document of the world bank · sector code (as % of total bank financing) general finance sector 74...

Document of The World Bank

Report No: ICR00003652

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-44050, TF-57849 & TF-98323)

ON A

CREDIT

IN THE AMOUNT OF SDR 7.0 MILLION (US$11.0 MILLION EQUIVALENT)

AND GRANT

IN THE AMOUNT OF US$3.0 MILLION

AND ADDITIONAL GRANT

IN THE AMOUNT OF US$1,865,000

TO THE

AZERBAIJAN REPUBLIC

FOR A

CORPORATE AND PUBLIC SECTOR ACCOUNTABILITY PROJECT

December 30, 2015 Governance Global Practice Public Resource Mobilization and Management Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 31, 2008)

Currency Unit = manat) 0.80 manat = US$1 US$1.5905 = SDR 1

(Exchange Rate Effective June 30, 2015)

Currency Unit = manat 1.0483 manat = US$1

US$1.41 = SDR 1

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACCA Association of Chartered Certified Accountants ACPATER Azerbaijan Center for Professional Accounting and Audit Training, Education and

Research APAA Association of Professional Accountants of Azerbaijan

ARPA Accounting and Risk Professionals Association of Azerbaijan CAPSAP Corporate and Public Sector Accountability Project Cert IPSAS Certificate in International Public Sector Accounting Standards (Cert IPSAS) issued

by Chartered Institute of Public Finance Accountants CFAA Country Financial Accountability Assessment CIPFA Chartered Institute of Public Finance Accountants CIS Commonwealth of Independent States CoA Chamber of Accounts (Supreme Audit Institution) CoAA Chamber of Auditors of Azerbaijan CPD Continuous Professional Development CPF Country Partnership Framework CPS Country Partnership Strategy DO Development Objective ECA Europe and Central Asia Region ERP Enterprise Resource Planning EU European Union FARABI Financial and Accountability Reporting Application for Budgetary Institutions FOFEA Federal Office of Foreign Economic Affairs (Switzerland) FM Financial Management FMIS Financial Management Information System FSTC Financial Science and Training Center

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GDP Gross Domestic Product GOA Government of Azerbaijan ICAEW Institute of Chartered Accountants in England and Wales ICR Implementation Completion and Results Report IDA International Development Association IES International Education Standards IFAC International Federation of Accountants IFMIS Integrated Financial Management Information System IFRS International Financial Reporting Standards IP Implementation Progress IPSAS IPSASB

International Public Sector Accounting Standards International Public Sector Accounting Standards Board

ISA International Standards on Auditing ISR Implementation Status and Results Report ISSAI International Standards of Supreme Audit Institutions M&E Monitoring and Evaluation MOF Ministry of Finance MS Moderately Satisfactory NASBO National Accounting Standards for Budgetary Organizations NASCO National Accounting Standards for Commercial Organizations NAQ National Accounting Qualification NPV Net Present Value PAD Project Appraisal Document PDO Project Development Objective PHRD Policy and Human Resources Development (Grant) PEFA Public Expenditure and Financial Accountability PIE Public Interest Entity PIFC Public Internal Financial Control PMU Project Management Unit QAG Quality Assurance Group ROSC Report on Observance of Standards and Codes SECO State Secretariat for Economic Affairs (Switzerland) SDP Strategic Development Plan SIL SME

Specific Investment Loan Small and Medium Size Entities

SMO Statements of Membership Obligation SOEs State-Owned Enterprises SSPF State Social Protection Fund STAREP Strengthening Auditing and Reporting in the Countries of the Eastern Partnership TIMS Treasury Information Management System USD United States Dollars VAT Value Added Tax

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Regional Vice President: Cyril E. Muller

Country Director: Mercy Miyang Tembon

Global Practice Director: Samia Msadek

Country Manager: Larisa Leshchenko

Practice Manager: Soukeyna Kane

Project Team Leader: Tural Jamalov and Jarett Decker

ICR Team Leader: Patrick Piker Umah Tete

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AZERBAIJAN


CONTENTS DATA SHEET ................................................................................................................... vi A. Basic Information .......................................................................................................... vi

B. Key Dates ...................................................................................................................... vi

C. Ratings Summary ......................................................................................................... vii

D. Sector and Theme Codes.............................................................................................. vii

E. Bank Staff .................................................................................................................... viii

F. Results Framework Analysis ....................................................................................... viii

G. Ratings of Project Performance in ISRs ..................................................................... xiii

H. Restructuring ............................................................................................................... xiv

I. Disbursement Profile .................................................................................................... xv

Executive Summary ......................................................................................................... xvi

1. Project Context, Development Objectives and Design ................................................... 1

1.1 Context at Appraisal ..................................................................................................... 1 1.2 Original Project Development Objectives (PDO) and Key Indicators ......................... 2 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Justification ......................................................................................................................... 2 1.4 Main Beneficiaries ........................................................................................................ 3 1.5 Original and Revised Components (as approved) ........................................................ 3 1.6 Other Significant Changes ............................................................................................ 6 2. Key Factors Affecting Implementation and Outcomes .................................................. 6

2.1 Project Preparation, Design and Quality at Entry ......................................................... 6 2.2 Implementation ............................................................................................................. 8 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization .............. 9 2.4 Safeguard and Fiduciary Compliance ........................................................................... 9 2.5 Post-completion Operation/Next Phase ...................................................................... 10 3. Assessment of Outcomes .............................................................................................. 11

3.1 Relevance of Objectives, Design and Implementation ............................................... 11 3.2 Achievement of Project Development Objectives ...................................................... 12 3.3 Efficiency .................................................................................................................... 17 3.4 Justification of Overall Outcome Rating .................................................................... 19 3.5 Overarching Themes, Other Outcomes and Impacts .................................................. 19 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops ........... 20 4. Assessment of Risk to Development Outcome ............................................................. 21

5. Assessment of Bank and Borrower Performance ......................................................... 22

5.1 Bank Performance ....................................................................................................... 22 5.2 Borrower Performance ................................................................................................ 23

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6. Lessons Learned............................................................................................................ 24

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ............... 25

Annex 1. Project Costs and Financing .............................................................................. 26

Annex 2. Outputs by Component...................................................................................... 28

Results Framework Analysis ............................................................................................ 36

Annex 3. Economic and Financial Analysis ..................................................................... 40

Annex 4. Bank Lending and Implementation Support/Supervision Processes ................. 43

Annex 5. Beneficiary Survey Result ................................................................................. 45

Annex 6. Stakeholder Workshop Report and Results ....................................................... 47

Annex 7. Summary of Borrower's ICR ............................................................................. 48

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ........................... 57 Annex 9. List of Supporting Documents .......................................................................... 60 Annex 10. Map of Azerbaijan Republic ........................................................................... 62

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AZERBAIJAN


DATA SHEET

A. Basic Information

Country: Azerbaijan Project Name:

Corporate and Public Sector Accountability Project

Project ID: P099924 L/C/TF Number(s): IDA-44050, TF-57849 & TF-98323

ICR Date: December 30, 2015 ICR Type: Core ICR

Lending Instrument: SIL Borrower:

GOVERNMENT OF AZERBAIJAN

Original Total Commitment:

IDA-44050: XDR 7 million (US$11 million) TF-57849: US$3 million TF-98323: US$1,865,000 Total: US$15,865,000

Disbursed Amount:

IDA-44050: XDR 7 million (US$10,567,744.80) TF-57849: US$3 million TF-98323: US$1,847,561.57 Total: US$15,413,306.37

Government Co-financing US$8,000,000 Disbursed Amount: US$7,154,957.88

Revised Amount: Same as Original Commitments

Environmental Category: C

Implementing Agencies: Ministry of Finance

Cofinanciers and Other External Partners: Switzerland, Federal Office of Foreign Economic Affairs (FOFEA) and Japan, Ministry of Finance (PHRD Grant)

B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s) Concept Review:

07/17/2006 Effectiveness: 12/19/2008 12/19/2008

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B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s) Appraisal: 12/12/2007 Restructuring(s): 09/23/2011

11/19/2013 Approval: 03/27/2008 Mid-term

Review: 06/10/2012 11/09/2012

Closing: 12/31/2012 06/30/2015

C. Ratings Summary

C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Satisfactory

Borrower Performance: Moderately Satisfactory

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

Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately

Satisfactory Quality of Supervision:

Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments

(if any) Rating

Potential Problem Project at Any Time (Yes/No):

No Quality at Entry (QEA): None

Problem Project at Any Time (Yes/No): Yes

Quality of

Supervision (QSA): None

DO Rating before

Closing/Inactive Status: Satisfactory

D. Sector and Theme Codes

Original Actual

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Sector Code (as % of total Bank financing)

General finance sector 74 74

Central government administration 19 19

General industry and trade sector 7 7

Theme Code (as % of total Bank financing)

International financial standards and systems 50 50

Public expenditure, financial management and procurement

25 25

Corporate governance 25 25

E. Bank Staff

Positions At ICR At Approval Vice President: Cyril E. Muller Shigeo Katsu

Country Director: Mercy Miyang Tembon D-M Dowsett-Coirolo

Country Manager: Larisa Leshchenko Gregory T. Jedrzejczak

Practice Manager: Soukeyna Kane Siew Chai Ting

Project Team Leader: Tural Jamalov and Jarett Decker

Ida Njeri Muhoho

ICR Team Leader: Patrick Piker Umah Tete

ICR Primary Author: Patrick Piker Umah Tete

Winston Percy Onipede Cole

F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The main Project Development Objective (PDO) was to strengthen accountability and transparency in financial reporting for the public and corporate sectors in line with international best practices, and to support institutional strengthening to sustain reforms. The PDO targeted the following components: corporate sector accountability; public sector accountability; and stronger accounting, auditing and financial management capacity. Revised Project Development Objectives (as approved by original approving authority): Not Applicable.

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(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: Transparency, self-governance and education in the accounting and audit profession improved with the establishment of an Association of Professional Accountants that follows international standards.

Yes/No (Whether an Association that follows international standards is established)

No Yes

Yes

Date achieved 02/01/2013 06/30/2015 06/30/2015

Comments (Incl. % achievement)

Partially achieved. The Accounting and Risk Professional Association (ARPA) of Azerbaijan was established and registered with the Ministry of Justice on December 16, 2014, and is in the process of becoming an associate member of International Federation of Accountants (IFAC) by the second quarter of 2017. ARPA has complied with 7 of the 47 actions required in IFAC’s Compliance Self-Assessment Questionnaire. There are ongoing efforts towards full compliance.

Indicator 2: Accountability in management of public funds strengthened through improvements in the external audit and internal controls environments.

%

(Percent of total budget expenditures audited, using new methodology, by Chamber of Accounts (CoA)+ percent of state budget processed through Financial and Accountability Reporting Application for Budgetary Institutions (FARABI)

0% 10% for CoA & 30% for FARABI

0% for CoA & 40%for FARABI

Date achieved 01/01/2008 06/30/2015 06/30/2015

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Partially Achieved. While the CoA has built requisite technical capacity to undertake financial and performance audits using the new methodology, and most process steps have been achieved, implementation is subject to enactment of amendments to the CoA law. Draft changes to the law are being reviewed before presentation to Parliament. Fully Achieved (target exceeded). State budget expenditure processed through FARABI achieved 133% of the target. Total budget expenditure was 10,928.50 million MANAT and for institutions connected to FARABI, the total budget expenditure was 4,352 million MANAT.

Indicator 3: Accounting and auditing profession strengthened through the establishment of training and certification programs and education standards in line with international standards.

Number of trained students at ACPATER

0 3500 4843

Date achieved 01/01/2008 06/30/2015 06/30/2015


Fully Achieved (target exceeded). Target achievement of 138%.

(b) Intermediate Outcome Indicator(s)


Original Target Values (from approval documents)




Indicator 1: Number of updated International Financial Reporting Standards (IFRS) translated, explanatory notes issued.

Number 0 40 41 Date achieved 01/01/2008 06/30/2015 06/30/2015


Fully Achieved (target exceeded). 2015 IFRS translated with 41 standards and interpretations. Target achieved is 103%.

Indicator 2: Charter and other legal documents for the establishment of the Association of Professional Accountants of Azerbaijan (APAA) are prepared and registered with the Ministry of Justice.

Text No Yes Yes Date achieved 07/31/2013 06/30/2015 06/30/2015


Fully Achieved. APAA, which is now called Accounting and Risk Professionals Association of Azerbaijan (ARPA), was registered with the Ministry of Justice on December 16, 2014. The 2009 Charter for Azerbaijan Risk Professional Association was revised on December 16, 2014 to the ARPA Charter. The association’s tax identification is also in the name of ARPA.

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Indicator 3: APAA is capable of preparing new/revised accounting and audit standards when necessary, and fully responsible for marking exams written by students under the National Accounting Qualification Program.

Text No Yes Yes

Date achieved 02/28/2013 06/30/2015 06/30/2015


Fully Achieved. ARPA has the capacity to preparing new/revised accounting and audit standards. ARPA also has the capacity to handle exam marking after conducting two accredited trainings.1

Indicator 4: Number (#) of National Accounting Standards for Budgetary Organizations(NASBOs) issued based on International Public Sector Accounting Standards (IPSAS) and explanatory notes.

Number 0 41 38

Date achieved 01/01/2008 06/30/2015 06/30/2015

Comments (Incl. percent achievement)

Significantly Achieved. The target of 41 NASBOs2 was based on the forecast of the number of standards in place when the project closed. To date, IFAC’s IPSAS Board has issued 39 standards (38 standards based on an accrual accounting system and one standard for cash-based accounting). This means that a maximum of 39 standards can be translated at this point in time, resulting in 97% target achievement. The 2011 translated IPSAS in Azerbaijani is on the IFAC website.

Indicator 5: Number (#) of key budget organizations and line ministries using unified automatic accounting system.

Number 0 59 99 Date achieved 02/01/2013 06/30/2015 06/30/2015 Comments (Incl. % achievement)

Fully Achieved (target exceeded). Target reached 168% achievement.

Indicator 6: Percentage (%) of items completed in the Strategic Development Plan (SDP) of the Chamber of Accounts.

% 0% 100% 100%

Date achieved 07/31/2013 06/30/2015 06/30/2015

1 Trainings comprised: (i) Ernst & Young Academy of Business Marking and Exam Questions Composition training for 20 accounting professionals held on May 15-17, 2015, and (ii) the CIPFA Training of Trainers’ course for Cert IPSAS held on June 8-12, 2015 for 36 accounting professionals.

2 The Republic of Azerbaijan Accounting Law (2004) mandates NASBOs.

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Fully Achieved. All 4 themes3 of 2012-2014 SDP for CoA have been accomplished.

Indicator 7: Percentage (%) of total budget expenditures audited, using new methodology. % 0% 10% 0% Date achieved 01/01/2008 06/30/2015 06/30/2015


Partially Achieved. While the CoA has built requisite technical capacity to perform financial and performance audits using new methodology, implementation is subject to enactment of amendments to the CoA law. Draft changes to the law are being reviewed before presentation to Parliament.

Indicator 8: Number (#) of accredited training programs (including undergraduate, graduate and vocational training programs).

Number 0 4 4

Date achieved 01/01/2008 06/30/2015 06/30/2015


Fully Achieved. The Ministry of Education licensed the Financial Science and Training Center (FSTC) on November 24, 2014 under license no. 074508. The center is running 44 accredited training programs. Target achieved is 100%.

Indicator 9: Number (#) of accredited trainers.

Number 0 35 36

Date achieved 01/01/2008 06/30/2015 06/30/2015


Fully Achieved (target exceeded). Target achieved is 103%. Two5 accreditation programs seen.

3 The four themes include: improvement of financial audit; introduction of performance audit capabilities; enhancement of legal and standards framework; and upgrades to human resource and training systems.

4 The four accredited training programs are: the National Accounting Qualification (NAQ), which is the professional accountancy program modelled on the ACCA course; NASBO Certification for Public Accountants modelled on aspects of CIPFA; Bookkeepers course modelled on International Association of Bookkeepers; and CIPFA’s Certificate in International Public Sector Accounting Standards (Cert. IPSAS).

5 The first accredited training was offered by Ernst and Young Academy of Business for Marking and Exam Questions Composition held on May 15-17, 2015 and the second was the CIPFA Training of Trainers Course on CIPFA Certificate in International Public Sector Accounting Standards (Cert IPSAS) held on June 8-12, 2015.

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Indicator 10: Number (#) of students successfully passing the various training programs.

Number 0 3500 2629

Date achieved 01/01/2008 06/30/2015 06/30/2015


Significantly Achieved. Target achieved is 75%. As of September 1, 2015, the number of successfully passing students increased to 2,797 (80% of the target). This target was unrealistic, as it assumed that 100% of the students that enrolled for courses at FSTC would pass the exams.

Indicator 11: Number (#) of new accounting and audit, tax related textbooks introduced at higher education institutes.

