REPUBLIC OF AZERBAIJAN

RURAL INFRASTRUCTURE SERVICES IN AZERBAIJAN

SECTOR NOTE

JANUARY 2001

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Rural Infrastructure Sector Work

CONTENTS

PAGE

Acknowledgements

Acronyms and Abbreviations

PREFACE

i.EXECUTIVE SUMMARY

ii.INTRODUCTION AND OVERVIEW

Purpose

Approach

Structure of the Note

Background and Context for Rural Development

I.PART ONE: ESTABLISHING RURAL INFRASTRUCTURE TYPOLOGIES

Analysis of the Tables:

II.PART TWO: DESCRIPTION OF RURAL INFRASTRUCTURE, ITS INSTITUTIONS AND DELIVERY MECHANISMS

Organization of Government and the Public Realm

Organization of Government

Local Government Institutions and Decision-Making Processes

Organized Civil Society

Government in Rural Areas

Legal Context of Rural Municipalities: Rights, Responsibilities and Obligations

Financial Arrangements and Funding Sources

Essential Infrastructure

Road Transport

Electric Power

State Water Committee

Amelioration andIrrigation

Telecommunications

(Primary) Education Facilities

Health Facilities

Administrative Buildings

Overview of Service Delivery Systems

III.PART THREE: INSTITUTIONAL AUDIT AND ANALYSIS OF DELIVERY EFFECTIVENESS

Mandating Participation of Local Government in Service Delivery

A New Role for Central and Local Government

Problems with Public Sector Service Delivery

Centralization - the ‘Traditional’ Response

Context for Services Upgrading in Rural Areas

Institutional Strengthening Issues of Relevance to Rural Development and the Agricultural Sector

Overview of Problems Identified

Constraints to Rural Service

Summary Analysis of Infrastructure Issues for Resolution

Citizen Responses to Public Sector Deficiencies

The Role of NGOs and Emerging Civil Society

Key Findings of Institutional Audit

Roles and responsibilities

Developing support for policies

Reducing transaction costs

The Need to Develop Trust

Budgeting and financial management

Improving overall capacity

IV.PART FOUR: CONSIDERATIONS AND OPTIONS FOR IMPROVING DELIVERY AND INSTITUTIONAL EFFECTIVENESS

General Approach to Improved Rural Services

The Need For Action to Strengthen (particularly emerging indigenous) Civil Society Capacity

The Need to Improve Government Procedures and Resources

The Need to Find Room for Roles for the ‘Third’ Sector (NGOs and CBOs)

Performance Improvement

Devolving Responsibility From the State Down

Alternative Approaches For Enhanced Delivery

Enhancing Participation Processes

Partnerships – a way forward

Alternative Delivery Models for Consideration:

A Focus on Capacity Building - for Local Government and the Disadvantaged

Key Issues for Follow-On Programs

Recommended Follow-On Project Approach

REFERENCES

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Acknowledgements

GHKI would like to thank all the central, raion and local government officials; community workers; donor representatives and project members; private sector representatives; and individual citizens with whom we met during our four week program in Azerbaijan. We trust that the views and aspirations of these stakeholders are clearly expressed in this report.

We would particularly like to thank the Acting Resident Representative of the World Bank Mission in Azerbaijan Mr. Rufiz Chirag-Zade, who facilitated meetings and introduced us to key stakeholders at all levels, and provided us with strategic guidance on our work. Considerable support was also received from Ms. Sabina Yusifova of the RM in Baku. The staff at SIGMA consultants (Rasim Ramzanov, Ismail Allahverdiev and Allahverdi Musayev) who partnered with the FAO to undertake the preliminary survey and quantitative analysis, which serves as the foundation of our report, have been of immense help throughout our program in Baku. Their assistance and co-operation was truly appreciated. Our work would have been impossible without the invaluable assistance of our Project Liaison Officer, Mr. Mamedali Aminov.

Lastly, but by no means least, we wish to record our thanks to the various NGOs and other internationally assisted projects that opened their doors to us. In particular, the various World Bank projects, CARE International, the TACIS Agribusiness Support Project, as well as civil society groups such as the various Water User Associations (WUAs) whose work and enthusiasm is, we hope, adequately reflected in this report.

