companies, to be included in the 1st LAP Progress Report” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Expanding distribution channels for government securities.

3.2.2 Expanding distribution channels for government securities 53 23/02/15

Recommendations Related to Investment Companies and Securities Market Participants Bankruptcy

3.2.3Report on the feasibility of the market-makers and draft regulations governing them

54 08/10/15

This deliverable was changed to “Report on bankruptcy of investment funds and securities market participants” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Recommendations covering the issues under activity 3.2.4. as required

3.2.4 Recommendations covering the issues under activity 3.2.4. as required

55 08/10/15 This deliverable was changed to “Organization of at least 4 workshops and LAP launch event” by the Amendment No 1, dd 15 Oct 2014, to the lump sum

64



contract with the Consultant.

Provide recommendations for developing the corporate bond market

3.3.1 Recommendations report for developing the corporate bond market 56 28/04/15

This deliverable was changed to “Recommendations report for developing the corporate bond market, to be included in a report on initial screening of at least 4 companies” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Support LAP Activities – 2nd LAP Progress Report 3.3.2 List of best Azerbaijani corporate

candidates for corporate debt offering 57 07/08/15

This deliverable was changed to “List of best Azerbaijani Corporate candidates for corporate debt offering to be included in 2 nd

LAP Progress report” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Develop Presentation Materials for LAP Team and Coordinate with Agencies

3.4.1Published educational materials describing the role of the capital markets and opportunities for corporate issuers

58 15/08/14

Develop and publish educational materials on IPO 3.4.2

Published educational materials describing the benefits of good corporate governance and profitability

59 23/02/15

This deliverable was changed to “Published educational materials on IPO” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

65



Create a cadre of instructors capable of leading corporate education events - At least 3 training sessions for trainers leading the corporate education events

3.4.3 At least 3 training sessions for trainers leading the corporate education events 60 24/11/14

Develop educational materials for investors describing investment funds

3.5.2 Published educational materials for investors describing the investment funds 62 28/04/15

Recommendations on creating and enabling ETFs 3.5.3 Recommendations report on creating and

enabling ETF 63 15/08/14

This deliverable was changed to “Recommendations report on enabling and creating ETFs and developing the needed regulations and published educational materials concerning ETFs” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Feasibility study for implementing a market (MTF) for foreign stocks traded on the BSE

3.5.4 Recommendations report on enabling and creating REITs and their regulations 64 15/08/14

This deliverable was changed to “Feasibility study for implementing a market (MTF) for foreign stocks traded on the BSE” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Concept guidelines for local sponsors for trading in

3.5.5 Published educational materials on ETF and REITs, as requested

65 15/08/14 This deliverable was changed to “Concept

66



foreign stocks (MTF) on the BSE

guidelines for local sponsors for trading in foreign stocks (MTF) on the BSE ” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Recommendation/ educational materials/manual for ABS sponsors

3.5.6 Recommendations on introduction of Assets Backed Securities 66 23/02/15

Recommendations on how capital markets can support projects

3.6.1 Recommendations report on the project financing through securities market 67 28/04/15

Recommendations on how capital markets can support state companies

3.6.2 Recommendations on how Capital Market can support state companies 68 23/02/15

Recommendations on how capital markets can support privatization

3.6.3 Recommendations on how capital markets can support privatization 69 23/02/15

Review current government support to private sector development

3.7.1Recommendations report on development of instruments to support government funding for the private sector

71 24/11/14

Conduct a training needs assessment for all levels of SCS staff

4.1.1 Training needs assessment report 71 30/01/13

Devise and provide a training program 4.1.2 Curricula for all subject matter categories

of staff and all levels 72 03/04/14

Conduct in-house training for SCS staff 4.1.3 Around 30 training sessions for SCS staff 73 07/08/15

67



Conduct a train-the-trainer program for the training sessions

4.1.4 Conduct around 10 train-the-trainers programs 74 28/04/15

Identify external training opportunities for SCS staff 4.1.5 Identified external training opportunities 75 27/05/13

Devise and provide a knowledge management system

4.1.6 Establish information portal and searchable database within SCS intranet 76 24/10/13

Review the SCS’s internal systems, policies, structures and procedures

4.2.1

Recommendations report with proposed time based road map for SCS ‘ s internal systems , structures and procedures realignment

77 28/04/15

Review the SCS’ current procedures and practices of decision-making

4.2.2 Recommendations report on SCS’s current procedures and decision making 78 15/08/14

Review the SCS’ current market surveillance policies and systems

4.3.1Recommendations report on SCS’s interim market surveillance policies and procedures

79 28/04/15

Review the SCS’ market enforcement capacity and revisions to enforcement procedures

4.3.3Recommendations report on SCS enforcement capacity and revisions to enforcement procedures

81 07/08/15

Review the current systems used for reporting by market participants

4.3.4Recommendations report on improvement of the current systems of reporting by market participants

82 07/08/15

Automation of the disclosure of public information and reports to the regulator

4.3.5

Report on module descriptions, parameters for the automated disclosure of public information and reports to the regulator.

83 24/10/13

68



Promote the Azeri market to International Investors 4.4.1

Conducting 2 regional conferences every year and 2 international conferences overall.

8430/01/13

Two international conferences have been supported technically and financially. Financial support for regional conferences has been provided.

Assist SCS in conducting annual financial surveys 4.5.2 Financial support for annual financial

literacy surveys 85 03/04/14

Prepare a communications plan for SCS 4.5.4 Communication plan for SCS 87 24/10/13

Recommendation/ educational materials/manual for ABS sponsors

4.5.5 Review and update the SCS’s website 88 23/02/15

Assessment training programs propose a model for the training center

4.6.1Assessment report of the current situation and presentation of the proposed model for the training center

89 18/3/13

Strategic business plan for establishing training center 4.6.2 Business plan for the training center 90 24/10/13

Conduct needs assessment and identify demand for training programs

4.6.3

Recommendations report on the training programs (such as certification programs, regulatory trainings, trading trainings, mini-MBA with concentration in finance, etc.)

91 03/05/13

Developing a self-study kit on securities trading (capital market )

4.6.4 Around 3-4 training programs and curricula for more general public based on the agreement with SCS on the recommendations for the task 4.6.3. At each training session approximate number of participants will be around 10 to 15

92 July 2015 This deliverable was changed to “Developing a self-study kit on securities trading (Capital market)” by the Amendment No 1, dd 15 Oct 2014, to the lump sum

69



contract with the Consultant.

Developing a self-study guide on Corporate Bonds 4.6.5 Attracting the trainers and identifying the

trainers for each program 93 July 2015

This deliverable was changed to “Developing a self-study guide on corporate bonds” by the Amendment No 1, dd 15 Oct 2014, to the lump sum contract with the Consultant.