Number 0 7 136

Date achieved 01/01/2008 06/30/2015 06/30/2015


Achieved (target exceeded). Target achieved is 186%.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (US$ millions)

1 08/29/2008 Satisfactory Satisfactory 0 2 06/17/2009 Moderately Satisfactory Moderately Satisfactory 0

3 12/15/2009 Moderately

Unsatisfactory Moderately

Unsatisfactory 0



Unsatisfactory 0.3



Unsatisfactory 0.3

6 12/24/2011 Moderately Satisfactory Moderately Satisfactory 1.65 7 12/11/2012 Moderately Satisfactory Moderately Satisfactory 3.47 8 09/17/2013 Moderately Satisfactory Moderately Satisfactory 7.07 9 02/06/2014 Moderately Satisfactory Moderately Satisfactory 7.2

10 07/22/2014 Moderately Satisfactory Moderately Satisfactory 10.76 11 12/30/2014 Satisfactory Satisfactory 11.01 12 06/16/2015 Satisfactory Satisfactory 15.42

6 Thirteen textbooks have been translated, including 10 ACCA textbooks for the NAQ course and three textbooks for CIPFA course.

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H. Restructuring

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in

US$ millions

Reason for Restructuring & Key Changes Made

DO IP

09/23/2011 No MS MS 0.84

The major modifications proposed were: (a) addition of sub-component 2.3 on a unified automated accounting system for line ministries and budgetary organizations; (b) limitation of the scope of the sub-component 1.3 by cancelling support to the Chamber of Auditors; and (c) extension of the project closing date to December 31, 2013, from the original date of December 31, 2012.

11/19/2013 No MS MS 7.20

This project restructuring was dropped and new activities were added under: (1) Component 1: (a) IFRS introduction at PIEs is being dropped; (b) modifications to support Association of Professional Accountants of Azerbaijan; and (c) cancellation of planned activities to transfer audit oversight function from profession to the MOF; (2) Component 2: (a) activities pertaining to the introduction of Public Internal Financial Control (PIFC) are being cancelled; (b) new activities are being introduced to deploy FARABI to additional budgetary institutions and to establish FARABI Maintenance and Support Center; and (c) support to Chamber of Accounts is being modified based on revised activities in the SDP; and (3) Component 3: provision of financial assistance to successive staff of public and private sector accountants and establishment of an

xv

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in

US$ millions

Reason for Restructuring & Key Changes Made

DO IP

international advisory panel of experts in accounting and audit are being cancelled. The restructuring revised the Project’s PDO level and intermediate results and indicators; extended the closing date of the project from December 31, 2013 to June 30, 2015; and increased the current World Bank share for IDA credit from 60% to 100% to ensure full utilization funds and to balance IDA and Government contributions.

I. Disbursement Profile

xvi

Executive Summary

The Corporate and Public Sector Accountability Project (CAPSAP) was approved by the Bank on March 27, 2008. The Project Development Objective (PDO) was to strengthen accountability and transparency in public and corporate sector financial reporting in accordance with international best practices, and to support ongoing institutional strengthening. The project aimed to support the Government of Azerbaijan’s (GOA) implementation of the 2004 Accounting Law, which mandated the use of accounting standards based on international best practices. At the time, GOA lacked capacity to comply with the law. The Bank’s support was in line with the Country Partnership Strategy for 2007-2010. The project involved four components, including: corporate sector accountability; public sector accountability; stronger accounting, auditing and financial management capacity; and project management. Two modifications were made to activities within the components, but not to the PDO. Other notable changes arising from the restructurings included a change in IDA contribution to 100 percent from 60 percent; changes to the results framework and monitoring indicators; and two extensions of the closing date from December 31, 2012 to December 31, 2013, then to June 30, 2015. After a slow and problematic start, the project began yielding positive results subsequent to the first restructuring. The development outcome risk was assessed as moderate, while both Bank and borrower performance have been assessed as satisfactory. A beneficiary survey by an independent consultant and stakeholders’ workshop were conducted, indicating the project produced a positive outcome. The co-financier State Secretariat for Economic Affairs (SECO) of Switzerland rated the project as satisfactory. The Government of Azerbaijan also submitted its Implementation and Completion Results Report (ICR), which reflected a satisfactory performance of the project. The GOA noted in its evaluation of the Bank’s performance that the Bank provided full support to the implementation of the project and was receptive to the government’s priorities, which contributed greatly to the achievement of the PDO. Following project closure, the GOA will continue implementing all activities related to this project using its own resources. One of the achievements of the project was the roll out of Financial and Accountability Reporting Application for Budgetary Institutions (FARABI) system to 99 ministries and budget organizations. This has enhanced financial control and is being scaled up to an additional 900 institutions. FARABI has received very strong backing from the President and has a user satisfaction rate of 85% based on the beneficiary survey findings. Another achievement is the training program by the Financial Science and Training Center (FSTC) which has trained 4,843 students in three courses that target both the public and corporate sectors. The professional accounting program is in accordance with International Education Standards that will enhance students’ skills to comply with international accounting and auditing standards. The Chamber of Accounts (CoA) has improved its external audit function through strengthening its skills in financial and performance audits adhering to the International Standards of Supreme Audit Institutions (ISSAI). Pilot audits undertaken under the project

xvii

will be scaled up when Parliament passes the revised Chambers of Accounts law, providing the CoA the mandate to conduct the audits. Transparency and self-governance of the accounting profession is expected to improve following the establishment of the Accounting and Risk Professional Association of Azerbaijan (ARPA) that is now registered with the Ministry of Justice. The association is professionalizing will professionalize the accounting profession in the country by providing quality assurance to ensure its members comply with international accounting and auditing standards, setting international ethical standards, and disciplining and investigating accountants where the need arises. The association is working towards complying with international requirements as a member of the International Federation of Accountants (IFAC). It plans to become an IFAC member in 2017, funded via membership fees. This has been a unique project combining activities to strengthen both corporate and public sector accountability and transparency based on international best practices. While the project achieved a satisfactory outcome, it demonstrated that both corporate and public sectors could benefit from synergies in training and accountancy oversight. The project also indicated that the flexibility in project design, particularly a gradual and incremental approach to implementing FARABI, the commitment of the beneficiaries, and openness to dialogue, are critical to project success.

1

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal Country Context: The Republic of Azerbaijan got its independence from the former Soviet Union in 1991. Discoveries of new oil fields were made in the 1990s and a pipeline to the port in Turkey completed in 2005. GDP growth rate moved from an average of 4% between 1995-2000 to 17% between 2001-2008. The poverty rate was reduced from 49% in 2001 to 13.2% in 2008. Revenues increased due to the oil boom and the challenge at the time was how to grow the non-oil sectors in order to have a diversified, sustainable, middle-income economy. Diversification of the non-oil economy required improvements in the supply of utilities, better infrastructure services (especially transportation), continued investment in human capital, a supportive business environment, strengthened public sector management, and expansion of the financial sector. Sector Context: The Republic of Azerbaijan previously had little experience with international best practices in accounting, auditing and financial management. The government enacted the Accounting Law in November 2004 to enhance transparency and accountability in the corporate and public sectors with the use of international accounting standards.7 However, it lacked the capacity to comply with these standards. Meanwhile, ad hoc curriculum development and non-compliance with international accounting and auditing standards constrained the quality of higher education in accounting and auditing. Accountancy professionals also lacked access to continuing education opportunities. Increasing use of the Azerbaijani language posed a further challenge due to the absence of local language textbooks and other teaching materials. Rationale for Bank Assistance: The Bank aimed to support the government’s reform effort to align the Azerbaijani accounting and auditing arrangements with international practices, bringing them closer to the needs of a market economy. Bank assistance supported the first pillar of the Country Partnership Strategy (CPS) for 2007-2010, namely, to: (i) improve the quality and transparency of public sector governance by maintaining a stable macroeconomic framework that makes prudent use of oil revenues; (ii) improve public expenditure planning and management; (iii) strengthen financial management and procurement systems; (iv) establish proper public sector and corporate governance, accounting and auditing frameworks; and (v) create an administrative and regulatory environment conducive to growth. The Bank’s findings in the 2003 Country Financial Accountability Assessment (CFAA) and the 2006 ROSC for Accounting and Auditing suggested a need for reforms to build capable and accountable state and public interest institutions to manage public resources and improve accountability and transparency in financial reporting. A September 2009,

7 These are the International Financial Reporting Standards (IFRS) for Public Interest Entities and National Accounting Standards for Budgetary Organizations (NASBO) that are in line with IPSAS.

2

Corporate Governance ROSC also observed that SOEs controlled 15 percent to 25 percent of GDP. The Bank was well placed to support the government in implementing such reforms given its knowledge, previous engagement in the country, and broader experience in the Europe and Central Asia Region (ECA) region, including the European Union (EU) accession countries.

1.2 Original Project Development Objectives (PDO) and Key Indicators The Project Development Objective (PDO) was to strengthen accountability and transparency in financial reporting for the public and corporate sectors in line with international best practices, and to support institutional strengthening to sustain reforms. The PDO in the Financing Agreement was the same as that reflected in the results monitoring framework of the Project Appraisal Document (PAD) under Annex 3 but differed from that presented in the main text of the PAD. The main text of the PAD read: The Project Development Objective was to strengthen accountability and transparency in financial reporting for the public and corporate sectors in line with international best practices. This report used the PDO presented in the Financing Agreement. The project outcome indicators were:

a. Transparency in the corporate and public sectors increased through publishing annual financial statements according to international standards.

b. Accountability within Ministry of Finance (MOF) and Chamber of Accounts (CoA) to enforce Public Internal Financial Control (PIFC).

c. Updated legislative framework for accounting and auditing standards established. d. Accounting and auditing profession strengthened through the establishment of

training and certification programs and education standards in line with international standards.

Arrangements for results monitoring as presented in the PAD did not include the indicator on an updated legislative framework for accounting and auditing standards.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Justification The PDO was not revised during the project. The results and indicators were revised under the second restructuring to reflect modifications that were introduced to the project. Modifications were referred to as PDO Level Results Indicators, and include:

a. Transparency, self-governance and education in the accounting and audit profession improved with the establishment of an Association of Professional Accountants that follows international standards.

b. Accountability in management of public funds strengthened through improvements in the external audit and internal controls environments.

3

c. Accounting and auditing profession strengthened through the establishment of training and certification programs and education standards at Azerbaijan Center for Professional Accounting and Audit Training, Education and Research (ACPATER) in line with international standards.

This Implementation and Completion Results Report (ICR) uses the Results Framework and Monitoring table approved under the second restructuring.

1.4 Main Beneficiaries The original beneficiaries comprised public interest entities, including state-owned enterprises, the CoA (the country's supreme audit institution), the Chamber of Auditors (CoAA), the MOF, and accounting and auditing professionals and stakeholders in Azerbaijan. The beneficiaries were modified following the first and second restructuring of the project. This involved dropping the Chamber of Auditors and adding the Financial Science and Training Center, Accounting and Risk Professionals Association of Azerbaijan (ARPA) and budget organizations using FARABI.

1.5 Original and Revised Components (as approved) The project originally comprised four components, two of which were revised in the first restructuring in September 2011 and three in the November 2013 second restructuring. Table 1 below, summarizes the original and revised structuring. Table 1: Original and Revised Components

Original Components Revised Components Component 1: Corporate Sector Accountability. The corporate sector accountability objective was (i) to assist public interest entities (PIEs) in embedding IFRS in compliance with the Accounting Law; (ii) to establish appropriate legal and institutional frameworks and capacity for translation, adoption and enforcement of IFRS and National Accounting Standards for Commercial Organizations (NASCO); and (iii) to improve the statutory framework and build capacity to regulate and oversee the audit function.

Under the first restructuring in September 2011, sub-component 1.3 on “Improving the statutory framework and building capacity to regulate and oversee the audit function,” was cancelled. The activities envisaged to support the CoAA were cancelled to focus on establishing an agency within the MOF to regulate the audit profession. However, under the second restructuring, the transfer of the audit oversight from the profession to MOF was cancelled. Three sub components were revised in the second restructuring in November 2013 as follows: Cancellation of sub-component 1.1 on “Assisting the PIEs in embedding IFRS” based on the government’s request and decision to finance directly the envisioned activities.

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Original Components Revised Components Modification of sub-component 1.28 and 1.39 to reflect emphasis on the establishment of the Association of Professional Accountants of Azerbaijan (APAA). This would enable APAA to develop appropriate legal and institutional frameworks and capacity for translation, adoption and enforcement of IFRS and NASCOs. Activities expected from APAA included: (a) translate international accounting and audit standards and prepare proposals to MOF on new standards; (b) independently mark exam papers written by students of the National Accounting Qualification (NAQ) Program; (c) submit necessary documents to become a member of International Federation of Accountants (IFAC).

Component 2: Public Sector Accountability. The public sector accountability component aimed to enhance public sector accountability through the implementation of the government’s public sector accounting reform strategy, in part by implementing the section of the 2004 Accounting Law requiring budgetary organizations and off-budget state funds to prepare financial statements in accordance with NASBOs based on IPSAS. The component aimed to strengthen the public sector internal financial control framework by insisting that managers are responsible for establishing and maintaining sound internal control frameworks for their organizations, paving the way for establishing internal audit units in budget organizations that can provide management with assurance that the processes for which they are accountable are operating in a manner that minimizes the occurrence of

Under the first restructuring in September 2011, a new sub-component 2.3 for “Unified automated accounting system for line ministries and budgetary organizations” was added to support the implementation of the NASBOs and help the government to achieve effective control over spending of budget funds, and to generate reliable consolidated financial statements. Under the second restructuring in November 2013, sub-components10 2.1, 2.2 and 2.3 were modified to reflect recent developments in the execution of the Chamber of Accounts and automated accounting software (FARABI). Modifications included: Under sub-component 2.2, CAPSAP was to continue financing the implementation of the Chamber of Accounts’ SDP, but there were changes in the areas that the PAD indicated the SDP would undertake,

8 Sub-component 1.2 pertains to establishing appropriate legal and institutional frameworks and capacity for translation, adoption and enforcement of IFRS and NASCO.

9 Sub-component 1.3 pertains to improving the statutory framework and building capacity to regulate and oversee the audit function.

10 Sub-component 2.1 is “Public Sector Accounting Reform;” 2.2 is “External and Internal Financial Control;” and 2.3 is “Strengthening Accounting, Auditing and Financial Management Capacity.”

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Original Components Revised Components fraud, error or inefficient and uneconomic practices; and to strengthen the capacity of the country’s Supreme Audit Institution, the Chamber of Accounts (CoA), to increase transparency and accountability in managing public resources.

including focusing on four major themes: enhancing financial audit; introducing performance audit; improving legal and standards framework; and strengthening human resource practices. Under sub-component 2.2, the activities pertaining to the introduction of Public Internal Financial Control (PIFC) in Azerbaijan were dropped, since the GOA was expected to develop an Internal Financial Control Framework outside the Corporate and Public Sector Accountability Project (CAPSAP). PEFA indictors related to effectiveness of internal controls for non-salary expenditure improved from D+ in 2008 to B+ in 2014, and effectiveness of internal audit improved from a D in 2008 to C+ in 2014. Under sub-component 2.1 and 2.3, the establishment of a Maintenance and Support Centre for FARABI was added to ensure due maintenance and technical support of the system.

Component 3: Strengthening accounting, auditing and financial management capacity. This component aimed to build long-term capacity in accounting, auditing and financial management, bringing both corporate and public sector compliance into alignment with accounting and auditing standards.

Under the second restructuring in November 2013, revisions were made to bring the PAD language more in line with the direction the project had taken since the first restructuring. The original PAD activity of “financial assistance, in the form of part-payment or subsidies of the costs of professional qualifications in accounting and auditing will be provided to successive staff of public and private sector accountants to encourage the re-tooling program” was cancelled, with new emphasis placed on institutionalizing and accrediting the National Accounting Qualification Program. The “establishment of an international advisory panel of experts in accounting and auditing,” which was envisaged in the original project design, was deleted. The APAA was to establish structures responsible for the activities initially envisaged for the international advisory panel of experts.

Component 4: Project Management. This component was to provide support to the government to implement the project. It established a Project Management Unit

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Original Components Revised Components (PMU) at the MOF. The PMU conducted project management, procurement, financial management and monitoring and evaluation of the project.

