Vice-President: ADB to continue supporting Azerbaijan’s participation in regional integration

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Exclusive interview of Trend and Azernews with Wencai Zhang, Vice-President of the Asian Development Bank (ADB), tells AzerNews about ADB-Azerbaijan cooperation, current and future plans

Question: How will ADB’s new corporate strategy support Azerbaijan’s national development strategy for development and facilitate closer cooperation?

Answer: Thank you for the question and for the warm welcome of my visit to your beautiful country. I’m very pleased to be here. Strategy 2030 sets the course for ADB’s efforts to respond to the changing needs of Asia and the Pacific until 2030. In the past five years, we have seen Azerbaijan’s needs significantly change as the country’s economy has expanded and diversified. Strategy 2030 identifies seven operational priorities which were developed in close consultation with our members, including Azerbaijan. Our priorities are (i) addressing remaining poverty and reducing inequality; ii) accelerating progress in gender equality; (iii) tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability; (iv) making cities more livable; (v) promoting rural development and food security; (vi) strengthening governance and institutional capacity; and, (vii) fostering regional cooperation. These focus areas, with due consideration of the country’s specific needs and the government’s policy priorities, will guide our engagement with Azerbaijan in the medium-term. Our current Country Partnership Strategy (CPS) with Azerbaijan will end in 2018. A new CPS (2019–2023) is now being prepared. It is expected to be completed in the first half of 2019. The new CPS will build on extensive consultations with a wide range of development stakeholders in Azerbaijan; an analysis of binding constraints to inclusive growth; the government’s strategic roadmaps; as well as ADB’s Strategy 2030.

Q.: You mentioned that a new CPS for Azerbaijan is now being prepared. Are you able to share the main differences between the current CPS (2014-2018) and the new CPS (2019-2023)?

A.: It is a little too early to discuss specifics. ADBs Independent Evaluation Department is currently evaluating what worked well in the current CPS and what could be improved. We have also commissioned a country diagnostic study to identify and suggest solutions to address the main constraints to inclusive growth, and another study on state-owned enterprises (SOEs) to identify how to improve their efficiency and effectiveness. The government has also provided guidance on their expectations for the new CPS in terms of its sector and thematic focus, and support modalities and instruments. The three main areas that ADB will likely focus on over the next five years in Azerbaijan are: (i) supporting the acceleration, sustainability and diversification of the country’s economy; (ii) improving the efficiency of the public sector; and (iii) improving infrastructure and human capital to meet the needs of a diversified economy. In addition, ADB will continue supporting Azerbaijan’s participation in regional cooperation and integration.

Q.: What kind of support does ADB intend to provide to improve the public sector?

A.: The government has undertaken several important reforms to increase the efficiency of public spending and improve SOE performance. These reforms are supported by ADB’s Improving Governance and Public Sector Efficiency Program – a programmatic approach to support policy reforms that was approved in December 2017. Specifically, the government has adopted fiscal rules to reduce budget dependency on oil revenues; a medium-term expenditure framework to sustain state budget expenditures on critical infrastructure projects and social sector (education, health, social assistance); and a public debt management strategy to ensure fiscal sustainability of the government’s and public corporate sector’s borrowing. We commend these measures.

As I’ve mentioned, ADB has conducted a study on Azerbaijan’s SOE sector. The study proposes a four-step reform approach: (i) the development of a state-ownership policy; (ii) the alignment of the legal and regulatory framework with the state-ownership policy; (iii) the setting up an overarching commercial performance framework for SOEs; and (iv) upon successful completion of the previous steps, increasing the private sector’s role through the adoption of a strategic divestment approach and mainstreaming public-private partnerships (PPPs) in some sectors. ADB’s support may also extend to providing financial and technical assistance to transform relevant SOEs from budget-dependent and loss-making to commercially viable and financially sustainable corporations.

Q.: ADB is working with Azerishiq to make the power supply more reliable. This summer we had a blackout due to a disruption in the system. Does ADB intend to continue to support the power distribution sector?

A.: ADB supports the Government’s efforts to reform the energy sector and ensure a reliable supply of power to households and businesses. The introduction of two layers of differentiated electricity tariffs in December 2016 and the establishment of the Energy Sector Regulator in December 2017 are welcome reforms. The government now plans to undertake further reforms, which we also support. They are: (i) establishing a regulatory framework for sustainable tariff mechanisms; (ii) adopting an electricity market law; and (iii) creating the Renewables and Alternative Energy Framework, including legislation on Efficient Use of Energy Resources and Energy Efficiency; (iv) further power sector unbundling or separation of transmission assets from generation.