Start the train the trainers for the local trainers 4.6.6 Conducting the “Train the trainers”

program for local staff 94 30/05/14

Prepare the marketing plan of the center and promote the center

4.6.7 Marketing plan of the center and its execution 95 30/07/13

70

2.2 Component 1: Streamlining and Automating Market Infrastructure.

This Component was designed to address the outdated capital market infrastructure constraints by focusing on: (i) increasing automation of the market through establishing one depository center and consolidating clearance and settlement; (ii) opening the infrastructure’s membership and access; (iii) minimizing off-market trades and improving price discovery; (iv) facilitating the operational introduction of investment funds; and (v) building better risk protection through establishing an updated trade guarantee mechanism.

Key deliverables of the Component 1:

- The country’s post-trading architecture and environment was consolidated making the National Depository Centre (NDC) the sole CSD for government and corporate securities, providing clearing and settlement functions to members;

- The central role of the NDC was supported by converting it to the non-for-profit infrastructure organization serving its members and local issuers. All other registry-keeping licenses in the country were abolished. The securities numbering and lean registration were transferred to the NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems ensuring DVP principles of both government and corporate securities.

- The securities numbering function was transferred to the NDC and its methodology was harmonized with internationally recognized ISIN standards; the NDC is a member of the Association of National Numbering Agencies.

- Implementation of the renewed post-trading procedures complying with the international best practices and newly adopted securities market legislation;

- Drafting extensive, best-practices based TOR for the new electronic trading/post-trading/surveillance platform comprising.

- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement, issuing functionalities in the market in strict compliance with the newly adopted securities market legislation;

2.2.1 List of NDC rules and post-trading system rules adopted in accordance with the new “On Securities Markets” Law (2015):

1. Rules on requirements to Central Depository members;2. Rules on opening, closing and managing accounts in Depository Centre;3. Rules on registration and transfer of securities;4. Rules on safe-keeping of securities in Depository Centre;5. Rules on forming and holding securities owners’ registry;6. Rules on registering liens in the Depository Centre;7. Rules on fees payment;8. Rules on depository risks management;9. Rules on operation of financial security in the Depository Centre;10. Rules on depository information protection and retention;11. Requirements on post-trading system formation and operation;

71

12. Requirements to clearing organization members;13. Rules on clearing operations;14. Rules on information exchange in clearing operations; 15. Rules on information protection and reporting in clearing operations.

2.3. Component 2: Updating and Strengthening the Legal and Regulatory Framework .

To maximize the benefits of adopting an adequate legal and regulatory framework, this Component was designed to focus on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are addressed through the forthcoming new Capital Market Act and identifying key implementing regulations needed to make the law effective; (ii) enhancing market confidence and safety by introducing minimum capital requirements for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry of Finance, eliminating tax obstacles to capital formation for companies and avoiding double taxation of participants in investment funds; (iv) allowing pooled investments by insurance companies; (v) fostering competitiveness by extending market participation through new licenses and broader geographic coverage; and (vi) ensuring effective coordination with other regulatory authorities in the financial sector to minimize regulatory gaps and arbitrage opportunities. Key deliverable elements of the Component 2:

- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3) and National Depository Centre (as a part of the Component 1) fully complying with the country’s new governing legislation;

- Drafting tax regulation initiatives covering various aspects of the securities market operations. The new “On Securities Markets” Law was adopted on 14th July, 2015. The adoption of the Law was assessed as a considerable effort to improve the legal and operational framework within which securities market will operate in the future by experts. The Law sufficiently addresses “rule of law” related issues, including: provisions for finality of settlement, better rules of supervision administration, initiatives that move toward the creation of a modern central depository, enhanced book entry securities “ownership”, reporting requirements, provisions for an investor compensation fund, more intensive monitoring of market abuses, proper conduct of business with retail market participants. In brief, the Law provisions observe the three IOSCO core objectives of securities regulation:

- The protection of investors;

- Ensuring that markets are fair, efficient and transparent; and

- The reduction of systemic risk.

The regulator recognizes that matters which are not directly subject of the law itself, such as thorough surveillance and compliance programs, effective enforcement and close cooperation with other regulators are necessary to give further effect to all three objectives. After the adoption of the Law (as well as the Presidential Decree endorsing it and subsequent Regulations) the supervisory authority (e.g. SCS at that time) works under a clear mandate, with its responsibilities and

72

powers established by legislation and further specified within the Law for specific areas. Responsibility for supervision of the conduct of business obligations of investment companies and other market participants (institutions) is clearly stated. Decisions of the regulator are required to be transparent and are open to judicial review.

On the other hand, under the new legislative platform the supervisory authority has adequate powers to carry out its regulatory functions, and has rulemaking authority. In addition, members and staff are subject to integrity policies that ensure high standards of professional conduct.

Under the Law provisions supervisory authority has appropriate powers to obtain information and records, and can exercise these powers on a routine basis to ensure compliance with the laws it administers. Regulated entities are subject to record keeping requirements directly under the LAW, including records relating to clients’ orders. Supervisory authority has adequate powers to investigate both administrative violations of the law. Further development of the legislative platform is agreed to consider in future enabling the regulator(s)’criminal prosecution and sanctions ability for serious violations.

Under the Law, appropriate disclosure rules requiring public offering, material event reporting and ownership and control reporting, which attempt to improve transparency of information and to guide continuous disclosure has been adopted, as has the requirement for preparers and management to be liable for the accuracy of disclosure. Issues to the public of equity and debt securities require a prospectus approved by the supervisory authority. Secondary legislation adopted under the Law ensures disclosure requirements for prospectuses are in line with IOSCO principles. Issuers are also required to submit reports about material developments. Financial statements must be prepared in accordance with IFRS. The supervisory authority has sufficient powers to enforce issuers ‘compliance with reporting standards, and to issue supporting secondary legislation. In addition, changes of control transactions are required to comply with disclosure requirements.

The Law provisions related to market intermediaries in general properly achieve three main objectives: to protect client assets from insolvency of the investment company, guard against defaults and sudden disruption to the market, either through sudden insolvency or settlement failure, and, to ensure that intermediaries are fair and diligent in dealing with their clients.

The Law sets appropriate licensing standards (limiting the market place to those with sufficient resources and qualification), prudential standards (protecting against sudden financial failure), internal controls and risk management standards (reducing the possibility of default or appropriate of client assets), and business conduct rules (ensuring proper handling of client accounts).

Provisions on secondary markets are in place to ensure the efficiency and credibility of the markets as mechanisms for pricing and transfer of securities. Exchange is subject to licensing requirements, including standards applicable to information technology systems and risk management, and is subject to on-going supervision, including inspections and reporting requirements.

Potential sources of market disruption are addressed through the regulation of clearing, settlement and depository services, including risk management mechanisms designed to ensure that intermediaries settle their market obligations in a timely and orderly manner. Market activity is properly subject to market abuse rules, including prohibitions on trading on insider information, market manipulation and

73

misrepresentation.