1.6 Other Significant Changes Change in IDA Contribution: After the first restructuring, IDA increased its funding contribution to the project from 60 percent to 100 percent mainly because it agreed to fund sub-component 2.3, pertaining to the unified automated accounting system for line ministries and budgetary organizations. Closing Date Extensions: Initial project implementation delays as well as modifications to project components that required time to implement resulted in project extensions. The first restructuring extended the project’s closing date for 12 months from December 31, 2012 to December 31, 2013. The second restructuring extended the closing date by 18 months to June 30, 2015 for IDA (Credit 44050) and Japan PHRD (TF 57849), while SECO (TF 98323) was extended by 12 months to December 31, 2014, as the parent Trust Fund was due to close by June 30, 2015. Results Framework and Monitoring Indicators: The PDO level and intermediate results and indicators were revised during the second restructuring to reflect modifications introduced to the project after it had begun. The ICR is using these indicators to assess results. Cancellations: At project closure, US$17,438.43 related to SECO funding (TF 98323) was cancelled since it was not utilized. Government Co-financing: The Government of Azerbaijan committed to fund US$8 million, but disbursed only US$7,154,957.88 by the project’s end. The Government ICR notes that the balance of US$845,042.12 is attributable to US$644,437.70 related to exchange rate losses as well as US$200,604.42 that was on the project bank account but fully committed to be utilized under the project.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry Soundness of background analysis: The project was prepared primarily to support MOF’s implementation of the 2004 Accountancy Law11 given that that it lacked the

11 These included compliance with international accountant standards, that is, IFRS and NASBOs that mirror IPSAS.

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capacity to do so, and to support extensive state ownership of the corporate sector. SOEs controlled 15 percent to 25 percent12 of GDP, and need to comply with IFRS in line with market economy international practices. To prepare the project, the Bank leveraged its experience in implementing similar projects in other regions, as well as its extensive diagnostic work in other ECA countries to address similar challenges. The Bank’s experience includes improving corporate and public sector accountability in countries that had transitioned from a command- to market-driven economy. The Bank also drew from relevant recommendations in the Azerbaijan 2003 CFAA and 2006 ROSC Accounting and Auditing reports. Assessment of the project design: The PDO was ample and allowed flexibility in including requirements from the government during the first and second restructuring. The components were sufficient to cover aspects of the 2004 Accountancy Law that the government was targeting. One issue to note is that the project design should have prioritized Component Two on Public Sector Accountability, to have an Integrated Financial Management Information System (IFMIS), rather than Component One on Corporate Sector Accountability, to strengthen the financial management capacity (including computerizing the accounting system) of three SOEs that were PIEs so they would comply with IFRS. SOEs tend to fund these capacity-building activities using their own resources. However, it was noted during project preparation that the three SOEs did not have the required resources. Implementation arrangements: The Project Management Unit (PMU) was responsible for implementing the project but had to coordinate with a number of beneficiary implementing entities (CoA, CoAA, FSTC, ARPA, ministries and budget organizations). Each of these beneficiaries had a dedicated management team to implement their respective components. At appraisal, the MOF assessed the PMU’s capacity as limited, and it consequently strengthened the PMU to be able to coordinate beneficiaries’ implementation of the project by recruitment of experienced and qualified staff. Japan’s PHRD Grant (TF 56724) financed project preparation, including PMU operational expenses. The PHRD Grant of US$895,000 was approved and made effective on December 8, 2006. It closed on March 26, 2008 after utilizing US$881,274.65, with US$13,725.35 cancelled. The objective of the grant was to prepare the project, supporting consultancy services that included project implementation staff, purchase of goods, training and operating costs. Adequacy of government commitment: Government commitment was sufficient since the project directly supported the operationalization of the 2004 Accountancy Law. The government committed to co-finance the project with US $8 million. The Minister of Finance demonstrated commitment to the project, and established a Project Steering Committee (PSC), chaired by the Deputy Ministry of Finance, to provide oversight. Assessment of risks: At appraisal, project risk was assessed as moderate. Critical risks and mitigation measures were identified adequately. The Ministry of Finance’s (MOF) capacity

12 The percentage is based on the Corporate Governance ROSC for Azerbaijan dated September 2009.

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to implement the project was assessed as high risk, but this was appropriately mitigated as the PMU of MOF satisfactorily implemented the project. Reluctance to address perceived corruption in the country contributed to a high-risk country and sector assessment, but this did not impact project implementation.

2.2 Implementation Delay in implementation of the project: Two issues delayed project implementation for a total of 2.75 years, and caused the project to have a slow disbursement flag and be categorized as a problem. Initially, the project struggled since the PMU was disbanded when Japan’s PHRD Grant (TF 56724) closed on March 26, 2008. MOF subsequently made a commitment to fund the PMU, and advertised to attract experienced candidates to key project positions, including the Director, Procurement Specialist and Finance Manager. The PMU was fully staffed by December 2009. Further delay ensued when the government changed its priorities and engaged the Bank to harmonize its new strategy with the project. The major change was that the GOA wanted to have an IFMIS for ministries and budget organizations, instead of building capacity for three selected PIEs (mainly SOEs) to comply with IFRS, which required computerizing their accounting systems. GOA argued that PIEs could use their own resources to apply IFRS, which they did, with 27 PIEs applying the standards at project closure. The Bank also helped to synchronize GOA’s new strategy after the first restructuring in September 2011, and thereafter project implementation significantly scaled up. Restructuring: Project operations scaled up significantly after the first restructuring, with disbursements increasing from zero to 10.5 percent for IDA 44050, as documented in the aide memoire for the mission on November 14-18, 2011. The second restructuring solidified the government’s implementation strategy and further scaled up project operations and results. SECO financing: The Bank’s Board approved the project on March 27, 2008, but co-financing from SECO Grant TF 98323 was not signed until June 14, 2011, delaying implementation of sub-component 2.2 on external audit reforms with the CoAs. This was one of the reasons cited for extending the closing date during the second restructuring. Chamber of Auditors (CoAA): MOF wanted to engage the CoAA to become an independent regulatory body providing oversight of external auditors of PIEs. However, the CoAA wanted to remain a self-regulatory audit body comprised of individual auditors and audit firms. Related activities were dropped from the project as a result, costing the government an opportunity to strengthen oversight of PIE external auditors. This issue can be reassessed under the World Bank’s program on Strengthening Auditing and Reporting in the Countries of the Eastern Partnership (STAREP),13 under its two components on Accounting and Auditing Standards and Financial Regulators Practice Forum.

13 The STAREP program aims to assist participating countries, including Azerbaijan, to build capacity in the accounting and auditing profession, including regulators, students and other stakeholders, and to develop and

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2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E Design: Baseline indicators started at zero, based on Advisory Services and Analytics conducted in Azerbaijan, including the 2003 CFAA, 2006 ROSC Accounting and Auditing, 2008 PEFA reports, and MOF institutional knowledge. The indicators were in line with the PDO and were revised during the second restructuring after changes were made to activities within the components. The indicators were simple and easy to ascertain amongst the beneficiaries by a monitoring and evaluation (M&E) Specialist working with the PMU. A status update on the M&E indicators was included in the project’s quarterly progress reports. M&E Implementation: The PMU collected appropriate data from the beneficiaries. The data proved reliable when validated. The indicators were simple, and the information was easy to acquire. M&E Utilization: The project had up-to-date M&E data that the PMU evaluated and used to assess the speed of implementation, particularly to achieve targets that were lagging behind. Following project closure, the MOF arranged to have M&E data as follows: FSTC will continue using the current indicators for the training program; the Accounting Policy Division will also continue using the current indicators to monitor the conversion of accounting standards into Azerbaijani; and the Modern Technology and Automation Information Systems Department will expand on the current indicators used for FARABI, by using periodic beneficiary surveys to identify problem areas. Other beneficiaries, including the CoA and APRA, will continue to maintain M&E data.

2.4 Safeguard and Fiduciary Compliance Procurement: Procurement was rated as satisfactory despite a slow start. After the project’s restructuring, a revised procurement plan was implemented quickly and effectively. The project complied with the Bank’s procurement guidelines. Comprehensive procurement plans were prepared and submitted to the Bank for approval. Approved procurement plans were published on a regular basis and updated as needed. The Bank staff carried out ex ante and ex post previews of the procurement process, reviewed and cleared procurement documents, contract awards, and amendments as per the provisions of the Financing Agreements. The PMU completed three procurement post reviews and identified and resolved minor procurement discrepancies. Recommendations were also made that strengthened the PMU’s procurement capacity. Financial Management (FM): Financial management was rated as satisfactory. All FM financial covenants were complied with in accordance with the Financing Agreement. All audit reports were received and all had unqualified (clean) audit opinions. There were no

practice an institutional framework for corporate financial reporting that adheres to international accounting, auditing and accounting education standards.

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major issues raised in the audit reports. Management was also responsive in addressing FM issues. Safeguards: At appraisal, the project raised no safeguard issues and there were none during implementation.

2.5 Post-completion Operation/Next Phase Institutional arrangements: Institutional arrangements have been integrated into existing country systems. MOF will continue to implement FARABI; FSTC will provide accountancy training, and CoA will conduct financial and performance audits upon the passing of the CoA law by Parliament. ARPA, a non-governmental organization, will continue overseeing accountants in line with IFAC requirements. Financial sustainability: The MOF has allocated funding to scale up the roll out of FARABI to about 1000 ministries and budget organizations, starting with a target of 303 institutions by the end of 2017. The MOF will also absorb the FARABI Maintenance and Support Center support staff who are currently under the management of SINAM14 within the ministry. MOF plans to raise support fees from each budget organization and ministry using FARABI to meet the costs of the maintenance and support center. In the last two years of implementation, the Bank has proactively engaged the GOA on financial sustainability, including insisting on having a business plan. Consequently, the FSTC is charging fees for the NAQ course, and has earned US$56,000 to date. Revenues are expected to grow alongside awareness campaigns to increase student numbers. Since the FSTC is part of MOF, it will receive ministry funding to meet administrative costs related to its accountancy training programs, including lecturer fees and curricula development. FSTC also plans to charge license fees to training institutions, such as the Azerbaijan State Economic University, interested in delivering the NAQ course. MOF will also continue to support ARPA’s execution of its mandate. ARPA will be collecting membership fees from accountants and exam fees for the professional accountancy students to sustain its operational costs. The CoA has an updated SDP for 2015-2017 and plans to start conducting financial and performance audits of ministries and budget organizations. The CoA has requested funding support from the Bank and other donors to continue with this reform program. Human capital: MOF has acquired the technical capacity to continue the rollout of FARABI. FSTC has also built capacity by hiring certified lecturers to continue training accountancy courses. ARPA currently has a team of seven experts. CoA has trained its staff to conduct financial and performance audits. They are waiting for the passing of the CoA law by Parliament to commence these audits. Marketing: MOF plans to market FARABI and the accounting certification program, and aims to scale up both programs.

14 SINAM is the company that developed FARABI and is rolling it out to ministries and budget organizations.

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Sustainability of monitoring performance indicators: As noted, MOF and all beneficiaries plan to continue using the project’s indicators as guidance for M&E indicators. There are also plans to increase the indicators, particularly for FARABI, to tackle common challenges. Periodic beneficiary surveys will inform indicator development.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives: High The project’s objectives are highly relevant as they adhere to the 2016-2020 Country Partnership Framework (CPF), which supports the priorities in Azerbaijan’s Vision 2020. The CPF’s focus area on Public Sector Management and Service Delivery is particularly relevant to the PDO since the CPF program will continue to support the government to enhance transparency and accountability in public sector management and service delivery. The GOA is committed to continue implementing the activities that will strengthen public and corporate sector accountability and transparency, bringing them in line with international best practices. For example, the President of Azerbaijan has endorsed the rollout of FARABI as one of MOF’s key reforms, aiming to improve internal control systems and ensure ministries and budget organizations produce financial statements that comply with IPSAS. The MOF’s strong focus on the education of accountants in Azerbaijani will strengthen the accounting skills of the public sector civil servants and provide affordable training of professional accountancy courses for the corporate sector. The efforts of CoA to comply with ISSAIs and make arrangements to start financial and performance audits will strengthen accountability. Plans for a professional accountancy body that will monitor accountants in line with IFAC membership requirements will create professionalism, as ARPA will provide quality assurance, ensure accountants comply with their code of ethics and discipline, and investigate accountants whenever required. The role of ARPA in translating or interpreting international accounting standards working in coordination with MOF will also remain relevant going forward. Relevance of Design: Substantial The project’s design became more relevant after the restructuring, despite the cancellation of some activities within the project, since the GOA continued to implement the cancelled activities using its own resources. For example, activities related to “Assisting the PIEs in Embedding IFRS” were cancelled but GOA focused on how it could support all the PIEs in the country through continuing with activities such as the translation of IFRS into Azerbaijani and training of corporate accountants under the project and the outcome has been positive. Twenty-seven PIEs are now applying IFRS, instead of only three that were targeted to be supported at appraisal. The implementation of the PIFC was canceled, but

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the GOA implemented the PIFC since it improved related PEFA15 ratings. The GOA plans to scale up the implementation of project-related components and activities as part of its Vision 2020 effort, demonstrating the relevance of project design in the post completion phase. The results framework will also remain relevant since it will be used as a basis to set new revised targets and set relevant related indicators, for example, to address challenges in the implementation of FARABI based on findings of beneficiary surveys that MOF plans to do going forward. The implementation arrangements have been satisfactory and they will remain. Outsourced activities, such as the FARABI Maintenance and Support Center, that SINAM is currently managing, will be integrated within the structures of the MOF.

3.2 Achievement of Project Development Objectives Objective One: Strengthen accountability and transparency in financial reporting for the public sector in line with international best practices Rating: Substantial The achievements were met under the following PDO indicators: PDO indicator one: Transparency, self-governance and education in the accounting and audit profession improved with the establishment of an Association of Professional Accountants of Azerbaijan (APAA) that follows international standards. This outcome indicator has benefitted both the public and corporate sector. The Accounting and Risk Professional Association (ARPA) of Azerbaijan was established and registered with the Ministry of Justice on December 16, 2014. The indicator was partially achieved because the association is still working on becoming a member of IFAC and following international standards that require meeting the SMOs.16 However, APRA aims to become an IFAC a member by the second quarter of 2017. It has met seven of the 47 actions on IFAC’s Compliance Self-Assessment Questionnaire, and is working on completing the rest of the actions. Completed actions include: adoption of the International Ethics Standards Board of Accountants Code; provision of a group of experts to provide technical advice on compliance with the SMOs; provision of a contract with CIPFA to provide Cert. IPSAS course in Azerbaijan and the translation of the course materials into Azerbaijani; and holding a training and trainers for Cert. IPSAS course. ARPA will use funds generated from membership fees to achieve the remaining actions.

15 PEFA indictors related to effectiveness of internal controls for non-salary expenditure improved from D+ in 2008 to B+ in 2014. The indicator on effectiveness of internal audit improved from a D in 2008 to C+ in 2014.

16 There are seven SMOs: IES, IPSAS, ISA, IFRS, Quality Assurance, International Code of Ethics and Discipline and Investigations.

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Intermediate Outcome Indicator (Fully Achieved): The indicator, “Charter and other legal documents for the establishment of the Association of Professional Accountants of Azerbaijan (APAA) are prepared and registered with the Ministry of Justice,” was fully achieved. The project contributed to APAA’s establishment by transforming an existing association, the Azerbaijan Risk Professional Association, into the Accounting and Risk Professional Association (ARPA). The 2009 Charter of the Azerbaijan Risk Professional Association was revised to recognize ARPA’s new role with respect to accountants. It registered as ARPA’s charter with the Ministry of Justice on December 16, 2014. The association’s tax identification also changed to ARPA. Intermediate Outcome Indicator (Fully Achieved): The indicator, “APAA is capable of preparing new and revised accounting and audit standards when necessary and fully responsible for marking exams written by students under National Accounting Qualification Program,” was fully achieved. ARPA has a group of experts comprised of 5 ACCA members plus 2 ACCA students at the final level of study to prepare and revise accounting and audit standards. ARPA will be responsible for exam marking. Twenty accounting professionals received trainings on Marking and Exam Questions Composition from Ernst & Young 17 Academy of Business on May 15-17, 2015. The accounting professionals will form a roster of exam markers for ARPA. Thirty-six accounting professionals who attended the CIPFA18 Training of Trainers’ course for Cert IPSAS on June 8-12, 2015, will also mark exams. ARPA will oversee both public and corporate sector accountants by providing quality assurance over compliance with international accounting standards; ensuring accountants abide by ethical standards; and disciplining and investigating accountants if the situation warrants. This will professionalize accounting in the country and enhance public trust by strengthening accountability and transparency in financial reporting. PDO Indicator Two: Accountability in management of public funds strengthened through improvements in the external audit and internal controls environments. This has two indicators: Percentage of state budget processed through FARABI (Fully Achieved-Target Exceeded): The FARABI system was rolled out to ministries and budget organizations that together covered 40 percent of the total budget expenditure, versus a target of 30 percent coverage. This represents a target achievement of 133 percent. Total budget expenditure was 10,928.50 million manat, out of which institutions connected to FARABI had a total budget expenditure of 4,352 million manat. FARABI was implemented as a pilot, adopting an incremental and modular approach in budget organizations that included, for example educational institutions, where unique modules were developed in the area of student

17 Ernst & Young is a “big four” global audit firm that trains accounting professionals in international best practices.

18 CIPFA is the world’s only professional accountancy body specializing in bringing public finance in line with international best practices.

