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Document of

The World Bank

Report No: ICR00004007

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD-80240)

ON A

LOAN

IN THE AMOUNT OF

US$ 12 MILLION EQUIVALENT

TO THE

Republic of Azerbaijan

FOR A

Capital Markets Modernization Project (CMMP)

January 25, 2017

Finance & Markets Global Practice

Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective October 11, 2016)

Currency Unit = Azeri New Manat (AZN

1.00 AZN = US$ 1.599

1.00 SDR = US$ 1.382

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS ABS Asset Backed Securities MoF Ministry of Finance

ADB Asian Development Bank MoT Ministry of Taxes

AZN Azerbaijan New Manat NCB National Competitive Bidding

BSE Baku Stock Exchange NDC National Depository Center

CAS Country Assistance Strategy ORAF Operational Risk Assessment

CMMP Capital Markets Modernization Project Framework

CPS Country Partnership Strategy PAD Project Appraisal Document

EBRD European Bank for Reconstruction and PID Project Information Document

Development PIU Project Implementation Unit

ECA Europe and Central Asia POM Project Operation Manual

EU European Union PQ Prequalification

FIRST Financial Sector Reform and Strengthening PPP Public-Private Partnerships

Initiative RVP Regional Vice President

FIMSA Financial Markets Supervision Authority SBD Standard Bidding Documents

GDP Gross Domestic Product SCS State Committee for Securities

IBRD International Bank for Reconstruction and SECO Swiss State Secretariat for

Development Economic Affairs

ICR Implementation Completion and Results TAL Technical Assistance Loan

Report USAID United States Agency for

IC SSS Individual Consultant Single Source International Development

Selection WBT World Bank Treasury

IDA International Development Association

IFC International Finance Corporation

ISDS Integrated Safeguard Data Sheet

Senior Global Practice Director: Gloria Grandolini

Sector Manager: Rolf Behrndt

Project Team Leader: Angela Prigozhina

ICR Team Leader: Stephen Pirozzi

Republic of Azerbaijan

Capital Markets Modernization Project (CMMP)

CONTENTS

Data Sheet

A. Basic Information

B. Key Dates

C. Ratings Summary

D. Sector and Theme Codes

E. Bank Staff

F. Results Framework Analysis

G. Ratings of Project Performance in ISRs

H. Restructuring

I. Disbursement Graph

1. Project Context, Development Objectives and Design ............................................. 11

2. Key Factors Affecting Implementation and Outcomes ............................................ 15

3. Assessment of Outcomes .......................................................................................... 19

4. Assessment of Risk to Development Outcome ......................................................... 25

5. Assessment of Bank and Borrower Performance ..................................................... 25

6. Lessons Learned ....................................................................................................... 29

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 30

Annex 1. Project Costs and Financing .......................................................................... 31

Annex 2. Outputs by Component ................................................................................. 32

Annex 3. Economic and Financial Analysis ................................................................. 33

Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 34

Annex 5. Beneficiary Survey Results ........................................................................... 36

Annex 6. Stakeholder Workshop Report and Results ................................................... 37

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 41

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 50

Annex 9. List of Supporting Documents ...................................................................... 50

Annex 10. Borrower ICR .............................................................................................. 52

Map (IBRD 33365) ....................................................................................................... 97

A. Basic Information

Country: Azerbaijan Project Name: Capital Markets

Modernization Project

Project ID: P120321 L/C/TF Number(s): IBRD-80240

ICR Date: 01/10/2017 ICR Type: Core ICR

Lending Instrument: TAL Borrower: REPUBLIC OF

AZERBAIJAN

Original Total

Commitment: USD 12.00M Disbursed Amount: USD 11.96M

Revised Amount: USD 12.00M

Environmental Category: C

Implementing Agencies:

Azerbaijan State Committee for Securities

Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 12/09/2010 Effectiveness: 11/07/2011 11/07/2011

Appraisal: 01/19/2011 Restructuring(s): 05/06/2015

Approval: 03/17/2011 Mid-term Review: 01/20/2014 02/03/2014

Closing: 12/31/2015 07/01/2016

C. Ratings Summary

C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Substantial

Bank Performance: Moderately Satisfactory

Borrower Performance: Satisfactory

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

Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing

Agency/Agencies: Satisfactory

Overall Bank

Performance: Moderately Satisfactory

Overall Borrower

Performance: Satisfactory

C.3 Quality at Entry and Implementation Performance 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): No

Quality of

Supervision (QSA): None

DO rating before

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Public administration - Financial Sector 7 7

Capital Markets 93 93

Theme Code (as % of total Bank financing)

International financial standards and systems 36 36

Other Financial Sector Development 22 22

Regulation and competition policy 42 42

E. Bank Staff

Positions At ICR At Approval

Vice President: Cyril E Muller Philippe H. Le Houerou

Country Director: Mercy Miyang Tembon Asad Alam

Practice

Manager/Manager: Rolf Behrndt Sophie Sirtaine

Project Team Leader: Angela Prigozhina Michael Edwards

ICR Team Leader: Stephen Francis Pirozzi

ICR Primary Author: Stephen Francis Pirozzi

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document)

Increase the use of equity and corporate debt as financing and/or investment instruments

through the adoption of an effective capital markets regulatory framework and

infrastructure

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

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target

Values

Actual Value

Achieved at

Completion or

Target Years

Indicator 1 : Increased issuance of corporate bonds

Value

quantitative or

Qualitative)

1.9%

3.8%

14.1%

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Outstanding amount of corporate debt to 2010 Non-oil GDP

Indicator 2 : Increased number of listed companies

Value

quantitative or

Qualitative)

2

8-10

5

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Number of listed companies

Indicator 3 : Improved price transparency

Value

quantitative or

Qualitative)

0%

90%

100%

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

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

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target Values

Actual Value

Achieved at

Completion or

Target Years

Indicator 1 :

Ratio of market participants electronically linked to market infrastructure

(trading, clearing and settl

Value 0% 100% 100%

(quantitative

or Qualitative)

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Ratio of market participants electronically linked to market infrastructure

Indicator 2 : Enactment of new Capital Market Law

Value

(quantitative

or Qualitative)

No

Yes

Yes

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Law enacted

Indicator 3 :

Promulgation of capital markets regulation required upon enactment of

Law

Value

(quantitative

or Qualitative)

No

Yes

Yes

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Regulations promulgated

Indicator 4 :

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

equity)

Value

(quantitative

or Qualitative)

0

15

16

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Number of companies involved in the listing advisory program

Indicator 5 :

Increased of the threshold pass rate of the Financial Certification

examination for market participants

Value

(quantitative

or Qualitative)

50%

75%

75%

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

Measures financial literacy level

Indicator 6 : Consumer Awareness of Capital Market Instruments

Value

(quantitative

or Qualitative)

24

45

59.38

Date achieved 10/04/2011 12/31/2015 07/01/2016

Comments

(incl. %

achievement)

using the Capital Markets Awareness Index

G. Ratings of Project Performance in ISRs

No. Date ISR

Archived DO IP

Actual

Disbursements

(USD millions)

1 07/09/2011 Satisfactory Satisfactory 0.00





6 06/11/2014 Satisfactory Moderately Satisfactory 4.24

7 11/22/2014 Satisfactory Moderately Satisfactory 4.75

8 05/18/2015 Moderately Satisfactory Satisfactory 6.18



H. Restructuring (if any)

Restructuring

Date(s)

Board

Approved

PDO Change

ISR Ratings at

Restructuring

Amount

Disbursed at

Restructuring

in USD

millions

Reason for Restructuring &

Key Changes Made DO IP

05/06/2015 MS S 6.18

I. Disbursement Profile

11

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

1. From 2004 – 2008 Azerbaijan experienced an average annual increase in GDP over 20

percent and decrease in poverty, due in large part to rising oil and gas production and prices.

However, given the exhaustive nature of oil and gas production, it was believed that Azerbaijan may have

reached its peak, as production was estimated to remain steady over the next decade and decline thereafter,

thereby leaving limited window to create an economic environment to support growth in the non-oil

economy. The challenge for Azerbaijan was the ability to transform into a sustainable higher middle

income country with a more diversified economy.

2. At the time of appraisal, Azerbaijan had made good progress on its first round of economic

reforms. This includes establishing a sound macro-framework, including the oil fund. It also includes

small-scale privatization, internal trade and price liberalization and a stable central banking and foreign

exchange system. Improved policies to provide effective services in basic health, education and social

protection had also been put into place. However, Azerbaijan continued to lag behind most other CIS

countries in second generation reforms, in such areas as, large-scale privatization, competition policy,

consumer protection, rural access to financial services, banking and securities market reform, and foreign

trade in the non-oil sector. In addition, there was a lag in developing policies and institutions needed to

support a competitive highly skilled workforce, an innovative and flexible private sector environment, and

to address the environmental legacy of the Soviet Union.

3. The Government sought to maintain progress reflected in the 2011 Doing Business Report by

further diversifying the economy and making gains in areas that at the time were identified as

requiring urgent attention, including business licensing, tax and customs administration and

reduction of corruption. While the Country’s rankings for business entry were good at the time of

appraisal, Azerbaijan ranked poorly on exit, competition and dimensions that deal with ongoing business

operations, including trading across borders, paying taxes, etc. For example, Azerbaijan’s rank for

“Starting a New Business” improved from 64 to 15 during the period 2008-2011. However, during the

same period, the rankings for “Trading Across Borders” and “Paying Taxes” ranged from 173-177 and

141-103, respectively.

4. During the time of appraisal, the capital market in Azerbaijan was underdeveloped, with

equity and debt market capitalization of 0.5 percent and 1.9 percent of non-oil GDP, respectively, at

the end 2010. Development of the capital market in the medium term was considered crucial to support

economic diversification of the non-oil sector. The main activity of the Baku Stock Exchange (BSE) was

to serve as the auction mechanism for the issuance of Government Securities. However, due to a number

of limiting factors1, secondary trading of treasury debt did not exist. Only two companies had listed their

shares on the BSE to date, one of which was closely-held and did not trade. The most active trading

surrounded shares of about 500 companies privatized in the mid-1990s, which represent the “unlisted

securities market”, which was not regulated by the State Committee for Securities (SCS). As virtually all

equity trades were pre-arranged, traditional exchange driven price discovery is not attained. The investor

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

12

base was acutely underdeveloped and banks have had little interest of investing in low yielding existing

market instruments2. As a consequence of the underdevelopment of the capital markets, the banking sector

dominates the financial sector with more than 95 percent of total assets.

5. A number of key benefits would result in the medium term from the development of the

capital market. As a result of prior years’ high bank credit growth, both credit and related foreign

exchange risks had become concentrated in the banking system. It was anticipated that over time these

risks would be diffused as the nascent corporate bond market develops and more firms are able to gain

access to longer term funding. Secondly, the banking system’s domestic funding structure would be

enhanced through banks’ improved access to debt and equity financing. Thirdly, through a stronger capital

market, holders of privatization vouchers would be able to more readily determine the price offered to sell

their holdings. In sum, lenders, borrowers and investors would each have new opportunities to participate

in the growth of non-oil economy through the capital market.

6. At project design, market participants were interested in exploring more attractive financing

opportunities for the private sector. At the time the project was conceived, the corporate sector was

relying on expensive, short-term and increasingly scarce local financing from the commercial banks.

Moreover, with the exception of IBA (which is majority owned by the State), few banks were large

enough to provide substantial funding to enterprises. Market participants and the regulator alike had

indicated that a number of enterprises have an interest to access the capital market for debt and/or equity

financing. Equally, banks were interested in diversifying their funding sources away from short-term

deposits and find alternative sources of finance. The capital market, through both equity and debt

financing, offered banks potential access to longer term funding, which was considered essential to

encourage private sector development.

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

Increase the use of equity and corporate debt as financing and/or investment instruments through the

adoption of an effective capital markets regulatory framework and infrastructure.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

The PDO was not revised.

1.4 Main Beneficiaries

7. The main beneficiaries of the CMMP project identified in the PAD are:

• State Committee for Securities

• Baku Stock Exchange

• National Depository Centre

• Central Bank of Azerbaijan

• Ministry of Finance

• Ministry of Economic Development

• Professional financial intermediaries

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

13

• Corporate Sector

• Individual, corporate and institutional investors

1.5 Original Components

8. The PAD defined five components or parts (as they are called in the Development Credit

Agreement), as follows:

9. Component 1: Streamlining and Automating Market Infrastructure. This

Component will address the outdated capital market infrastructure constraints by focusing on: (i)

increasing automation of the market through establishing one depository center and consolidating

clearance and settlement; (ii) opening the infrastructure’s inclusion/participation and access; (iii)

minimizing off-market trades and improving price discovery; (iv) facilitating the operational introduction

of investment funds; and (v) building better risk protection through establishing an updated trade

guarantee mechanism. Market infrastructure activities supported under this Component will seek to

maximize compliance with the Group of Thirty standards on clearance and settlement, IOSCO Principles

35-38 and CPSS-10 clearance and settlement principles. In this manner the Project will promote

compliance with best international practices, and just as importantly, ready the reformed market

infrastructure for connectivity to EU systems, when the level of Azeri market activity makes this advisable.

10. Component 2: Updating and Strengthening the Legal and Regulatory Framework. To

maximize the benefits of adopting an adequate legal and regulatory framework, this Component will focus

on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are addressed through

the forthcoming new Capital Market Act and identifying key implementing regulations needed to make the

law effective; (ii) enhancing market confidence and safety by introducing minimum capital requirements

for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry of Finance,

eliminating tax obstacles to capital formation for companies and avoiding double taxation of participants

in investment funds; (iv) allowing pooled investments by insurance companies; (v) fostering

competitiveness by extending market participation through new licenses and broader geographic coverage;

and (vi) ensuring effective coordination with other regulatory authorities in the financial sector (e.g., the

Central Bank of Azerbaijan and the Ministry of Finance Insurance Directorate) to minimize regulatory

gaps and arbitrage opportunities. The EU TACIS project is currently supporting drafting of the new and

approximation of the EU directives in Azerbaijan regulatory framework. This Component of the Project

will largely build on the preparation of the draft Capital Market Act and be strengthened through the SCS

undertaking in 2013 an IOSCO self-assessment and an independent IOSCO assessment at the end of the

Project

11. Component 3: Stimulating Supply. This Component will promote greater use of capital markets

as a financing alternative by focusing on: (i) creating a more appropriate environment to encourage equity

listings and the corporate bond market; (ii) actively reaching out to corporations to promote benefits of

financial market as a funding alternative and working proactively with prospective issuers to assist them in

coming to the market; (iii) promoting development of reliable benchmarks in the government bond market

(in cooperation with IMF); (iv) supporting domestic capital market financing of the large infrastructure

projects, by examining the potential for PPPs; and (v) assessing potential for introduction of new financial

products (e.g., Electronic Traded Funds in the medium term).

14

12. Component 4: Capacity Building. This Component will seek to overcome the low capacity of

market participants and regulators through launching capacity building activities. First, as the SCS is the

major force leading the CMMP reform, it is important to assure that the agency’s human and financial

capacities are sufficient and effective. This Component, will aim to: (i) strengthen the SCS’ knowledge

management, its policy formation processes and transparency of operations; and (ii) strengthen the

institutional capacity of the SCS’ surveillance, reporting and enforcement systems. Second, investor

education is a key factor to the encouraging the breadth and depth of participation in capital markets. It is

therefore necessary to ensure that potential investors are well-informed as to the use, benefits and risks of

securities ownership.

13. This Component will include, inter alia, activities to: (i) improve public awareness of the capital

market by carrying out a series of effective communication programs through media, outreach sessions

hosted by the SCS in major cities of Azerbaijan; (ii) increase potential investors’ understanding of capital

market by series of education seminars and outreach tools to nascent investment funds and insurance

industry; and (iii) promoting the Azeri market to international investors. Third, skilled capital markets

intermediaries are essential to the creation of efficient capital markets. The establishment of high

professional standards for capital markets professionals has a direct influence on the credibility of the

capital market and encourages the inflow of investment funds.

14. The set of proposed measures regarding on-going training and certification under this Component

should provide investors with confidence that the persons they are dealing with have the necessary skills,

knowledge, experience and ethical standards to administer their investments This Component will

support an increase in the professional knowledge base by: (i) developing a capital markets training center;

(ii) gauging the current capacity of the capital markets participants; (iii) establishing curricula for

qualification for licenses; and (iv) developing a sustainability plan for Training Center.

1.6 Revised Components

15. No material changes were made to project components.

1.7 Other significant changes

16. Changes were made to the loan closing date and funds were reallocated between

procurement categories. The revised closing date was July 1, 2016 which was six months beyond the

original closing date of December 31, 2015. Funds totaling USD 440,000 were reallocated, between

procurement categories. The extension of the project closing date was requested to accommodate the

installation of the Capital Market Information System (CMIS) under Component 1 of the Project

“Streamlining and automating capital markets infrastructure”. The work under the CMIS contract

commenced in late February 2015 and installation was estimated to be completed within 12 months

thereby representing a two-month slippage from the original project end date. A formal letter (#13/06-53-

1271) dated March 4, 2015 was received from the Ministry of Finance of the Republic of Azerbaijan

(MOF) requesting extension of the closing date to July 1, 2016 and the reallocation of funds between

procurement categories.

15

17. Project funds were reallocated as follows:

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

category;

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

“Incremental Operating Costs” category

Table 1: Reallocation of Proceeds

Category

Amount of the

Loan Allocated

(expressed in USD)

Current)

Amount of the

Loan Allocated

(expressed in

USD)

(Revised)

Percentage of

Expenditures to be

Financed

(Net of VAT)

(1) Goods 4,300,000

4,700,000

100.00

(2)Consultants' services

including audit and

training

7,600,000

7,160,000

100.00

(3) Incremental Operating

Costs 70,000 110,000 100.00

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

TOTAL 12,000,000

12,000,000 100%

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

18. Preparation of the CMMP took place in an economic climate significantly different from that

of today. In 2010, the corporate bonds market saw eight new issuances making it one of the most active

segments of the capital markets. These new issuances were led by banks, insurance and microfinance

companies. The total amounted to 17.6 AZN million with an average maturity of 1.5 years and an average

interest rate of 14 percent. One bank issued a 0.999 AZN million Eurobond with a maturity of 1 year and

an interest rate of 11 percent. The Azerbaijan Mortgage Fund (AMF) issued 5 and 7 year covered bonds at

3.0 and 3.25 percent respectively3. The CMMP intended to leverage these positive trends in the market

and increase private sector financing through the capital markets as an alternative to bank financing which

was more expensive and offered shorter terms. The bond market remained active but it was apparent by

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

16

early 2015 that there was waning interest in listing equities as the macroeconomic conditions began to

weaken.4

19. The TAL was the appropriate instrument for the implementation of the CMMP. As described

in detail in the PAD, the GoA was committed to improving the capital market infrastructure so that it

would encourage and support securities issuance (debt and equity) as an alternative to bank borrowing.5

The CMMP continued and complemented work focused on the securities and capital markets supported by

IMF, SECO, IFC, EBRD, USAID and EU TACIS. More specifically, the project was designed to address

existing regulatory, infrastructure and capacity gaps identified in the Capital Market Assessment Report

developed with support of the FIRST Initiative in mid-2010

20. Commitment to the project remained high despite economic challenges. In spite of the

prevailing economic challenges facing Azerbaijan during project implementation, the borrower remained

committed to achieving the reforms and structural changes required under the CMMP plan. The level of

commitment is evidenced by the issuance of Presidential Decree #760 (February 3, 2016) which created an

integrated Financial Market Supervisory Authority (FIMSA). FIMSA has been created with regulatory and

supervisory responsibility over banks, non-bank credit institutions, capital markets, payment systems, and

financial monitoring of AML/CFT. Upon approval of the FIMSA Charter on March 11, 2016, the State

Committee for Securities (SCS) had been dissolved. The move was designed to add efficiency to

securities and capital markets regulation and oversight.