Exchange business is subject to licensing allowing operating both securities and derivatives markets. Clearing and settlement facilities are performed by the NDC. Both trading and post-trading are subject to the supervision of the supervisory authority, which has proper powers to ensure both institutions acts in accordance with regulatory requirements. The Law has sufficient provisions that trading on the markets is transparent, and supervisory authority has direct responsibility for detecting insider trading and other forms of market abuse, which will be further subject of uses and assistance of technological system.

2.3.1. List of implementing regulations adopted subsequent to the “On Securities Market” Law (2015):

1. Rules on securities issuance and conversion at reorganization of juridical entities; 2. Rules on real estate certificates in the Republic of Azerbaijan; 3. Rules on merging, splitting and par value increase of shares; 4. Requirements applicable to issuers’ management reports; 5. Rules on statutory registry of securities; 6. Rules on issuance of securities outside of the boarders of the Republic of Azerbaijan;7. Disclosure rules for persons conducting research on securities or issuers, proposing investment

strategies recommendations; 8. Rules on lien registration, lien cancelation, pledge management; 9. Disclosure rules on securities issuers; 10. Rules on prospectuses and information memoranda; 11. Rules on transactions with investment securities; 12. Rules on investment securities subscription and allocation;13. Rules on payment, notarial and depository registration of securities enactment contracts; 14. Regulations on market manipulation (market abuse);15. Rules on issuers maximal limits of bond issuances; 16. Regulations on the registration of the mortgage cover and form and manner of a mortgage cover

inspection report;17. Rules on registry-keeping of the mortgage covers, depository reports on validating mortgage covers;18. Regulations on the procedure of stabilization of prices of securities;19. Rules on issuance, registration and turnover of depository receipts; 20. Rules on placement and turnover of derivative financial instruments; 21. Disclosure rules for stock exchanges; 22. Rules on drafting and submission of reports by investment firms; 23. Rules on conducting investment services (transactions) by investment firms; 24. Rules on post-trading systems and clearing operations; 25. Rules on margin trading with securities; 26. Rules on conducting attestations for qualification certificates on delivering investment firm services

(transactions);

74

27. Rules on attestation of executives and branch managers of licensed entities in securities market; 28. Regulations on the requirements to external auditors of the regulated institutions;29. Rules on minimum chapter capital and sources of its formation for licensed entities in securities

market; 30. Rules of capital adequacy for investment firms.

2.3.2 Tax regime initiatives:

One of the aspects of the component 2 was modernization of the tax legislation in respect of the securities market operations. Together with the Project consultants the SCS specialists elaborated main aspects of the taxation legislation and in 2015 proposed the following amendments to the Ministry of Taxes:

- Elimination of the double taxation on dividends (withholding tax on issuer and profit tax on investors);

- Elimination of the double taxation on investment funds units (withholding tax on issuer and profit tax on investors);

- Elimination of the capital gain tax in securities operations; - Elimination of tax on profit made from difference of par value and public placement price of

shares; - Elimination of profit tax on accrued interest of fixed income instruments; - Elimination of the VAT tax on financial services operations made with securities.

The Ministry of Taxes were handed the prepared drafts of amendments to be made into variety of legislative acts and codes to implement the above stimulating measures. The amendments will be considered as a part of the State Budgetary plenaries in 2016/7.

In January 2016, the Parliament adopted amendment to the Taxation Code withdrawing profits tax on dividends and coupon payments for the next 3 fiscal years.

2.4. Component 3: Stimulating Supply

This Component was designed to promote greater use of capital markets as a financing alternative by focusing on creating a more appropriate environment to encourage equity listings and the corporate bond market; actively reaching out to corporations to promote benefits of financial market as a funding alternative and working pro-actively with prospective issuers to assist them in coming to the market.

Key deliverable elements of the Component 3:

- Re-organization of the BSE listing tiers and adoption of the new listing requirements;- BSE trading (subscription, public offer and secondary market) rules and procedures enabling

transparent and competitive price discovery and fully complying with the newly adopted securities market regulation;

- Conducting Listing Advisory Program (LAP) to local issuers, stimulating new issues at BSE platforms.

75

2.4.1. New Listing regulations at BSE:

As a key aspect of the Component 3 the re-drafting of BSE listing/delisting rules and regulations were started in 2014. Initial changes were made to the listing rules on the 30 th of January, 2015. After the adoption of the “On Securities Market Law” (2015) the listing rules and regulations were updated to fully comply with certain provisions (definitions) of the new Law.

Regarding the new Listing regulations, separation of bond and stock market, the creation of market segments, minimum capital requirements according to market segments, compulsory free float rates are the most noteworthy changes for the description of key developments headline.

Before the modernization of Market Structure, Bond and Stock markets (requirements to Bond and Stock issuers) were not separated. Therefore, there was sole requirement for the acceptance of companies to the listing and disclosures for both the issuance of stocks and bonds. However, after the new regulations, the bond and stock markets were apportioned and each was treated as an independent market as regards to listing and disclosure requirements.

Moreover, after the approval of new Listing regulations, the transition from 2 tiers listing structure (1st tire and the 2nd tire listing markets) to 3 tiers listing structure (Prime, Standard and Alternative segmentations) was realized. This development made the ground for the companies to be rearranged to these market segments according to their financial and other indicators.

One of the main contributions of new Listing regulations was to shed light on the minimum capital requirements of the companies. Hence, companies that were to be listed in prime segment should carry at least 2.5 million AZN of minimum capital requirement), this indicator is 0.5 million AZN for standard market segment (in which there was not any capital requirement before new the regulation).

Another noteworthy and one of most essential changes was the creation of free-float rates required to be listed in each tier. For the Prime market, minimum portion of shares to be on free-float if 5% to 10% depending on the overall equity of the company and those new shares should be held by at least 50 shareholders and no more than 5 % for each singular investor.

It can be noted that there were substantial changes in the listing requirements, trading fees and the acceptance regulation of the companies to the listing.

For the easing of burden of the listed companies and to enhance the capital market practice, some fees were substantially lowered, even some of them totally eliminated. With respect to these modifications, one-time fee for being accepted to the listing was canceled out which was 3000 AZN and 600 AZN for stocks and 600 AZN and 300 AZN for bonds for the 1st and the 2nd tire listings, respectively.

Annual membership fee for issuers was fixed by 1000 AZN in prime market, 500 AZN in standard market and 200 AZN in alternative market. Previously, these numbers were 0.03% of total issue in the 1st tire listing and 0.015% of total issue 2nd tire listing.

76

Moreover, the bonds to be traded in prime market segment were required by this new regulation to be rated by S&P and Fitch rating agencies with the rating “BBB-“, “Baa3” by Moody’s or should be rated with the equivalent rating by other rating agencies. Otherwise, Market maker is required to be appointed for these bonds within the whole maturity date of these securities.