It should be noted that the views and opinions expressed in this report should be attributed to GHKI exclusively, and do not necessarily reflect those of the World Bank Group or its members. The usual disclaimers apply.

The Project Team

GHK International Ltd.: Team Leader: Azim Manji

Project Liaison: Mamedali Aminov

Peer Reviewer:Kevin Tayler

Peer Reviewer: Asima Shaikh

Baku, Azerbaijan/September 2000 and London, England/January 2001

Acronyms and Abbreviations

ADBAsian Development Bank

CBDOcommunity based development organization

CISCommonwealth of Independent States

COMCabinet of Ministers

CSPCivil Society Participation

EBRDEuropean Bank for Reconstruction and Development

ECEuropean Commission

EIRREconomic Internal Rate of Return

EIUEconomic Intelligence Unit Ltd.

EUEuropean Union

EXCOMExecutive Committee

FAOFood and Agriculture Organization of the United Nations

FDIForeign Direct Investment

FSUFormer Soviet Union

GDPGross Domestic Product

GNPGross National Product

GoAGovernment of Azerbaijan

HRDHuman Resources Development

IDBIslamic Development Bank

IDPsInternally Displaced Persons (refugees from the Ngorno-Karabagh conflict with Armenia)

IMFInternational Monetary Fund

JSCJoint Stock Company

MoFMinistry of Finance

MoEMinistry of Economy

MoTCMinistry of Transport and Communications

MoUMemoranda/Memorandum of Understanding

MSPMunicipal service partnerships

NGONon-governmental Organization

O & MOperation and Maintenance

PHCPrimary Health Care

PSPPrivate Sector Participation

SMEsSmall and Medium Enterprises

SCPState Committee of Property

TATechnical Assistance

TACISTechnical Assistance to the Southern Republics of the Commonwealth of Independent States

ToRTerms of Reference

USS Under-Serviced Settlements

VATValue Added Tax

WASAWater and Sanitation Authority

WBThe World Bank

WSSWater Supply and Sanitation

WUAWater Users Association

1PREFACE

  1. The early years of Azerbaijan's independence were hampered by the conflict with neighboring Armenia over the sovereignty of the Nogorno Karabagh. From the escalation of the conflict in 1992, an estimated one-million people have fled the highlands of the Karabagh into adjacent towns and villages. The swell of refugees fleeing their mountainous lifestyles left many neighboring towns and villages, with already deteriorating infrastructure, unable to cope with the increased demands on shelter, water, sanitation and other essential services. Moreover, since the abandonment of their farms and therefore the majority of wealth, little or no resource-base from which migrants of war could start a new and productive life remained. Considering that even the major towns and the capital city of Baku faced severe service and food constraints in the few years since declaring independence in 1991, the situation in the rural areas was more dire because of increased geopolitical instability as a result of the conflict; the swell of internally displaced persons (IDPs) from the Karabagh; and the irregular levels (or in most cases, complete absence) of essential infrastructure which remained as a legacy from the collapse of the Soviet system. The overly centrally-managed government, emerging from the command and control systems of the FSU, had its own problems to contend with, and much of the country's interest was focused on resolving the issues in Baku, not the countryside.
  1. While humanitarian assistance and the interest of trans-national petroleum conglomerates served to provide some much needed assistance to the fledgling democracy, there has been no comprehensive effort to address the levels of poverty that still persist in rural areas as a result of increased population, weak institutions and deteriorating infrastructure.
  1. The following Sector Note examines the potential for interventions in ameliorating the above. The Note explores ways of improving infrastructure essential to stimulate rural development (through improvements in roads, water supply, irrigation, telecommunications, and related social facilities including markets, clinics, schools, etc.) in an equitable and sustainable manner. It focuses on improvements necessary to support Azerbaijan's agricultural sector, complementing the State's desire to diversify its economic base from petroleum alone. Moreover, there is a recognition of the high quality of inputs available (including land and labor) to stimulate the latent potential of the agricultural sector in contributing to rural development while addressing poverty. It starts from an assessment of the types of infrastructure necessary to address the dual aims of increasing rural development opportunities simultaneous to the alleviation of poverty. Furthermore, it looks at various roles that forms of local government can play in bringing about the changes necessary to support these dual aims. This includes the increase in their scope of influence to one which includes a brokering or partnership-building focus amongst civil society organizations and the private (both formal and informal) sector.