21. Appropriate risks were identified at the time of project design. However, macroeconomic

stability and a decline in crude oil prices were neither identified nor anticipated. Given the scope of

the project, the team correctly identified the following core risks:

Stakeholder risks. Failure to secure broad political, industry and investment community would

potentially result in delay or discontinued implementation of the capital markets reform process.

Institutional risks. Unforeseen changes in the SCS leadership structure (both high and mid-level)

could significantly delay portions of the project implementation.

Implementation risks. Given the limited capacity of the SCS there was a potential for delay. The

SCS had no experience leading a broad reform agenda and implementing World Bank Projects.

However, SCS did have successful experience implementing projects with other IFIs

22. The team believed that “the relatively simple design and implementation arrangements”6 would

help mitigate operational risks, while other risks regarding the institutional environment and governance

will be mitigated through the active engagement of the SCS Board of Directors and robust local project

supervision. However, the team did not identify macroeconomic risks that could have an adverse effect on

4 16 bond issuances occurred in the first quarter of 2016 compared to 82 issuances during the same period in 2015. The Manat

devaluations in February and December 2015 negatively impacted investor sentiment, while tighter monetary policy and fiscal

consolidation resulted in a tightening of local currency liquidity and an increase in cost of funds in the period 2H2015-1H2016.

Several IPOs planned for 2015 had been cancelled pending improved conditions. (See Aide-Memoire June 6-10, 2016)

5 See PAD page 12, Paragraph 37

6 See PAD page 12, Paragraph 34

17

both project implementation and market participation. An unanticipated significant drop in oil prices7

triggered a series of negative consequences including sharply reduced economic activity, tightened

liquidity and significant distress in the banking sector which resulted in several high profile bank closures.

With the benefit of hindsight, it is apparent that this has had a significant negative affect on the expected

uptake and issuance of corporate debt and securities.

2.2 Implementation

23. In spite of some delay in implementation, all deliverables were realized by the revised project

end date. As mentioned, in spite of unforeseen economic challenges most of the project deliverables were

completed on time. In April 2015, the project team sought a six month extension in the project closing

date.8 The extension was requested due to a delay in procurement and contracting of a consultant for the

IT solution related to the capital markets infrastructure system (CMIS) under component 1. By June 10,

2016, all deliverables under components 1, 2 and 3 were completed. Two remaining items under

Component 4 were completed before project closing. These were (i) recommendations of expanding

commercial b2b consultancy services of the CMTC, and (ii) Financial Literacy Survey.

24. Delays were encountered in the early stages of the project which are attributed to a more

complex preparation process than anticipated and a delayed launch in the CMIS. The disbursement

schedule lagged almost 12 months behind initial projections and persisted until the end of 2015 Q3 when

disbursements began to pick up. In addition to project complexities cited by the team, it is understandable

why such a project would experience delays given the overarching threat of financial crisis and two

currency devaluations in February and December 2015. In spite of these challenges, the project had

achieved essentially all its objectives by the revised closing date, which was only six months beyond that

of the original closing date.

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

25. At the time of approval the Project was relevant to country needs and the M&E framework

supported the assessment of progress towards the achievement of the PDO. At the time of approval,

Azerbaijan had largely weathered the financial crisis in 2008 and experienced a 9.3% GDP growth rate in

2009. However, growth in the non-oil sectors had slowed down to 3.2% in 2009 compared with double

digit growth during the period 2006-2008. As Azerbaijan had already begun instituting economic reforms,

strengthening of the capital markets by modernizing, facilitating access and promoting transparency was a

logical step towards market expansion and encouraging non-bank long-term financing. The banking

system, however, was not a primary focus of these efforts.

7 Crude oil prices began a steady trend upward starting in early 2002 and dipped in early 2007 when the financial crisis hit.

Subsequently, there was a rapid and dramatic rise to a peak price of $139.05* in June 2008 which was followed by an equally

dramatic drop to $35.23* in February 2009. Since then, the price per barrel has risen to about $100* and has settled to about

$52* as of January 2, 2017 *(2016 Dollars)

8 See Report No: RES18549 Restructuring Paper on a Proposed Project Restructuring of Capital Markets Modernization Project

Loan IBRD-80240 Board Approval: March 17, 2011 To the Republic of Azerbaijan

18

26. Monitoring of the CMMP TAL was conducted by the PIU, located within the State

Committee for Securities (SCS), in close collaboration with the Government and World Bank. The

SCS was responsible for project implementation and M&E. The PIU was established within the SCS and

had direct responsibility for procurement, disbursement, accounting and reporting to the SCS, Government

and World Bank. The Internal Audit Department of the SCS was specifically given the responsibility of

M&E tracking and reporting. It was also responsible for ensuring that the implementation units were

integrated into the management information results aggregation process. Reporting was provided on a

regular and timely basis. The project was also closely monitored by the World Bank. Two ISR missions

per year were completed at regular intervals during Project implementation for a total of ten missions.

27. Of three PDO indicators, two were achieved, and one fell short. The indicator which fell short

of its target is “number of companies with listed equity”. At the time of project closing, five companies

had listed equity which fell short of the target of 8-10. It is not hard to see why this was not achieved

given the prevailing macroeconomic conditions. Poor investor sentiment, low market liquidity and

uncertainty in the stability of the Manat are not conducive to IPOs or other forms of equity issuance. All

other indicators linked to the Project’s four components were either met or surpassed – a significant

achievement given the uncertain macroeconomic conditions during project implementation.

2.4 Safeguard and Fiduciary Compliance

28. Fiduciary performance by the Borrower was satisfactory. The PIU provided financial

reporting on a timely basis in a form and format satisfactory to the World Bank Financial Management

Specialist. All annual audits were conducted by a reputable firm and all audit opinions on the Project’s

financial statements were unqualified. Accounting records are maintained in a 1C based accounting system

for SCS components and accounting records were consistently found to be accurate and with adequate

controls to ensure accuracy of accounting records and reports.9

ISR FM Rating

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

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

2.5 Post-completion Operation/Next Phase

30. At the time of the drafting of this ICR, The GoA is in discussions with the World Bank for an

Advisory Services and Analytics (ASA) package for the purposes of financial sector stabilization and

development. Given the decline in macroeconomic conditions in Azerbaijan, the shift to focus on broader

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

2016

19

issues to stabilize the financial markets appears to be an appropriate and much needed follow up to the

CMMP.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

Dimension Rating

Relevance of Objectives Moderate

Relevance of Design Substantial

Relevance of Implementation Substantial

Overall Relevance Rating Substantial

Sub-Rating for Relevance of Objectives: Moderate

31. The objectives of the Project have less relevance to current Government priorities than when

it was approved. At the time of project approval, the economic situation in Azerbaijan was reasonably

stable. At the time, emphasis was placed on diversification of the local economy and fostering the

development of alternative sources of financing to support growth in the private sector. The deepening of

the capital markets was accepted as a path forward to create a more efficient means for companies to

obtain cheaper long term capital and encourage growth in the non-oil economy. However, the

macroeconomic environment has changed significantly and there is greater need to stabilize the economy

and the financial sector generally to prevent further deterioration. Currency devaluation in 2015 has put

the banking sector under enormous pressure and has contributed to the failure of some institutions.

Markets are virtually illiquid and companies are not accessing the equity markets and are conducting

limited bond issues in the bond market. This is due to the currently high degree of economic uncertainty

and waning confidence in the financial sector, manly banks.

Sub-Rating for Relevance of Design: Substantial

32. The Project’s design correctly placed emphasis on institutional strengthening, reform of the

regulatory regime and streamlining market infrastructure. As mentioned earlier in this document,

gaps existed in the regulatory and institutional structures supporting capital markets development and

growth. The CMMP project leveraged off of prior work that had identified these weaknesses and focused

on critical elements that would serve as a platform for the issuance of debt and equity securities. Among

these elements are capacity building, streamlining and automation of the capital market infrastructure

including the trading platform, strengthening the legal and regulatory framework and educating business

and the public, generally, on capital markets operations and corresponding benefits. The level of

transparency achieved by the project should not be undervalued given the prevailing adverse

macroeconomic conditions that has shaken confidence in the banking sector and financial markets. It is

also important to note, however, that there has been lower than originally expected market activity and

participation due to these poor conditions. Uncertainty over the strength of the Manat as well as the

viability of several large retail banks (following a series of attempted restructurings and liquidations) has

dogged the domestic financial sector.

Sub-Rating for Relevance of Implementation: Substantial

20

33. Throughout project implementation, the SCS, Baku Stock Exchange, National Depository

Center and the Bank remained committed to meeting project objectives and in spite of a challenging

environment, substantially all objectives were met within budget and on time. The CMMP, has

established a streamlined capital market trading platform underpinned by a revised legal framework and

regulations that support its operations. However, the prevailing economic climate is not attractive to

potential issuers of securities and more fundamental financial sector strengthening work is needed at this

time. Related challenges such as instability of the banking sector and two currency devaluations had a

negative effect on the banks’ ability to attract deposits. Several commercial banks have been declared

insolvent and overall confidence in the financial sector is low. Measures to stabilize the financial sector,

generally, are very much needed at this time. As mentioned above, WB is working with the GoA to

develop an ASA package focused on financial sector stabilization to address these issues.

3.2 Achievement of Project Development Objectives

Overall Achievement of PDOs Rating: Substantial

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

PDO outcomes were achieved despite considerable challenges. Responsible

Institution

PDO Indicator Description –

Indicator

Definition

End Target

(Approved)

Actual

Result

Level of

Achievement

(ICR’s

Assessment)

Rating

PDO: Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption

of an effective capital markets regulatory framework and infrastructure.

Internal

Audit

Department

of

SCS

1. Increased

issuance of

corporate

bonds

Outstanding

Amount of

Corporate Debt to

2010 Non-oil

GDP

3.80% 14.1% Fully achieved High

Internal

Audit

Department

of

SCS

2. Increased

number of

companies

with listed

equity

(cumulative)

Number of Listed

Companies

8-10 5 Partially achieved Substantial

Internal

Audit

Department

of

SCS

3. Improved

price

transparency

Ratio of

Competitive

Transactions/Total

Equity (Non-

Block

Transactions)

90% 100% Fully achieved.

High

35. PDO: “Increase the use of equity and corporate debt as financing and/or investment instruments

through the adoption of an effective capital markets regulatory framework and infrastructure”

21

36. PDO Indicator one: Increased issuance of corporate bonds. There has been an increase in the

issuance of securities during the life of the project based on results tracked under the indicator

“Outstanding Amount of Corporate Debt to Non-oil GDP”. The baseline in 2010 was 1.9%. The

percentage rose steadily during the life of the project and was 14% as of May 2016. This was down from

a high of 24% in 2015 and highlights the quickly changing macroeconomic environment as well as the

short-term nature of corporate debt issues. Nonetheless, it is significantly higher than the target of 3.8%.

In retrospect this target, although a doubling of the 2010 baseline, may have been set at a more ambitions

level considering the fact that the result of 14% has been achieved under the current challenging economic

conditions.

Outstanding Amount of Corporate Debt to 2010 Non-oil GDP (actual)

2011 2012 2013 2014 2015 May 2016

4.9% 4.1% 7.3% 21.4% 24% 14%

37. PDO Indicator two: Increased number of companies with listed equity. This indicator fell short of

its original target range of 8-10 companies with listed equity. It is not surprising that there was a

slowdown in equity issues given the lack of appetite and ability of companies to conduct an initial public

offering. Unanticipated price volatility, lack of market confidence and tightening liquidity contributed to a

stagnation in the equity markets.

38. PDO Indicator three: Improved price transparency. This indicator achieved 100% of its target.

The indicator was defined as the ratio of competitive transactions to total equity. “Competitive

transactions” are non-block transactions as block transactions are not considered competitive and

transparent. However, the BSE has taken measures that are designed to make block (or cross trades) more

competitive by allowing a 60 minute price discovery period to allow counter-bid/offers and prepay

requirements have been eliminated for purchase orders. Whether this actually increases competitiveness

and transparency of block trades remains untested in the currently illiquid market.10

Intermediate Results Indicators

39. Component 1: Streamlining and Automating Market Infrastructure. The rating for this

component in the project’s final ISR was Satisfactory and targeted results had been achieved by project

closing. However, this comment was rated as moderately satisfactory in two consecutive ISRs, November

22, 2014 and May 18, 2015, respectively. The implementation of new (CMIS) is a critical step in advancing and

supporting capital market development as it main focus/function is aimed at substantial upgrading of trading,

clearance and settlement, depository and surveillance functions. The procurement process experienced delays in

finalizing the supporting technical specifications and the bid invitation which was originally planned for September

2013 was delayed until April 2014.

Intermediate Indicators for Component 1. Responsible

Institution

Intermediate Indicator End Target

(Approved)

Level of

Achievement

Rating

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

22

(ICR’s

Assessment)

Internal

Audit

Department

of

SCS

1. Ratio of market

participants

electronically linked to

market infrastructure

(trading, clearing and

settlements)

100% Fully achieved High

40. Component 2: Updating and Strengthening the Legal and Regulatory Framework. The rating

for this component in the project’s final ISR was Satisfactory and targeted results had been achieved by

project closing. This component had experienced some minor delay during project implementation as the

review and consultation process within the Cabinet of Ministers and the Presidential Administration was

longer than anticipated.

Despite the delay in the enactment of the Law, the SCS and the consultancy firm had in parallel advanced

thirty required regulations while awaiting the Law’s passage.11

Intermediate Indicators for Component 2 Responsible

Institution


(Approved)

Level of

Achievement

(ICR’s

Assessment)

Rating

Internal

Audit

Department

of

SCS

2. Enactment of a new

Capital Market Act

Enacted Fully achieved High

Internal

Audit

Department

of

SCS

3. Promulgation of

capital markets

regulation required

upon enactment of

Law

Regulations

Promulgated

Fully Achieved High

41. Component 3: Stimulating Supply: The rating for this component in the project’s final ISR was

Satisfactory and results were fully achieved by the time of project closing.. However, this comment was

rated as moderately satisfactory in two consecutive ISRs, January 11, 2014 and November 22, 2014,

respectively. The objective of Component 3 is to stimulate supply of issuers in the Azerbaijan capital

market and its core activity is the Listing Advisory Program (LAP) which an effort to focus available

resources on increasing listings on the Baku Stock Exchange. The LAP was approved in March 2013 and

formally launched in April 2014 after a 6 months delay which resulted from ) as a result of

recommendations made in the Inception Report to shift certain deliverables into this unified program. By

September 2014, realignment of these deliverables were agreed.

Intermediate Indicators for Component 3 Responsible Intermediate Indicator End Target Level of Rating

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

23

Institution (Approved) Achievement

(ICR’s Assessment)

Internal

Audit

Department

of

SCS

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

15 Companies Fully achieved High

42. Component 4: Capacity Building. The rating for this component in the project’s final ISR was

Satisfactory, and was rated at Satisfactory for the life of the project. The Capital Markets Training Center

has been with some slight delay and curricula for the Training Center have been adopted and a train-the-

trainers program enacted. A nation-wide education program was approved by the SCS and has been

continued under FIMSA. FIMSA leadership confirmed that in addition to university curricula, an

agreement was made with the Ministry of Education to include security markets materials to school books

and to explore expanding the curriculum to secondary schools. The 100US$ million SOCAR bond issue

in 2016 played an important role in raising public awareness of the bond market due to SOCAR’s

visibility.

Intermediate Indicators for Component 4 Responsible

Institution


(Approved)

Level of

Achievement

(ICR’s Assessment)

Rating

Internal

Audit

Department

of

SCS

Increase of the threshold

pass rate of the Financial Certification examination for market participants

75% Fully achieved High

Internal

Audit

Department

of

SCS

Consumer Awareness of

Capital Market

Instruments12

45 Fully Achieved:

59.38

High

3.3 Efficiency

Rating for Efficiency: Substantial

43. The project achieved a high level of cost effectiveness given the multitude of complex

deliverables competed within budget. However, the project required an extension of six months due

to early delays. The project helped facilitate the modernization of the debt and equity trading platform for

the BSE and helped inform the creation of the Financial Markets Supervision Authority (FIMSA) and

subsequent liquidation of the SCS. However there was some delay experienced in the early stages of the

project due to unanticipated complexities surrounding the TOR, tendering and ultimate installation and

12 Using the Capital Markets Awareness Index.

24

testing of the CMIS system. The successful completion of the later tasks necessitated a six month

extension of the project closing date. Aside from this particular delay, the amount of progress made was

considerable. For example, the new “On Securities Markets” Law was adopted on July 14, 2015. Twelve

new NDC and post-trading system rules and thirty implementing regulations were adopted in support of

the new securities law.

44. The markets are currently too illiquid to perform an economic analysis to assess the cost

savings accruing to issuers of corporate debt or equities vis-à-vis the alternative of short term bank

financing. An economic analysis calculating the cost savings benefits to securities issuers’ vis-à-vis

reliance on bank debt would have been a useful measure to quantify current savings and perhaps

extrapolate future benefits. Furthermore, bank lending activity has declined due to macroeconomic

uncertainly, recent devaluations of the Manat and illiquidity.

3.4 Justification of Overall Outcome Rating

Rating: Satisfactory

Overall this TAL is rated as Satisfactory.