Additionally, for providing the creditworthiness of issuer, it is required that 50 % of the sum of the last 3 year PBIT (which should take into consideration the outstanding bonds as well) should exceed the annual interest payments on the new issued bonds.

2.4.1.a. Equity Market Listing Requirements:

Market Structure

(listing levels)

Listing Requirements

Primary Market

Issuer should have the legal form of OJSC No bankruptcy procedures should have been started for the year before

the listing application Net positive income for at least one of the past three years At least one year of operating history Equity capital AZN 2.5m - 5m: minimum 10% free float Equity capital AZN 5m - 10m: minimum 7% free float Equity capital more than AZN 10m: minimum 5% free float Shares in free float should be divided among at least 50 shareholders,

each of whom cannot possess more than 5% of total shares. Financial statements prepared in accordance with IFRS and audited by

an international auditor No significant changes in structural management for past six months

(i.e. at least two-thirds of management staff should remain unchanged).

Standard Market

Equity capital should be at least AZN 0.5m At least one year of operating history Financial statements in accordance with local accounting standards

(GAP) Audit by an independent auditor Minimum of 5% free float (or at least AZN 125,000) which should be

divided among at least 20 shareholders, each of whom cannot possess more than 5% of total shares.

Alternative Trading Market

Shares of issuers that do not meet the requirements of either the Primary Market or the Standard Market will be included in the Alternative Trading Market

77

2.4.1.b. Bond Market Listing Requirements:

Market Structure

(listing levels)

Listing Requirements

Primary Market

Financial statements prepared in accordance with IFRS, and audited by an international auditor

No significant changes in structural management for past six months (i.e. at least two-thirds of management staff should remain unchanged).

No bankruptcy can be declared by the issuer during one year prior to the date of submission of listing application

Equity capital at least AZN 2.5m. The presence of a market-maker and/or a high credit ranking granted by

an international credit agency (i.e. at least “BBB-” from Standard & Poor's or Fitch, “Baa3” from Moody's, or equivalent of those rankings granted from other rating agencies)

Sound and clear debt history The I to be paid over one year should not be more than 50% of total

earnings before tax for the past three years. Government bonds can be traded in this segment Bonds with maturity of less than one year cannot be traded in this

market

Standard Market

Equity capital should be at least AZN 0.5m Net positive income for at least one of the past three years At least one year of operating history Financial statements in accordance with local accounting standards

(GAP) Audit by an independent auditor Sound and clear debt history

Alternative Trading Market

Bonds of issuers that do not meet the requirements of either the Primary Market or the Standard Market will be included in the Alternative Trading Market

2.4.2. Listed instruments at the BSE to the date of the document:

Segment / Instrument Equity Bond

Prime DemirBank OJSC Ministry of Finance

78

MarketCentral Bank

International Bank of Azerbaijan OJSC

Azerbaijan Mortgage FundSOCAR

Standard Market

Azərkosmos OJSC Unileasing CJSCFinans Lizinq OJSC

Turanbank OJSC Finex Kredit BOKT OJSCKredAqro CJSC

Aqrolizinq OJSC Merkuri BOKT LLCAmrahbank OJSC

Alternative Market

Meqa Siğorta OJSC ProKredit BOKT OJSCBank BTB OJSC Premier Kredit BOKT LLC

Bakı Siğorta OJSC FinansLizinq OJSC Muğanbank OJSC FINOKOBOKT OJSC

FINOKO BOKT OJSCAXA MBASK Sığorta Şirkəti

OJSC

FinEx Kredit BOKT"OJSC Bank of Baku OJSC Rabita Bank OJSC

2.4.3. Listing Advisory Program:

Listing Advisory Program was established and implemented by Baku Stock Exchange within Capital Market Modernization Project as part of the government program of “The development of the Capital Markets of Azerbaijan for the years of 2011-2020”. The Program was launched in April 2014 and aims to build on success in making a “highly effective securities market” in order to attract financial resources to the real sector, move capital between sectors and increase effectiveness of the economic system, contributing to creating better corporate governance and more transparency about economic activities of listed issuers and increasing popular participation. Together with the consortium of the partners joining the initiative (the country’s leading auditors, lawyers, investment firms) LAP is conducting seminars and round-tables for prospective issuers on variety of technical topics, and, on pro-bono basis, is providing issuers with legal and organizational guidance and support to assess their needs and potentials for capital market fund raising, and, once decided, fulfill the whole process, from drafting comprehensive prospectus to organization of secondary market for their issued instruments. So far, more than 40 local companies participated in the initiative, out of 16 companies signed special agreement with LAP consortium for closer, one-to-one cooperation and support of the capital market fund raising.

Joining Partners of the LAP:

Auditing companies: KPMG Azerbaijan, Baker Tilly Azerbaijan, PwC Azerbaijan, EY Azerbaijan;

Legal companies: Dentons Azerbaijan, Baker & McKenzie;

Investment firms: Pasha Capital, Invst Az, AzFinance Invest, UniCapital.

79

Key activities of LAP in 2014/5/6:

LAP organized several seminars for companies that might be interested in listing. The aim of those seminars was to educate companies and its management about the capital markets and help them to take advantage of this market. Key events were:

On the 16th of April 2014 LAP was introduced to the public through the initial workshop organized by BSE.



Issuers joined LAP and the initiative results:

Over what period have these shares ben issued?

#Name of the Company

Memorandum of

Cooperation (under

LAP)