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2i. EXECUTIVE SUMMARY

  1. This report sets out the findings of a study commissioned by the World Bank on rural infrastructure services in Azerbaijan. The Study was undertaken in two parts: The first of these is a survey of rural infrastructure services, commissioned by the FAO and SIGMA consultants. The second part is this Sector Note which aims to address the effectiveness of rural services institutions.
  1. There are three aims for the Note. Firstly, to examine the types of institutional arrangements governing rural infrastructure; secondly, to analyze the delivery and operation & maintenance constraints facing service providers; and thirdly, to recommend alternative approaches to service delivery in light of the previous two aims.
  1. The key findings of the Study are as follows:
  1. To date, there has been no systematic attempt to involve the formal private sector in local infrastructure provision. While civil society based Public-Private Partnerships (PPPs) is often encouragedas a way of increasing the delivery of services, there has been little or no attempt to involve the corporate sector into service delivery partnerships. Instead, the informal sector has filled gaps in provision where they think it would be financially rewarding to do so. PPPs involving the informal sector or civil society groups have arisen mostly from take-up of opportunities to fill a supply shortfall. One reason cited for the lack of PPPs is that the public sector suffers from extreme inefficiencies and lacks adequate capacity to actually entice the private sector to want to form service partnerships.
  1. While individual initiatives are usually self-contained, some area-based trends are emerging. For instance, it is not uncommon for rural municipalities and individual farmers to completely bypass statutory systems and develop independent means of service delivery in networks that are parallel to traditional means of delivery. This occurs mostly in the form of potable water provision (at the farm gate as well as community level), but in some cases also in terms of electricity generation through production by diesel generators.
  1. This points to the possibility of developing more systematic, co-ordinated and comprehensive efforts to encourage service delivery partnerships in service provision in sectors and regions where partnerships/co-operatives have already proved successful. These efforts should start with dissemination of findings on existing good practice and guidance on the ways in which unbundled approaches can be initiated without major changes in legislation and procedures. The State can usefully produce guidelines on the way in which individual raions, municipalities, and farm groups should approach opportunities for improving delivery.
  1. There appears to be a need for a clear policy statement on rural infrastructure if the government is to actually stand behind their commitment for diversification of the economy, and targeting the agricultural sector to lead this initiative. There is a lead from the top on putting in place action plans which follow-on from policy directives, allowing necessary diversification to actually occur. If the agricultural sector is to be promoted, the constraints impeding its growth must be removed. Critically, this starts with rural infrastructure services which supports agricultural productivity.
  1. Generally,service delivery improvements, where they have occurred, have had positive impacts on the lives and livelihoods of poorer people. Most of the successful initiatives investigated originally set out to actually rectify supply failures, which normally impact disproportionately upon disadvantaged groups and the poor. It is probable that their greatest impact is upon those groups who have achieved a basic level of security and are thus able to consider ways of improving their quality of life through infrastructure improvements. IDPs are therefore an exception to such an approach because of the interventions of humanitarian agencies. While improvements to irrigation can assist with improving crop yield, the health benefits achieved from improved water supply/drainage can be expected to reduce vulnerability to disease and, hence, help to enhance people’s ability to improve or at least cope with their existing situation, as well as directly contribute to their livelihoods.
  1. There is a general division between telecoms, irrigation and electricity services, for which users pay something approaching the true cost of services, fuel, roads and water supplyservices, which are nominally provided at subsidised rates to most farmers (with the exception of roads which are not-tolled for any users). To improve the delivery of services, partnerships are likely to take the lead in identifying opportunities to engage with services in the first category once these market haveincreased their levels of sophistication or users willingness to pay increases, and sufficient institutional capacity exists. In the second category, there may be opportunities for farmers, municipalities and other government departments to improve delivery through increasing their own capacity to plan, implement and manage services, or through greater cost recovery be ensuring better service quality and fairer charging structures. Maximising the chargeability of services in the second category while still ensuring fair and equitable access is a task that many actors in rural Azerbaijan are having considerable difficulty with.
  1. There is some evidence that many farmers are cognizant of both the economic and social costs of services. There is a realisation that services are as a source of economic input, provide social benefits in terms of wellness, etc., and have an economic cost assisted to their delivery and consumption. However, existing systems and assumptions will have to be changed before users’ willingness to pay can be converted to monetary gains. Attempts to charge for water, for example, from public standposts are unlikely to be successful unless they are introduced across the board. In this respect, willingness to permit charging is as important as willingness to pay. Both these have a direct bearing on the institutions’ willingness to charge, issue and collect fees for services, and the end users’ willingness to see enough (social and economic) benefits to comply with the above requests for fees.
  1. There is a need to educate key stakeholders regarding the roles and responsibilities of institutions responsible for delivering infrastructure in Azerbaijan. This will take time and probably preclude the possibility of moving straight into attempts to introduce rapid and comprehensive raion-wide approaches to improved services A better approach will be to build on what already exists in individual communities and addressing deficiencies based on felt needs. This will require the development of tools designed to help stakeholders to identify areas of opportunity and encourage good practice in production and consumption of essential infrastructure services. Immediate actions to implement this approach might include the following:
  • Efforts to disseminate information on improved versions of civil society approaches to water delivery, and the State involvement in WUA partnerships for irrigation.
  • Action to promote the use of alternative finance and delivery mechanisms for local infrastructure management. Such action will promote thinking on how infrastructure delivery can be kick-started by small injections of capital that cover risk, while community contributions are used to build equity in improved services.
  • Exploration of the ways in which raion-wide upgrading initiatives can be responsive to the tertiary infrastructure needs of municipalities and farmers.