Dimension Rating

Relevance Substantial

Achievement of Objectives Substantial

Efficiency Substantial

Overall Outcome Rating Satisfactory

45. The overall outcome rating for the project is Satisfactory. This is based on its Substantial rating

for Relevance, Substantial rating for Achievement of Objectives, and Substantial rating for Efficiency.

The project’s objective of strengthening key institutions continues to be highly relevant for the GoA’s and

World Bank’s development priorities, and the project objectives were substantially met. Revisions to the

project completion data was needed – and reflects the Bank’s responsiveness to the project and

implementing institutions. There were moderate shortcomings primarily in the project’s efficiency

evidenced by the six month extension.

3.5 Overarching Themes, Other Outcomes and Impacts

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

(b) Institutional Change/Strengthening

46. During the implementation phase, the responsible agency, SCS, was dissolved and its

responsibilities transferred to the newly established Financial Market Supervisory Authority

(FIMSA). The Decree of the President of Azerbaijan #760 dated February 3, 2016 called for the creation

of an integrated Financial Market Supervisory Authority (FIMSA) with regulatory and supervisory

responsibility over banks, non-bank credit institutions, capital market, payment systems and financial

monitoring for AML/CTF. Upon approval of the FIMSA Charter on March 11, 2016, the State Securities

Committee (SCS) was dissolved with FIMSA designated as its legal successor. Prior to this, the World

Bank had expressed concern that the oversight powers of the SCS (as they related to inspection and

25

investigation of market players) were impeded by the Inspections Law13

. The FIMSA has a much broader

mandate than the SCS and is responsible for ensuring the effective functioning of the financial markets, as

well as protection of the rights of creditors, investors and insurers.14

This institutional change is viewed as

an improvement that will have a positive effect on capital markets oversight and securities price

transparency. Experienced leadership within SCS (many of whom were directly involved in the CMMP)

were assigned new roles in FIMSA thereby retaining the knowledge and experience of key managers.

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

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops – No Stakeholder workshop

was conducted. However a project closing event was held in Baku on November 4, 2016. See Annex 6.

4. Assessment of Risk to Development Outcome

Rating: Significant

47. The overall risk the project outcomes are rated as Significant due to the struggling banking

and financial sector. The devaluation of the Manat, lack of liquidity in the financial markets and the

draining of deposit accounts in retail banks have shaken popular confidence in the banking system. Direct

stakeholders and market participants have reported that the lack of regulatory transparency and uncertainty

in the markets are major factors contributing to the anemic state of the financial sector. Several large banks

have been declared insolvent thereby eroding confidence in the banking sector.15

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry

Rating: Moderately Satisfactory

48. The Bank correctly assessed the relevance of the PDO at the time of project design as well as

the strategic relevance of the objective to broaden and deepen the capital markets in Azerbaijan.

This was a timely and relevant project from inception. The project is well aligned with the FY07-10 and

FY11-14 Country Partnership Strategies16

and their common objective of strengthening the non-oil

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

2014.

14 See: http://en.fimsa.az/pages/10

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

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

Partnership Strategy for Azerbaijan FY11-14 (56246 – AZ).

26

economy through changes in a wide range of areas including financial markets. In the case of the CMMP,

the focus was on the development of the securities markets. At the time of project design, this was a highly

relevant objective. However, over the course of project implementation the financial sector generally

began to weaken under the pressure of lower economic activity, tighter liquidity and distress in the

banking sector

49. The Bank team failed to identify potential macroeconomic risks that could have an adverse

effect on the overall success of the project. During implementation, an unanticipated significant drop in

oil prices triggered a cascade of negative effects including a sharp reduction in economic activity,

tightened liquidity and significant distress in the banking sector. As a result of the increasingly adverse

macroeconomic conditions, there was and remains an acute need for financial market stability and

management and oversight of the banking sector. This threatened the success of the project as well as cast

some question on project relevance vis-à-vis the prevailing economic issues and distress in the financial

and banking sectors.

(b) Quality of Supervision


50. The Bank team actively supervised project implementation and was responsive to client

needs. The project was closely monitored by the Bank. Two ISR missions per year were completed at

regular intervals during project implementation for a total of ten missions. A review of project documents

indicates regular and active communication between the Bank, the PIU and implementing agencies. The

ISRs provided straightforward assessments of project progress and highlighted potential issues or areas on

concern. The project was led by four TTLs at varying points, with most of them supervising the project

from Washington DC. A variety of senior technical staff from the Bank joined implementation missions to

ensure quality control of the technical aspects of components, as detailed in ISRs and AMs. Procurement

and Financial Management specialists were present in the region. Project implementation took place in a

very challenging macroeconomic environment and the Bank team provided adequate support and expertise

to bring the project to a satisfactory completion.

51. Fiduciary aspects of the project were managed in a timely manner and all audits were clean. As mentioned earlier in this document financial reporting was submitted by to the World Bank Financial

Management Specialist on a timely basis in the proper form and format. All annual audits were conducted

by a reputable firm and all audit opinions on the Project’s financial statements were unqualified.

Accounting records were consistently found to be accurate and with adequate controls to ensure accuracy

of accounting records and reports. A review of project–related documents and correspondence indicate a

close working relationship between the Bank’s Financial management Specialist and the PIU.

(c) Justification of Rating for Overall Bank Performance

Rating: Moderately Satisfactory

52. The Bank’s overall performance is assessed to be Moderately Satisfactory based on the

ratings for quality at entry, quality of supervision, and the overall outcome rating (see table below).

The CMMP project was relevant at the time of time of its inception and had the solid backing the GoA and

the respective implementing agencies. Substantially all targets were met and some were surpassed. Delays

were experienced early in the preparation stage which delayed the launch of the procurement process for

27

the capital markets information system (CMIS). Some delay was also experienced in the launch of the

national public awareness program for capital markets. The project team requested a six month extension

of the closing date to allow for the completion al all project components. The extension was reasonable

given the unexpected challenges that were encountered and the high quality of deliverables. Substantially

all outcomes were achieved in spite of unforeseen macroeconomic challenges including falling oil process,

tightened liquidity and a deteriorating banking sector. The Bank team did not account for these

macroeconomic or financial sector risks during project design. Consequently, the project is less relevant

today given the current market conditions. The successful completion of the CMMP can be largely

attributed to strong counterpart commitment to the project.

Dimension Rating

Quality at Entry Moderately Satisfactory

Quality at Supervision Satisfactory

Overall Bank Performance Moderately Satisfactory

5.2 Borrower Performance

(a) Government Performance


53. The Government’s performance is rated as Satisfactory. The Azerbaijan Ministry of Finance

demonstrated ownership and commitment to the project during preparation and led project implementation

via a PIU established at the SCS. It maintained the PIU with staff responsible for project coordination,

procurement, financial management and M&E. The project was declared effective on Nove. 7. 2011, eight

months after Board approval, which is a period longer than average for this type of project and was the

result of a lengthy approval process and delays in establishing and staffing the PIU. Following Bank

Board approval, the Borrower initiated a lengthy review process of the Loan document which included the

Ministry of Finance, Ministry of Education, Ministry of Justice, and the Cabinet of Ministers. The

initiation of the CMMP was also dependent on the then-anticipated Presidential decree endorsing the State

Program on the Development of the Securities Markets.17

(b) Implementing Agency or Agencies Performance


54. The Azerbaijan State Committee for Securities (SCS) was the primary implementing agency

for the CMMP. The overall implementation of the CMMP was delayed during the preparation phase. The

17 Decree of the President of the Republic of Azerbaijan endorsing the State Program on the Development of the Securities

Market of the Republic of Azerbaijan in 2011-2020. May 16, 2011,18:35

28

establishment and staffing of the PIU proved to be a more problematic than anticipated.18

In March 2011,

two specialists were identified but could not be retained until project effectiveness. As the process edged

forward, one of the specialists took another position and notified SCS of this decision in late August.

Similarly, the procurement of the 1C financial system and the search for consultants for the task “Creation

of General Framework for Stimulating Supply and Capacity Building of Capital Markets”, took longer

than what was originally anticipated. The unexpectedly complex preparation process also delayed the

launch of the procurement process for the CMIS. The setbacks experienced early in the project had a

ripple effect that ultimately required an extension of the closing date by an additional six months.

55. Despite early implementation delays and unanticipated negative macroeconomic conditions,

SCS remained fully committed to the project and achieved all deliverables. As mentioned earlier in

this document, commitment to the project remained high despite economic challenges. The borrower

remained committed to achieving the reforms and structural changes required under the CMMP plan. The

creation of the integrated FIMSA resulted in an improved agency with regulatory and supervisory

responsibility over banks, non-bank credit institutions, capital market, payment systems and financial

monitoring for AML/CTF.

(c) Justification of Rating for Overall Borrower Performance


56. Overall Borrower performance is assessed to be Satisfactory. (see table below).With a high

level of commitment, the borrower undertook and implemented complex reforms in a difficult

environment which was exacerbated by falling oil prices, tightened liquidity and a weak financial sector.

Despite delays experienced during the initial phase of the project, significant achievements were realized

and internal capacity ultimately improved.

57. As of July 1 (the amended closing date), all the deliverables envisioned under the project had been

delivered and endorsed by the implementation agency. These include:

• Component 1: the adoption of 31 new regulations by the State Committee for Securities (SCS)

following the enactment of the new Law on Securities Market, which introduced new standards for

capital market operation and new requirements for licensing and operations of market participants;

• Component 2: successful installation of the new integrated Capital Market Information System (CMIS)

and its satisfactory testing result,

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

mission;

• Component 4: finalization of the national capital market education program and launch of the

respective public financial awareness activities; the development of strategic plan for a sustainable

operation of the Capital Market Training Center (CMTC).

18 In March 2011, two specialists were identified but could not be retained until project effectiveness. As the process edged

forward, one of the specialists took another position and notified SCS of this decision in late August.

29

58. Procurement under the project has been completed. Disbursement of the loan funds are at 98% in

June 2016, with several outstanding payments due in the next few months. Funds under the capital market

component of the FSMP grant TF00975 has been fully disbursed by October 2015.

Government Performance Rating Satisfactory

Implementing Agency Rating Satisfactory

Overall Borrower Performance Rating Satisfactory

6. Lessons Learned

59. When a country’s economy is reliant on a particular commodity or sector, it is critical to

assess the risks associated with both short and long-term price fluctuations. Azerbaijan’s economy

has been and remains highly reliant on oil exports. Based on customs data, petroleum products represented

over 90% of the country’s exports in 2011.19

Sustained downward price movements would have

significant effects on the country’s national budget and, as experienced during project implementation,

negative effects on GDP, pressure on the national currency, tightened liquidity and pressure on the

financial sector. As a result, the prevailing economic conditions are not conducive to participation in the

capital markets. The countries’ vulnerability to macroeconomic conditions must therefore be identified

and, if available, a mitigation plan should be developed.

60. It is important to fully assess all required actions during the preparation stage of a project

and identify and assess the implementing agency’s internal capacity to execute or manage all

required functions. The project experienced initial delays largely due to a protracted process requiring

approval from multiple government authorities before loan signing and staffing the PIU. The procurement

process also proved to be challenging in the early stage as the PIU team lacked the capacity and had taken

time to become familiar with requirements and standards. Tendering and contracting also proved to be

more involved that initially anticipated. As a result, the project got off to a slow start and, despite efforts

to catch up, required a six month extension. The scale and scope, as well as the timeline, of a project

should be well aligned with the implementing agency’s capacity for coordination, procurement, contract

management, and financial management. The Bank should consider up-front training of key government

operational staff or temporarily embedding experts in the PIU if necessary to help support the weaker

aspects of project implementation

61. Strong government commitment to a project agenda is a vital aspect in helping assure the

success of Bank-sponsored projects. Strong ownership of this TAL helped to make sizable progress

which included decisive legal and regulatory actions by the Government including the President, Cabinet

of Ministers and the SCS/FIMSA. It is especially noteworthy that a high level of commitment was

maintained in the face of macroeconomic and financial sector distress. If not for the Government’s

perseverance the project may very well have been sidelined in order to shift resources to other pressing

issues.

19 Economist Intelligence Unit, Country Risk Services: Azerbaijan. August 2016.

30

62. Capacity building and institutional reforms are not only more challenging to measure, but

often take longer to be realized. The Bank should dedicate resources to monitoring and tracking such

projects after closure since impacts may be realized more in the medium-term as opposed to the short term

just after closing. This could help account for longer development periods needed for capacity building

and institutional reforms to be fully realized. Teams should also be encouraged at the design stage to

consider indicators and M&E arrangements that will allow for the tracking of results and follow up after

closing.

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

(a) Borrower/implementing agencies – No Comments received

(b) Cofinanciers – No Comments received

(c) Other partners and stakeholders – No Comments received

31

Annex 1. Project Costs and Financing

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

Components Appraisal Estimate

(USD millions)

Actual/Latest

Estimate (USD

millions)

Percentage of

Appraisal

Component 1: Streamlining and

Automating Market Infrastructure 6.05 7.72 127%

Component 2: Updating and

Strengthening the Legal and

Regulatory Framework

1.89 1.42 74%

Component 3: Stimulating Supply 1.86 1.70 91%

Component 4: Capacity Building 3.84 2.70 58%

Total Baseline Cost 13.64 13.56 99%

Physical Contingencies

0.00 0.00

0.00

Price Contingencies

0.00 0.00

0.00

Total Project Costs 0.00 0.00

Front-end fee PPF 0.00 0.00 0.00

Front-end fee IBRD 0.03 0.03 100%

Total Financing Required 13.64 13.56 99%

(b) Financing

Source of Funds Type of

Cofinancing

Appraisal

Estimate

(USD millions)

Actual/Latest

Estimate

(USD millions)

Percentage of

Appraisal

Borrower 2.2 2.2 100%

International Bank for Reconstruction

and Development 12.00 11.96 99.6%

SECO (Component 2 and 3) 1.60 1.6 100%

Total: 15.80 15.76 99.7%

32

Annex 2. Outputs by Component

The following are Key deliverables by Component:

Key deliverables Component 1:

- The country’s post-trading architecture and environment was consolidated making the National

Depository Centre (NDC) the sole CSD for government and corporate securities, providing

clearing and settlement functions to members;

- The central role of the NDC was supported by converting it to the non-for-profit infrastructure

organization serving its members and local issuers. All other registry-keeping licenses in the

country were abolished. The securities numbering and lean registration were transferred to the

NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems

ensuring DVP principles of both government and corporate securities.

- The securities numbering function was transferred to the NDC and its methodology was

harmonized with internationally recognized ISIN standards; the NDC is a member of the

Association of National Numbering Agencies.

- Implementation of the renewed post-trading procedures complying with the international best

practices and newly adopted securities market legislation;

- Drafting extensive, best-practices based TOR for the new electronic trading/post-

trading/surveillance platform comprising.

- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement,

issuing functionalities in the market in strict compliance with the newly adopted securities market

legislation;


- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law

harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing

regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3)

and National Depository Centre (as a part of the Component 1) fully complying with the country’s

new governing legislation;

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


- Re-organization of the BSE listing tiers and adoption of the new listing requirements;

- BSE trading (subscription, public offer and secondary market) rules and procedures enabling

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

market regulation;

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

platforms.


- Conducting of the Nation-wide Education Program, including producing and disseminating printed,

visual and interactive study materials for schools, universities and general public, establishment of

the Financial Laboratory at the Azerbaijan State University of Economics;

- Establishing Capital Markets Training Centre (CMTC);

33

Annex 3. Economic and Financial Analysis

The markets are currently too illiquid to perform an economic analysis to assess the cost savings accruing

to issuers of corporate debt or equities vis-à-vis the alternative of bank financing. By 2013, the twin

shocks of low oil prices and currency devaluations had brought to an end the growth in bank credit

availability that the markets had enjoyed up to that point.

Therefore, as both the securities and banking sector are under severe pressure and uncertainty, it is

impossible to conduct an analysis of relative savings that issuers of securities could realize over the

alternative of bank financing.

34

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit

Alina Nagdimunov Consultant GTCDR

Altantsetseg Shiilegmaa Economist GMF02

Angela Prigozhina Senior Financial Sector Specialist - TTL GFM09

Arben Maho Procurement Specialist GGO03

Deepal Fernando Consultant GGO03

Dulguun Byambatsoo Consultant GGO20

Farid Bakhshiyev Economist ECSF2

Gantuya Paniga Senior Program Assistant EACMF

Ghada Youness Senior Counsel LEGLE

Jianjun Guo Senior Procurement Specialist GGO08

Johanna Jaeger Senior Financial Sector Specialist GFM03

Joseph Huntington La Cascia Senior Procurement Specialist GGO03

Joseph Paul Formoso Senior Finance Officer CTRLA

Ketut Ariadi Kusuma Senior Financial Sector Specialist GFM08

Lars Jessen Lead Debt Specialist GMF13

Michael Edwards Adviser GFMDR

Michael Engelschalk Consultant GGO15

Nasreen Chudry Bhuller Program Assistant GFM03

Robert H. Singletary HQ Consultant ST GFM10

Sabina Vagif Majidova Program Assistant ECCAZ

Sandro Nozadze Procurement Specialist GGO03

Sau Ngan Wong Senior Counsel GFM02

Stephen Francis Pirozzi Senior Monitoring and Evaluation Specialist GFMSO

Tanja Boskovic E T Consultant ECSPF - HIS

Tural Jamalov Senior Financial Management Specialist GGO21

Uzma Khalil Senior Financial Sector Specialist GFM01

Yagut Iltifat Ertenlice Procurement Assistant ECCAZ

Yi Dong Senior Financial Management Specialist GGO20

Zahid Hasnain Senior Public Sector Specialist GGO15

(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) Le

Lending

FY10 3.10 26,023.63

FY11 27.96 173,689.25

35

Total: 31.06 199,712.88

Supervision/ICR

FY11 7.01 50,653.03

FY12 14.38 136,454.66

FY13 17.34 109,879.30

FY14 11.15 99,207.36

FY15 12.95 77,346.30

FY16 12.26 89,507.74

FY17 6.90 45,272.48

Total: 81.99 608,320.87

Overall Total: 113.05 808,033.75

36

Annex 5. Beneficiary Survey Results

No official survey was administered. However, an ICR mission in Baku20

from October 17-21, 2016

included meetings with the stakeholders listed below.

The main objectives of the mission were to:

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

ICR.

b) Use the findings of these meetings in concert with information provided during and subsequent to

the June 2016 ISR mission to assess the achievement of project objectives and identify measurable

results for inclusion in the ICR.