Listing tier

Type of

instrument

Number of Issued

Securities

Par value

per unit

Total Amount of Issue

1 Azərkosmos ASC signed StandardEquit

y 1,180,530AZN 20.00

AZN 23,610,600.00

2 Mega Sigorta ASC signedAlternati

veEquit

y500

AZN 5,000.0

0

AZN 2,500,000.00

3 Bank of Baku ASC signedAlternati

veEquit

y 3,400,000AZN 15.55

AZN 52,870,000.00

4 Bank BTB ASC signed Alternative

Equity

5,160

AZN 1,000.0

0

AZN 5,160,000.00

Equity

2,000 AZN 1,000.0

AZN 2,000,000.00

80

0

5

Prokredit BOKT ASC

signedAlternati

veDebt

400

AZN 1,000.0

0

AZN 400,000.00

6 Finans Lizing ASC signed Standard

Debt1,200

USD 500.00

USD 600,000.00

Debt600

USD 500.00

USD 300,000.00

Debt600

USD 500.00

USD 300,000.00

Debt500

USD 500.00

USD 250,000.00

7FinEx Kredit BOKT

ASC signed Standard

Debt800

USD 500.00

USD 400,000.00

Debt900

USD 500.00

USD 450,000.00

Debt390

USD 500.00

USD 195,000.00

8 Finoko BOKT ASC signedAlternati

ve

Debt750

USD 1,000.0

0USD

750,000.00Equit

y 70,000AZN 10.00

AZN 700,000.00

9 Turanbank ASC signed Standard

Equity

43,440

AZN 1,082.0

0AZN

47,002,080.00

Equity

2,773

AZN 1,082.0

0AZN

3,000,386.00

10 Embawood MMC signed Standard Debt10,000

AZN 1,000.0

0AZN

10,000,000.00

11 Nikoil Bank ASC signed Standard Debt5,000

USD 1,000.0

0USD

5,000,000.00

12 Unileasing QSC signed Standard Debt5,000

USD 1,000.0

0USD

5,000,000.0013 Azersun Holding signed No issue till the moment of the report

81

MMC

14Kaspiyan Təhlükəsizlik Baltaları MMC

signed

15 Səba Kredit MMC signed 16 Golden Pay ASC signed

2.4.4. List of Operational Rules and Regulations by BSE:

After the endorsement of the “on Securities Markets” Law in mid-2015 and subsequent adoption of new implementing regulations by the SCS, in early 2016, BSE has totally revised and introduced its operational rules and procedures. New BSE rules and procedures were strictly harmonized with new technological trading and post-trading platform (the Capital Markets Information System) launched early 2016 as well.

List of new operational trading rules and regulations implemented in early 2016 by BSE are as follows:

1. Rules on trading membership; Enacted 30 Dec. 20152. Rules on trading of securities and derivative financial

instruments; Enacted 30 Dec. 2015

3. Rules of securities and derivative financial instruments market abuse and market protection;

Enacted 30 Dec. 2015

4. Rules dispute resolution at the Baku Stock Exchange; Enacted 30 Dec. 20155. Disclosure rules at the Baku Stock Exchange; Enacted 30 Dec. 20156. Rules on indices calculation; Enacted 30 Dec. 20157. Rules on ethical behavior and access to service information by

the exchange executives; Enacted 30 Dec. 2015

8. Rules of information protection, retention and security at the Baku Stock Exchange

Enacted 30 Dec. 2015

9. Rules on listing and delisting of securities Enacted 30 Jan. 2016

2.5. Component 4: Capacity Building

This Component was designed to overcome the low capacity of market participants and regulators through launching capacity building activities. First, as the SCS was the major force leading the CMMP reform, it was important to assure that the agency’s human and financial capacities were sufficient and effective. This Component, was aiming to: (i) strengthen the SCS’ knowledge management, its policy formation processes and transparency of operations; and (ii) strengthen the institutional capacity of the SCS’ surveillance, reporting and enforcement systems. Second, investor education is a key factor to the encouraging the breadth and depth of participation in capital markets. This Component included, inter alia, activities to: (i) improve public awareness of the capital market by carrying out a series of effective communication programs through media, outreach sessions hosted by the SCS in major cities of Azerbaijan; (ii) increase potential investors’ understanding of capital market by series of education seminars and outreach tools to nascent investment funds and insurance industry.

82

Key deliverable elements of the Component 4:

- Conducting of the Nation-wide Education Program, including producing and disseminating printed, visual and interactive study materials for schools, universities and general public, establishment of the Financial Laboratory at the Azerbaijan State University of Economics;

- Establishing Capital Markets Training Centre (CMTC);

2.5.1. Nationwide Education Program:

The SCS adopted the action plan on Capital Market Related Nationwide Education Program on 25 Feb 2015.

The action plan segmented the target audience and included the following initiatives: - For secondary schools: i) Preparing and agreeing study material brochure for pupils and teachers

on securities market topics, ii) video films on securities market topics; - For universities: i) updating economics faculties curriculum and study materials with securities

market topics; ii) assisting preparing separate securities market securities market classes and subjects; iii) internship programs for students at SCS, BSE, NDC and market participants; iv) Development of the electronic securities trading simulation platform; v) Research projects for students on securities market topics; vi) Financial Laboratory (study room) organized at a leading economics university faculty.

Within the Action Plan securities market study material (brochure and video film) was agreed and produced, and as a pilot project they are studied as a part of curriculum in Baku schools no 7 and 189-190 for 7th, 9th, 10th grade pupils. Test exams conducted at the end of pilot courses demonstrated positive comprehension indications.

Capital market based case-study tournament was organized at the Azerbaijan State Economic University. The results were studied by the academic staff of faculties and teaching materials on case study based examination were disseminated to applicable faculty professors. Relevant capital market based library of study material and case-studies (in the university’s all teaching languages: Azerbaijani, English, Russian and Turkish) was created at the University and handed over to the professors and student unions. High achieving students in capital market topics were appointed as “Capital Markets Ambassadors” by the SCS. Ambassadors are entitled to create academic and business practice ties between students and market participants/regulators.

Financial laboratory was created and handed over to the University by BSE. The laboratory is fully equipped for seminar workshops, simulation trading activities, invited guess lectures, practical exercises. The Lab’s annual activity schedule is drafted mutually by SCS and the University’s administration.

2.5.2. The Capital Market Training Centre (CMTC):

In 2013, together with the CMMP experts the SCS established a working group on planning and launching of the Capital Markets Training Centre (CMTC) under auspices of the SCS. For the next 12 months the CMTC’s strategic plan, development plan, management structure, financial plan, corporate identity and

83

legal for was agreed and prepared. The CMTC was officially launched and presented to the public on 01 March 2014. According to its strategic and marketing plan the initial courses portfolio was elaborated. (According to the Charter of the Financial Markets Supervision Authority (FSMA) endorsed by the Presidential Decree dated 10 March 2016 and subsequent amendments in the CMTC’s own Charter, the Centre was organized as non-for-profit training center under the auspices of the FSMA).

Two main audiences that the CMTC is targeting are: a/Capacity building for the SCS, BSE and NDC personnel and b/ Capital markets based training for wider professional audience including attestation exam preparations for market participants. Currently, CMTC is developing its potential to develop consulting capability to capital markets involved firms.