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management. FARABI was implemented in 99 institutions compared to the target of 59, achieving a success rate of 168 percent. The system has gained ownership at both political and technical levels of government in addition to support from the country’s President. According to the beneficiary survey, the system’s user satisfaction stands at 85 percent, while user friendliness is 92 percent. GOA now plans to roll out FARABI to an additional 900 major budget organizations and ministries. Institutions using FARABI have improved their internal control systems and produced timely financial statements that are compliant with IPSAS. According to the Open Budget Survey 2015, Azerbaijan now publicly makes available its in-year reports, year-end reports and audit reports, versus 2008, when it did not publicize this information. Percentage of state budget audited by CoA using new methodology (Partially Achieved): The CoA did not audit any budget expenditure using the new methodology, since the financial and performance audits depend on the CoA revised draft law being passed by Parliament. This explains the zero achievement compared to the target of 10 percent. However, CoA developed capacity to conduct financial and performance audits based on international standards and performed two pilot audits for each type of audit. Financial audits pilots related to the following entities: (i) Central Railway Hospital under Medical Service of Azerbaijan Railways; and (ii) Local Branch of the Remuneration Agency (Samur-Absheron Channel Operational Unit). CoA conducted two pilot performance audits related to the following entities: (i) Azerbaijan State Oil Academy’s Activities in Education Sphere; and (ii) Provision of Occupational Safety by the State Labor Inspectorate Service under the Ministry of Labor and Social Protection of Population. It is highly likely that the revised accounting law will be passed, particularly since it complements the 2004 Accounting Law requiring entities to conduct financial audits to complete financial statements using international standards. Performance audits are also critical to GOA’s Vision 2020 goal to improve management of state resources. Intermediate Outcome Indicator (Significantly Achieved): The indicator to issue 41 NASBOs based on IPSAS and explanatory notes was nearly achieved. A total of 38 NASBOs were issued following the translation of IPSAS versions for 2006, 2011 and 2015, into Azerbaijani. The 2011 translation of IPSAS in Azerbaijani is on the IFAC website. The target was 41 NASBOs was based on the forecast of the number of standards in place by project close. To date, IFAC’s IPSAS Board has issued 39 standards (38 standards based on an accrual accounting system and one standard for cash basis of accounting). This means that a maximum of 39 standards could have been translated into NASBOs at project closure, and implies that the translation of IPSAS into NASBOs reached a 97 percent achievement. The remaining standard of cash basis of accounting also is highly likely to be translated. The translated standards will enable public sector institutions to comply with financial reporting international standards, thus strengthening accountability and transparency. Intermediate Outcome Indicator (Fully Achieved): The indicator to achieve 100 percent completion of items in the Strategic Development Plan (SDP) of the Chamber of Accounts has been met. The 2012-2014 SDP accomplished four themes under the project, including: improving financial audits; introduction of performance audit capabilities; enhancement of legal and standards framework; and upgrading the human resource and training systems. The outputs achieved under each of these themes are documented under Annex 2.

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PDO Indicator Three (Fully Achieved-Target Exceeded): The achievement of Indicator Three, that accounting and auditing profession strengthened through the establishment of training and certification programs and education standards in line with international standards, is particularly significant since no such training existed before the project. As Azerbaijan moves towards adoption of international standards in accounting and auditing, it is critical to ensure high quality and relevant education in professional accounting. FSTC trained a total of 4,843 students by project closure, compared to the target of 3,500, exceeding the target by 138 percent. Out of 4,843 students, 967 trained in NASBOs, which mirror IPSAS and therefore benefits public sector accountants; the remaining 117 students trained in the NAQ course that mirrors ACCA; 3,759 students trained in a Bookkeepers course. The NASBOs and IPSAS courses’ curricula benefit both the public and corporate sector by enhancing accountability and transparency. Intermediate Outcome Indicator (Fully Achieved): The indicator to achieve four accredited training programs has been met. Out of the four programs, three relate to public sector courses that will strengthen accountability and transparency of financial reporting in line with international standards: NASBO Certification for Public Accountants modeled from aspects of CIPFA; Bookkeepers course modeled from International Association of Bookkeepers; and CIPFA’s Certificate in International Public Sector Accounting Standards (Cert. IPSAS). Intermediate Outcome Indicator (Fully Achieved-Target Exceeded): The indicator to have 35 accredited trainers reached 103 percent, with 36 trainers accredited. Two accreditation programs gave trainers the skills to teach students to comply with financial reporting standards in both the corporate and public sectors. Ernst & Young Academy of Business for Marking and Exam Questions Composition held the first accredited training on May 15-17, 2015 for 20 accounting professionals. The CIPFA Training of Trainers Course on Cert IPSAS for 36 accounting professionals held on June 8-12, 2015, benefited trainers for only the public sector courses. Intermediate Outcome Indicator (Fully Achieved-Target Exceeded): The indicator was to produce seven new accounting and audit, tax related textbooks introduced at higher education institutes was 186 percent, with 13 new textbooks produced. Three textbooks19 pertain to the Cert CIPFA Course benefiting the public sector, and 1020 ACCA-related textbooks will mainly benefit the corporate sector. The textbooks will strengthen students’

19 The three textbooks included IPSAS Solutions, Workbooks and Progress Tests (Workbooks and Marking Schemes).

20 The 10 textbooks are: Fundamentals of Economics, Financial Accounting, Managerial Accounting, Management Information Systems, Business Law and Taxation, Financial Reporting for Corporate Sector, Financial Management, Audit and Assurance, Management, Risk and Ethics and Corporate Reporting. Additional study materials, such as notes and question banks (revision kits), were also translated and published to complement the textbooks.

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skills in accountability and transparency on financial reporting in line with international standards. Objective Two: Strengthen accountability and transparency in financial reporting for the corporate sector in line with international best practices Rating: High The achievements were met under the following PDO indicators One and Three: PDO Indicator One (Fully Achieved-Target Exceeded): The establishment of an Association of Professional Accountants of Azerbaijan (APAA – which is now known as ARPA) that follows international standards improved transparency, self-governance and education in the accounting and audit profession. ARPA’s establishment will also strengthen accountability and transparency in financial reporting of the corporate sector. An additional intermediate outcome indicator related to the translation of IFRS and explanatory notes into Azerbaijani specifically relates to the corporate sector. This indicator has been fully achieved and the target exceeded, with 41 IFRS in line with the 2015 version of the standards translated into Azerbaijani, compared to the target of 40 IFRS. IFRS represent the international accounting standards for the corporate sector, particularly for PIEs. The translated IFRS are freely available on MOF’s website, and have enabled 27 PIEs approved by the Azerbaijan’s Cabinet Minister to apply the standards and submit their accounts to the MOF to comply with the 2004 Accountancy Law. The IFRS for Small and Medium Size Enterprises (SMEs) was also translated into Azerbaijani. These are important achievements that will strengthen financial reporting to comply with international accounting standards thus strengthening accountability and transparency in the corporate sector. At appraisal, the target was to provide financial support to three SOEs and advise another six SOEs to comply with IFRS. Although a number of activities to support these SOEs under Component One (except for translating IFRS) were dropped from the project, since GOA opted to use its resources to support the SOEs, more institutions are applying IFRS than initially anticipated. The GOA’s focus on implementing activities under the project that benefit all corporations aiming to comply with IFRS, as opposed to a selected few, helped produce this outcome. PDO Indicator Three (Fully Achieved-Target Exceeded): The accounting and auditing profession strengthened through the establishment of training and certification programs and education standards in line with international standards. As noted, this outcome indicator benefits both the corporate and public sector and was fully achieved, with the target exceeded. FSTC trained a total of 4,843 students by project closure compared to the target of 3,500, representing an achievement of 138 percent of target. The number of students trained in corporate sector courses teaching accountability and transparency in financial reporting in line with international standards included 117 students trained in NAQ, and 3,759 in Bookkeepers. As noted, both courses contain curricula benefiting both public and corporate sector.

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Intermediate Outcome Indicator (Fully Achieved): As noted, FSTC introduced four accredited training programs, meeting the target. Out of the four programs, two relate to corporate sector courses that will strengthen accountability and transparency of financial reporting in line with international standards. They include: NAQ, which is the professional accountancy program modeled on the ACCA course and meets IFAC’s International Education Standards (IES); and Bookkeepers course, which is modeled on International Association of Bookkeepers. Intermediate Outcome Indicator (Fully Achieved-Target Exceeded): As noted, the number of accredited trainers totaled 36 compared to a target of 35, representing 103 percent of target. The Ernst & Young Academy of Business for Marking and Exam Questions Composition, held on May 15-17, 2015, qualified trainers to teach students to comply with corporate sector financial reporting standards. Intermediate Outcome Indicator (Fully Achieved-Target Exceeded): As noted, a total of 13 new accounting, audit, and tax related textbooks were introduced at higher education institutes out of a target of 7, achieving 186 percent of target. Ten of the textbooks relate to ACCA and will train students to comply with IFRS, thereby strengthening their skills in accountability and transparency on financial reporting in line with international standards for the corporate sector.

3.3 Efficiency Rating: Substantial Although a financial and economic analysis was conducted at appraisal, most of the analysis is not relevant at project completion since it made calculations based on activities that were cancelled in the restructurings, such as the automation of PIE accounting systems. Details of this analysis are included under Annex 3. The cost-benefit analysis of CAPSAP is difficult to quantify, as acknowledged at appraisal. Despite these challenges, there is an efficiency analysis of the project with respect to training accountants, FARABI, strengthening the CoA and establishing ARPA, below. Training of accountants: The project instilled FSTC with the capacity to professionally train accountants within the country. Previously, students had to travel abroad for training. Annex 3 illustrates the significant potential cost savings achieved by training students locally – estimated at US$15.9 million for 4,843 students due to FSTC’s low fees per course and avoidance of travel and accommodation costs. These savings will accrue as student numbers grow, with an expected saving per student of US$3,280. By creating a domestic training program, the FSTC also avoided uneven education standards. Students also benefited from training in their native language. In addition, the project modernized FSTC and its eleven regional centers at MOF offices by providing all necessary furniture and equipment, including modern teaching tools such as smart boards; developing a web-portal to provide information on courses and an education tool for distance learners; and developing video lessons to support distance learning. The resulting program attracted students all over the country who will improve on compliance of IPSAS and IFRS in the public and private sectors, respectively.

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FARABI: The project’s restructuring resulted in the rollout of FARABI to ministries and budget organizations, and strengthened their internal control systems and financial reporting to comply with IPSAS. FARABI is a cloud-based Enterprise Resource Planning System that supports core Financial Management Information System (FMIS) and administrative functions. The system integrates all facets of financial and administrative operations, including the recording of daily accounting transactions, payroll, maintenance of records on fixed assets and inventory, employee lifecycle and automatic generation of financial reports required by MOF. The ministry plans to synchronize FARABI with the Treasury Information Management System (TIMS) so that all financial transactions can be made online, thereby enhancing efficiency. FARABI acquired 4,000 perpetual licenses21 at an average cost of US$ 395 per license, which is within the normal range for similar applications funded by the Bank. The perpetual licenses will free MOF from paying annual license fees associated with a number of off-the-shelf FMIS. According to a study22 done on FMIS for governments based on the compilation of experiences in World Bank-financed projects, license fees can be a significant recurrent cost, forming 20 percent to 22 percent of the initial license fees per annum for an off-the-shelf FMIS. FARABI is now in Azerbaijani, with local capacity to support its maintenance. These are key success factors that most off-the-shelf accounting systems lack. The beneficiary survey indicates that 92 percent of the users find FARABI user-friendly. The cost of the software, hardware and installation of FARABI for 99 institutions was US $11 million. As part of Azerbaijan’s Public Financial Management reforms, there are plans to continue rolling out FARABI using government’s own resources to about 1,000 ministries and budget organizations, starting with a target of 303 institutions by the end of December 2017. The additional cost for this rollout is US$20,000 to US$30,000 per budget organization. These costs are modest compared to other IFMIS given the FARABI’s functionality and unique advantages. The project has also resulted in improvements to Azerbaijan’s PEFA indicators. The PEFA indicator on quality and timeliness of annual financial statements was rated C+ in both 2008 and 2014 but the quality and coverage of information included in the annual financial report improved from a C to B. Strengthening the CoA: The CoA has developed the capacity to conduct financial and performance audits in line with ISSAIs. Audits should commence when the CoA law is passed by Parliament, strengthening accountability in Azerbaijan. At the moment, compliance audits for ministries and budget institutions are conducted annually on a sample basis, whereas financial audits will require annual audits to be conducted for all

21 Perpetual licenses are paid upon purchase of the software and there are no annual fees during the useful life of the software.

22 Ali Hashim, A Handbook on Financial Management Information Systems for Government: A Practitioners Guide for Setting Reform Priorities, System Design and Implementation (based on a compilation of experiences in World Bank-financed projects), The World Bank Group, Africa Region, 2014.

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institutions. The PEFA indicator on the scope, nature and follow-up of external audit was rated a D in 2008 and D+ in 2014,23 mainly due to improvements in audit follow-up and in performance through implementation of pilot audits using ISSAI. Stronger audits will improve transparency and accountability in the country. Establishment of ARPA: MOF’s establishment of ARPA produced cost savings and efficiency gains, since local experts would stand in for a team of international experts to interpret accounting and auditing international standards. Local experts speaking Azerbaijani can communicate directly and effectively with the majority of the public and corporate sectors stakeholders, impacting compliance with the international accounting and auditing standards. ARPA will also oversee accountants to ensure that they comply with accounting and auditing standards as well as a code of ethics, and also investigate and discipline any accountant where necessary, leading to greater professionalism in local accountancy. An explanation of the variances of the project costs determined at appraisal and eventually incurred, for each component is shown under Annex 1.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory The overall outcome rating of ‘Satisfactory’ is based on the individual ratings for relevance, efficacy and efficiency, as showed in Table 2, below. All ratings were either ‘Substantial’ or higher, with a ‘High’ rating for relevance of objectives and the achievement of one of two objectives.

Table 2 Calculation of the Overall Project Outcome Rating

Relevance of Efficacy: Objective

Efficiency Overall

Outcome Objective Design 1 2 High Substantial Substantial High Substantial Satisfactory

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty impacts, gender aspects, and social development No poverty impact, gender or social development study was conducted in relation to this project as it focused on institutions as beneficiaries. However, under Component Three,

23 See http://www.maliyye.gov.az/sites/default/files/PEFA_ENG%20FINAL.protected.pdf

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the gender impact was monitored. As a result, FSTC trained 1,54724 women in accounting out of a total of 4,843 students. This represents 32 percent of the total number of students as of June 30, 2015. (b) Institutional change/strengthening The project focused on strengthening existing public institutions to improve corporate and public sector accountability and transparency. The CoA 2012-2014 SDP was implemented, and it included building capacity to conduct financial and performance audits and legislation to strengthen the country’s audit function to comply with ISSAIs, including conducting financial and performance audits. FSTC’s training capacity and facilities were enhanced to train students in four courses using accredited lecturers and textbooks translated in Azerbaijani. MOF capacity to continue rolling out FARABI, monitoring compliance with NASBOs, and translating IPSAS and IFRS was enhanced. ARPA was established to oversee accountants, and its capacity strengthened with a group of local experts hired to interpret standards and set and mark professional accountancy examinations. ARPA is following an action plan to become a member of IFAC in 2017. (c) Other unintended outcomes and impacts (positive or negative) According to the GOA ICR, the project has contributed to the achievement of the objectives of the National Strategy for Increasing Transparency and Combating Corruption (2007-2011) by enhancing accountability and transparency. The Republic of Azerbaijan joined the Open Government Partnership in 2012 and the project is also contributing to the quality of the information it displays as part of the program.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Beneficiary survey A beneficiary survey was conducted to obtain the following information: (i) the benefits of the FARABI system to relevant budget institutions; (ii) the quality of accountancy training at the FSTC; and (iii) the ability of FSTC-trained students to produce financial statements in their organizations that comply with IFRS and IPSAS. Details of the survey results are included in Annex 5. The survey regarding FARABI covered 26 randomly selected institutions out of 99 using the system. Users totaled 133, out of which 69.2 percent were female and 30.8 percent were male. Eight-five percent of users were satisfied with FARABI. Sixty-nine percent said FARABI positively influenced their work, while 3.9 percent said FARABI made their work more difficult. Ninety-two percent found FARABI user friendly. At the time of the survey,

24 The 1,547 women accounting students comprise 482 (50%) women out of a total of 967 financial accounting, taxation and NASBO students; 1,023 (27%) women of a total of 3,759 Bookkeeping students; and 42 (36%) women out of a total of 117 professional accountancy students.