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

Name of Organization Name of Representative Title of Representative

1. Financial Market

Supervisory Authority

and Project

Management team

Mr. Ilgar Muradov Deputy Board Director

Mr. Bakhtiyar Azizov Project Manager, Head of Supervisory

Board of National Depository Center

Mr. Fariz Azizov PIU Manager, Chairman of Baku Stock

Exchange

2. Azerbaijan Mortgage

Fund

Mr. Samir Rzayev Head of Treasury

3. Demir Bank Mr. Elshad Ibrahimov Head of Treasury

4. Rabita Bank Mr. Ogtay Gasimov Head of Treasury

5. Pasha Bank Mr. Ivan Ukhlianidza Deputy Head of Investment Banking

Department

Mr. Mansur Mammadov Chief Risk Officer

6. Finex Group Mr. Farid Hamidov Chairman of the Board, Finexkredit

Mr. Vugar Zeynalov

7. European Bank for

Reconstruction and

Development

Ms. Ayten Rustamova Senior Banker

8. AXA MBASK

Insurance

Mr. Selcuk Adiguzel Chief Executive Officer

Mr. Fuad Musa Director of Legal & Finance

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

37

Annex 6. Stakeholder Workshop Report and Results

A closing event was held in Baku on November 4, 2016. Below are links to local media reports as well as

a WB project impact video. Two sample articles are also included.

WB project impact video:

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

Report on the website of the implementation agency

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

Media reports (in English and Russian)

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

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

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

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

project/

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

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

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

kapitala-infrastrukturu/

Government of Azerbaijan, World Bank conclude implementation of Capital

Markets Modernization Project

04.11.2016 [15:11]

A+ A

–

Baku, November 4, AZERTAC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

http://azertag.az/en

38

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

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

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

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

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

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

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

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

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

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

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

the team leader for the project.

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

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

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

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

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

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

protection practices.

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

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

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

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

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

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

Manats from the domestic capital market.

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

Modernization Project

© Content from this site must be hyperlinked when used.

39

Azerbaijan, WB hail implementation of Capital Markets Modernization

Project

4 November 2016 17:58 (UTC+04:00)

571

By Nigar Abbasova

The development of the capital market, which is considered to be a multi-faceted sector of the economy, is currently

in focus of relevant financial authorities of Azerbaijan.

The results of the Capital Markets Modernization Project (CMMP) supported by the World Bank and Switzerland’s

State Secretariat for Economic Affairs (SECO), was at core of discussions at the conference hosted by Azerbaijan’s

Financial Market Supervisory Body (FMSB) and the World Bank (WB).

The CMMP for Azerbaijan was aimed at the increase of the use of equity and corporate debt as financing or

investment instruments through the adoption of an effective regulatory framework of the capital market.

Head of FMSB Rufat Aslanli addressing the event said that the project has significantly enhanced the potential of

Azerbaijan’s capital market, providing organizational and operational support to modernization of the market.

However, the authority believes that the country needs implementation of additional measures in this direction.

Aslanli mentioned that the main objective is to attract those, who will be interested in the use of the potential of the

market.

SECO Deputy Regional Director for South Caucasus Simone Haeberli, speaking at the event said that the secretariat

is ready to implement new projects of technical assistance to help Azerbaijan solve the most difficult issues existing

in the sphere.

Haeberli said that Azerbaijan and Switzerland have been cooperating effectively for already 25 years, including the

cooperation within the SECO, which covers the microeconomic policy and ensuring financial stability. She

40

underlined that modern and transparent capital markets are now more important for Azerbaijan than at the time

when the SECO started implementation of the project.

Capital market, which stands for the market for buying and selling of equity and debt instruments, is vital to the

functioning of an economy, since capital is a critical component for generating economic output.

World Bank’s Practice Manager for Finance and Markets Rolf Berhnd, in turn, said that one of the main functions

of the WB is improvement of conditions for small and medium-scale entrepreneurs, mentioning that capital markets

are considered to be one of the main tools for reaching the goal. He mentioned that capital market is one of the key

vehicles for domestic and international investment mobilization, which requires concerted efforts, holistic reforms

and time to do it right. Berhnd said that the implementation of the reform of the capital market is quite a difficult

process, underlining that Azerbaijan has managed to succeed in the sphere despite the difficulties. He mentioned

that the reform will allow to create favorable conditions for the attraction of foreign investments.

WB’s senior financial sector specialist Angela Prigozhina said that the project supported a package of reforms

needed to diversify the financial sector and ease the access to alternative financing tools for Azerbaijani companies

operating in the non-oil sectors.

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

Trust Fund grant of $1.6 million. The share of Azerbaijani government in the project, which was closed on Luly 1,

2016 amounted to $2.2 million.

Among the most notable results of the project are enactment of the modern Law on Securities and implementation

of new regulatory requirements, which are in line with the best international practices. Moreover, the project

contributed to the establishment of the Centralized Trading System (CETA) which linked investors, market-players,

Baku Stock Exchange and National Depositary Center in a single trading and post-trading system, significantly

reducing transaction time and costs.

41

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

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

1. Context of the project initiation phase: Economic reforms which were implemented in the Republic of Azerbaijan during the recent years

determined the economic system functioning on the basis of free market relations. Fundamental

institutions of the market economy, including, legislative framework fixing new economic relations,

public institutions regulating such relations and private entrepreneurs, which are the main subjects of new

economic systems have been formed. During this period price and exchange rate policy had been

liberalized, large scale privatization program implemented and favorable environment for the

entrepreneurial activities in whole, macroeconomic stability and the country’s significant investment

attractiveness had been achieved.

Consequently, during the recent decade before the project the country’s GDP increased approximately 9

times, export more than 15 times, strategic currency reserves 31 times, hundreds of thousands of new jobs

has been created, relative number of poor population reduced by more than 5 times.

During this period, comprehensive reforms were implemented aimed at establishment and institutional

development of effective financial sector, administration, supervision and regulation of this sector was

improved in line with the international standards and consequently competing abilities of banks’ increased

significantly.

For the decade preceding the project initiation the bank assets increased 15 times, deposits of population

36 times and credit investment into economy increased 19,6 times.

Securities market, being an important component of financial system, had permanently been subject to

attention and advanced legal and organizational measures had been undertaken in this area. Initial legal

and regulatory framework and mechanisms, trading, clearing and settlement system, financial intermediary

institutes had been created for the securities market.

For the 5 recent years before the project volume of trading at the organized securities market increased 4,3

times. In whole, the securities market had demonstrated growth higher than general economic growth and

ratio of trading volume of the Baku Stock Exchange to non-oil GDP increased by 41% reaching 12,1%.

Lessons and consequences of resent Global Financial Global of 2007-2008 urged reshaping of regulatory

paradigm in the financial services sector including strengthened capital adequacy norms for financial

services intermediaries, reforms in post-trade/depository infrastructure, etc.

In parallel, development of the non-oil sector of the economy was declared by the government as a main

priority. Achieving new level of quality for the securities market enhances means to regulate economy,

facilitates attraction of financial resources to real sector and cross-sector movements of investment flows

and by putting forth necessary requirements, such as increasing transparency of economic activities

ensures increased effectiveness of the economic system in whole.

Increasing geopolitical instability in the region and commodities prices volatility of the mid-2010s

underpinned the importance and timeliness of the government’s “2011-2020 State Program on Capital

42

Market Development” (endorsed by the Presidential Degree on 16th

May, 2011). The Capital Markets

Modernization Project supported the implementation of the State Program goals for the first 5 years of it.

A primary goal of the State Program on the Development of the Securities Market of the Republic of

Azerbaijan in 2011-2020 is to develop a highly effective securities market, which is modern, complying

with the international standards, providing large capitalization opportunities for the economy and ensuring

reliable risk management.

To achieve this goal, the following tasks were identified:

- Improving securities market regulation mechanism in line with the best international practices,

increasing institutional development level of the securities market and ensuring that it complies

with the international standards ;

- achieving increased capitalization rate in national economy, enhancing use of non-inflational

investment resources attracted through the securities market for the purposes of financing

economic projects;

- creating conditions with protected investment and reliable risk management for the purposes of

effective placements of savings of economic subjects and the public;

- creating relevant conditions necessary for gradual integration of national securities market into

international stock market.

The State Program is comprised of three stages:

- First stage (2011-2014) envisions modernization of securities market infrastructure, improvement

of legal and regulatory base for this purposes, strengthening material-technical base, as well as

creating necessary opportunities for the development of human capacity at the securities market.

- Second stage (2015-2017) provides for full automation and consolidation of transactions at the

securities market and, meanwhile, establishment of framework necessary for introduction of new

tools and services.

- Third stage (2018-2020) envisions increased depth of securities market through the introduction of

new and more complicated types of tools and services and, in parallel, creation of effective system

risks management arrangements. Upon completion of this stage covering the last 3 years of the

State Program the stock market of Azerbaijan will be ready for integration into international

financial markets.

A very important role in the formulation of the capital markets strategic development goals was played by

the FIRST project initiated by the SCS in March 2010. Through the intense cooperation with the SCS and

country’s capital market organizations, by late 2010, FIRST consultants prepared a comprehensive capital

market assessment report. The FIRST initiative also catalyzed the inception of the CMMP project

supported by the World Bank and the SECO.

2. The Project:

According to the agreement with donors assisting in financing the implementation, the project was divided

into 4 parts and included 2 major tenders: on provision of the consultant services and on provision of

goods (the Capital Market Information System).

The agreements defined project parts as follows:

43

Part A: Streamlining and Automating Capital Market Infrastructure;

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

Part C: Stimulating Supply;

Part D: Capacity Building.

The total project finances breakdown is as follows:

1. IBRD loan- 12,000,000.00 USD

2. SECO grant – 1, 600,000.00 USD

3. Azerbaijan Government – 2,200,000. USD (for VAT)

Brief information of two major procurements within the project:

The Request of Expression of Interests for provision of the consulting services, namely the assignment

"Creation of General Framework for stimulating supply and capacity building of Capital Markets" was

announced on 11 October, 2011. QCBS was used as the selection method for this procurement. Forty-

six international companies, expressed their interests. The consortium of companies Corporate Solutions

Consulting Ltd, Wiener Borsa, CAPMEX was selected as a winner and the contract was signed on the 15th

of August 2012. The Consulting services contract 95 deliverables and 102 tasks to support the

implementation of the four project parts (components).

The tender for supply and installation of Capital Markets Information Systems was announced on 18 April

2014 within works and goods category. The two stage bidding selection method was used for this

procurement. KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the

contract was signed.

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

The project’s development objective was to increase the use of equity and corporate debt as financing

and/or investment instruments through the adoption of an effective capital markets regulatory framework

and infrastructure. The PDO level results indicators are: (i) increased issuance of corporate bonds; (ii)

increased number of listed companies and (iii) improved price transparency. The Project outcome and

output indicators are measurable

PDO 1. Increased issuance of corporate bonds

2010 2011 2012 2013 2014 2015 2016 6m

Outstanding amount of

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

Non-oil GDP 18,443 24,165 28,474 32,638 35,969 37,670 10,939


corporate debt/Non-oil GDP 1.9% 3.8% 2.6% 4.1% 11.0% 11.7% 23.9%

44

This indicator represents the ratio of outstanding amount of corporate debt to non-oil GDP (the

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

In 2016 outstanding amount of corporate debt to non-oil GDP increased to 23.9%. The baseline indicator

was 1.9% and the target was 3.8%.

The major factor for increase in indicator was a significant increase of corporate bond issuance including

by organizations like Azerbaijan Mortgage Fund (AMF). From 2011 to 2015 total issuance of AMF bonds

amounted to 256.6 mln AZN. Optimized REPO procedures, introduced incentives for market makers,

awareness programs to treasury managers resulted in total amount of corporate debt issuance from 2011 to

2016 was 2,400 mln AZN. The outstanding amount of corporate debt at the end of the project to baseline

year’s (2010) non-oil GDP is 14.2%, which is still considerably higher than expected target of 3.8%.

PDO 2. Increased number of companies with listed equity

2010 2011 2012 2013 2014 2015 2016 6M

Prime Market - 1 1 1 1 2 2

Standard Market - - - - - 3 3

In 2016 number of companies with listed equity is 5. The baseline was 2 and the target was 8-10

companies. There was only one listed company during 2010 - 2014 periods. The company was listed in the

first Tier. However, most of the transactions occurred in the Alternative Trading Market (ATM) without

needing to fulfill extensive listing and disclosure requirements. The first listing took place in the first tier

in 2011 which was Demir Bank OJSC with market capitalization of 23.11 million AZN. Due to the low

volatility in the market, this number has not significantly changed during the period from 2011 to 2014. In

2015 four new companies were listed in BSE. 1 – International Bank of Azerbaijan in Prime Market 2 –

Azerkosmos, Turanbank and Aqrolising in Standard market. Overall market capitalization increased to

1,019 million AZN. The Listing Advisory Program and other initiatives worked with tens of local

potential IPO candidates. Global financial crisis consequences, geo-political and regional instability and

volatilities in national currencies in all neighboring countries as well as in commodity prices turned local

issuers to conservative mood, making them consider bond issuances as more applicable capital market

fund raising tool, if any at all.

PDO 3. Improved price transparency

2010 2011 2012 2013 2014 2015 2016 6M

Price Transparency - 0% 0% 0% 100% 100% 100%

In 2016 overall price transparency indicator was 100%. The target for that period was 90%.

In 2014 the SCS, BSE and NDC took a number of measures to increase transparency and accessibility of

trades to all categories of traders and investors. First, a special regime was adopted at BSE for all cross

transactions at secondary market (cross transactions are transactions conducted by the same broker from

the buying and the selling side). Thus, a crossing transaction cannot be matched (finalized) unless within

next 30 minutes of trade session any other broker bids with better conditions (price) for the buying or the

selling side of the transaction. If the latter happens, the auction starts. If no interest was shown the original

transition was finalized. In 2015 the holding period of cross transactions was prolonged to 60 minutes.

45

Secondly, in 2014 the special regime was introduced by the NDC to let smaller and less financially

advanced brokers to participate instantly in cross transaction. The NDC eliminated funds pre-validation

regime for all categories of brokers and let them deliver funds after the transaction matched. The funds

provision is ensured by liquid assets pledged or bank guaranty mechanisms. Elimination of funds pre-

validation allows brokers and all categories of investors to promptly react on bid quotes in the trading

system. All transactions that appear on BSE trading system are a non-block transaction which means that

all of the transactions are counted as being competitive transactions. Thus all transactions in BSE trading

system are transparent and competitive.

Intermediate Results:

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

2010 2011 2012 2013 2014 2015 2016 6M

Ratio of market

participants




settlements)

0% 0%

100%

0%

100%

75%

100%

90%

100%

100%

100%

100%

100%

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

electronically connected to trading and post-trading operations at BSE, NDC and other involved entities,

the transformation was instant due to the decision of BSE and NDC to conduct all the necessary changes at

once and at their own expense. Thus, in 2011 BSE and NDC agreed the electronic protocol of data

exchange, developed the connection facilities and handed over them to all brokers. Later, in 2016 the

achievement was reinforced by implementation of the Korean technologies, through which, inter alia, the

surveillance, market watch and DVP processes were also processed and automated.

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

Framework

2010 2011 2012 2013 2014 2015 2016 6M

Enactment of a new

Capital Market Act No

No

No

Yes

No

Yes

No

Yes

No

Yes

Yes

Yes

Yes

After inter-ministerial, parliamentary and Presidential Administration discussions, the “On Securities

Markets” Law was enacted in July 2015.

Intermediate Result indicator Three (Component Two): Promulgation of capital markets regulation

required upon enactment of Law

2010 2011 2012 2013 2014 2015 2016 6M

Promulgation of capital

markets regulation

required upon

enactment of Law

No No

No

Yes

No

Yes

No

Yes

No

Yes

Yes

Yes

Yes

46

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

by end of the 2015.

Intermediate Result indicator Four (Component Three): Number of companies involved in the

listing advisory program (debt and equity)

2010 2011 2012 2013 2014 2015 2016 6M

Number of companies

involved in the listing

advisory program (debt

and equity)

0

5

0

10

0

15

1

15

4

15

16

15

16

The Listing Advisory program came into being after extensive negotiations with potential service

providers (brokers, auditors, lawyers and others) on 16th of April 2014.

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

seminars for companies that might be interested in listing. The aim of those seminars was to educate

companies and its management about the capital markets opportunities and help them to take advantage of

this market. Key events were:

On the 17th

of October 2014 the BSE staged a workshop for companies who had potential to do initial

public offers (IPOs) or otherwise to issue and list equity or debt securities. This workshop was led by BSE

team and invited guest expert Dr. Albrecht Buerger. There was an inspiring and “lessons learned”

presentation from the first company joined LAP, Embawood Furniture Production, about their successful

listing, through which they issued AZN10 millions of corporate bonds. A guest speaker from Borsa

İstanbul gave a presentation on the similar experience, corporate governance practices in Turkey,

challenges that Turkish SME issuers are facing.

On the 22nd

of May 2015 together with PWC Azerbaijan, BSE organized a workshop on the topic of

“Raising Public Equity and Debt Capital”. Over 70 representatives of 40 companies attended. The

workshop was led by Mr. Rustem Teregulov, Partner and Capital Markets Leader, PwC CIS and CEE.

Issues of major Azerbaijani companies were case studied in detail.

Since its establishment and till the end of the Project period, the LAP signed consortium contracts with 16

organizations, out of which 12 listed their instruments at Prime and Standard tier of BSE listing.

Alternative tier companies are decided not to be taken into account for the purposes of this indicator as

ATM tier companies are either offered to or traded by limited number of investors or have lower listing

entrance requirements.

Intermediate Result indicator Five (Component Four): Increased of the threshold pass rate of the

Financial Certification examination for market participants

2010 2011 2012 2013 2014 2015 2016 6M

Increased of the

threshold pass rate of 50%

50%

55%

60%

65%

75%

75%

47

the Financial

Certification

examination for market

participants

50% 50% 75% 75% 75% 75%

Financial Certification examinations were conducted by the SCS and lately by the FSMA. In 2013 the

methodology of the examination was completely revised based on the Consultant’s recommendations.

Since 2014 the CMTC provides preparation courses for the examinations. The threshold pass rate for the

Financial Certification has been 75% for the last 4 reporting periods.