Key Issues:

  1. The following BoxTablees are summaries of findings distilled from various sections in this Note. They aim to highlight the key issues raised during the Study and discussed in the Note.
  1. There are a number of important issues that need to be addressed in terms of infrastructure services in support of agricultural development. These have been divided into strategy-cum-policy issues, as well as technical issues. BoxTablees A and B deal with the five most important issues in these categories respectively, and BoxTablees C and D deal with the five least most important issues:

BOXTABLE A: Five Most Important Strategy/Policy Issues

Facing Rural Infrastructure in Azerbaijan

Most Important Issues / Issue / Rationale
1 / Political Will at Central Level to Genuinely Devolve Authority for Revenue Raising Functions Related to Enhancing Rural Infrastructure is Lacking or Insufficient. / Central level still has significant de facto control over budgets and staff in rural municipalities. Municipalities have limited revenue raising authority, yet are burdened with the liability of ensuring essential infrastructure is operational.
2 / Capacity at Rural Municipal Levels Insufficient to Negotiate Directly with Overly Centralized Decision-Making. / Unclear operational structures, low staff salaries, etc. has resulted in a culture of indifference in most municipalities. Staff are unable to counter overly powerful personalities and institutions at the Raion and State levels. Technical skills also in short supply to single-handedly assure quality services at rural level institutions.
3 / Unclear Regulatory and Legislative Framework Inhibits Municipal Service Partnerships (MSPs), particularly by the Private Sector. / One aspect of the Private Sector is that it is continually trying to minimize its risk. If the current policy environment for MSP/PPP places an undue portion of risk on the private sector, it is unlikely to enter into provision arrangements or service contracts for infrastructure. Clearly, there is a need to reform the policy and regulatory environment to share the risks, responsibilities and liabilities amongst all interested parties.
4 / Slow Progress in Creation of Rural Co-Operatives (or other self-help collectives) Which Can Defer Capital Expenditure for Necessary Investments. / With the memories of centralist planning and collective farming still fresh in the minds of most people, one of the biggest challenges will be to get groups of farmers to consider provision of tertiary services on a communal or collective basis. Many have already echoed the sentiment that they do not expect government to provide for their service needs, but as a result individuals are tying to provide for themselves without thinking of organizing themselves into cooperatives. Clearly this is an area worthy of further exploration.
5 / Lack of Apparent Incentives for Encouraging Larger, Formal, Private Sector Organizations to Enter the Services Market. / In order to engage the private sector, bulk (primary) services need to be improved. Either the government can do this, and invite the private sector in afterwards to assist with O&M, distribution etc, or the government can compensate the private sector for the improvements through a variety of methods (BOT, BOOT, etc). Neither of these approaches seems immediately realistic under the present policy environment or partnership circumstances.

BoxTable B: Five Most Important Technical Issues