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73 percent of users were not using FARABI’s financial reporting system as this required additional training that MOF and SINAM were going to provide. Seventy-two percent stated that FARABI had reduced the time spent on processing supplier payments, payroll and bank reconciliations. Users noted FARABI’s additional benefits, including enhanced data storage and security, reduction of technical errors, increased quality of bookkeeping, and increased internal control. The SINAM-managed Maintenance Support Center was able to increase usage of FARABI’s various modules via training and timely support. The MOF found the beneficiary survey useful in identifying key issues with FARABI’s implementation. The MOF plans to address issues in the report such as increasing the usage of financial reports in order to increase FARABI usage. MOF also intends to continue carrying out beneficiary surveys to address challenges faced by the users. The survey asked 27 students of FSTC whether they are producing financial statements that comply with IPSAS and IFRS. Fifty-two percent of the students responded that they are applying the standards in their organizations, but none could provide financial statements for review mainly due to challenges of obtaining their management’s approval within the beneficiary survey timeline. Responses from nearly 4,000 students addressed the quality of accountancy training at FSTC. Seventy-eight percent rated the courses as excellent, 19 percent rated the course as good, and three percent rated the course as average. Most (81.5 percent) rated trainers as excellent, 16.3 percent rated them as good, and 2.2 percent rated trainers as average. Stakeholders workshop Results from the stakeholders’ workshop resembled the findings documented under the beneficiary survey. The only new issue that arose was that of international recognition of the NAQ course, and it was clarified that the NAQ course that mirrors the ACCA course currently meets the internationally recognized IES of IFAC and will continue to do so. Details of the stakeholders’ workshop can be found under Annex 6.

4. Assessment of Risk to Development Outcome Rating: Moderate The risk of MOF not rolling out FARABI to about 1,000 ministries and budget organizations is low, since funding from government is secured and the President of Azerbaijan supports the project. In order to ensure that MOF improves on the usage of FARABI – an issue identified when the beneficiary survey was conducted – the MOF will create and maintain a user-friendly web portal for continuous learning and education. The MOF will absorb the maintenance and support center managed by SINAM, which has acquired technical staff with accounting knowledge who will provide timely support to system users. MOF will also continue conducting the beneficiary surveys and addressing issues arising. There is low risk that the accountancy training will be discontinued. MOF has committed to funding the administrative costs of FSTC, and revenues from the professional accountancy course (NAQ) will continue to grow as student numbers increase. The only

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risk as expressed during the stakeholders’ workshop is that students prefer the course to be internationally accredited. Students should be reassured that the course meets IFAC’s IES. Since the current NAQ course is based on the ACCA qualification that already meets IFAC’s IES, it is likely to receive IFAC’s endorsement. There is a moderate risk that ARPA will not become a member of IFAC, since membership is contingent on ARPA receiving endorsement from an existing IFAC member in Azerbaijan, which is the CoAA. If this recommendation is not provided, IFAC may still grant ARPA membership if ARPA gives sufficient reason for not receiving CoAA’s recommendation. However, since ARPA has established good relations with CoAA, it is likely to receive the endorsement initially to become an IFAC associate member, and later, a full member. Since ARPA is a non-governmental organization, it depends on members and exam fees for the professional accountancy course for revenues. These revenues should be match administrative costs. It is important to note that MOF supports ARPA. There is a moderate risk that the CoA will not perform financial and performance audits. CoA audits depend on passing of the revised law of the CoA, which is expected in 2016. MOF did not support the law until it understood that the law will strengthen auditing to comply with ISSAI, particularly financial and performance auditing, and will complement the 2004 Accounting Law that requires financial statements to be produced with financial audits. Performance audits are also essential to Vision 2020’s aim of improving the management of state resources. The MOF has reviewed the law and supports it. The law is now at the Office of the President for review and its first reading in Parliament expected in early 2016.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The Bank provided an experienced team to facilitate Azerbaijan’s implementation of international accounting and auditing standards to comply with the 2004 Accounting Law. The team facilitated the preparation of the project with a PHRD Grant, and appraised the operation to achieve the planned development outcomes by appropriately determining the risks and mitigation measures, implementing entity, and beneficiaries, as well as taking into consideration the Bank’s fiduciary measures. Regarding project design, the team could have provided more resources to Component Two (Public Sector Accountability) to computerize FMIS in the public sector, rather than to Component One (Corporate Sector Accountability), which aimed to facilitate the implementation of IFRS in three SOEs. This is because SOEs that are PIEs tend to use their own resources to computerize FMIS. This issue was addressed during the first restructuring and FARABI was included as part of the project. Plans for FMIS computerization in three SOEs were dropped when government opted to fund the SOEs using its own resources. This is not a major issue, but worth noting as a lesson going forward. Significant achievement in relation to the PDO was seen both on the installation of FARABI in 99 public sector institutions (ministries and budget

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organizations) and 27 PIEs applying IFRS despite dropping the subcomponent of assisting the PIEs in embedding IFRS. The GOA supported corporate sector compliance with IFRS with activities that would benefit all the PIEs and included translating IFRS into Azerbaijani and training corporate sector accountants in professional accountancy course at the FSTC under Component Three. (b) Quality of Supervision Rating: Satisfactory Bank supervision took place on a regular basis, providing appropriate and targeted advice and observations. The aide memoires provide evidence of regular and professional advice given by the Bank’s experts throughout the project. The Bank responded adequately to the two restructuring requests made by the government, which contributed to the project’s development outcome. Fiduciary policies were well managed and reported. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The Bank’s performance was adequate to the tasks and facilitated the success of the project.

5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory The Government of Azerbaijan supported the project throughout its preparation, appraisal and implementation. At project closure, GOA remained committed to the project’s objectives and activities. The stakeholders’ workshop and beneficiary survey provided positive feedback in relation to this project. GOA’s coordination with the Bank and SECO was adequate. However, there was a delay in GOA setting up the PMU as the Project Director was not appointed until December 2009, about one year after project effectiveness. This delayed the implementation of the project. (b) Implementing Agency or Agencies Performance Rating: Satisfactory All key staff of the PMU were appointed by MOF, although there were delays in setting up the PMU as noted above. The PMU timely resolved implementation issues related to the project, especially after the first restructuring when the GOA harmonized its strategy with the project. Fiduciary aspects struggled at the beginning as implementation arrangements were still in flux, but became satisfactory over time. M&E arrangements were established with all beneficiary institutions. PMU implemented a coordination mechanism. Stakeholders relied on reports for decision making. The PMU coordinated well with the Bank, SECO and all its beneficiary institutions. At project closure, the PMU closed, and key staff have been integrated into the MOF to sustain PDO achievements. All beneficiary institutions will continue to implement activities in line with the project’s objectives after project closure.

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(c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory As noted, except for the delay in setting up the PMU, the borrower’s performance was adequate to the tasks, significantly contributing to project’s success.

6. Lessons Learned Lessons learned from the project include: Flexibility in the project design is essential to a project’s success: Project design should allow adjustments to respond to a government’s evolving priorities within the PDO, since these may change significantly during implementation. Project design should accommodate new activities without changing the PDO, and therefore allow a Level Two restructuring that requires management approval, as opposed to a lengthy Level One restructuring process that requires Board approval. Commitment from beneficiaries is crucial: Introduction of new systems, processes and practices requires full commitment and sustainability of ownership by the beneficiary agencies. FARABI has been established in 99 institutions; however, full commitment from all beneficiaries (ministries and budget organizations) is essential to ensure data maintenance and system functioning. Feedback from beneficiaries through MOF’s planned periodic surveys will help to identify and resolve issues to ensure system functionality. Openness to dialogue and proactivity towards sustainability: Open dialogue between the Bank and the GOA was crucial to successful implementation and sustenance of the project. The Bank provided continuous guidance and actively engaged with government counterparts to collaboratively seek solutions to challenges as they arose, which contributed to the success of the project. For example, the Bank’s insisted on FSTC producing a sustainable business plan for the accountancy training program to increase its cost recovery ratio. This made them have commercial courses for the corporate sector. The FSTC is now generating and growing revenues to sustain the program. Strong government commitment: The Ministry of Finance considered it a flagship project of the Minister of Finance and monitored its progress accordingly. The GOA broadly demonstrated a strong commitment to the project, contributing to its success. Use of country systems: Country institutions including the MOF, CoA and FSTC benefited directly from the project. Their capacity and systems were strengthened and they have been able to continue implement project-related activities using government resources since project closure. Restructuring the project: Project restructuring was critical in resolving problems at the project’s start. It harmonized the government’s evolving demands with the project’s objectives and allowed for the project’s expansion and success. The project has demonstrated sustainability, exemplified government plans to scale up project activities, specifically the rollout of FARABI to about 1,000 budget organizations, to continue FSTC

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training programs, and to improve on CoA’s coverage and quality of audits with the introduction of financial and performance audits when Parliament passes the CoA law. Benefits of having a project strengthening both corporate and public sector accountability and transparency: The project incorporated an accountancy training component that has trained both public and corporate sector accountants to comply with international accounting standards. The project also facilitated the establishment of professional accountancy organization, ARPA, which will oversee accountants by providing quality assurance, setting ethical standards and disciplining and investigating accountants where the need arises. This will professionalize accountants in both the public and corporate sectors. The Bank should aim to produce similar benefits in future projects to strengthen public financial management and corporate financial reporting. Phased implementation of FMIS can be successful: FARABI started as a pilot with rollout to 39 budget organizations and ministries. This was eventually scaled up to 99 institutions at project closure, and therefore covered 40 percent of state budget expenditure. The beneficiary survey indicated that 85 percent of users rated FARABI satisfactorily, and 92 percent, as user friendly. The President also recognized the system’s effectiveness. As a result, the GOA plans to rollout FARABI to an additional 900 budget organizations and ministries using its own resources after project closure. The key lesson is that FARABI was implemented as a fit-for-purpose solution in the Azerbaijan context in an incremental and modular approach. The result is ownership of the system at the political and technical levels of the executive government.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies In its ICR report, GOA stated that the PDO was fully achieved. However, this statement seems to refer to aspects of the project that MOF was implementing, since the CoA cannot conduct financial and performance audits until Parliament passes the CoA law. In its evaluation of the Bank’s performance, GOA noted that the Bank provided full support for the project’s implementation and was receptive to their ideas and priorities. Regarding continuation of project components, GOA plans to continue rolling out FARABI and the accountancy training program. However, as noted above, CoA and ARPA also have plans to continue implementing activities related to the project. GOA submitted comments in agreement with the ICR. (b) Cofinanciers SECO rated the project as satisfactory. Annex 8 contains details of SECO’s comments. No comments were received from the Japan PHRD Grant. (c) Other partners and stakeholders No comments were received.

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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

Corporate Sector Accountability 4.57 0.25 5.47%

Public Sector Accountability 3.64 12.92 354.95%

Strengthening accounting,

auditing and financial

management capacity 10.58 5.56 52.55%

Project Management 0.76 1.39 182.89%

Total Baseline Cost 19.55 20.12 102.92%

Physical Contingencies ‐ ‐ ‐

Price Contingencies 1.55 0.00 0.00%

Value Added Tax (VAT)25 2.90 2.48 85.52%

Total Project Costs 24.00 22.60 94.17%

Total Financing Required 24.00 22.60 94.17%

(b) Financing

Source of Funds Type of Co‐

financing

Appraisal

Estimate (USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of

Appraisal

Borrower Joint 8.00 7.18 90%

International Development Association

(IDA) Joint 11.00 10.57 96%

Japan: Ministry of Finance ‐PHRD Grant Joint 3.00 3.00 100%

SWITZERLAND: FOFEA Parallel 2.00 1.85 93%

Total 24.00 22.60 94%

The major reason for the variances in component costs are: Component one (Corporate Sector Accountability): After the first restructuring, activities related to the CoAA on improving the statutory framework and building capacity

25 Grants exempted from VAT.

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to regulate and oversee the audit function under sub-component 1.3 were cancelled. In addition, under the second restructuring, sub-component 1.1 on assisting the PIEs in embedding IFRS was also cancelled. These led to a significant drop in the expenditure under component one although the establishment of ARPA was added under the component. Component two (Public Sector Accountability): After the first restructuring, a new sub-component 2.3 was added on unified automated accounting system for line ministries and budgetary organizations (FARABI). Under the second restructuring, the establishment of a maintenance and support center for FARABI was added to sub-component 2.3. This significantly increased the cost of the component. Component 3 (Strengthening Accounting, Auditing and Financial Management Capacity): This reduced because under the second restructuring, financial assistance in the form of part-payment or subsidies of the costs of professional qualifications in accounting and auditing for private sector accountants was cancelled. In addition, the establishment of an international advisory panel of experts in accounting and auditing was cancelled in favor of APAA conducting this activity using local experts. Component four (Project Management): This increased due to the extension of the closing dates from originally 12/31/2012 to 06/30/2015.

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Annex 2. Outputs by Component

Expected Outputs Actual at Completion Outputs

1. Corporate Sector Accountability

1.1 Assisting the PIEs in Embedding IFRS

Development of appropriate accounting and financial management system for PIEs to appropriately record all relevant transactions in line with IFRS.

Development of a computerized system for PIEs.

Development of a chart of accounts, manual of procedures and appropriate backup procedures for PIEs.

Training PIEs to use developed systems and comply with IFRS.

The sub-component activities were cancelled during the second restructuring but implementation was done using GOA own resources and now 27 PIEs are applying IFRS based on the Cabinet of Ministers list that is monitored by the MOF.

1.2 Establishing Appropriate Legal and Institutional Frameworks and Capacity for Translation, and Adoption and Enforcement of IFRS and NASCO

Translation of IFRS into Azerbaijani

A number of documents and standards were translated into Azerbaijani and adopted. These include: International Financial Reporting Standards

(IFRSs) that involved translating a total of 41 compared to the target of 40 standards; and

International Financial Reporting Standards (IFRSs) for Small and Medium-Sized Entities.

Provision of technical assistance to the MOF to enforce the requirements of the Law on Accounting.

This was provided to enforce the requirements of the Law on Accounting. However, gaps were identified and MOF has used this technical assistance to develop a draft law on accounting.

Development of an effective and efficient monitoring and enforcement capacity for the implementation of IFRS and NASCOs.

ARPA established to: (a) translate international accounting and audit standards and prepare proposals to MOF on new standards; (b) mark independently exam papers to

ARPA was established and registered with the Ministry of Justice on December 16, 2014. The charter of ARPA, was revised to take into consideration the recommendations made by Ernst and Young consultants in order to meet requirements of IFAC for an association of accountants. ARPA has strengthened its capacity by having a group of 7 experts that will ensure it can translate, adopt and enforce IFRS and NASCOs as well as prepare proposals for the MOF on new accounting and auditing standards. The group of experts is comprised

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be written by students of the National Accounting Qualification (NAQ) Program; (c) submit necessary documents to become member of International Federation of Accountants (IFAC).

of 5 ACCA members and 2 ACCA students at final level of study. ARPA has also developed its capacity to mark the NAQ program after two accredited training programs were conducted. The first involved training 20 accounting professionals on Marking and Exam Questions Composition which was done by Ernst & Young Academy of Business on May 15-17, 2015. The second was a CIPFA Training of Trainers’ course done on June 8-12, 2015 for 36 accounting professionals, which provided skills to mark the Cert IPSAS course. ARPA has developed an internal strategic action plan based on IFAC’s Compliance Self-Assessment Questionnaire that focuses on meeting the 7 SMOs. The plan has 47 actions out of which 40 are ongoing and 7 have been achieved. Achievements include: (i) ARPA has a contract with CIPFA to provide the Cert. IPSAS course in Azerbaijan and the association has so far translated the course materials into Azerbaijani and held a trainer of trainers course; ARPA has adopted the International Ethics Standards Board for Accountants Code of Ethics; and ARPA has a group of experts that provide technical advice on compliance with the SMOs. ARPA’s target is to be an IFAC member by the second quarter of 2017. It is important to note that though the second restructuring referred to the establishment of APAA which would have been the case if a new association was set up, the MOF decided not to start from scratch and therefore select and strengthen an established institution which started as the Azerbaijan Risk Professional Association and ended up as ARPA following the revision of its charter to conduct activities related to strengthening and overseeing the accounting profession.

1.3 Improving the Statutory Framework and Building Capacity to Regulate and Oversee the Audit Function

Enhance the statutory framework for audit and amend the law on auditing services to make it compliant with international best practice.

CoAA to implement the ROSC Accounting and

The sub-component activities were cancelled during the first restructuring. However the translation of the International Standards on Auditing into Azerbaijani was done by the MOF and the Handbook of International Auditing, Assurance, and Ethics Pronouncements of IFAC handed over to the CoAA.

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Auditing action plan recommendations.

Translate the International Standards on Auditing into Azerbaijani.

2. Public Sector Accountability

2.1 Public Sector Accounting Reform

Translate NASBOs into Azerbaijani.

IPSAS versions for 2006, 2011 and 2015 were translated into Azerbaijani. Although the target was to translate 41 standards, to date, only 39 standards have been issued by the IPSAS Board out of which 38 standards were translated into Azerbaijani. The remaining standard relates to Cash basis of accounting whose risk of not being translated in the short term is very low. Important to note is that on IFAC’s website, there is the 2011 IPSAS translated version in Azeri.