Training and Seminars conducted by CMTC in 2015:

No Date Audience Title

No of Participant

s

1 2/10/2015 SCS personnel Notion of the financial risks and financial risk management 20

2 3/13/2015 SCS personnel Managerial skills in public sector 10

3 4/27/2015 SCS personnel Team building 27

4 6/8/2015 SCS/BSE/NDC The ways financial markets operate (Master Class) 12

5 9/7/2015 SCS personnel Corporate finance 31

6 10/16/2015 SCS/BSE/NDC Performance Management (Master Class) 10

7 1/30/2016 "Fabrika Co-working Centre" youth center participants

1) Capital Markets, instruments, participants

(seminar)2) Foreign exchange (Master

Class)

30

8 2/9/2015Azerbaijan Architecture and Construction Engeneering

University strudents

Capital Markets financing, instruments, participants

(seminar) 41

9 2/11/2015 Qafqaz University students Investment management (Master Class) 32

10 2/12/2015 Public Administration Academy students


(seminar)26

11 2/19/2015 Qafqaz University students Capital Markets financing, instruments, participants

(seminar)40

12 2/25/2015 Baku State University Finance and finance management (seminar) 27

84

13 3/10/2015 Azerbaijan State Economy University students

Investment management (Master Class) 10

14 3/11/2015Azerbaijan State Economy

University studentsCapital Markets financing, instruments, participants

(seminar)17

15 3/17/2015 Azerbaijan State Economy University students

Finance and finance management (seminar) 32

16 4/1/2015 Azerbaijan State Economy University students Corporate finance 10

17 4/2/2015 Azerbaijan State Economy University students Foreign exchange 10

18 4/13/2015 Baku State University Investment management 16

21 4/15/2015 Baku Business University students


(seminar)14

2.6. Capital Markets Information System:

The tender for supply and installation of Capital Markets Information Systems was announced on 18 April 2014 within works and goods category. The two stage bidding selection method was used for this procurement. According to the TOR the winning vendor should have developed the following systems:

- Trading system, - Depository system, - Clearing system, - Market surveillance system, - Broker front end system - Install appropriate hardware and network infrastructure supporting the operation of the systems,

including Disaster Recovery Centre in Sumgait City, 35 km from Baku.

The main requirement to the platform was full integration, but modularity on database level, with usage of industry standard protocols, allowing integration to RTGS (AZIPS systems). The Platform should have been designed in the open architecture manner enabling incorporation of broker trading functionality by users.

KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the contract was signed and the integrated trading/post-trading/surveillance platform (branded CETA AZERBAIJAN) was launched on the 17th Feb 2016. The platform performs according to the expected indicators since the official launching ensuring automation of all major processes at the local capital market trading and post-trading. The platform enabled major placements including USD 100 mln public bond offering by State Oil Company SOCAR in September 2016. The platform strictly complies with newly modernized and introduced local legislation procedures, BSE listing and trading procedures, NDC post-trading, depository-

85

clearing and registry-keeping rules.

7. Project Development Objective (PDO) Indicators and Intermediate Result Indicators:

The project’s development objective was to increase the use of equity and corporate debt as financing and/or investment instruments through the adoption of an effective capital markets regulatory framework and infrastructure. The PDO level results indicators are: (i) increased issuance of corporate bonds; (ii) increased number of listed companies and (iii) improved price transparency. The Project outcome and output indicators are measurable

PDO 1. Increased issuance of corporate bonds

2010 2011 2012 2013 2014 2015 2016 6mOutstanding amount of

corporate debt 344 907 751 1,340 3,940 4,418 2,619

Non-oil GDP 18,443 24,165 28,474 32,638 35,969 37,670 10,939Outstanding amount of corporate debt/Non-oil

GDP1.9% 3.8% 2.6% 4.1% 11.0% 11.7% 23.9%

This indicator represents the ratio of outstanding amount of corporate debt to non-oil GDP (the outstanding amount of corporate debt to 2010 non-oil GDP, 1.9% was taken as a baseline for the indicator).

In 2016 outstanding amount of corporate debt to non-oil GDP increased to 23.9%. The baseline indicator was 1.9% and the target was 3.8%.

The major factor for increase in indicator was a significant increase of corporate bond issuance including by organizations like Azerbaijan Mortgage Fund (AMF). From 2011 to 2015 total issuance of AMF bonds amounted to 256.6 mln AZN. Optimized REPO procedures, introduced incentives for market makers, awareness programs to treasury managers resulted in total amount of corporate debt issuance from 2011 to 2016 was 2,400 mln AZN. The outstanding amount of corporate debt at the end of the project to baseline year’s (2010) non-oil GDP is 14.2%, which is still considerably higher than expected target of 3.8%.

PDO 2. Increased number of companies with listed equity

2010 2011 2012 2013 2014 2015 2016 6MPrime Market - 1 1 1 1 2 2

Standard Market - - - - - 3 3

In 2016 number of companies with listed equity is 5. The baseline was 2 and the target was 8-10 companies. There was only one listed company during 2010 - 2014 periods. The company was listed in the first Tier. However, most of the transactions occurred in the Alternative Trading Market (ATM) without needing to fulfill extensive listing and disclosure requirements. The first listing took place in the first tier

86

in 2011 which was Demir Bank OJSC with market capitalization of 23.11 million AZN. Due to the low volatility in the market, this number has not significantly changed during the period from 2011 to 2014. In 2015 four new companies were listed in BSE. 1 – International Bank of Azerbaijan in Prime Market 2 – Azerkosmos, Turanbank and Aqrolising in Standard market. Overall market capitalization increased to 1,019 million AZN. The Listing Advisory Program and other initiatives worked with tens of local potential IPO candidates. Global financial crisis consequences, geo-political and regional instability and volatilities in national currencies in all neighboring countries as well as in commodity prices turned local issuers to conservative mood, making them consider bond issuances as more applicable capital market fund raising tool, if any at all. PDO 3. Improved price transparency

2010 2011 2012 2013 2014 2015 2016 6MPrice Transparency - 0% 0% 0% 100% 100% 100%

In 2016 overall price transparency indicator was 100%. The target for that period was 90%. In 2014 the SCS, BSE and NDC took a number of measures to increase transparency and accessibility of trades to all categories of traders and investors. First, a special regime was adopted at BSE for all cross transactions at secondary market (cross transactions are transactions conducted by the same broker from the buying and the selling side). Thus, a crossing transaction cannot be matched (finalized) unless within next 30 minutes of trade session any other broker bids with better conditions (price) for the buying or the selling side of the transaction. If the latter happens, the auction starts. If no interest was shown the original transition was finalized. In 2015 the holding period of cross transactions was prolonged to 60 minutes. Secondly, in 2014 the special regime was introduced by the NDC to let smaller and less financially advanced brokers to participate instantly in cross transaction. The NDC eliminated funds pre-validation regime for all categories of brokers and let them deliver funds after the transaction matched. The funds provision is ensured by liquid assets pledged or bank guaranty mechanisms. Elimination of funds pre-validation allows brokers and all categories of investors to promptly react on bid quotes in the trading system. All transactions that appear on BSE trading system are a non-block transaction which means that all of the transactions are counted as being competitive transactions. Thus all transactions in BSE trading system are transparent and competitive.