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

Instruments

2010 2011 2012 2013 2014 2015 2016 6M

Consumer Awareness

of Capital Market

Instruments

24%

28

N/A

33

32

37

36

41

56

45

59.11

45

59.38

Consumer Awareness of Capital Market instruments was the most important indication that the SCS was

focusing on. Initiatives like establishing CMTC, launching LAP, Nation-wide Education Program

initiative, cooperation with universities, youth organizations and journalists, conducting local and

international conferences and workshops (detailed in above chapters) contributed to the increasing rates of

financial literacy and consumer awareness. Moreover, the CMMP coincided with analogous initiatives of

other financial institutions and governmental bodies, with whom the SCS cooperated closely in this regard

(CBAR, MoF, etc). The indication surveys were conducted by the external independent specialized

companies.

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

There were 3 occasions when the Project’s work plan was amended to comply with its main direction and

goals: at the inception (October 2012), in the midst of the project span (October 2014) and at the end of

the original project period (extension negotiations, October 2015- February 2016). All amendments were

pre-approved by the World Bank and consequently confirmed by official amendments to the consulting

services contract (the provision of goods contract remained unchanged for the whole period from Jan 2015

to Feb 2016).

4.1. Inception period amendments:

In the initial meetings in October 2012 with the project team, the Consultant and the World Bank, the SCS’

Chairman raised the issue of importance of increasing listing on BSE as a priority of the initial phase to be

supported by CMMP. The SCS had been considering the creation of a Listing Advisory Program (LAP) to

attract issuers to listing with resources to be allocated from BSE, SCS and other market participants and

professionals to actively promote Capital Market, provide training and provide preliminary listing

advisory services. The Consultant was requested to take the lead in defining the program and provide

technical and managerial support with its delivery. Supporting the LAP necessitated changes to the

activities under Component 3 namely 3.1.1, 3.1.2, 3.2.3, 3.3.1 and 3.3.2. (See table 2.1.1 above).

48

Moreover, other changes were also agreed in the inception phase.

Activities 2.3.1: “Review and analyze the risks and opportunities” and 2.3.2: “Recommendations on the

optimal participation of the banks and requirements” were considered no longer required as the Central

Bank had decided that commercial banks would only participate in Capital Market through their

subsidiaries and not directly. Resources of these two tasks were agreed to utilize to support BSE to

develop their rules and regulations to adapt new technological and legislative environment after launching

the Capital Markets Information system and enactment of the new “On Securities Market Law”

accordingly.

Activities 3.2.4 and 3.3.2 were similarly re-focused to concentrate on LAP activities, supporting seminars

to be provided by the LAP etc.

Activity 3.4.2: “Develop and publish educational material on Corporate Governance” was considered no

longer valid as the IFC had initiated, prepared and published extensive material on Corporate Governance

for local issuers. The Consultant was asked to assist BSE and prepare a study material on opportunities of

IPO for local issuers.

All changes were endorsed by the World Bank and then confirmed in the Amendment to the contract with

the Consultant (in October 2014).

4.2. Mid-period amendments:

In mid-2014 the SCS initiated another round of negotiations with the World Bank and the Consultant on

updating and amending the tasks and activities in the deliverables to comply with the recent developments

at the capital markets.

The role of the NDC as an asset manager of commercial investment funds were was reconsidered based on

the experts recommendation in order to prevent the State owned NDC’s monopolization of the segment.

Thus, it was asked to re-direct the Activity 1.3.8 from NDC to providing recommendations on potential

private fund administration entities.

Activities 2.2.2 and 2.2.3 were renamed and reshaped in order to comply fully with the task of preparing

the implementing regulations that would support the new “On Securities Market Law” draft.

Activity 2.3.3 was reconsidered to concentrate more specifically on role of banks in newly proposed

settlement model for the securities market of the country.

In light of the local real estate market dynamics, Activities3.5.4 and 3.5.5 were re-organized to focus on

bringing international expertise of organizing foreign securities trade (MTF) to BSE.

Activities 4.6.4 and 4.6.5 supporting the CMTC were completed by the SCS itself before the

commencement date of the Consultant assignment. So, the Consultant was asked to prepare self-study

materials on various topics of the capital market operations.



4.3. Extension of the Project period:

49

In light of the complexity and significance of CMIS procurement tender as well as multiplicity of terms

and conditions to be assessed, in the first quarter of 2015 the SCS and the World Bank started negotiating

the possibility of the Project Period extension. Indeed, the procurement of the CMIS took longer time than

initially anticipated. The project closing date extension topic was eventually triggered by the need to

complete installation of CMIS in 12 months period after its inception, whereas all pre-requisite technical

agreements and future contract negotiation were completed by mid-February 2015. The implementation of

the information system could be finalized at least within 12 months, meaning a two-month slippage from

the project’s original end-date (31 Dec 2015). In turn, the assessment of the development and

implementation results of the CMIS was possible only after its go-live and required the consultants at least

one month after its launching to be able to comprehensively assess all aspects of the implementation.

At the same time, the SCS requested to consider two additional tasks for CMTC strategic development and

sustainability. In consultation with the World Bank it was decided to sign new agreement with the same

Consultant for additional services. The SCS asked the World Bank’s no-objection for SSS method and the

Bank provided SCS with NOL on February 1, 2016 and new agreement with Corporate Solutions

Consulting Ltd was signed on the same date. At the same time the existing agreement was extended to

conduct the deliverable no 1.4.5 on assessing the CMIS implementation results.

The Borrower, Ministry of Finance (MOF) of Azerbaijan, requested extension of the project for additional

6 months to have enough time for CMIS installation and handover and accommodating services. The Bank

provided its approval of Project Closing Date extension till July 01, 2016.

50

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

None Available

Annex 9. List of Supporting Documents

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

8, 2006.

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

WBG. Country Partnership Strategy Progress Report for the Period FY2-11-FY2014 for Azerbaijan.

April 30, 2013.

Independent Evaluation Group (IEG) of the WBG. Completion and Learning Review CPS Period: FY11 –

FY14. June 30, 2015.

WBG. Project Information Document (PID) Concept Stage: Capital Markets Modernization Project.

November 30, 2010.

WBG. Project Appraisal Document on a Proposed Loan in the Amount of $12 Million Equivalent to the

Republic of Azerbaijan for the Capital Markets Modernization Program (CMMP). February 10, 2011.

WBG. Implementation Status and Results Reports: Capital Markets Modernization Project (P120321).

Sequence 1-10

WBG. Aide Memoires for Capital Markets Modernization Project (P120321). Dated June 2011; June

2012; March 2013; February, September 2014; February, October 2015.

WBG. Loan Agreement (Capital Markets Modernization Project) between the Republic of Azerbaijan and

the International bank for Reconstruction and Development. September 22, 2011.

WBG. Restructuring Paper on a Proposed Project Restructuring of Capital Markets Modernization

Project Loan IBRD-80240. Board Approval: April 29, 2015.

WBG. Azerbaijan Systemic Country Diagnostic. June 3, 2015

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

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

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

Project. December 24, 2012

WBG. Azerbaijan Partnership Program Snapshot. April 2015.

51

WBG. Doing Business 2008. September 26, 2007.

Doing Business 2009. September 10, 2008.

Doing Business 2010: Reforming through difficult times. September 9, 2009.

Doing Business 2011: Making a difference for entrepreneurs. November 4, 2010.

52

Annex 10. Borrower’s ICR

COMPLETION AND RESULTS REPORT

ON A LOAN

IN THE AMOUNT OF US$12 MILLION

TO

THE REPUBLIC OF AZERBAIJAN

FOR THE

CAPITAL MARKETS MODERNIZATION

PROJECT

OCTOBER, 2016

53

ABBREVIATIONS AND

ACRONYMS

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

AZN Azerbaijan New Manat NCB National Competitive Bidding

BSE Baku Stock Exchange NDC National Depository Center

CAS Country Assistance Strategy ORAF

Operational Risk

Assessment

CMMP Capital Markets Modernization Project Framework

CPS Country Partnership Strategy PAD Project Appraisal Document

EBRD

European Bank for

Reconstruction and PID

Project Information

Document

Development PIU

Project

Implementation Unit

ECA Europe and Central Asia POM Project Operation Manual

EU European Union PQ Prequalification

FIRST Financial Sector Reform and Strengthening PPP

Public-Private Partnerships

Initiative RVP

Regional Vice

President

FSMA

Financial Markets Supervision

Authority of SBD Standard Bidding Documents

the Republic of Azerbaijan SCS State Committee for Securities

GDP Gross Domestic Product SECO Swiss State Secretariat for

IBRD International Bank for Reconstruction and Economic Affairs

Development USAID United States Agency for

ICR Implementation Completion and Results

International Development

Report WBT World Bank Treasury

IC SSS Individual Consultant Single Source

Selection

IDA International Development Association

IFC International Finance Corporation

ISDS Integrated Safeguard Data Sheet

LAP Listing Advisory Program

54

5. Context of the project initiation phase:

Economic reforms which were implemented in the Republic of Azerbaijan during the recent years

determined the economic system functioning on the basis of free market relations. Fundamental

institutions of the market economy, including, legislative framework fixing new economic relations,

public institutions regulating such relations and private entrepreneurs, which are the main subjects of new

economic systems have been formed. During this period price and exchange rate policy had been

liberalized, large scale privatization program implemented and favorable environment for the

entrepreneurial activities in whole, macroeconomic stability and the country’s significant investment

attractiveness had been achieved.

Consequently, during the recent decade before the project the country’s GDP increased approximately 9

times, export more than 15 times, strategic currency reserves 31 times, hundreds of thousands of new jobs

has been created, relative number of poor population reduced by more than 5 times.

During this period, comprehensive reforms were implemented aimed at establishment and institutional

development of effective financial sector, administration, supervision and regulation of this sector was

improved in line with the international standards and consequently competing abilities of banks’ increased

significantly.

For the decade preceding the project initiation the bank assets increased 15 times, deposits of population

36 times and credit investment into economy increased 19,6 times.

Securities market, being an important component of financial system, had permanently been subject to

attention and advanced legal and organizational measures had been undertaken in this area. Initial legal

and regulatory framework and mechanisms, trading, clearing and settlement system, financial intermediary

institutes had been created for the securities market.

For the 5 recent years before the project volume of trading at the organized securities market increased 4,3

times. In whole, the securities market had demonstrated growth higher than general economic growth and

ratio of trading volume of the Baku Stock Exchange to non-oil GDP increased by 41% reaching 12,1%.

Lessons and consequences of resent Global Financial Global of 2007-2008 urged reshaping of regulatory

paradigm in the financial services sector including strengthened capital adequacy norms for financial

services intermediaries, reforms in post-trade/depository infrastructure, etc.

In parallel, development of the non-oil sector of the economy was declared by the government as a main

priority. Achieving new level of quality for the securities market enhances means to regulate economy,

facilitates attraction of financial resources to real sector and cross-sector movements of investment flows

and by putting forth necessary requirements, such as increasing transparency of economic activities

ensures increased effectiveness of the economic system in whole.

Increasing geopolitical instability in the region and commodities prices volatility of the mid-2010s

underpinned the importance and timeliness of the government’s “2011-2020 State Program on Capital

Market Development” (endorsed by the Presidential Degree on 16th

May, 2011). The Capital Markets

Modernization Project supported the implementation of the State Program goals for the first 5 years of it.

55

A primary goal of the State Program on the Development of the Securities Market of the Republic of

Azerbaijan in 2011-2020 is to develop a highly effective securities market, which is modern, complying

with the international standards, providing large capitalization opportunities for the economy and ensuring

reliable risk management.

To achieve this goal, the following tasks were identified:

- Improving securities market regulation mechanism in line with the best international practices,

increasing institutional development level of the securities market and ensuring that it complies

with the international standards ;

- achieving increased capitalization rate in national economy, enhancing use of non-inflational

investment resources attracted through the securities market for the purposes of financing

economic projects;

- creating conditions with protected investment and reliable risk management for the purposes of

effective placements of savings of economic subjects and the public;

- creating relevant conditions necessary for gradual integration of national securities market into

international stock market.

The State Program is comprised of three stages:

- First stage (2011-2014) envisions modernization of securities market infrastructure, improvement

of legal and regulatory base for this purposes, strengthening material-technical base, as well as

creating necessary opportunities for the development of human capacity at the securities market.

- Second stage (2015-2017) provides for full automation and consolidation of transactions at the

securities market and, meanwhile, establishment of framework necessary for introduction of new

tools and services.

- Third stage (2018-2020) envisions increased depth of securities market through the introduction of

new and more complicated types of tools and services and, in parallel, creation of effective system

risks management arrangements. Upon completion of this stage covering the last 3 years of the

State Program the stock market of Azerbaijan will be ready for integration into international

financial markets.

A very important role in the formulation of the capital markets strategic development goals was played by

the FIRST project initiated by the SCS in March 2010. Through the intense cooperation with the SCS and

country’s capital market organizations, by late 2010, FIRST consultants prepared a comprehensive capital

market assessment report. The FIRST initiative also catalyzed the inception of the CMMP project

supported by the World Bank and the SECO.

6. The Project:

According to the agreement with donors assisting in financing the implementation, the project was divided

into 4 parts and included 2 major tenders: on provision of the consultant services and on provision of

goods (the Capital Market Information System).

The agreements defined project parts as follows:

Part A: Streamlining and Automating Capital Market Infrastructure;

56

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

Part C: Stimulating Supply;

Part D: Capacity Building.

The total project finances breakdown is as follows:

4. IBRD loan- 12,000,000.00 USD

5. SECO grant – 1, 600,000.00 USD

6. Azerbaijan Government – 2,200,000. USD (for VAT)

Brief information of two major procurements within the project:

The Request of Expression of Interests for provision of the consulting services, namely the assignment

"Creation of General Framework for stimulating supply and capacity building of Capital Markets" was

announced on 11 October, 2011. QCBS was used as the selection method for this procurement. Forty-

six international companies, expressed their interests. The consortium of companies Corporate Solutions

Consulting Ltd, Wiener Borsa, CAPMEX was selected as a winner and the contract was signed on the 15th

of August 2012. The Consulting services contract 95 deliverables and 102 tasks to support the

implementation of the four project parts (components).

The tender for supply and installation of Capital Markets Information Systems was announced on 18

April 2014 within works and goods category. The two stage bidding selection method was used for this

procurement. KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the

contract was signed.

57

2.1. List of the Consultancy services contract deliverables:

Task name No Deliverables Del

No.

Date

Approved Comment

Formation of Policy Steering

Committee 1.1.1

Draft description of the Steering

Committee and establishment of Steering

Committee

1 30/01/13

Formation of MAGs 1.1.2 Draft description of the MAGs and

establishment of MAGs 2 30/01/13

Arranging MAG(s) and

Policy Steering Committee 1.1.3 Minutes for each of the meeting 3 24/11/14

Diagnostic study on

clearance and settlement and

depository functions

1.2.1

Financial and operational diagnostic

report for consolidating the clearance and

settlement and depository functions

4 15/05/13

Road map for consolidating

functions 1.2.2.

Road map for consolidating the clearance

and settlement and depository functions 5 24/06/13

Present the consolidation

plan to industry. 1.2.3

Organization and delivering of workshop

on the presentation of the plan to the

industry with support of SCS

6 15/08/14

Rules and procedures for

clearance and settlement

systems

1.2.4

Draft rules and procedures for

administering clearance and settlement

systems at CSD

7 24/11/2014

Settlement default guarantee

fund procedures and

procedures for use of

guarantee fund for CSD

1.2.5 Draft Settlement default procedures at

CSD 8 23/02/15

Review of ISIN codification

system, its implementation

and functionality.

1.2.6 Review of already-existing ISIN

Implementation 9 24/06/13

58

Prepare new rules and

procedures for CSD on its

participants‘ structure that

allows custodians and

investment firms to access

CSD

1.3.1

Prepare new rules and procedures for

CSD

10 23/02/15

Draft internal procedures on

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

Draft procedures for

dematerialized securities 1.3.3

Draft procedures on conversion of

certificated securities into dematerialized

securities

12 03/04/14

Recommendations on the

transfer of functions on

registration of securities liens

from SCS to CSD, including

business procedures

1.3.4

Recommendations report on the proposed

approaches for the transfer of lien

registration from SCS to CSD

13 24/11/14

Draft procedures for CSD in

managing information

security

1.3.5 Draft procedures ensuring the security of

accounts 14 23/02/15

Draft risk-management and

internal technical-audit

procedures for the new CSD

1.3.6

Risk management and internal technical

audit procedures for CSD (name is

different in the work plan)

15 23/02/15

The CSD’s ability to provide

services 1.3.7

Feasibility report on the CSD’s ability to

provide the services mentioned under

activity 1.37

16 24/11/14

Review the CSD’s ability to

act as share registry for

investment funds

1.3.8 Feasibility report on the CSD’s ability to

provide services mentioned under activity 17 28/04/15

This deliverable was

changed to “Report on how

Investment Funds Asset

Managers can provide fund

administration services for

investments funds” by the

Amendment No 1, dd 15 Oct

59

2014, to the lump sum

contract with the Consultant.

Provide capacity building to

newly formed CSD 1.3.9

Completion of around 10 training

sessions on the operations of the newly

formed CSD through CMTC.

18 08/10/15

IT system needs of the

consolidated capital market

infrastructure

1.4.1

Report on the assessment of the IT

system requirements for the consolidated

capital market infrastructure

19 24/06/13

Develop functionality for the

required IT systems 1.4.2

Presentation of the parameters for the

required IT systems’ functionality on the

main infrastructure components: trading,

depository, registry, clearance-settlement

and surveillance.

20 24/06/13

Draft the technical

specifications for IT system

and bidding documents

1.4.3

ToR for acquiring the integrated IT

systems for the consolidated capital

market infrastructure.

21 24/10/13

Assist PIU with selecting the

appropriate system(s) and

consult SCS for selection of

appropriate system(s

1.4.4

Provide assessment report for each of the

proposed IT systems during the IT

procurement

22 23/02/15

Oversee the system

installation and testing 1.4.5

Assessment report on the testing results

of the selected and installed systems prior

the ownership transfer.

23 May 2016

The deadline for this

deliverable was changed due

to prolongation of the project

life span till 1 July 2016. The

change was confirmed by

parties in additional contract

signed with the Consultant

on 1 February 2016

Analyze the market risk for

revised settlement

procedures.

1.5.1 Risk assessment report of revised

settlement procedures 24 24/11/14

Review of various options for 1.5.2 Recommendations report on clearance- 25 15/08/14

60

clearance and settlement

procedures

settlement procedures

Identify the extent of a

required settlement guarantee

fund, including sources of

funding, such as transaction-

based fees, letters of credit

and/or insurance

1.5.3 Identify the extent of a required

settlement guarantee fund 26 23/02/15

Roadmap for reforming the

current pre-pay / pre-deliver

system

1.5.4

Road map containing recommendations

for reforming current pre-pay / pre-

deliver system into a system based on

payment and delivery post-trade,

implemented together with risk-reducing

mechanisms.