In conjunction with component 3, deliver training to public sector management, accountants and auditors.

The capacity of FSTC was strengthened to deliver accountancy training to both the public and corporate sector accountants, auditors and management. Training courses offered related to the public sector are Cert. IPSAS, NASBOs and Bookkeepers courses.

Amend legal framework particularly at the level of secondary legislation as well as other implementing regulations to implement the 2004 Accounting Law.

MOF has prepared a draft Accounting Law to address the current shortfalls of the 2004 Accounting Law. The main emphasis on the amended draft Accounting Law is on enforcement.

Support public sector accounting policy-making, standard-setting and enforcement institutions either within or overseen by the MOF.

As noted, ARPA was established to support public and also corporate sector accounting policy-making, standard-setting and enforcement. This will be overseen by the MOF under the Accounting Policy Division.

2.2 External Audit and Internal Financial Control

Support the CoA to implement its SDP.

The CoA was strengthened in line with the 2012-2014 SDP. The SDP had four components which are: (i) Introducing Performance Audit; (ii) Upgrading financial Audits; (iii) Enhancing Legislative and Standards Framework; and (iv) Upgrading Human Resources and Training. All the outputs and activities of the SDP were achieved and they include: Performance Auditing

Performance Audit Guidelines; Performance Audit Methods Guidance; Performance Audit Strategy for 2015-2016;

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Two Pilot Performance Audits Reports on (i) Azerbaijan State Oil Academy’s Activities in Education Sphere; and (ii) Provision of Occupational Safety by the State Labor Inspectorate Service under the Ministry of Labor & Social Protection of Population; and

Training of senior and lower staff in performance auditing and training of trainers’ course.

Financial Auditing

Financial Audit Manual; Financial Audit Strategy for 2015-2017; Information Technologies Strategy for 2015-

2017; Report on Cost Benefit Analysis: Electronic

Working papers (EWP) and Computer Assisted Audit Techniques (CAATs);

Two Pilot Financial Audits on: (i) Central Railway Hospital under Medical Service of Azerbaijan Railways; and (ii) Local Branch of the Remuneration Agency (Samur-Absheron Channel Operational Unit); and

Training of senior and lower staff in financial auditing, training of trainers’ course and CAATs training.

Enhancing Legislative and Standards Framework

Draft Law on CoA was prepared in line with the requirements of Lima and Mexico Declarations reflecting the main principals of SAIs and ISSAIs framework; and

49 standards from ISSAIs were translated into Azerbaijani language.

Important to note is that the draft Law of CoA has been submitted to the Parliament and its likelihood of being passed is high. Upon the passing of the law, CoA will be able to conduct financial and performance audits. Upgrading Human Resources and Training

Human Resources Development Strategy and Implementation Plan 2014-2018;

Human Resources Policies and Procedures Manual;

Training Curriculum; and Strategic Development Plan for 2015-2017.

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Support the completion of the Government’s Public Internal Financial Control (PIFC) Policy Paper that will include establishing appropriate legal and institutional frameworks to have an internal audit function for budget organizations (PIFC policy paper.

The PIFC Policy Paper was completed but its implementation was cancelled under the second restructuring as GOA planned to do its implementation outside the project.

2.3 Unified Automated Accounting System for Line Ministries and Budgetary Organizations

Support implementation of NASBO, and help government to have effective control over spending of budget funds and generate reliable consolidated financial statements.

FARABI was started as a pilot and rolled out to 99 budget organizations and ministries compared to a target of 59 institutions. FARABI is now covering 40% of the Azerbaijan’s state budget expenditure compared to the target of 30%. Total budget expenditure at project closure was 10,928.50 million MANAT out of which institutions connected to FARABI had a total budget expenditure of 4,352 million MANAT. Post the project, MOF plans to rollout FARABI to 1000 budget organizations and ministries using its own resources. The establishment of FARABI has strengthened the consolidation of government financial statements in accordance with NASBOs that mirror IPSAS.

Maintenance and support center for FARABI was established that is managed by SINAM and is due to be transferred the MOF after project closure.

More detail about FARABI is documented under Annex 7 on the Summary of the Borrower’s ICR.

3. Strengthening accounting, auditing and financial management capacity

Create the Azerbaijan Center for Professional Accounting and Audit Training Education and Research (ACPATER) to provide accountancy training.

MOF instead of creating a new entity known as ACPATER, decided to strengthen FSTC to provide accountancy training. FSTC that has been in existence under the MOF following its creation by a decree of Cabinet Ministers, registered with the Ministry of Education on November 24, 2014, under license no. 074508, as an accredited training center for accountancy courses. The center now provides four training programs as targeted, which are NAQ, NASBO Certification of Public Accountants, Bookkeepers course and Cert IPSAS. FSTC was strengthened by :

33


Equipping it with all necessary furniture, office equipment, servers and modern teaching tools e.g. smart boards. This was also done for the 11 regional training centers that were at the offices of the MOF.

Developing a web-portal to provide information on the courses and serve as an education tool for distant learners.

Developing video lessons to support distant learning.

Establishing a virtual university based on the CLIX system.

The table below shows the number of students doing FSTC accountancy courses:

FSTC trained 4,843 students compared to a target of 3,500. Students that passed were 2,629 (75% of target) compared to a target of 3,500. As at September 1, 2015, the number of passing students had increased to 2,797 (80% of target). This target of expecting of expecting all students studying professional accounting courses to pass was unrealistic. However, this target will eventually be met as FSTC has more than 3,500 who plan to pass and graduate.

Establish detailed syllabi for the various professional qualifications based on existing internationally recognized professional accountancy qualifications.

Detailed syllabus for training programs in both the corporate and public sector were developed based on existing internationally recognized qualifications. NAQ which is the professional accountancy course was modelled from ACCA that complies with IES and a Syllabus for Professional Accountancy Qualification Framework Level 1-3, 2011 was developed; NASBO Certification of Public Accountants was modelled from CIPFA which is an international recognized qualification for the public sector; Bookkeepers course was modelled from International Association of Book-keepers; and Cert IPSAS which is a CIPFA program had its course details and materials translated into Azerbaijani.

Course

Number of

Students

Number that

Passed Exams

Percentage

Passed

NAQ 117 52 44%

NASBO 967 545 56%

Bookkeeping 3,759 2,032 54%

Total 4843 2629 54%

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Support the government to formulate a strategy for the development of institutional framework, standards and syllabi for corporate and public sector accounting, auditing and financial management education.

Ensure providers of accounting and auditing education and qualifications are licensed and monitored.

Establish standards for accounting and auditing qualifications and professional designations including syllabi, examinations and experience criteria, by reference primarily to International Education Standards for Professional Accountants as approved and issued by the Education Committee of the International Federation of Accountants (IFAC).

Develop accounting terminology, methodological guidelines and other relevant materials for academics professionals and practitioners.

Internal policies for FSTC were developed, which includes policies for admitting students, approval and monitoring of accredited education providers, organization of examination process, Continuous Professional Development (CPD) and quality assurance.

Standards for syllabi for corporate and public sector accounting, auditing and financial management education were established as noted above.

Methodological guidelines and other relevant materials for academics professionals and practitioners were developed.

Outputs produced included: FSTC, Training Program Structure and

Regulations, Regulations for the Retraining of Accounting and Auditing Professionals

FSTC, Education and Training Program Structure and Regulations, Administrative Procedures for Education and Training Program

FSTC, Training Program Structure and Regulations, Regulations for the Accreditation of Organizations Active in Accounting Education

FSTC, Education and Training Program Structure and Regulations, Regulations for the Approval and Development of Accounting and Auditing Trainings

Financial Science and Education Center, Norms and Standards of Training Facilities

Translate course materials into Azerbaijani.

Ensure Azerbaijan-specific course materials are devised in accordance with recognized international norms.

FSTC has translated 13 text books into Azerbaijani in accordance with recognized international norms compared to the target of 7. These relate to accounting, auditing and tax text books. The books translated comprise of 10 ACCA text books published by BPP for the NAQ professional accountancy course and 326 text books from CIPFA for the Cert IPSAS course. MOF together with FSTC and in collaboration with ARPA acquired the rights to translate these text books from BPP and CIPFA.

26 The three textbooks included IPSAS Solutions, Workbooks and Progress Tests (Workbooks and Marking Schemes)

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11,000 books were printed covering 10 different study texts for NAQ, which are: Fundamentals of Economics, Financial Accounting, Managerial Accounting, Management Information Systems, Business Law and Taxation, Financial Reporting for Corporate Sector, Financial Management, Audit and Assurance, Management, Risk and Ethics and Corporate Reporting. Additional study materials, that is, key notes and question banks (revision kits) were also translated and published to complement the text books.

Train a core group of two or three tutors per subject to deliver the course materials in Azerbaijan.

FSTC has conducted two accreditation programs for its trainers and now has 36 accredited trainers compared to the target of 35. The first accredited training was offered by Ernst and Young Academy of Business for Marking and Exam Questions Composition held on May 15-17, 2015 and the second was the CIPFA Training of Trainers program for Cert IPSAS held on June 8-12, 2015.

Establish professional and ethical standards for accountants and auditors.

ARPA has adopted the International Ethics Standards Board for Accountants Code of Ethics issued by IFAC. Ethical standards for auditors was one of the activities to be done by the CoAA that was cancelled following the first restructuring.

Ensure independent oversight of audit supervisory bodies and professional accounting bodies.

This is an activity for which the CoAA is responsible and is doing but it was cancelled following the first restructuring.

Establish an international advisory panel of experts in accounting and auditing.

This was modified under the second restructuring to allow ARPA have a group of local experts, which has been done as noted above.

4. Project Management

Provide support to the government to implement the projects through establishment of a Project Management Unit (PMU) at the MOF.

PMU was established at the MOF and it satisfactorily carried activities that included project management, procurement, financial management and monitoring and evaluation aspects of the project.

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Results Framework Analysis

Project Development Objective (PDO): The main Project Development Objective is to strengthen accountability and transparency in financial reporting for the public and corporate sectors in line with international best practices, and to support institutional strengthening to sustain reforms.

Revised Project Development Objective: N/A

PDO Level Results Indicators* C

ore

D=Dropped C=Continue N= New

R=Revised Unit of Measure

Baseline

Cumulative Target Values by December**

Frequency Data Source/ Methodology

Responsibility for Data Collection 2012

2013

2014 2015

Indicator One:

a. Transparency, self-governance and education in the accounting and audit profession improved with the establishment of an Association of Professional Accountants that follows international standards

R Yes/No (whether an Association that follows international standards is established or not)

No No Yes Yes Yes Result: Yes

Semi-annual PMU Progress Reports

PMU

Indicator Two:

b. Accountability in management of public funds strengthened through improvements in the external audit and internal controls environments

R %

(% of total budget expenditures audited, using new methodology, by Chamber of Accounts + % of state budget processed through FARABI)

0 0 0% for COA, 0% for FARABI

5% for COA, 10% for FARABI See footnote 3 below FARABI – 10%

10% for COA, 30% for FARABI Result: FARABI - 40% and COA 0%

Semi-annual PMU progress reports

PMU

Indicator Three:

c. Accounting and auditing profession strengthened through the establishment of

C Number of trained students at ACPATER

0 500 336

1,500 1795

2,500 4515 (by the end of 2014)

3,500 Result: 4843 (up to June 1, 2015)


PMU

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training and certification programs and education standards at ACPATER in line with international standards.

INTERMEDIATE RESULTS Intermediate Result (Component One): Appropriate international standards for accounting and audit are in place; Credible corporate sector accounting and auditing regulatory function;

Revised Intermediate Result (Component One):Appropriate international standards for accounting and audit are in place

Intermediate Result indicator Four: Number of updated IFRS translated, explanatory notes issued

C Number 0 5 31

31

Note27

40

Result: 41


PMU

Intermediate Result indicator Five: Charter and other legal documents for the establishment of Association of Professional Accountants of Azerbaijan are prepared and registered with the Ministry of Justice

N Text No Yes

No

Yes

Yes

Yes

Result:

Yes


PMU

Intermediate Result indicator Six: APAA is capable of preparing new/revised accounting and audit standards when necessary and fully responsible for marking exams written by students under National Accounting Qualification Program

N Text No No

No

Yes

No

Yes

Result:

Yes


PMU

27 41 IFRS standards were translated plus IFRS for SMEs (issue 2009).

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Intermediate Result (Component Two): Public sector budget organizations produce high quality financial statements; Functional and transparent public sector external audit functions

Revised Intermediate Result (Component Two):External audit and internal controls environments are improved through strengthening the capacity of the Chamber of Accounts and installing automated accounting systems in budgetary institutions

- Intermediate Result indicator One: # of NASBOs issued based on IPSAS and explanatory notes

C Number None 31 41

Translated IPSAS – 32

NASBOs developed based on IPSAS - 32

41

Translated IPSAS – 32

NASBOs developed based on IPSAS - 32

41

Result:

Additional 6 IPSAS translated, 32 IPSAS updated in line with new editions

Semi-annual PMU Progress reports

PMU

- Intermediate Result indicator Three: # of Key budget organizations and Line Ministries using unified automatic accounting system.

C Number None 0 0 39

39 (all first stage modules)

72 (including first stage modules and additional second stage module)

59

Result:

99


PMU

- Intermediate Result indicator Four: % of items completed in the Strategic Development Plan of the Chamber of Accounts

R % None 0 0 30

100

Result: 100%

Semi-Annual Reports submitted by Chamber of Accounts

Chamber of Accounts

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- Intermediate Result indicator Five:% of total budget expenditures audited, using new methodology

R Number None 0 0 5%

Note28

10%

Result: 0%

Annual Reports submitted by Chamber of Accounts

Chamber of Accounts

Intermediate Result (Component Three): Sustainable financial management human capacity.

Revised Intermediate Result (Component Three):

Intermediate Result indicator One: # of accredited training programs (incl. undergraduate, graduate and vocational training programs)

C Number 0 2 3 4

4

4

Result: 4


PMU

Intermediate Result indicator Three: # of accredited trainers

C Number 0 10 20 30

18

36

Result: 36

Semi-Annual PMU Progress Reports

PMU

Intermediate Result indicator Four: # of students successfully passing the various training programs

C Number None 500 233

1,500 952

2,500 2,130 (by 31 December 2014)

3,500 2629 (up to 30.06.2015)

Quarterly ACPATER Annual reports

PMU

Intermediate Result indicator Five: # of new accounting and audit, tax related textbooks introduced at higher education institutes.

C Number 0 0 5 5

7 9

7 Result:13

Semi-Annual PMU Progress Reports

PMU

28 Cumulative target values by December are for 2012 – 0, for 2013 – 0, 2014 – 0, 2015 – 0. The reason is that the progress in using new methodology of audit is strongly tied to approval of the CoA Law which Parliament has not yet passed.