The first tranche of ADB’s multitranche financing facility (MFF) for Power Distribution Enhancement Program has helped reduce the losses of electricity and generate additional revenues via enhanced collection. The second tranche, if implemented, can further promote the technical and financial viability of the Power Distribution Company (Azerishiq). Apart from rehabilitation of critical elements of power distribution infrastructure, the first tranche also supported the preparation of the electricity sector’s financial recovery plan. The approval of this plan, which recommends a new electricity tariffs structure, will encourage private sector investment and provide a foundation for ADB’s continued support. ADB will continue to support the government’s plan to develop renewable energy, including through the pilot design-build-operate project on floating solar panels on Boyukshor Lake. We are discussing with the government on how ADB can continue to support the power distribution sector.

Q.: Are there opportunities for ADB to build partnerships in other sectors or areas?

A.: Yes, there are. In December 2017, the Government established the Small and Medium Enterprises Development Agency (SMEDA). SMEDA and ADB are working together to promote PPPs in the country. The Government also recently drafted a concept that provides an overarching vision and policy statement on PPPs. ADB commends the government for their focus on PPPs. Through our policy-based loans we can support reform measures on creating an enabling environment and adoption of government-support mechanisms (such as viability gap funding) to facilitate the roll-out of PPP projects across the country. We are also discussing with the government on several PPP proposals to encourage private sector participation, including two pilot power-sector projects, and one project for the student accommodation in Baku that we are closely working on with the Ministry of Education and the Ministry of Economy.

In the finance sector, the government and ADB is focused on easing access to finance for businesses. This is key to growing the private sector and generating jobs, especially for SMEs. To this end and given the still fragile condition of the banking sector, it is important to develop domestic capital markets as an alternative source of funding for the private sector’s investment needs. ADB’s local currency bonds could serve this purpose. ADB held the first round of dialog on this matter in September 2018. We hope that the government will provide the necessary approvals and confirmations to launch the first-ever issuance of ADB bonds in manat. If successful, these ADB manat-denominated bonds will have longer tenors and the proceeds will be attractive for selected local banks and non-banking credit institutions. These financial intermediaries could offer a more diverse menu of manat financing with better terms and conditions for their customers.

We will also discuss with the government on how ADB can support the urban and rural infrastructure and human capital development.

Q.: Last year, ADB approved a sector development program to finance the first phase of the North-South Railway Corridor. What is the status of this project and will ADB support the second phase?

A.: In December 2017, ADB approved two loans for a total of $400 million for the Azerbaijan Railway Sector Development Program. The Program is designed to improve Azerbaijan’s rail services and the financial viability of its operators. It consists of two parts: a $250 million policy-based loan and a $150 million project investment loan. The policy component supports railway sector reforms, such as strengthening corporate governance of Azerbaijan Railways (ADY) through, for instance, establishment of a professional supervisory board, and improving financial and asset management systems. We commend the government and ADY with initiation of the comprehensive railway sector reforms and stand ready to support their effective and timely implementation and completion.

The project component will finance the rehabilitation of a double-track and structures on the Yalama-Sumgayit section. This section is a critical part of the North–South Railway Corridor within the Central Asia Regional Economic Cooperation program. The project component is also jointly co-financed by the French Development Agency – AFD. The preparation of bid documents for the scope of work is almost complete. The tender announcement is expected by the end of next month. We hope that work will commence on the project in early 2019.

The second phase, as we understand, will include the rehabilitation of the southern section down to Astara. The Railway company – ADY – has recently started preparatory works, including the project design. If the government approaches ADB to provide financing for this project, we will be happy to consider the request.

Q.: How will the government’s new debt management strategy affect cooperation with ADB? Does the bank plan to change its strategy as a result?

A.: ADB’s Strategy 2030 encourages broader engagement with upper middle-income countries (UMICs), such as Azerbaijan. Our focus will be on the areas where we can add the most value. Given the Government’s conservative approach to external borrowing, the new CPS, in its early years, will support the Government through policy-based operations, technical assistance, policy dialogue, and capacity development of key government institutions. We also aim to increase our work in private sector operations; provide local currency financing through tapping the domestic capital market; and deploy new lending approaches such as project-ready financing for the preparation and design of projects, which was requested by Government during the initial years of the CPS. In the second half of the CPS, when we expect bigger public borrowing space, ADB–while continuing to support structural policy reforms–will selectively finance high-priority, innovative and smart development projects, especially those that utilize the latest technologies and are regarded as international best practice.