27 24/10/13

Devise the required rules to

implement the roadmap and

revise business processes and

procedures

1.5.5

Draft rules to implement the roadmap,

including revised business procedures

(Rule Book)

28 08/10/15

Recommendations on the

CCP capacity of the CSD 1.5.6

Assessment report on the CCP capacity of

the newly established CSD 29 24/10/13

Review the fee schedules and

incentives for trade 1.6.1

Recommendations report including

proposed fee structure on eliminating

financial incentives for pre-arranged

trades

30 24/06/13

Definition and use of

“address sales” and provide

recommendations

1.6.2 Draft revised legislation to cover the gaps

indicated under activity 1.6.2. 31 24/06/13

Recommendations for

integrating C&S of limited

off-market transaction

1.6.3

Feasibility report on integrating clearance

and settlement operations of the limited

off-market transactions.

32 15/08/14

Review the definition and use

of non-trade transfers 1.6.4

Draft revised legislation to cover gaps in

negotiated trade transfer. 33 24/06/13

61

Recommendations on

approaches to order

placement and trading rules

for thinly-traded securities

that will promote depth and

better price discovery

1.6.5

Recommendations report on the

placement and trading rules for thinly –

traded securities

34 24/11/2014

Support SCS and review laws

and regulation 2.1.1

Recommendations and international

expertise (cases) during the discussions of

the Draft Law, as required.

35 30/01/13

Revisions to the legislation

and international standards 2.1.2

The list of the laws and regulations

requiring amendment including the scope

of the amendments to ensure the

maximum compliance with IOSCO

principles.

36 30/01/13

Inventory of implementing

regulations supporting Law

on Securities

2.2.1

The list of the new implementing

regulations and revisions to the existing

legislation under the new law.

37 30/01/13

Draft/comments on the

required new implementing

regulations

2.2.2 Draft and deliver 16 high-priority

implementing regulations 38 24/10/13


changed to “Draft and

deliver high-priority

implementing regulations”

by the Amendment No 1, dd

15 Oct 2014, to the lump

sum contract with the

Consultant.

Revisions to existing

regulations to conform to

new Law

2.2.3 Draft and deliver remaining

implementing regulations 39 15/08/14


changed to “Completion of

remaining implementing

regulations” by the




62

Review, analyze the risks and

opportunities 2.3.1

Review/ development of agreed rules for

BSE 40 28/04/15


changed to

“Review/development of

agreed rules for BSE” by the




Additional regulation for

BSE 2.3.2

Additional regulation for BSE to ensure

compliance with new Securities Market

Law

41 07/10/15


changed to “Additional rules

for BSE to ensure

compliance with new

Securities Market Law” by

the Amendment No 1, dd 15

Oct 2014, to the lump sum


Recommendations and

Guidelines related to the role

that banks will play in the

new settlement model

2.3.3

Recommendations and Guidelines related

to the role that banks will play in the new

settlement model imposed by the new

draft legislation

42 24/11/14


changed to “Report on

Recommendations and

Guidelines related to the role

that banks will play in the

new settlement model

imposed by the new draft

legislation ” by the




Adopt accounting and tax

treatment for shares sold

above nominal value

2.4.1

Recommendations report on the proper

accounting and tax treatment for shares

sold above nominal value

43 03/04/14

Implement “tax

transparency” of investment

funds

2.4.2

Recommendations report on the “tax

transparency” implementation of

investment funds

44 03/04/14

Reinstate the tax waiver on 2.4.3 Recommendations report on the tax 45 15/08/14

63

dividend and interest income

from bonds

waiver on dividend and interest income

from bonds

Provide tax incentives for

companies to list their

securities on the BSE

2.4.4

Recommendations report on the tax

incentives for companies to list their

securities on the BSE

46 03/04/14

Analyze pooled investment

by insurance companies 2.5.1

Report on feasibility of pooled

investment by insurance companies 47 15/08/14

Drafting the regulations on

capital adequacy of the

market participants.

2.6.1 Draft the regulations on capital adequacy

of the market participants. 48 03/04/14

Drafting regulations on risk

management & requirements

of the market

2.6.2

Draft regulations on risk management

systems and prudential requirements of

the market participants.

49 24/10/13

Drafting regulations on

reporting procedures of the

market participants

2.6.3

Drafting regulations on the prudential

reporting procedures of the market

participants

50 24/10/13

Assessment report on the

modality of attracting local

and foreign issuers to the

listing

3.1.1

Assessment report on the modality of

attracting local and foreign issuers to the

listing

51 10/04/13


changed to “Listing

Advisory Programme (LAP)

Report” by the Amendment

No 1, dd 15 Oct 2014, to the

lump sum contract with the

Consultant.

1st LAP Progress Report 3.1.2

Strategy for BSE for providing fund

raising platform for Azerbaijani

companies

52 03/04/14


changed to Strategy for BSE

for providing fund raising

platform for Azerbaijani

companies, to be included in

the 1st LAP Progress

Report” by the Amendment



64

Consultant.

Expanding distribution

channels for government

securities.

3.2.2 Expanding distribution channels for

government securities 53 23/02/15

Recommendations Related to

Investment Companies and

Securities Market

Participants Bankruptcy

3.2.3

Report on the feasibility of the market-

makers and draft regulations governing

them

54 08/10/15


changed to “Report on

bankruptcy of investment

funds and securities market

participants” by the




Recommendations covering

the issues under activity

3.2.4. as required

3.2.4 Recommendations covering the issues

under activity 3.2.4. as required 55 08/10/15


changed to “Organization of

at least 4 workshops and

LAP launch event” by the




Provide recommendations for

developing the corporate

bond market

3.3.1 Recommendations report for developing

the corporate bond market 56 28/04/15


changed to

“Recommendations report

for developing the corporate

bond market, to be included

in a report on initial

screening of at least 4

companies” by the




Support LAP Activities – 2nd

LAP Progress Report 3.3.2

List of best Azerbaijani corporate

candidates for corporate debt offering 57 07/08/15


changed to “List of best

Azerbaijani Corporate

65

candidates for corporate debt

offering to be included in 2 nd

LAP Progress report” by




Develop Presentation

Materials for LAP Team and

Coordinate with Agencies

3.4.1

Published educational materials

describing the role of the capital markets

and opportunities for corporate issuers

58 15/08/14

Develop and publish

educational materials on IPO 3.4.2

Published educational materials

describing the benefits of good corporate

governance and profitability

59 23/02/15


changed to “Published

educational materials on

IPO” by the Amendment No

1, dd 15 Oct 2014, to the


Consultant.

Create a cadre of instructors

capable of leading corporate

education events - At least 3

training sessions for trainers

leading the corporate

education events

3.4.3 At least 3 training sessions for trainers

leading the corporate education events 60 24/11/14

Develop educational

materials for investors

describing investment funds

3.5.2 Published educational materials for

investors describing the investment funds 62 28/04/15

Recommendations on

creating and enabling ETFs 3.5.3

Recommendations report on creating and

enabling ETF 63 15/08/14


changed to

“Recommendations report

on enabling and creating

ETFs and developing the

needed regulations and

published educational

materials concerning ETFs”

66

by the Amendment No 1, dd

15 Oct 2014, to the lump

sum contract with the

Consultant.

Feasibility study for

implementing a market

(MTF) for foreign stocks

traded on the BSE

3.5.4 Recommendations report on enabling and

creating REITs and their regulations 64 15/08/14


changed to “Feasibility study

for implementing a market

(MTF) for foreign stocks

traded on the BSE” by the




Concept guidelines for local

sponsors for trading in

foreign stocks (MTF) on the

BSE

3.5.5 Published educational materials on ETF

and REITs, as requested 65 15/08/14


changed to “Concept

guidelines for local sponsors

for trading in foreign stocks

(MTF) on the BSE ” by the




Recommendation/

educational materials/manual

for ABS sponsors

3.5.6 Recommendations on introduction of

Assets Backed Securities 66 23/02/15

Recommendations on how

capital markets can support

projects

3.6.1 Recommendations report on the project

financing through securities market 67 28/04/15



state companies

3.6.2 Recommendations on how Capital

Market can support state companies 68 23/02/15



privatization

3.6.3 Recommendations on how capital

markets can support privatization 69 23/02/15

67

Review current government

support to private sector

development

3.7.1

Recommendations report on development

of instruments to support government

funding for the private sector

71 24/11/14

Conduct a training needs

assessment for all levels of

SCS staff

4.1.1 Training needs assessment report 71 30/01/13

Devise and provide a training

program 4.1.2

Curricula for all subject matter categories

of staff and all levels 72 03/04/14

Conduct in-house training for

SCS staff 4.1.3 Around 30 training sessions for SCS staff 73 07/08/15

Conduct a train-the-trainer

program for the training

sessions

4.1.4 Conduct around 10 train-the-trainers

programs 74 28/04/15

Identify external training

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

Devise and provide a

knowledge management

system

4.1.6 Establish information portal and

searchable database within SCS intranet 76 24/10/13

Review the SCS’s internal

systems, policies, structures

and procedures

4.2.1

Recommendations report with proposed

time based road map for SCS ‘ s internal

systems , structures and procedures

realignment

77 28/04/15

Review the SCS’ current

procedures and practices of

decision-making

4.2.2 Recommendations report on SCS’s

current procedures and decision making 78 15/08/14

Review the SCS’ current

market surveillance policies

and systems

4.3.1

Recommendations report on SCS’s

interim market surveillance policies and

procedures

79 28/04/15

Review the SCS’ market

enforcement capacity and

revisions to enforcement

4.3.3 Recommendations report on SCS

enforcement capacity and revisions to 81 07/08/15

68

procedures enforcement procedures

Review the current systems

used for reporting by market

participants

4.3.4

Recommendations report on

improvement of the current systems of

reporting by market participants

82 07/08/15

Automation of the disclosure

of public information and

reports to the regulator

4.3.5

Report on module descriptions,

parameters for the automated disclosure

of public information and reports to the

regulator.

83 24/10/13

Promote the Azeri market to

International Investors 4.4.1

Conducting 2 regional conferences every

year and 2 international conferences

overall.

84 30/01/13

Two international

conferences have been

supported technically and

financially. Financial support

for regional conferences has

been provided.

Assist SCS in conducting

annual financial surveys 4.5.2

Financial support for annual financial

literacy surveys 85 03/04/14

Prepare a communications

plan for SCS 4.5.4 Communication plan for SCS 87 24/10/13

Recommendation/

educational materials/manual

for ABS sponsors

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

Assessment training

programs propose a model

for the training center

4.6.1

Assessment report of the current situation

and presentation of the proposed model

for the training center

89 18/3/13

Strategic business plan for

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

Conduct needs assessment

and identify demand for

training programs

4.6.3

Recommendations report on the training

programs (such as certification programs,

regulatory trainings, trading trainings,

mini-MBA with concentration in finance,

etc.)

91 03/05/13

69

Developing a self-study kit

on securities trading (capital

market )

4.6.4

Around 3-4 training programs and

curricula for more general public based

on the agreement with SCS on the

recommendations for the task 4.6.3. At

each training session approximate number

of participants will be around 10 to 15

92 July 2015


changed to “Developing a

self-study kit on securities

trading (Capital market)” by




Developing a self-study

guide on Corporate Bonds 4.6.5

Attracting the trainers and identifying the

trainers for each program 93 July 2015


changed to “Developing a

self-study guide on corporate

bonds” by the Amendment



Consultant.

Start the train the trainers for

the local trainers 4.6.6

Conducting the “Train the trainers”

program for local staff 94 30/05/14

Prepare the marketing plan of

the center and promote the

center

4.6.7 Marketing plan of the center and its

execution 95 30/07/13

70

2.2 Component 1: Streamlining and Automating Market Infrastructure.

This Component was designed to address the outdated capital market infrastructure constraints by

focusing on: (i) increasing automation of the market through establishing one depository center and

consolidating clearance and settlement; (ii) opening the infrastructure’s membership and access; (iii)

minimizing off-market trades and improving price discovery; (iv) facilitating the operational introduction

of investment funds; and (v) building better risk protection through establishing an updated trade

guarantee mechanism.

Key deliverables of the Component 1:

- The country’s post-trading architecture and environment was consolidated making the National

Depository Centre (NDC) the sole CSD for government and corporate securities, providing

clearing and settlement functions to members;

- The central role of the NDC was supported by converting it to the non-for-profit infrastructure

organization serving its members and local issuers. All other registry-keeping licenses in the

country were abolished. The securities numbering and lean registration were transferred to the

NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems

ensuring DVP principles of both government and corporate securities.

- The securities numbering function was transferred to the NDC and its methodology was

harmonized with internationally recognized ISIN standards; the NDC is a member of the

Association of National Numbering Agencies.

- Implementation of the renewed post-trading procedures complying with the international best

practices and newly adopted securities market legislation;

- Drafting extensive, best-practices based TOR for the new electronic trading/post-

trading/surveillance platform comprising.

- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement,

issuing functionalities in the market in strict compliance with the newly adopted securities market

legislation;

2.2.1 List of NDC rules and post-trading system rules adopted in accordance with the new “On

Securities Markets” Law (2015):

1. Rules on requirements to Central Depository members;

2. Rules on opening, closing and managing accounts in Depository Centre;

3. Rules on registration and transfer of securities;

4. Rules on safe-keeping of securities in Depository Centre;

5. Rules on forming and holding securities owners’ registry;

6. Rules on registering liens in the Depository Centre;

7. Rules on fees payment;

8. Rules on depository risks management;

9. Rules on operation of financial security in the Depository Centre;

10. Rules on depository information protection and retention;

11. Requirements on post-trading system formation and operation;

71

12. Requirements to clearing organization members;

13. Rules on clearing operations;

14. Rules on information exchange in clearing operations;

15. Rules on information protection and reporting in clearing operations.

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

To maximize the benefits of adopting an adequate legal and regulatory framework, this Component was

designed to focus on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are

addressed through the forthcoming new Capital Market Act and identifying key implementing regulations

needed to make the law effective; (ii) enhancing market confidence and safety by introducing minimum

capital requirements for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry

of Finance, eliminating tax obstacles to capital formation for companies and avoiding double taxation of

participants in investment funds; (iv) allowing pooled investments by insurance companies; (v) fostering

competitiveness by extending market participation through new licenses and broader geographic coverage;

and (vi) ensuring effective coordination with other regulatory authorities in the financial sector to

minimize regulatory gaps and arbitrage opportunities.

Key deliverable elements of the Component 2:

- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law

harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing

regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3)

and National Depository Centre (as a part of the Component 1) fully complying with the country’s

new governing legislation;

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

The new “On Securities Markets” Law was adopted on 14th

July, 2015. The adoption of the Law was

assessed as a considerable effort to improve the legal and operational framework within which securities

market will operate in the future by experts. The Law sufficiently addresses “rule of law” related issues,

including: provisions for finality of settlement, better rules of supervision administration, initiatives that

move toward the creation of a modern central depository, enhanced book entry securities “ownership”,

reporting requirements, provisions for an investor compensation fund, more intensive monitoring of

market abuses, proper conduct of business with retail market participants. In brief, the Law provisions

observe the three IOSCO core objectives of securities regulation:

- The protection of investors;

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

- The reduction of systemic risk.

The regulator recognizes that matters which are not directly subject of the law itself, such as thorough

surveillance and compliance programs, effective enforcement and close cooperation with other regulators

are necessary to give further effect to all three objectives.

72

After the adoption of the Law (as well as the Presidential Decree endorsing it and subsequent Regulations)

the supervisory authority (e.g. SCS at that time) works under a clear mandate, with its responsibilities and

powers established by legislation and further specified within the Law for specific areas. Responsibility

for supervision of the conduct of business obligations of investment companies and other market

participants (institutions) is clearly stated. Decisions of the regulator are required to be transparent and are

open to judicial review.

On the other hand, under the new legislative platform the supervisory authority has adequate powers to

carry out its regulatory functions, and has rulemaking authority. In addition, members and staff are subject

to integrity policies that ensure high standards of professional conduct.

Under the Law provisions supervisory authority has appropriate powers to obtain information and records,

and can exercise these powers on a routine basis to ensure compliance with the laws it administers.

Regulated entities are subject to record keeping requirements directly under the LAW, including records

relating to clients’ orders. Supervisory authority has adequate powers to investigate both administrative

violations of the law. Further development of the legislative platform is agreed to consider in future

enabling the regulator(s)’criminal prosecution and sanctions ability for serious violations.

Under the Law, appropriate disclosure rules requiring public offering, material event reporting and

ownership and control reporting, which attempt to improve transparency of information and to guide

continuous disclosure has been adopted, as has the requirement for preparers and management to be liable

for the accuracy of disclosure. Issues to the public of equity and debt securities require a prospectus

approved by the supervisory authority. Secondary legislation adopted under the Law ensures disclosure

requirements for prospectuses are in line with IOSCO principles. Issuers are also required to submit

reports about material developments. Financial statements must be prepared in accordance with IFRS. The

supervisory authority has sufficient powers to enforce issuers ‘compliance with reporting standards, and to

issue supporting secondary legislation. In addition, changes of control transactions are required to comply

with disclosure requirements.

The Law provisions related to market intermediaries in general properly achieve three main objectives: to

protect client assets from insolvency of the investment company, guard against defaults and sudden

disruption to the market, either through sudden insolvency or settlement failure, and, to ensure that

intermediaries are fair and diligent in dealing with their clients.

The Law sets appropriate licensing standards (limiting the market place to those with sufficient resources

and qualification), prudential standards (protecting against sudden financial failure), internal controls and

risk management standards (reducing the possibility of default or appropriate of client assets), and

business conduct rules (ensuring proper handling of client accounts).

Provisions on secondary markets are in place to ensure the efficiency and credibility of the markets as

mechanisms for pricing and transfer of securities. Exchange is subject to licensing requirements, including

standards applicable to information technology systems and risk management, and is subject to on-going

supervision, including inspections and reporting requirements.

Potential sources of market disruption are addressed through the regulation of clearing, settlement and

depository services, including risk management mechanisms designed to ensure that intermediaries settle

73

their market obligations in a timely and orderly manner. Market activity is properly subject to market

abuse rules, including prohibitions on trading on insider information, market manipulation and

misrepresentation.

Exchange business is subject to licensing allowing operating both securities and derivatives markets.

Clearing and settlement facilities are performed by the NDC. Both trading and post-trading are subject to

the supervision of the supervisory authority, which has proper powers to ensure both institutions acts in

accordance with regulatory requirements. The Law has sufficient provisions that trading on the markets is

transparent, and supervisory authority has direct responsibility for detecting insider trading and other

forms of market abuse, which will be further subject of uses and assistance of technological system.