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Annex 3. Economic and Financial Analysis At appraisal, a financial and economic analysis was conducted. Some of the analysis with respect to strengthening corporate financial reporting for PIEs was no longer part of this project following the restructuring. This meant that at project closure, it would not be possible to compare the NPV’s that took into consideration costs and benefits associated with the investment on PIEs. These NPVs included: (i) USD 27.34 million related to perceived direct financial savings by participating PIEs; (ii) USD 67.3 million related to stakeholder impact assessment; and (iii) USD 43 million related to CAPSAP. In addition, due to the same reason, it is not possible to confirm the benefit-cost ratio of 3.0 times determined at appraisal. However, the government did support the PIEs using its own resources to comply with IFRS and this could have contributed to increased tax revenues, mainly due to additional disclosures associated with financial reporting in compliance with IFRS. These disclosures lower tax evasion and avoidance which increases tax compliance. It was also determined at appraisal that the real GDP growth rate of CAPSAP was positive but the assumptions used were based on experiences in other countries and not related to Azerbaijan so it has not been taken into consideration. Other benefits determined at appraisal but which were concluded as insignificant included the improvement of the credit ratings of the PIEs which would reduce their borrowing costs due to compliance with IFRS and VAT arising from the project. We agree with this observation. The cost-benefit analysis of CAPSAP as acknowledged at appraisal is difficult to quantify. However, below is an efficiency analysis of the project with respect to training accountants, FARABI, strengthening the CoA and establishing ARPA. Training of accountants: The project did build the capacity of FSTC to provide professional accountancy training in the country as previously, students had to travel abroad to get this training. The cost saving arising from training identified at appraisal, is one of the major achievements of the project. At appraisal it was determined that the cost of training Level 1 ACCA course in the ECA region was US$2,000. Given that most of this training was being done at training centers in Kazakhstan, Russia and Ukraine, it involved travel costs of US$400 to US$800 per person per trip and accommodation costs of US$800 to US$2000 per person per trip. While these costs seem modest at this point in time given that student fees, text books and tuition have been annually increasing, FSTC is offering the cost of training that includes text books, revision kits and pass cards at US$380 per subject. The equivalent amount to a Level 1 ACCA course with 4 subjects would be US$1,520 compared to US$2,000. Additional costs savings are on travel and accommodation, as an Azerbaijan student can now learn the professional accountancy course from FSTC or any of its 11 regional centers. The total cost of training each student abroad based on the above is put at US$4,800 compared to US$1,520 at FSTC, thus a saving of US$3,280 per student. With 4843 students undergoing training this represents potential cost savings of US$15.9 million, which is expected to grow as students trained increase. In addition, having FSTC avoided training abroad based on education standards that were likely to be uneven and not complying with international education standards. The other issues is that the training is conducted in Azerbaijani and the reading materials

41

have also been translated to the local language, therefore significantly contributing to the attraction of many students who when they graduate, will improve on compliance with IPSAS and IFRS in the public and private sectors respectively. FARABI: A benefit that arose after the restructuring of the project was on the rollout of FARABI to ministries and budget organizations, as it strengthened internal control systems and financial reporting to comply with IPSAS. FARABI is a cloud based Enterprise Resource Planning System that supports core Financial Management Information System (FMIS) and administrative functions. The system integrates all facets of financial and administrative operations that include the recording of daily accounting transactions, payroll, maintenance of records on fixed assets and inventory, employee life-cycle and automatic generation of financial reports required by MOF. FARABI is planned to be synchronized with the TIMS so that all financial transactions can be made online and therefore enhance efficiency. FARABI acquired 4,000 perpetual licenses at an average cost of USD 395 per license which is within the normal range for similar applications funded by the Bank. The perpetual licenses mean that GOA will not be paying annual license fees associated with a number of off-the-shelf FMIS. According to a study29 done on FMIS for Governments based on the compilation of experiences in World Bank-financed projects, license fees can be a significant recurrent cost, forming 20 percent to 22 percent of the initial license fees per annum for an off-the-shelf FMIS. This is a cost MOF will avoid. The other benefit of FARABI is that it is in Azerbaijani, with local capacity to support its maintenance. These are key success ingredients that most off-the-shelf accounting systems would not have, and as seen in the beneficiary survey, 92 percent of the users find FARABI user friendly. The cost of the software, hardware and installation of FARABI for 99 institutions was US$11 million. As part of Azerbaijan Public Financial Management reforms, there are plans to continue rolling out FARABI using government’s own resources to about 1,000 ministries and budget organizations, starting with a target of 303 institutions by the end of December 2017. The additional cost for this rollout is between US$20,000 and US$30,000 per budget organization. These costs are very modest compared to other IFMIS given the functionality FARABI has and its unique advantages as noted above. There are benefits that have been seen with respect to improvements in the country’s PEFA indicators. The PEFA indicator on quality and timeliness of annual financial statements was rated C+ in both 2008 and 2014 but the quality and coverage of information included in the annual financial report improved from a C to B while the timeliness of submission of the government consolidated annual accounts to the CoA within 6 months was maintained with an A rating and the presentation of annual financial statements that comply with national or international standards maintained a C rating which is expected to improve when FARABI is rolled out to more budget organizations given that at the time of conducting the PEFA report, FARABI was being rolled out under the first phase to only

29 The study is derived from Ali Hashim’s “A Handbook on Financial Management Information Systems for Government, A Practitioners Guide for Setting Reform Priorities, System Design and Implementation” (based on a compilation of experiences in World Bank-financed projects).

42

39 budget organizations. The indicator on timeliness and regularity of accounts reconciliation was also maintained with an A rating between 2008 and 2014 while the indicator on availability of information of in-year budget reports improved from D in 2008 to A in 2014. The indicator on quality and timeliness of in-year budget reports was maintained as C+ in both 2008 and 2014 but its sub indicators on data accuracy in the monthly and quarterly budget execution reports improved from B to A while timeliness of reporting was maintained with an A rating and the sub indicator on information on expenditure commitments remained limited thus maintaining a C rating which is expected to improve when FARABI is rolled out to more budget organizations. Going forward, FARABI will effectively control expenditure and generate quality budgets and financial statements based on international best practices which will improve decision making. Strengthening the CoA: The CoA has developed its human capacity to conduct financial and performance audits in line with ISSAIs, which should commence when the CoA law is passed by Parliament. This will strengthen accountability in Azerbaijani given that at the moment, compliance audits for ministries and budget institutions are conducted annually on a sample basis while financial audits will require annual audits to be conducted for 100% of these institutions. The PEFA indicator on the scope, nature and follow-up of external audit was rated a D in 2008 and D+ in 2014 mainly due to having less than 50% audit coverage of central government expenditure and conducting compliance audits. Improvements were noted with respect to the adoption of ISSAIs and conducting pilot financial audits which slightly improved the rating. Going forward with the passing of the CoA law by Parliament, this indicator will significantly improve as more financial and performance audits will be done by the CoA in line with ISSAIs and the coverage as noted above will increase with annual financial audits being done for budget organizations and ministries. The strengthening of audits will improve on transparency and accountability in the country. Establishment of ARPA: The MOF established ARPA, and one of its cost savings was to substitute a team of international experts with local experts that would be involved in the interpretation of accounting and auditing international standards. The local experts also do have the additional benefit of speaking Azerbaijani and therefore can easily communicate to the majority of the public and corporate sectors stakeholders, thus making a bigger impact with respect to compliance with the international accounting and auditing standards. The major benefit of ARPA is that it will oversee accountants to ensure that they comply with accounting and auditing standards as well as a code of ethics and also investigate and discipline any accountant where necessary. This will lead to more professionalism of accountants in Azerbaijan.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members

Names Title Unit Responsibility/

Specialty Lending

Ida Njeri Muhoho Task Team Leader/Sr. FinancialManagement Specialist

GGODR

John Hegarty Co-Task Team Leader/Head -Center for Financial Reporting Reform

GGODR

Ranjan Kumar Ganguli Financial Management Consultant GGODR

Christian E. Petersen Lead Economist GMFDR

Christos Kostopoulos Sr. Economist GMFDR

Jonathan George Hooper Sr. Financial Management Specialist GGODR

Junko Funahashi Sr. Counsel LEGEN

Hannah Koilpillai Sr. Finance Officer WFALA

Arben Maho Procurement Analyst GGODR

Norpulat Daniyarov Financial Management Specialist GGODR

Anna O’Donnell Consultant GGODR

Agil Guluzade Financial Management Consultant GGODR

Aida Mammadova Financial Management Consultant GGODR

Yagut Ertenlice Program Assistant ECCAZ

Una Raymond Team Assistant ECSPS

Supervision/ICR

Tural Jamalov Financial Management Specialist andTask Leader

GGODR

Karina Mostipan Procurement Specialist GGODR

Oxana Druta Financial Management Specialist GGODR

Agnes I. Kiss Safeguard Specialist OPSOR

Vusala Mamed Asadova Senior Program Assistant ECCAZ

Norpulat Daniyarov Sr. Financial Management Specialist GGODR

Ranjan Kumar Ganguli Consultant GGOFR

John Hegarty Adviser WFAVP

Christos Kostopoulos Lead Economist GMFDR

Jan Tyl Consultant GGOFR

Patrick Piker Umah Tete Sr. Financial Management Specialistand ICR Task Leader

GGODR

Winston Percy Onipede Cole Sr. Financial Management Specialist GGODR

Parviz Aliyez Consultant GGODR

Jarett Decker Sr. Financial Management Specialist GGODR

Onur Erdem Public Sector Specialist GGODR

44

Names Title Unit Responsibility/

Specialty Khuram Farooq Sr. Financial Management Specialist GGODR

Alexander Fawcett Consultant GGODR

Deepal Fernando Sr. Procurement Specialist GGODR

Jerry Peter Henzel Consultant GTCLA

Bahruz Mammad Jafarzade IT Analyst, Client Services ITSCR

Isao Leslie Kojima Consultant GGODR

Andrew James Mackie Sr. Financial Management Specialist GGODR

Ida Njeri Muhoho Sr. Financial Management Specialist GGODR

Elshad Musayev Consultant GGODR

Jesus Renzoli Sr. Procurement Specialist GGODR

Zulfiya Sharifli Consultant GGODR

Antonia G. Viyachka Procurement Specialist GGODR

(b) Staff Time and Cost

Stage of Project Cycle

Staff Time and Cost (Bank Budget Only)

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

Lending

FY06 7.63 45.84

FY07 22.48 289.32

FY08 17.37 159.09

Total: 47.48 494.25

Supervision/ICR

FY09 33.88 140.69

FY10 23.69 105.09

FY11 29.22 138.94

FY12 20.47 116.57

FY13 15.77 159.43

FY14 20.12 119.76

FY15 16.71 116.79

FY16 (ICR) 7.00 30.00

Total: 166.86 927.27

45

Annex 5. Beneficiary Survey Result A beneficiary survey was conducted to confirm the following:

To confirm and determine the benefits of the roll out of the FARABI system to the budget institutions.

To assess the quality of accountancy training at the FSTC. To determine whether the students trained at the FSTC are producing financial

statements in their organizations that comply with IFRS and IPSAS. FARABI The first survey was conducted among twenty six (26) institutions selected randomly out of the 99 institutions FARABI was rolled out to. These institutions had on average used FARABI for twenty (20) months with the shortest usage period of six (6) months and longest of forty-three (43) months. User group for this sample constituted 133 staff, 69.2% of which were female and 30.8% male. A dominant majority of users (91.8%) had undergraduate and above education level attainment. 73.7% of users were accountants or accounting assistants and 26.3% were senior approvers/accountants or accounting officers. The results were the following:

84.6% of users expressed satisfaction with FARABI in general with the rest remaining neural.

69.2% of users noted a positive influence on their work (26.9% did not report any significant change and 3.9% reported that it worsened their work).

92% reported satisfaction with user-friendliness of the system while 8% were somewhat satisfied. The users were satisfied with quality of support and business continuity management (recovery point and time, timeliness of responses to queries, desk-based hand-holding, accounts manuals and user guides).

In response to how time spent has changed to process supplier payments, payroll and bank reconciliations, 71.8% of users on average reported reduction of time, 3.8% reported increase, 6.4% did not report any change. 18% of users did not use all of these features simultaneously.

73% of users did not use management reports or annual statutory reports. The other key benefits reported from FARABI were enhanced data storage and

security, reduction of technical errors, time saving, increased quality of book-keeping and increased control.

Despite the satisfactory results above, effective usage of all FARABI’s modules remains a challenge mainly due to allegiance to legacy systems and budget organizations using FARABI having to comply with old reporting formats demanded by their parent ministries for consolidation because they are not yet using FARABI. This issue can be effectively addressed through training, timely support from the Maintenance Support Center managed by SINAM and ensuring that ministries are prioritized in the rollout of FARABI such that they use NASBO compliant financial statements for consolidation.

46

The survey results were shared with the MOF and SINAM. They stated that they would address the issues arising out of this survey. MOF found the survey useful and plans to continue undertaking it for all the institutions on FARABI such that they can get useful feedback to address challenges identified. Compliance with IFRS and IPSAS The second survey was conducted among a sample of 27 students at FSTC who had studied financial accounting, tax accounting, NASBOs/IPSAS and IFRS. Each of this student was from a different organization. The purpose of the survey was to determine whether they are applying the standards they are learning in their organizations. The result was that 52% of the students stated that they are applying the standards in their organizations. Unfortunately, none of these students could provide the financial statements of their organization for review mainly due to challenges of getting management’s approval. Quality of FSTC Accountancy training The third survey was conducted by FSTC among close to 4000 students. The results were:

78% rated the course as excellent, while 19% rated the course as good and 3% rated the course as average.

The students also rated highly the quality of their trainers. In response to questions on effectiveness of trainers, their coverage of full issues, their preparation level, ability to conduct effective discussions and create conditions for learning, on an average 81.5% rated trainers as excellent, 16.3% rated as good and 2.2% rated as average.

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Annex 6. Stakeholder Workshop Report and Results A stakeholder workshop was organized by the MOF on November 5, 2015. In attendance were representatives from ministries and budget organizations that use FARABI; FSTC management, lecturers and students; ARPA representatives; SINAM representatives, the MOF and the Bank. The findings of the beneficiary survey were presented and there was feedback from the participants. MOF eventually summed up the key issues arising and closed the workshop. The issues arising were:

There was general agreement on the findings of the survey. SINAM responded to some of the usage challenges associated with FARABI and

it stated that it has put in place web portal for continued learning and education that was user friendly such that FARABI users would be able to learn more about the system. This however, would not take away their responsibility to respond to issues in a timely manner.

There was a discussion on the issue identified in the beneficiary survey with respect to budget organizations not using FARABI for reporting purposes because the parent ministry would request for the report in a format based on the legacy system in order to consolidate its financial report. MOF pointed out that they will follow recommendations in the beneficiary report to ensure that FARABI is rolled out to groups of organizations under the same consolidation such that financial reporting consolidation can be done using FARABI.

Head of ARPA laid out his vision for preparations for the accountant certification program and noted that international experience was being studied and that the local-language certification would be based on ACCA standards.

Students were concerned about the international certification of the NAQ course and one issue that was pointed out is that the NAQ is currently complying with the IES of IFAC and will continue to do so. This was one way of getting international acceptability.

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Annex 7. Summary of Borrower's ICR Project context and development objective Corporate and Public Sector Accountability Project (CAPSAP) has been mutually developed by the World Bank and the Government of the Republic of Azerbaijan. The project supports the overarching goal of governance by improving the accounting standards in both the private and public sectors in order to comply with the 2004 Accounting Law. The quality of higher education in accounting and auditing was also strengthened under the project as it was constrained by ad hoc curriculum development and a general lack of continuing education for accountancy professionals. The increased use of the Azeri language posed further challenges, because of the absence of textbooks and other teaching materials. Project Development Objective The overall Project Development Objective (PDO) for CAPSAP is to strengthen accountability and transparency in financial reporting for the public and corporate sectors in line with international best practices. Main Beneficiaries and Target Groups The key beneficiaries are the Public Interest Entities including State-Owned Enterprises, the Chamber of Accounts (Supreme Audit Institution), the Ministry of Finance, the Chamber of Auditors (the country’s auditing services regulator and standard-setter), accounting and auditing professionals (includes ARPA and FSTC), other stakeholders benefitting from FARABI such as ministries and budget organizations. Project Restructuring The project was restructured in 2011 and 2013 after its launch in 2009. The first restructuring was based the evolving political agenda which needed reprioritization to address specific technological and human capacity constraints, particularly within the public sector. The second restructuring cancelled activities associated with project sub-components that were inactive since project inception, and those that were no longer relevant given the direction that government priorities had taken since the first restructuring; and the inclusion of ongoing initiatives that were not explicitly acknowledged in the original PAD. The results indicators were also revised during the second restructuring. The original PDO was not changed but revisions were made to the intermediate results and indicators. Benefits from the project Shift to modern accounting and financial management systems would enable management to achieve transparency and accountability in financial reporting, improve decision-making, realize cost saving from improved systems, and minimize business corruption. Azerbaijan

49

will benefit from higher tax collection from improved and efficient enterprises as a result of the introduction of IFRS and National Accounting Standards for Budgetary Organizations (NASBO) that are in line with IPSAS and promote transparency and accountability in financial reporting in both corporate and public sectors. In addition, the perceived country risks is expected to reduce and therefore lower the costs associated with sovereign borrowing. Overall Progress in PDO Achievement The project made significant progress towards achieving PDOs:

Within the framework of the project IFRS (for SME), IPSAS, NASBO and NASCO standards were translated into Azerbaijani language and adopted. Accountability and analytical reporting capacity in budget institutions were enhanced through development of Financial and Reporting Application for Budget Institutions and its piloting in 99 institutions, including high education institutions and government agencies. Capacity of CoA was enhanced through improvement of internal procedures, introduction of performance audit and translation of ISSAI standards into Azerbaijani. The institutional capacity of CoA was further enhanced through development of Information Technology, financial audit, Human Resources all under the SDP for 2012-2014. Draft Law on Chamber of Accounts was prepared in line with the requirements of Lima and Mexico Declarations reflecting the main principals of SAIs and ISSAIs framework.

To ensure continuing support to organizations in preparation financial reports in line with international standards, the project supported establishment of association of accounting professionals, which will take advisory role in their updating and adopting.

Strengthening of accounting and audit profession was achieved through development of National Accounting Qualification for different groups of accounting professionals; provision of training materials for all qualifications under NAQ; expanding functions of the Financial Training Centre under the Ministry of Finance and transforming it into the Financial and Science Training Centre responsible for delivery of trainings on NAQ, certification of tutors and training centers on NAQ; delivery of trainings to accounting professionals; appropriate study materials were either developed or translated into Azerbaijani; and test question banks were developed for ten papers of NAQ.

Financial and Science Training Centre was established under the Ministry of Finance to ensure continuing education of accounting professionals; FSTC was equipped with all necessary education materials, furniture and equipment, including modern education tools such as smart boards and laptops to facilitate education and examination processes. Internal policies for FSTC were developed, which includes policies for admitting students, approval and monitoring of accredited education providers, organization of examination process, CPD, quality assurance. Web-portal for FSTC was developed to provide information on the

50

courses and serve as an education tool for distant learners; video lessons are being developed to support distant learning.