Intermediate Results:

Intermediate Result One (Component One): Streamlining and Automating Market Infrastructure:

2010 2011 2012 2013 2014 2015 2016 6MRatio of market participants electronically linked to market infrastructure (trading, clearing and settlements)

0% 0%

100%

0%

100%

75%

100%

90%

100%

100%

100%

100%

100%

Despite the project planning phase expectations of gradual grow of number of market participants 87

electronically connected to trading and post-trading operations at BSE, NDC and other involved entities, the transformation was instant due to the decision of BSE and NDC to conduct all the necessary changes at once and at their own expense. Thus, in 2011 BSE and NDC agreed the electronic protocol of data exchange, developed the connection facilities and handed over them to all brokers. Later, in 2016 the achievement was reinforced by implementation of the Korean technologies, through which, inter alia, the surveillance, market watch and DVP processes were also processed and automated.

Intermediate Result Two (Component Two): Updating and Strengthening the Legal and Regulatory Framework

2010 2011 2012 2013 2014 2015 2016 6M

Enactment of a new Capital Market Act No No

No

Yes

No

Yes

No

Yes

No

Yes

Yes

Yes

Yes

After inter-ministerial, parliamentary and Presidential Administration discussions, the “On Securities Markets” Law was enacted in July 2015.

Intermediate Result indicator Three (Component Two): Promulgation of capital markets regulation required upon enactment of Law

2010 2011 2012 2013 2014 2015 2016 6MPromulgation of capital markets regulation required upon enactment of Law

No No

No

Yes

No

Yes

No

Yes

No

Yes

Yes

Yes

Yes

All implementing regulations required by the enactment of the “On Securities Markets” Law were adopted by end of the 2015.

Intermediate Result indicator Four (Component Three): Number of companies involved in the listing advisory program (debt and equity)

2010 2011 2012 2013 2014 2015 2016 6MNumber of companies involved in the listing advisory program (debt and equity)

05

0

10

0

15

1

15

4

15

16

15

16

The Listing Advisory program came into being after extensive negotiations with potential service providers (brokers, auditors, lawyers and others) on 16th of April 2014.

Since its establishment LAP partners arranged numbers of company meetings and organized several group 88

seminars for companies that might be interested in listing. The aim of those seminars was to educate companies and its management about the capital markets opportunities and help them to take advantage of this market. Key events were:



Since its establishment and till the end of the Project period, the LAP signed consortium contracts with 16 organizations, out of which 12 listed their instruments at Prime and Standard tier of BSE listing. Alternative tier companies are decided not to be taken into account for the purposes of this indicator as ATM tier companies are either offered to or traded by limited number of investors or have lower listing entrance requirements.

Intermediate Result indicator Five (Component Four): Increased of the threshold pass rate of the Financial Certification examination for market participants

2010 2011 2012 2013 2014 2015 2016 6MIncreased of the threshold pass rate of the Financial Certification examination for market participants

50%50%

50%

55%

50%

60%

75%

65%

75%

75%

75%

75%

75%

Financial Certification examinations were conducted by the SCS and lately by the FSMA. In 2013 the methodology of the examination was completely revised based on the Consultant’s recommendations. Since 2014 the CMTC provides preparation courses for the examinations. The threshold pass rate for the Financial Certification has been 75% for the last 4 reporting periods.

Intermediate Result indicator Six (Component Four): Consumer Awareness of Capital Market Instruments

2010 2011 2012 2013 2014 2015 2016 6MConsumer Awareness of Capital Market

24% 28 33 37 41 45 45

89

Instruments N/A 32 36 56 59.11 59.38

Consumer Awareness of Capital Market instruments was the most important indication that the SCS was focusing on. Initiatives like establishing CMTC, launching LAP, Nation-wide Education Program initiative, cooperation with universities, youth organizations and journalists, conducting local and international conferences and workshops (detailed in above chapters) contributed to the increasing rates of financial literacy and consumer awareness. Moreover, the CMMP coincided with analogous initiatives of other financial institutions and governmental bodies, with whom the SCS cooperated closely in this regard (CBAR, MoF, etc). The indication surveys were conducted by the external independent specialized companies.

4. Amendments and extensions to the original project work plan.

There were 3 occasions when the Project’s work plan was amended to comply with its main direction and goals: at the inception (October 2012), in the midst of the project span (October 2014) and at the end of the original project period (extension negotiations, October 2015- February 2016). All amendments were pre-approved by the World Bank and consequently confirmed by official amendments to the consulting services contract (the provision of goods contract remained unchanged for the whole period from Jan 2015 to Feb 2016).

4.1. Inception period amendments:

In the initial meetings in October 2012 with the project team, the Consultant and the World Bank, the SCS’ Chairman raised the issue of importance of increasing listing on BSE as a priority of the initial phase to be supported by CMMP. The SCS had been considering the creation of a Listing Advisory Program (LAP) to attract issuers to listing with resources to be allocated from BSE, SCS and other market participants and professionals to actively promote Capital Market, provide training and provide preliminary listing advisory services. The Consultant was requested to take the lead in defining the program and provide technical and managerial support with its delivery. Supporting the LAP necessitated changes to the activities under Component 3 namely 3.1.1, 3.1.2, 3.2.3, 3.3.1 and 3.3.2. (See table 2.1.1 above).

Moreover, other changes were also agreed in the inception phase. Activities 2.3.1: “Review and analyze the risks and opportunities” and 2.3.2: “Recommendations on the optimal participation of the banks and requirements” were considered no longer required as the Central Bank had decided that commercial banks would only participate in Capital Market through their subsidiaries and not directly. Resources of these two tasks were agreed to utilize to support BSE to develop their rules and regulations to adapt new technological and legislative environment after launching the Capital Markets Information system and enactment of the new “On Securities Market Law” accordingly.

Activities 3.2.4 and 3.3.2 were similarly re-focused to concentrate on LAP activities, supporting seminars to be provided by the LAP etc. Activity 3.4.2: “Develop and publish educational material on Corporate Governance” was considered no

90

longer valid as the IFC had initiated, prepared and published extensive material on Corporate Governance for local issuers. The Consultant was asked to assist BSE and prepare a study material on opportunities of IPO for local issuers.


4.2. Mid-period amendments:

In mid-2014 the SCS initiated another round of negotiations with the World Bank and the Consultant on updating and amending the tasks and activities in the deliverables to comply with the recent developments at the capital markets.

The role of the NDC as an asset manager of commercial investment funds were was reconsidered based on the experts recommendation in order to prevent the State owned NDC’s monopolization of the segment. Thus, it was asked to re-direct the Activity 1.3.8 from NDC to providing recommendations on potential private fund administration entities. Activities 2.2.2 and 2.2.3 were renamed and reshaped in order to comply fully with the task of preparing the implementing regulations that would support the new “On Securities Market Law” draft.

Activity 2.3.3 was reconsidered to concentrate more specifically on role of banks in newly proposed settlement model for the securities market of the country.

In light of the local real estate market dynamics, Activities3.5.4 and 3.5.5 were re-organized to focus on bringing international expertise of organizing foreign securities trade (MTF) to BSE.