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

(2015):

1. Rules on securities issuance and conversion at reorganization of juridical entities;

2. Rules on real estate certificates in the Republic of Azerbaijan;

3. Rules on merging, splitting and par value increase of shares;

4. Requirements applicable to issuers’ management reports;

5. Rules on statutory registry of securities;

6. Rules on issuance of securities outside of the boarders of the Republic of Azerbaijan;

7. Disclosure rules for persons conducting research on securities or issuers, proposing investment strategies recommendations;

8. Rules on lien registration, lien cancelation, pledge management;

9. Disclosure rules on securities issuers;

10. Rules on prospectuses and information memoranda;

11. Rules on transactions with investment securities;

12. Rules on investment securities subscription and allocation; 13. Rules on payment, notarial and depository registration of securities enactment contracts;

14. Regulations on market manipulation (market abuse);

15. Rules on issuers maximal limits of bond issuances;

16. Regulations on the registration of the mortgage cover and form and manner of a mortgage cover inspection report;

17. Rules on registry-keeping of the mortgage covers, depository reports on validating mortgage covers;

18. Regulations on the procedure of stabilization of prices of securities;

19. Rules on issuance, registration and turnover of depository receipts;

20. Rules on placement and turnover of derivative financial instruments;

21. Disclosure rules for stock exchanges;

22. Rules on drafting and submission of reports by investment firms;

23. Rules on conducting investment services (transactions) by investment firms;

24. Rules on post-trading systems and clearing operations;

25. Rules on margin trading with securities;

74

2.3.2 Tax regime initiatives:

One of the aspects of the component 2 was modernization of the tax legislation in respect of the securities

market operations. Together with the Project consultants the SCS specialists elaborated main aspects of

the taxation legislation and in 2015 proposed the following amendments to the Ministry of Taxes:

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

investors);

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

tax on investors);

- Elimination of the capital gain tax in securities operations;

- Elimination of tax on profit made from difference of par value and public placement price of

shares;

- Elimination of profit tax on accrued interest of fixed income instruments;

- Elimination of the VAT tax on financial services operations made with securities.

The Ministry of Taxes were handed the prepared drafts of amendments to be made into variety of

legislative acts and codes to implement the above stimulating measures. The amendments will be

considered as a part of the State Budgetary plenaries in 2016/7.

In January 2016, the Parliament adopted amendment to the Taxation Code withdrawing profits tax on

dividends and coupon payments for the next 3 fiscal years.

2.4. Component 3: Stimulating Supply

This Component was designed to promote greater use of capital markets as a financing alternative by

focusing on creating a more appropriate environment to encourage equity listings and the corporate bond

market; actively reaching out to corporations to promote benefits of financial market as a funding

alternative and working pro-actively with prospective issuers to assist them in coming to the market.


- Re-organization of the BSE listing tiers and adoption of the new listing requirements;

- BSE trading (subscription, public offer and secondary market) rules and procedures enabling

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

market regulation;

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

platforms.

26. Rules on conducting attestations for qualification certificates on delivering investment firm services (transactions);

27. Rules on attestation of executives and branch managers of licensed entities in securities market;

28. Regulations on the requirements to external auditors of the regulated institutions;

29. Rules on minimum chapter capital and sources of its formation for licensed entities in securities market;

30. Rules of capital adequacy for investment firms.

75

2.4.1. New Listing regulations at BSE:

As a key aspect of the Component 3 the re-drafting of BSE listing/delisting rules and regulations were

started in 2014. Initial changes were made to the listing rules on the 30th

of January, 2015. After the

adoption of the “On Securities Market Law” (2015) the listing rules and regulations were updated to fully

comply with certain provisions (definitions) of the new Law.

Regarding the new Listing regulations, separation of bond and stock market, the creation of market

segments, minimum capital requirements according to market segments, compulsory free float rates are

the most noteworthy changes for the description of key developments headline.

Before the modernization of Market Structure, Bond and Stock markets (requirements to Bond and Stock

issuers) were not separated. Therefore, there was sole requirement for the acceptance of companies to the

listing and disclosures for both the issuance of stocks and bonds. However, after the new regulations, the

bond and stock markets were apportioned and each was treated as an independent market as regards to

listing and disclosure requirements.

Moreover, after the approval of new Listing regulations, the transition from 2 tiers listing structure (1st tire

and the 2nd

tire listing markets) to 3 tiers listing structure (Prime, Standard and Alternative segmentations)

was realized. This development made the ground for the companies to be rearranged to these market

segments according to their financial and other indicators.

One of the main contributions of new Listing regulations was to shed light on the minimum capital

requirements of the companies. Hence, companies that were to be listed in prime segment should carry at

least 2.5 million AZN of minimum capital requirement), this indicator is 0.5 million AZN for standard

market segment (in which there was not any capital requirement before new the regulation).

Another noteworthy and one of most essential changes was the creation of free-float rates required to be

listed in each tier. For the Prime market, minimum portion of shares to be on free-float if 5% to 10%

depending on the overall equity of the company and those new shares should be held by at least 50

shareholders and no more than 5 % for each singular investor.

It can be noted that there were substantial changes in the listing requirements, trading fees and the

acceptance regulation of the companies to the listing.

For the easing of burden of the listed companies and to enhance the capital market practice, some fees

were substantially lowered, even some of them totally eliminated. With respect to these modifications,

one-time fee for being accepted to the listing was canceled out which was 3000 AZN and 600 AZN for

stocks and 600 AZN and 300 AZN for bonds for the 1st and the 2nd tire listings, respectively.

76

Annual membership fee for issuers was fixed by 1000 AZN in prime market, 500 AZN in standard market

and 200 AZN in alternative market. Previously, these numbers were 0.03% of total issue in the 1st tire

listing and 0.015% of total issue 2nd

tire listing.

Moreover, the bonds to be traded in prime market segment were required by this new regulation to be

rated by S&P and Fitch rating agencies with the rating “BBB-“, “Baa3” by Moody’s or should be rated

with the equivalent rating by other rating agencies. Otherwise, Market maker is required to be appointed

for these bonds within the whole maturity date of these securities.

Additionally, for providing the creditworthiness of issuer, it is required that 50 % of the sum of the last 3

year PBIT (which should take into consideration the outstanding bonds as well) should exceed the annual

interest payments on the new issued bonds.

2.4.1.a. Equity Market Listing Requirements:

Market

Structure

(listing

levels)

Listing Requirements

Primary

Market

Issuer should have the legal form of OJSC

No bankruptcy procedures should have been started for the year before

the listing application

Net positive income for at least one of the past three years

At least one year of operating history

Equity capital AZN 2.5m - 5m: minimum 10% free float

Equity capital AZN 5m - 10m: minimum 7% free float

Equity capital more than AZN 10m: minimum 5% free float

Shares in free float should be divided among at least 50 shareholders,

each of whom cannot possess more than 5% of total shares.

Financial statements prepared in accordance with IFRS and audited by

an international auditor

No significant changes in structural management for past six months

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

Standard

Market

Equity capital should be at least AZN 0.5m


Financial statements in accordance with local accounting standards

(GAP)

Audit by an independent auditor

Minimum of 5% free float (or at least AZN 125,000) which should be

divided among at least 20 shareholders, each of whom cannot possess

more than 5% of total shares.

Alternative Shares of issuers that do not meet the requirements of either the Primary

77

Trading

Market

Market or the Standard Market will be included in the Alternative

Trading Market

2.4.1.b. Bond Market Listing Requirements:

Market

Structure

(listing

levels)

Listing Requirements

Primary

Market

Financial statements prepared in accordance with IFRS, and audited by

an international auditor

No significant changes in structural management for past six months

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

No bankruptcy can be declared by the issuer during one year prior to the

date of submission of listing application

Equity capital at least AZN 2.5m.

The presence of a market-maker and/or a high credit ranking granted by

an international credit agency (i.e. at least “BBB-” from Standard &

Poor's or Fitch, “Baa3” from Moody's, or equivalent of those rankings

granted from other rating agencies)

Sound and clear debt history

The I to be paid over one year should not be more than 50% of total

earnings before tax for the past three years.

Government bonds can be traded in this segment

Bonds with maturity of less than one year cannot be traded in this

market

Standard

Market

Equity capital should be at least AZN 0.5m

Net positive income for at least one of the past three years


Financial statements in accordance with local accounting standards

(GAP)

Audit by an independent auditor

Sound and clear debt history

Alternative

Trading

Market

Bonds of issuers that do not meet the requirements of either the Primary

Market or the Standard Market will be included in the Alternative

Trading Market

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

78

Segment /

Instrument Equity Bond

Prime

Market

DemirBank OJSC Ministry of Finance

Central Bank

International Bank of

Azerbaijan OJSC

Azerbaijan Mortgage Fund

SOCAR

Standard

Market

Azərkosmos OJSC Unileasing CJSC

Finans Lizinq OJSC

Turanbank OJSC Finex Kredit BOKT OJSC

KredAqro CJSC

Aqrolizinq OJSC Merkuri BOKT LLC

Amrahbank OJSC

Alternative

Market

Meqa Siğorta OJSC ProKredit BOKT OJSC

Bank BTB OJSC Premier Kredit BOKT LLC

Bakı Siğorta OJSC FinansLizinq OJSC

Muğanbank OJSC FINOKOBOKT OJSC

FINOKO BOKT OJSC

AXA MBASK Sığorta Şirkəti

OJSC

FinEx Kredit BOKT"OJSC

Bank of Baku OJSC

Rabita Bank OJSC

2.4.3. Listing Advisory Program:

Listing Advisory Program was established and implemented by Baku Stock Exchange within Capital

Market Modernization Project as part of the government program of “The development of the Capital

Markets of Azerbaijan for the years of 2011-2020”. The Program was launched in April 2014 and aims to

build on success in making a “highly effective securities market” in order to attract financial resources to

the real sector, move capital between sectors and increase effectiveness of the economic system,

contributing to creating better corporate governance and more transparency about economic activities of

listed issuers and increasing popular participation. Together with the consortium of the partners joining the

initiative (the country’s leading auditors, lawyers, investment firms) LAP is conducting seminars and

round-tables for prospective issuers on variety of technical topics, and, on pro-bono basis, is providing

issuers with legal and organizational guidance and support to assess their needs and potentials for capital

market fund raising, and, once decided, fulfill the whole process, from drafting comprehensive prospectus

to organization of secondary market for their issued instruments. So far, more than 40 local companies

participated in the initiative, out of 16 companies signed special agreement with LAP consortium for

closer, one-to-one cooperation and support of the capital market fund raising.

Joining Partners of the LAP:

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

Legal companies: Dentons Azerbaijan, Baker & McKenzie;

79

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

Key activities of LAP in 2014/5/6:

LAP organized several seminars for companies that might be interested in listing. The aim of those

seminars was to educate companies and its management about the capital markets and help them to take

advantage of this market. Key events were:

On the 16th

of April 2014 LAP was introduced to the public through the initial workshop organized by

BSE.

On the 17th








On the 22nd





Issuers joined LAP and the initiative results:

Over what period have these shares ben issued?

# Name of the

Company

Memorand

um of

Cooperatio

n (under

LAP)

Listing

tier

Type

of

instru

ment

Number of

Issued

Securities

Par

value

per unit

Total Amount

of Issue

1 Azərkosmos ASC signed Standard Equit

y 1,180,530

AZN

20.00

AZN

23,610,600.00

2 Mega Sigorta ASC signed Alternati

ve

Equit

y 500

AZN

5,000.0

0

AZN

2,500,000.00

3 Bank of Baku ASC signed Alternati

ve

Equit

y 3,400,000

AZN

15.55

AZN

52,870,000.00

4 Bank BTB ASC signed Alternati

ve

Equit

y 5,160

AZN

1,000.0

0

AZN

5,160,000.00

80

Equit

y 2,000

AZN

1,000.0

0

AZN

2,000,000.00

5

Prokredit BOKT

ASC

signed Alternati

ve Debt

400

AZN

1,000.0

0

AZN

400,000.00

6 Finans Lizing ASC signed Standard

Debt 1,200

USD

500.00

USD

600,000.00

Debt 600

USD

500.00

USD

300,000.00

Debt 600

USD

500.00

USD

300,000.00

Debt 500

USD

500.00

USD

250,000.00

7 FinEx Kredit BOKT

ASC signed Standard

Debt 800

USD

500.00

USD

400,000.00

Debt 900

USD

500.00

USD

450,000.00

Debt 390

USD

500.00

USD

195,000.00

8 Finoko BOKT ASC signed Alternati

ve

Debt

750

USD

1,000.0

0

USD

750,000.00

Equit

y 70,000

AZN

10.00

AZN

700,000.00

9 Turanbank ASC signed Standard

Equit

y 43,440

AZN

1,082.0

0

AZN

47,002,080.00

Equit

y 2,773

AZN

1,082.0

0

AZN

3,000,386.00

10 Embawood MMC signed Standard Debt

10,000

AZN

1,000.0

0

AZN

10,000,000.00

11 Nikoil Bank ASC signed Standard Debt

5,000

USD

1,000.0

0

USD

5,000,000.00

12 Unileasing QSC signed Standard Debt 5,000

USD

1,000.0

USD

5,000,000.00

81

0

13 Azersun Holding

MMC signed

No issue till the moment of the report 14

Kaspiyan

Təhlükəsizlik

Baltaları MMC

signed

15 Səba Kredit MMC signed

16 Golden Pay ASC signed

2.4.4. List of Operational Rules and Regulations by BSE:

After the endorsement of the “on Securities Markets” Law in mid-2015 and subsequent adoption of new

implementing regulations by the SCS, in early 2016, BSE has totally revised and introduced its operational

rules and procedures. New BSE rules and procedures were strictly harmonized with new technological

trading and post-trading platform (the Capital Markets Information System) launched early 2016 as well.

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

1. Rules on trading membership; Enacted 30 Dec. 2015

2. Rules on trading of securities and derivative financial instruments;

Enacted 30 Dec. 2015

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


4. Rules dispute resolution at the Baku Stock Exchange; Enacted 30 Dec. 2015

5. Disclosure rules at the Baku Stock Exchange; Enacted 30 Dec. 2015

6. Rules on indices calculation; Enacted 30 Dec. 2015

7. Rules on ethical behavior and access to service information by the exchange executives;


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


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

2.5. Component 4: Capacity Building

This Component was designed to overcome the low capacity of market participants and regulators through

launching capacity building activities. First, as the SCS was the major force leading the CMMP reform, it

was important to assure that the agency’s human and financial capacities were sufficient and effective.

This Component, was aiming to: (i) strengthen the SCS’ knowledge management, its policy formation

processes and transparency of operations; and (ii) strengthen the institutional capacity of the SCS’

surveillance, reporting and enforcement systems. Second, investor education is a key factor to the

encouraging the breadth and depth of participation in capital markets. This Component included, inter

alia, activities to: (i) improve public awareness of the capital market by carrying out a series of effective

communication programs through media, outreach sessions hosted by the SCS in major cities of

82

Azerbaijan; (ii) increase potential investors’ understanding of capital market by series of education

seminars and outreach tools to nascent investment funds and insurance industry.


- Conducting of the Nation-wide Education Program, including producing and disseminating

printed, visual and interactive study materials for schools, universities and general public,

establishment of the Financial Laboratory at the Azerbaijan State University of Economics;

- Establishing Capital Markets Training Centre (CMTC);

2.5.1. Nationwide Education Program:

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

2015.

The action plan segmented the target audience and included the following initiatives:

- For secondary schools: i) Preparing and agreeing study material brochure for pupils and teachers

on securities market topics, ii) video films on securities market topics;

- For universities: i) updating economics faculties curriculum and study materials with securities

market topics; ii) assisting preparing separate securities market securities market classes and

subjects; iii) internship programs for students at SCS, BSE, NDC and market participants; iv)

Development of the electronic securities trading simulation platform; v) Research projects for

students on securities market topics; vi) Financial Laboratory (study room) organized at a leading

economics university faculty.

Within the Action Plan securities market study material (brochure and video film) was agreed and

produced, and as a pilot project they are studied as a part of curriculum in Baku schools no 7 and 189-190

for 7th

, 9th

, 10th

grade pupils. Test exams conducted at the end of pilot courses demonstrated positive

comprehension indications.

Capital market based case-study tournament was organized at the Azerbaijan State Economic University.

The results were studied by the academic staff of faculties and teaching materials on case study based

examination were disseminated to applicable faculty professors. Relevant capital market based library of

study material and case-studies (in the university’s all teaching languages: Azerbaijani, English, Russian

and Turkish) was created at the University and handed over to the professors and student unions. High

achieving students in capital market topics were appointed as “Capital Markets Ambassadors” by the SCS.

Ambassadors are entitled to create academic and business practice ties between students and market

participants/regulators.

Financial laboratory was created and handed over to the University by BSE. The laboratory is fully

equipped for seminar workshops, simulation trading activities, invited guess lectures, practical exercises.

The Lab’s annual activity schedule is drafted mutually by SCS and the University’s administration.

2.5.2. The Capital Market Training Centre (CMTC):

83

In 2013, together with the CMMP experts the SCS established a working group on planning and launching

of the Capital Markets Training Centre (CMTC) under auspices of the SCS. For the next 12 months the

CMTC’s strategic plan, development plan, management structure, financial plan, corporate identity and

legal for was agreed and prepared. The CMTC was officially launched and presented to the public on 01

March 2014. According to its strategic and marketing plan the initial courses portfolio was elaborated.

(According to the Charter of the Financial Markets Supervision Authority (FSMA) endorsed by the

Presidential Decree dated 10 March 2016 and subsequent amendments in the CMTC’s own Charter, the

Centre was organized as non-for-profit training center under the auspices of the FSMA).

Two main audiences that the CMTC is targeting are: a/Capacity building for the SCS, BSE and NDC

personnel and b/ Capital markets based training for wider professional audience including attestation exam

preparations for market participants. Currently, CMTC is developing its potential to develop consulting

capability to capital markets involved firms.