More than 4843 accountants were trained within 2012-2015, 2643 students have successfully passed the exams.

Negotiations with ACCA were initiated to get ACCA accreditation for NAQ. Original and revised components This is similar to what has been included in the main body of the ICR. Evaluation of the Government of Azerbaijan’s performance in implementing the project Government demonstrated full support to implementation of the project. The major problem was initial delay in implementation. However, the Implementing Agency was proactive in initiating discussion with the WB aimed at re-designing of the project to adapt it to the changing needs and priorities of the Government. After revision of the project design and restructuring of the project, the project progressed with a good pace. The Government was highly supportive in all aspects of Project implementation. The counterpart funds were timely provided, as well as approvals for disbursements from the Credit or for Withdrawal Applications. The project team had good communication with and access to MOF officials as needed. Evaluation of the World Bank’s performance in implementing the project The World Bank’s team collaborated closely with the Government during implementation of the Project. The Bank provided full support to the project implementation, through provision of project supervision, advisory support, access to international experience and expertise. The Bank was receptive to Government’s ideas and priorities, which is demonstrated by two restructuring processes during the project lifetime. The Bank has contributed greatly to facilitating the project implementation, and final achievement of PDO. Lessons Learned These have been incorporated in the lessons learned documented in the main body of the ICR. Relevance of the Objectives, Design and Implementation to current country and global priorities The project was initiated to support implementation of the Accounting Law enacted in November 2004. Enhancement of transparency and accountability of government institutions is one of the key tools of the Government in its fight with corruption. In order to improve the activity of the state institutions in line with the modern standards, National Strategy for Increasing Transparency and Combating Corruption (2007-2011) has been

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implemented. The Strategy contained important measures in the area of Open Government. The Republic of Azerbaijan also joined all international initiatives in the sphere of Good Governance. The country has also joined the Open Government Partnership (OGP) in 2012 with a view to improve its activities aimed at increasing transparency and promoting Open Government; to exchange the international experience; and to contribute to the international efforts in this domain. In 2012, the President endorsed Open Government Initiative National Action Plan for 2012-2015. Project’s Impact Within the framework of the project almost 4,843 accountants from 418 institutions have been trained (263 of them passed full trainings in NASBOs, 3,759 were trained in fundamentals of NASBOs, 534 – accounting, 279 – law and taxation, 8 - IFRS); Financial Accounting and Reporting system for budget institutions (FARABI) was developed and implemented in a total of 99 budget institutions and universities, which enhances transparency in accounting and financial reporting, and helps to maintain accurate and correct HR and accounting records; NAQ was developed and specialized training center established, which creates strong ground for continuing education of accounting and audit professionals. The project has contributed to enhancing account keeping and reporting capacity both through a) creating capacity for institutions to keep accounting records in a due manner; b) creating capacity of the CoA to conduct financial and performance audits when the CoA law is passed by Parliament. All these measures help to tackle challenges standing in front of the institutions responsible for financial control, i.e. reveal inappropriate spending, overstaffing, excessive pricing for assets, incorrect depreciation and early/improper write-off of the assets, etc. It is expected that the accountants that passed the trainings have got necessary knowledge and skills to correctly maintain accounting ledgers, calculate depreciation, etc. In a new ERP system many of these functions are automated, for example, those related to payroll, calculation of depreciation. The system automatically generates reports required by MOF, and does not allow data manipulation. Implementation of the system will also help the budget institutions to free up financial resources and staff time, which can be spent more effectively. Institutional Change/Strengthening The project contributed to institutional strengthening through building human resource capacity in the area of accounting and bookkeeping, and creating an institutional framework for continuing development of these professions. Financial Science and Training Centre under the Ministry of Finance was restructured to become a training and certification center responsible for development of accounting profession in the country. The center was equipped with all necessary furniture and servers, classrooms were equipped with the state-of-the-art smart boards and laptops to facilitate education and examination process.

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National Accounting Qualification was established and four programs were developed for the National Accounting Qualification: Certification program for accounting professionals, Certification program for public sector accountants (NASBO and Cert IPSAS) and Certification program for bookkeepers. The project has purchased rights for translation and distribution in Azerbaijan of 10 study texts, along with question banks and key notes. All these were translated into Azerbaijani and published within the framework of the project. Additionally, study texts for Business law and taxation were developed and published to support education process in FSTC. Trainings on financial accounting, NASBOs, fundamentals of NASBOs, business law and taxation, IFRS were conducted for 4843 accounting professionals. More than 418 institutions can now benefit from the services provided by more knowledgeable and skilled accountants. Training of Trainers on IPSAS has been conducted by CIPFA for 15 public sector accountants in Azerbaijan. Financial Accounting and Reporting system for budget institutions (FARABI) was developed and implemented in agreed budget institutions and universities receiving financing from the budget. Appropriate servers and other equipment were purchased and installed in both MOF HQ and backup center in Yevlakh. The system was introduced in budget institutions in two phases. During the first phase, the system was introduced in 39 institutions. The second phase covered additional 60 institutions. 99 institutions can now benefit from the functional capacity of developed financial accounting and reporting system (FARABI). Public institutions can benefit from updated IPSAS translated into Azerbaijani, and adapted NASBOs. MOF has conducted negotiation with the Azerbaijan State Economic University which is a flagship university in the area of economics, finance and accounting in Azerbaijan. As per the agreements reached, the university will cooperate closely with FSTC for introducing extended program for accountants based on the study books developed within the framework of the project. The project contributed to establishment of association of accountants in Azerbaijan by selecting an existing association of risk professionals and expanding its area of activities to cover accounting professionals. It is planned that re-designed ARPA will take advisory role in updating and adopting accounting standards. ARPA will be directly responsible for exam marking. For this purpose, trainings were conducted by Ernst and Young Academy to 20 accounting professionals, who will form a roster of exam markers for the association. Unintended outcomes and Impacts (positive and negative) Even though some of the beneficiary institutions showed ambiguous reaction and even some reluctance to implementation of the new ERP system, successful implementation of the system in a number of sites and positive word-of-mouth resulted in great interest to the

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system from the side of budget institutions. A number of budget organizations informally applied to MOF, requesting installation of the system in their institutions, branch offices and affiliates. These institutions were partially covered during the second phase of the introduction of the system in budget institutions. It is planned that other institutions will be covered by MOF after completion of the project. The NAQ model has been recognized by the World Bank experts as the best qualification model in the CIS and Eastern Europe. It is now planned to share experience in this area with other countries in the region. This outcome also supported the idea to gradually expand FSTC to become regional training center. For this purpose, the project initiated negotiations with best practice certification institutions (ACCA, CIPFA, ICAEW etc.) to mutually recognize certifications and obtain exemptions for similar papers. Active negotiations were held with ACCA and this process will be held further beyond the framework of the project. Monitoring & Evaluation Design, Implementation and Utilization A monitoring specialist was hired by the project to carry out monitoring of the project implementation. Additionally, monitoring consultant was hired by the World Bank to facilitate implementation of the project activities and supervise the specialist. Achieving PDOs by Components These are consistent with the Outputs by Component and Results Framework analysis under Annex 2. However more detail on FARABI is provided below. Creation of an electronic reporting system for ministries and budget organizations FARABI is a cloud-based Enterprise Resource Planning ERP system aimed to automate back office functions in budget institutions. The system integrates all facets of financial and administrative operations, including recording of daily accounting transactions, payroll, maintenance of records on fixed assets and inventory, employee life-cycle, and automatic generation of reports required by the MOF. FARABI is planned to be synchronized with the TIMS so that all financial transactions can be made online, which enhance efficiency. The system represents a powerful tool for analysis of financial and statistical data by the MOF and enhances transparency and accountability of the budget institutions. Modern Server Centre equipped with high-performance servers and other equipment, including security and fire extinguishing systems, was established to serve FARABI. Initially the system included the following modules: Organization structure; Staff list; Human Resource cards; Payroll; Stock on hand; Assets in use; Inventories in operation; and Treasury/banking operations. More modules were later on added in order to meet the general requirements of budget organizations and specific needs of universities. They include: Student module; budget planning and implementation; and Submission of documents to treasury.

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Advantages of FARABI Compliance of procedures and reports to Azerbaijan legislation Integration with the systems of the Ministry of Taxes and State Social Protection Fund

(SSPF) Enhanced transparency and accountability in data processing leading to greater

accuracy of records. The system automatically generates output based on created accounting models, calculates salaries based on a monthly timesheet, and calculates depreciation based on the in-built schemes complying with the requirements of Azerbaijan legislation. All this ensures minimum human intervention and helps to avoid human errors and attempts to data falsification.

Enhanced efficiency in data processing. The system automatically processes input data and frees up staff time which can now be spent on more challenging issues. The system generates documents necessary for payment and enables automated submission of documents to the treasury.

Business Intelligence application helps to generate various statistical and analytical reports, required for decision-making.

Efficiency in design. Cloud-based solution frees up money required for purchase of expensive server equipment and Human Resource required for support of the system at the beneficiary’s site.

Comprehensive and flexible reporting options. Integration with other Information Technology systems is possible. Universal and convenient user interface. Universal search system. Multilingual interface - “3 +”. Multifunctional customization. Export of charts and reports to Microsoft Office applications. Video tutorials are in the system which make learning user friendly. The system was presented to the President of Azerbaijan and commitment was taken to cover 1000 budget organizations starting with 303 by the end of 2017. This phase will be implemented using government resources. The server centers were established in MOF Head Quarters (central server) and Yevlakh (backup server) to serve the system. The servers were equipped with necessary electricity backup system, monitoring and fire protection systems. Special monitoring software was installed in MOF to enable online monitoring of the system and all connections. The Service Centre is established in the Ministry of Finance and duly equipped within the framework of the project. Currently, the center is operated by the contractor responsible for implementation of FARABI system, that is, SINAM. After the project completion, it is planned that Information Technology staff from the Service Centre will be hired either on a basis of consulting contracts with MOF or the services will be outsourced to private companies.

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Implementation The project had significant delay in implementation during the first year of effectiveness. The change of project design to align it with the changed priorities of the government contributed greatly to progress in achievement of PDO objectives. Within 12 months after the first restructuring the project showed significant progress in implementation of the planned activities. The second project restructuring was initiated to further adapt the project design to the changing priorities, and achieving of 50% of disbursement, as well as completion of the delivery of equipment for FARABI system was a pre-condition set by the World Bank for endorsing the second restructuring. PMU did manage to fulfill both conditions set by the Bank and the second project restructuring was approved. Both the MOF and WB provided active support to the implementation of the project and achievement of PDO. The PDO was fully achieved. The PMU had positive experience with communication within the MOF and the Bank. All the requests and applications submitted to the Bank were processed and responded within a shortest period of time, without any delays and reminders. Active collaboration with all involved stakeholders helped to facilitate implementation of the project and achieve PDO in an effective and timely manner. Proposed arrangements for future operations of the project There are two major activities under the project that need further support of the Government to ensure sustainability of the achieved results. These are: Support of FARABI system and roll-out of the system to all budget institutions across the country; and Support FSTC in further delivering of NAQ. Support of FARABI system: The system developed and introduced in 99 institutions requires financial, technical and operational support to remain fully functional. MOF does not possess necessary HR capacity to maintain the system alone. The system will need to be further supported in order to ensure the system is maintained (this involves updating licenses, hardware upgrades, changes to perform system backups, monitoring of equipment and software and making necessary changes to keep the system in line with the legislation); and technical support to system users (responding to questions, connecting new organizations, train new users, solve technical problems, monitor the system, etc.). It has been planned that the support fee will be applied to user organizations, which will be included in the expenditure budget of government organizations. The support fee will be defined based on the organization type, size, average number and type of operations performed by the organization. The support of the system will be outsourced to a commercial entity that will be financed out of the collected fees. Support of NAQ and FSTC: FSTC is part of the government structure under the MOF that is partially financed from the state budget. Currently, FSTC receives about 300k

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MANAT (~290k USD) from the state budget. This amount covers salaries of FSTC permanent staff, utilities and trainings of public sector accountants. Additional financial resources are required to continue delivery of trainings for NAQ for corporate institutions, payment to tutors, relevant operating costs, update of study materials, etc. These are to be funded through fees paid by students of commercial courses. Another source of financing to meet these costs, will be licensing fees for training companies which will be interested in delivery of NAQ trainings. The main revenues are expected to be obtained from the membership fees, exams and commercial trainings and licensing of training institutions. The revenue obtained from the commercial courses and licensing of training companies will be mainly spent on salaries of part-time tutors, training consumables and updating training materials. Taking into consideration that the project supplied FSTC with all necessary equipment, study materials and supplies, the expenditures of FSTC during the first year after project completion will be mainly spent on salaries of part-time tutors, which FSTC is planning to cover out of the commercial courses.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders SECO provided its report on the project and it shows a satisfactory overall rating.

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Annex 9. List of Supporting Documents

1. Project Appraisal Document, Azerbaijan Republic, Corporate and Public sector Accountability Project, February 29, 2008 Report 42314-AZ

2. Financing Agreements 3. First and Second Restructuring Packages 4. All Aide Memoires and ISRs of the project 5. The Republic of Azerbaijan Accounting Law, June 29, 2004 6. Azerbaijan Country Partnership Strategy for 2007-2010 7. Azerbaijan Country Partnership framework for 2016-2020 8. PEFA Reports for 2008 and 2014 9. Azerbaijan Republic ROSC Accounting and Auditing, September 2006 10. Open Budget Survey Report 2008 and 2015 11. Open Budget Initiative Report 2006 12. Government of Azerbaijan Implementation Completion Report 13. The Swiss Cooperation Office Report on CAPSAP 14. Beneficiary Survey Results Report 15. Stakeholder Workshop Report 16. Accounting and Risk Professionals Association (ARPA) of Azerbaijan Charter and

Registration Certificate with Ministry of Justice 17. Chamber of Accounts SDP for 2012-2014 and 2015-2017 18. Financial Science and Training Center License No. 074508 issued by Ministry of

Education on November 24, 2014 19. The Draft Law of the Republic of Azerbaijan on the Chamber of Accounts 20. IPSAS translation in Azeri 21. ISA translation in Azeri 22. IFRS translation in Azeri 23. IFRS for SMEs translation in Azeri 24. ISSAI translation in Azeri 25. Pilot Financial and Performance Audit Reports 26. Professional Accountancy text books, revision kits and pass card translations into

Azeri 27. IFAC letter to the Ministry of Finance dated November 5, 2012, authorizing the

publishing of the translated version in Azeri of the Handbook of International Public Sector Accounting Pronouncements (June 2012)

28. Contract Agreement between CIPFA and ARPA dated May 18, 2015, to conduct the Cert IPSAS course in Azerbaijan

29. ARPA Action Plan to meet IFAC SMOs 30. SINAM, Introduction of Financial and Accounting Reporting Application for

Budgetary Institutions (FARABI), May 12, 2015 31. FSTC, Training Programme Structure and Regulations, Regulations for the

Retraining of Accounting and Auditing Professionals 32. FSTC, Education and Training Programme Structure and Regulations,

Administrative Procedures for Education and Training Programme

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33. FSTC, Training Programme Structure and Regulations, Regulations for the Accreditation of Organizations Active in Accounting Education

34. FSTC, Education and Training Programme Structure and Regulations, Regulations for the Approval and Development of Accounting and Auditing Trainings

35. Financial Science and Education Center, Norms and Standards of Training Facilities

36. Syllabus for Professional Accountancy Qualification Framework Level 1-3, 2011 37. Comparison between Azerbaijan Professional Accountant Certification and

ACCA 38. CIPFA, Cert IPSAS course materials 39. Chamber of Accounts, Performance Audit Guidelines 40. Chamber of Accounts, Performance Audit Methods Guidance 41. Chamber of Accounts, Performance Audit Strategic Plan, 2015-2016 42. Chamber of Accounts, Human Resources Policies and Procedures Manual 43. Chamber of Accounts, Human Development Strategy and Implementation Plan

2014-2018 44. Chamber of Accounts, Cost Benefit Analysis Report on Electronic Working

Papers and Computer Assisted Audit Techniques 45. Chamber of Accounts, Financial Audit Manual 46. Chamber of Accounts, Financial Audit Strategy 2015-2017 47. Chamber of Accounts, IT Strategy for 2015-2017 48. Chamber of Accounts, Training Curriculum 49. A Handbook on Financial Management Information Systems for Government, A

Practitioners Guide for Setting Reform Priorities, System Design and Implementation (based on a compilation of experiences in World Bank-financed projects) by Ali Hashim

50. Republic of Azerbaijan, The Cabinet List of PIEs implementing IFRS 51. Republic of Azerbaijan, Corporate Governance ROSC dated September 2009.

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Annex 10. Map of Azerbaijan Republic