Activities 4.6.4 and 4.6.5 supporting the CMTC were completed by the SCS itself before the commencement date of the Consultant assignment. So, the Consultant was asked to prepare self-study materials on various topics of the capital market operations.


4.3 Extension of the Project period:

In light of the complexity and significance of CMIS procurement tender as well as multiplicity of terms and conditions to be assessed, in the first quarter of 2015 the SCS and the World Bank started negotiating the possibility of the Project Period extension. Indeed, the procurement of the CMIS took longer time than initially anticipated. The project closing date extension topic was eventually triggered by the need to complete installation of CMIS in 12 months period after its inception, whereas all pre-requisite technical agreements and future contract negotiation were completed by mid-February 2015. The implementation of the information system could be finalized at least within 12 months, meaning a two-month slippage from the project’s original end-date (31 Dec 2015). In turn, the assessment of the development and implementation results of the CMIS was possible only after its go-live and required the consultants at least one month after its launching to be able to comprehensively assess all aspects of the implementation. At the same time, the SCS requested to consider two additional tasks for CMTC strategic development and sustainability. In consultation with the World Bank it was decided to sign new agreement with the same

91

Consultant for additional services. The SCS asked the World Bank’s no-objection for SSS method and the Bank provided SCS with NOL on February 1, 2016 and new agreement with Corporate Solutions Consulting Ltd was signed on the same date. At the same time the existing agreement was extended to conduct the deliverable no 1.4.5 on assessing the CMIS implementation results. The Borrower, Ministry of Finance (MOF) of Azerbaijan, requested extension of the project for additional 6 months to have enough time for CMIS installation and handover and accommodating services. The Bank provided its approval of Project Closing Date extension till July 01, 2016.

5. Financial Reports are attached to the report:

See attached XL tables

92

Forecast : Next6 months

GoA 157 781,11 2 094 595,42IBRD 230 888,26 11 999 971,99Other - 1 410,86SECO - 1 600 000,00

Total financing

Incremental operating cost 1 594,10 104 063,24Consultants’ services including Audit and Training SECO - 1 385 816,56Incremental Other - 1 295,60Front-end fee - 30 000,00Good 172 414,63 5 542 845,90Consultants’ services including Audit and Training 309 777,59 8 591 166,44

Total expenditure

-95 116,95 40 790,53Add : Foreign exchange differenceAdd : Net change in advances given

Net change in cash -95 125,45 40 115,51

Opening cash balanceInternational Bank of Azerbaijan (Project A/c, AZN) 47,44International Bank of Azerbaijan (DA,USD) 135 193,52

Total opening cashAdd : Net change in cash

Net cash available

Closing cash balanceXalq BankSahil Branch (DA) 39 968,32 39 968,32Xalq BankSahil Branch (Project, AZN) 147,19 147,19

Total closing cash balance

Note:

ii) Closing balance of PA: 1 USD = 1.6102 AZN

Signator 1: / / /signature date signator's initials position


THE REPUBLIC OF AZERBAIJANCapital Market Modernization Project

Sources and Uses of FundsFor the period ended: 9/30/2016

in USD

Quater: 7/1/2016 - 9/30/2016 Cumulative as of 9/30/2016

Cash receipts

388 669,37 15 695 978,27

Less: expenditure by categories

483 786,32 15 655 187,74

Receipts less expenditure-8,50 -675,02

- -

135,240.96-95 125,45 40 115,51

i) Opening balance of PA in Quarter: 1 USD = 1.5078 AZN

40,115.51 40,115.51

40 115,51 40 115,51

The following rates were used for conversion:

93

N Planned Actual Variance Planned Actual Variance483,786,32 483,786,32 15,678,658,83 15,655,187,74 23,471,09

1 133,031,69 133,031,69 7,721,835,16 7,721,835,16

2 1,425,472,68 1,425,472,68

3 1,705,025,48 1,705,025,49 -0,01

4 2,231,737,43 2,231,737,43

5 2,534,64 2,534,64 289,120,78 287,450,72 1,670,06

6 157,781,11 157,781,11 2,115,028,42 2,093,227,38 21,801,04

7 190,438,88 190,438,88 190,438,88 190,438,88



THE REPUBLIC OF AZERBAIJANCapital Market Modernization ProjectUses of Funds by Project Activities

For the period from: 7/1/2016 to: 9/30/2016in USD

Quarter CumulativeProject Component/ActivityTotal Project ExpenditureStreamlining and Automating Market Infrastructure

Updating and Strengthening the Legal and Regulatory Framework

Stimulating Supply

Capacity Building

VAT

Supporting Capital Markets Training Center's Operational Efficiency and Its Divercification

Project management

94

1 176,598.482 235.973 214,000.00

390,834.4545 390,834.45

67 350,432.158 2,074.54

910 350,432.15

11 40,402.30

NOTES

/i:

Disclosure to Dİscrepancy (11):

268.22

174,922.02

Total discrepancy 175,190.24


THE REPUBLIC OF AZERBAIJANCapital Market Modernization Project

Designated Account (DA) StatementInternational Bank of Azerbaijan (DA,USD)

as of 9/30/2016in USD

Opening balance as at 1/1/2016Add: Cumulative unexplained discrepancy

IBRD advance during period from: 1/1/2016 to: 9/30/2016

Less: Refund to IBRD from DA during the period from: 1/1/2016 to: 9/30/2016Present outstanding amount advanced to DA

DA closing balance as at 9/30/2016 carried forward to next periodAdd: Amount of eligible expenditures paid during quarter

Service charges (if debited into DA)

Less: Interest earned (if credited into DA)

Amounts due to other bank accounts(-) or DA (+)Amount in cash on hand (retained (+)/due (-))

Total advance accounted for

Discrepancy (5) - (10) to be explained /i

The discrepancy, w hich should be explained in a separate note, may comprise eligible expenditures paid out of DA but not yet entered by the DA bank, amount advanced by the Bank but not yet credited by the DA bank, etc.

Foreign exchange difference(losses (-)/gains(+)Payables(-)/advances(+) to contractors and employees

95

ASSETS

Cash and cash equivalents

147.1939,968.32

Advance Payments

Cumulative Project Expenditures 1/ 15,655,187.74

FUNDS AND LIABILITIES

Project Financing 2/ 15,695,978.27Other income (like bid fees)Exchange Rate Difference 3/ -675.02

Total funds and liabilities

NOTE:1/ Total Uses of Funds (see Report 1-A)2/ Total Sources of Funds (see report 1-A)3/ See Report 1-A



PROJECT BALANCE SHEETas of: 9/30/2016

in USD

15,695,303.25

15,695,303.25

International Bank of Azerbaijan (Project A/c, AZN)International Bank of Azerbaijan (DA,USD)Xalq BankSahil Branch (Project, AZN)Xalq BankSahil Branch (DA)

Total assets

96

1

Date post:	14-Oct-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times