Training and Seminars conducted by CMTC in 2015:

No Date Audience Title No of

Participants

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

financial risk management 20

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

sector 10

3 4/27/2015 SCS personnel Team building 27

4 6/8/2015 SCS/BSE/NDC The ways financial markets

operate (Master Class) 12

5 9/7/2015 SCS personnel Corporate finance 31

6 10/16/2015 SCS/BSE/NDC Performance Management

(Master Class) 10

7 1/30/2016 "Fabrika Co-working Centre"

youth center participants

1) Capital Markets, instruments,

participants (seminar)

2) Foreign exchange (Master

Class)

30

8 2/9/2015

Azerbaijan Architecture and

Construction Engeneering

University strudents

Capital Markets financing,

instruments, participants

(seminar)

41

9 2/11/2015 Qafqaz University students Investment management

(Master Class) 32

10 2/12/2015 Public Administration Academy

students



(seminar)

26

84

11 2/19/2015 Qafqaz University students



(seminar)

40

12 2/25/2015 Baku State University Finance and finance

management (seminar) 27

13 3/10/2015 Azerbaijan State Economy

University students

Investment management

(Master Class) 10

14 3/11/2015

Azerbaijan State Economy

University students



(seminar)

17


University students Finance and finance

management (seminar) 32


University students Corporate finance 10


University students Foreign exchange 10

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

21 4/15/2015 Baku Business University

students



(seminar)

14

2.6. Capital Markets Information System:

The tender for supply and installation of Capital Markets Information Systems was announced on 18 April

2014 within works and goods category. The two stage bidding selection method was used for this

procurement.

According to the TOR the winning vendor should have developed the following systems:

- Trading system,

- Depository system,

- Clearing system,

- Market surveillance system,

- Broker front end system

- Install appropriate hardware and network infrastructure supporting the operation of the systems,

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

The main requirement to the platform was full integration, but modularity on database level, with usage of

industry standard protocols, allowing integration to RTGS (AZIPS systems). The Platform should have

been designed in the open architecture manner enabling incorporation of broker trading functionality by

users.

KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the contract was

signed and the integrated trading/post-trading/surveillance platform (branded CETA AZERBAIJAN) was

85

launched on the 17th

Feb 2016. The platform performs according to the expected indicators since the

official launching ensuring automation of all major processes at the local capital market trading and post-

trading. The platform enabled major placements including USD 100 mln public bond offering by State Oil

Company SOCAR in September 2016. The platform strictly complies with newly modernized and

introduced local legislation procedures, BSE listing and trading procedures, NDC post-trading, depository-

clearing and registry-keeping rules.

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

The project’s development objective was to increase the use of equity and corporate debt as financing

and/or investment instruments through the adoption of an effective capital markets regulatory framework

and infrastructure. The PDO level results indicators are: (i) increased issuance of corporate bonds; (ii)

increased number of listed companies and (iii) improved price transparency. The Project outcome and

output indicators are measurable

PDO 1. Increased issuance of corporate bonds

2010 2011 2012 2013 2014 2015 2016 6m


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

Non-oil GDP 18,443 24,165 28,474 32,638 35,969 37,670 10,939


corporate debt/Non-oil GDP 1.9% 3.8% 2.6% 4.1% 11.0% 11.7% 23.9%

This indicator represents the ratio of outstanding amount of corporate debt to non-oil GDP (the

outstanding amount of corporate debt to 2010 non-oil GDP, 1.9% was taken as a baseline for the

indicator).

In 2016 outstanding amount of corporate debt to non-oil GDP increased to 23.9%. The baseline indicator

was 1.9% and the target was 3.8%.

The major factor for increase in indicator was a significant increase of corporate bond issuance including

by organizations like Azerbaijan Mortgage Fund (AMF). From 2011 to 2015 total issuance of AMF bonds

amounted to 256.6 mln AZN. Optimized REPO procedures, introduced incentives for market makers,

awareness programs to treasury managers resulted in total amount of corporate debt issuance from 2011 to

2016 was 2,400 mln AZN. The outstanding amount of corporate debt at the end of the project to baseline

year’s (2010) non-oil GDP is 14.2%, which is still considerably higher than expected target of 3.8%.

PDO 2. Increased number of companies with listed equity

2010 2011 2012 2013 2014 2015 2016 6M

Prime Market - 1 1 1 1 2 2

Standard Market - - - - - 3 3

86

In 2016 number of companies with listed equity is 5. The baseline was 2 and the target was 8-10

companies. There was only one listed company during 2010 - 2014 periods. The company was listed in the

first Tier. However, most of the transactions occurred in the Alternative Trading Market (ATM) without

needing to fulfill extensive listing and disclosure requirements. The first listing took place in the first tier

in 2011 which was Demir Bank OJSC with market capitalization of 23.11 million AZN. Due to the low

volatility in the market, this number has not significantly changed during the period from 2011 to 2014. In

2015 four new companies were listed in BSE. 1 – International Bank of Azerbaijan in Prime Market 2 –

Azerkosmos, Turanbank and Aqrolising in Standard market. Overall market capitalization increased to

1,019 million AZN. The Listing Advisory Program and other initiatives worked with tens of local

potential IPO candidates. Global financial crisis consequences, geo-political and regional instability and

volatilities in national currencies in all neighboring countries as well as in commodity prices turned local

issuers to conservative mood, making them consider bond issuances as more applicable capital market

fund raising tool, if any at all.

PDO 3. Improved price transparency

2010 2011 2012 2013 2014 2015 2016 6M

Price Transparency - 0% 0% 0% 100% 100% 100%

In 2016 overall price transparency indicator was 100%. The target for that period was 90%.

In 2014 the SCS, BSE and NDC took a number of measures to increase transparency and accessibility of

trades to all categories of traders and investors. First, a special regime was adopted at BSE for all cross

transactions at secondary market (cross transactions are transactions conducted by the same broker from

the buying and the selling side). Thus, a crossing transaction cannot be matched (finalized) unless within

next 30 minutes of trade session any other broker bids with better conditions (price) for the buying or the

selling side of the transaction. If the latter happens, the auction starts. If no interest was shown the original

transition was finalized. In 2015 the holding period of cross transactions was prolonged to 60 minutes.

Secondly, in 2014 the special regime was introduced by the NDC to let smaller and less financially

advanced brokers to participate instantly in cross transaction. The NDC eliminated funds pre-validation

regime for all categories of brokers and let them deliver funds after the transaction matched. The funds

provision is ensured by liquid assets pledged or bank guaranty mechanisms. Elimination of funds pre-

validation allows brokers and all categories of investors to promptly react on bid quotes in the trading

system. All transactions that appear on BSE trading system are a non-block transaction which means that

all of the transactions are counted as being competitive transactions. Thus all transactions in BSE trading

system are transparent and competitive.

Intermediate Results:

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

Infrastructure:

2010 2011 2012 2013 2014 2015 2016 6M

Ratio of market

participants



0% 0%

100%

0%

100%

75%

100%

90%

100%

100%

100%

100%

100%

87


settlements)

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

electronically connected to trading and post-trading operations at BSE, NDC and other involved entities,

the transformation was instant due to the decision of BSE and NDC to conduct all the necessary changes at

once and at their own expense. Thus, in 2011 BSE and NDC agreed the electronic protocol of data

exchange, developed the connection facilities and handed over them to all brokers. Later, in 2016 the

achievement was reinforced by implementation of the Korean technologies, through which, inter alia, the

surveillance, market watch and DVP processes were also processed and automated.

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

Regulatory Framework

2010 2011 2012 2013 2014 2015 2016 6M

Enactment of a new

Capital Market Act No

No

No

Yes

No

Yes

No

Yes

No

Yes

Yes

Yes

Yes

After inter-ministerial, parliamentary and Presidential Administration discussions, the “On Securities

Markets” Law was enacted in July 2015.

Intermediate Result indicator Three (Component Two): Promulgation of capital markets

regulation required upon enactment of Law

2010 2011 2012 2013 2014 2015 2016 6M

Promulgation of capital

markets regulation

required upon

enactment of Law

No No

No

Yes

No

Yes

No

Yes

No

Yes

Yes

Yes

Yes

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

by end of the 2015.

Intermediate Result indicator Four (Component Three): Number of companies involved in

the listing advisory program (debt and equity)

2010 2011 2012 2013 2014 2015 2016 6M

Number of companies

involved in the listing

advisory program (debt

and equity)

0

5

0

10

0

15

1

15

4

15

16

15

16

88

The Listing Advisory program came into being after extensive negotiations with potential service

providers (brokers, auditors, lawyers and others) on 16th of April 2014.

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

seminars for companies that might be interested in listing. The aim of those seminars was to educate

companies and its management about the capital markets opportunities and help them to take advantage of

this market. Key events were:

On the 17th








On the 22nd





Since its establishment and till the end of the Project period, the LAP signed consortium contracts with 16

organizations, out of which 12 listed their instruments at Prime and Standard tier of BSE listing.

Alternative tier companies are decided not to be taken into account for the purposes of this indicator as

ATM tier companies are either offered to or traded by limited number of investors or have lower listing

entrance requirements.

Intermediate Result indicator Five (Component Four): Increased of the threshold pass rate

of the Financial Certification examination for market participants

2010 2011 2012 2013 2014 2015 2016 6M

Increased of the

threshold pass rate of

the Financial

Certification

examination for market

participants

50%

50%

50%

55%

50%

60%

75%

65%

75%

75%

75%

75%

75%

Financial Certification examinations were conducted by the SCS and lately by the FSMA. In 2013 the

methodology of the examination was completely revised based on the Consultant’s recommendations.

Since 2014 the CMTC provides preparation courses for the examinations. The threshold pass rate for the

Financial Certification has been 75% for the last 4 reporting periods.

89

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

Market Instruments

2010 2011 2012 2013 2014 2015 2016 6M

Consumer Awareness

of Capital Market

Instruments

24%

28

N/A

33

32

37

36

41

56

45

59.11

45

59.38

Consumer Awareness of Capital Market instruments was the most important indication that the SCS was

focusing on. Initiatives like establishing CMTC, launching LAP, Nation-wide Education Program

initiative, cooperation with universities, youth organizations and journalists, conducting local and

international conferences and workshops (detailed in above chapters) contributed to the increasing rates of

financial literacy and consumer awareness. Moreover, the CMMP coincided with analogous initiatives of

other financial institutions and governmental bodies, with whom the SCS cooperated closely in this regard

(CBAR, MoF, etc). The indication surveys were conducted by the external independent specialized

companies.

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

There were 3 occasions when the Project’s work plan was amended to comply with its main direction and

goals: at the inception (October 2012), in the midst of the project span (October 2014) and at the end of

the original project period (extension negotiations, October 2015- February 2016). All amendments were

pre-approved by the World Bank and consequently confirmed by official amendments to the consulting

services contract (the provision of goods contract remained unchanged for the whole period from Jan 2015

to Feb 2016).

4.1. Inception period amendments:

In the initial meetings in October 2012 with the project team, the Consultant and the World Bank, the

SCS’ Chairman raised the issue of importance of increasing listing on BSE as a priority of the initial phase

to be supported by CMMP. The SCS had been considering the creation of a Listing Advisory Program

(LAP) to attract issuers to listing with resources to be allocated from BSE, SCS and other market

participants and professionals to actively promote Capital Market, provide training and provide

preliminary listing advisory services. The Consultant was requested to take the lead in defining the

program and provide technical and managerial support with its delivery. Supporting the LAP necessitated

changes to the activities under Component 3 namely 3.1.1, 3.1.2, 3.2.3, 3.3.1 and 3.3.2. (See table 2.1.1

above).

Moreover, other changes were also agreed in the inception phase.

Activities 2.3.1: “Review and analyze the risks and opportunities” and 2.3.2: “Recommendations on the

optimal participation of the banks and requirements” were considered no longer required as the Central

Bank had decided that commercial banks would only participate in Capital Market through their

subsidiaries and not directly. Resources of these two tasks were agreed to utilize to support BSE to

develop their rules and regulations to adapt new technological and legislative environment after launching

the Capital Markets Information system and enactment of the new “On Securities Market Law”

accordingly.

90

Activities 3.2.4 and 3.3.2 were similarly re-focused to concentrate on LAP activities, supporting seminars

to be provided by the LAP etc.

Activity 3.4.2: “Develop and publish educational material on Corporate Governance” was considered no

longer valid as the IFC had initiated, prepared and published extensive material on Corporate Governance

for local issuers. The Consultant was asked to assist BSE and prepare a study material on opportunities of

IPO for local issuers.



4.2. Mid-period amendments:

In mid-2014 the SCS initiated another round of negotiations with the World Bank and the Consultant on

updating and amending the tasks and activities in the deliverables to comply with the recent developments

at the capital markets.

The role of the NDC as an asset manager of commercial investment funds were was reconsidered based on

the experts recommendation in order to prevent the State owned NDC’s monopolization of the segment.

Thus, it was asked to re-direct the Activity 1.3.8 from NDC to providing recommendations on potential

private fund administration entities.

Activities 2.2.2 and 2.2.3 were renamed and reshaped in order to comply fully with the task of preparing

the implementing regulations that would support the new “On Securities Market Law” draft.

Activity 2.3.3 was reconsidered to concentrate more specifically on role of banks in newly proposed

settlement model for the securities market of the country.

In light of the local real estate market dynamics, Activities3.5.4 and 3.5.5 were re-organized to focus on

bringing international expertise of organizing foreign securities trade (MTF) to BSE.

Activities 4.6.4 and 4.6.5 supporting the CMTC were completed by the SCS itself before the

commencement date of the Consultant assignment. So, the Consultant was asked to prepare self-study

materials on various topics of the capital market operations.



4.3 Extension of the Project period:

In light of the complexity and significance of CMIS procurement tender as well as multiplicity of terms

and conditions to be assessed, in the first quarter of 2015 the SCS and the World Bank started negotiating

the possibility of the Project Period extension. Indeed, the procurement of the CMIS took longer time than

initially anticipated. The project closing date extension topic was eventually triggered by the need to

complete installation of CMIS in 12 months period after its inception, whereas all pre-requisite technical

agreements and future contract negotiation were completed by mid-February 2015. The implementation of

the information system could be finalized at least within 12 months, meaning a two-month slippage from

91

the project’s original end-date (31 Dec 2015). In turn, the assessment of the development and

implementation results of the CMIS was possible only after its go-live and required the consultants at least

one month after its launching to be able to comprehensively assess all aspects of the implementation.

At the same time, the SCS requested to consider two additional tasks for CMTC strategic development and

sustainability. In consultation with the World Bank it was decided to sign new agreement with the same

Consultant for additional services. The SCS asked the World Bank’s no-objection for SSS method and the

Bank provided SCS with NOL on February 1, 2016 and new agreement with Corporate Solutions

Consulting Ltd was signed on the same date. At the same time the existing agreement was extended to

conduct the deliverable no 1.4.5 on assessing the CMIS implementation results.

The Borrower, Ministry of Finance (MOF) of Azerbaijan, requested extension of the project for additional

6 months to have enough time for CMIS installation and handover and accommodating services. The Bank

provided its approval of Project Closing Date extension till July 01, 2016.

5. Financial Reports are attached to the report:

See attached XL tables

93

Forecast : Next

6 months

GoA 157 781,11 2 094 595,42

IBRD 230 888,26 11 999 971,99

Other - 1 410,86

SECO - 1 600 000,00

Total financing

Incremental operating cost 1 594,10 104 063,24

Consultants’ services including Audit and Training SECO - 1 385 816,56

Incremental Other - 1 295,60

Front-end fee - 30 000,00

Good 172 414,63 5 542 845,90

Consultants’ services including Audit and Training 309 777,59 8 591 166,44

Total expenditure

-95 116,95 40 790,53

Add : Foreign exchange difference

Add : Net change in advances given

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

Opening cash balance

International Bank of Azerbaijan (Project A/c, AZN) 47,44

International Bank of Azerbaijan (DA,USD) 135 193,52

Total opening cash

Add : Net change in cash

Net cash available

Closing cash balance

Xalq BankSahil Branch (DA) 39 968,32 39 968,32

Xalq BankSahil Branch (Project, AZN) 147,19 147,19

Total closing cash balance

Note:

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

Signator 1: / / /

signature date signator's initials position

Signator 2: / / /



Capital Market Modernization Project

Sources and Uses of Funds

For the period ended: 9/30/2016

in USD

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

Cash receipts

388 669,37 15 695 978,27

Less: expenditure by categories

483 786,32 15 655 187,74

Receipts less expenditure

-8,50 -675,02

- -

135,240.96

-95 125,45 40 115,51

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

40,115.51 40,115.51

40 115,51 40 115,51

The following rates were used for conversion:

94

N Planned Actual Variance Planned Actual Variance

483,786,32 483,786,32 15,678,658,83 15,655,187,74 23,471,09

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

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

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

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

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

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

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

Signator 1: / / /


Signator 2: / / /




Uses of Funds by Project Activities

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

in USD

Quarter Cumulative

Project Component/Activity

Total Project Expenditure

Streamlining and Automating Market Infrastructure

Updating and Strengthening the Legal and Regulatory Framework

Stimulating Supply

Capacity Building

VAT

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

Project management

95

1 176,598.48

2 235.97

3 214,000.00

390,834.45

4

5 390,834.45

6

7 350,432.15

8 2,074.54

9

10 350,432.15

11 40,402.30

NOTES

/i:

Disclosure to Dİscrepancy (11):

268.22

174,922.02

Total discrepancy 175,190.24

Signator 1: / / /




Designated Account (DA) Statement

International Bank of Azerbaijan (DA,USD)

as of 9/30/2016

in USD

Opening balance as at 1/1/2016

Add: Cumulative unexplained discrepancy

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

Less: Refund to IBRD from DA during the period from: 1/1/2016 to: 9/30/2016

Present outstanding amount advanced to DA

DA closing balance as at 9/30/2016 carried forward to next period

Add: Amount of eligible expenditures paid during quarter

Service charges (if debited into DA)

Less: Interest earned (if credited into DA)

Amounts due to other bank accounts(-) or DA (+)

Amount in cash on hand (retained (+)/due (-))

Total advance accounted for

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

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

advanced by the Bank but not yet credited by the DA bank, etc.

Foreign exchange difference(losses (-)/gains(+)

Payables(-)/advances(+) to contractors and employees

96

ASSETS

Cash and cash equivalents

147.19

39,968.32

Advance Payments

Cumulative Project Expenditures 1/ 15,655,187.74

FUNDS AND LIABILITIES

Project Financing 2/ 15,695,978.27

Other income (like bid fees)

Exchange Rate Difference 3/ -675.02

Total funds and liabilities

NOTE:

1/ Total Uses of Funds (see Report 1-A)

2/ Total Sources of Funds (see report 1-A)

3/ See Report 1-A

Signator 1: / / /


Signator 2: / / /


PROJECT BALANCE SHEET

as of: 9/30/2016

in USD

15,695,303.25

15,695,303.25

International Bank of Azerbaijan (Project A/c, AZN)

International Bank of Azerbaijan (DA,USD)

Xalq BankSahil Branch (Project, AZN)

Xalq BankSahil Branch (DA)

Total assets